Explained: How principal-based trading choked Indian M&E players

New Delhi: Principal-based trading, which has prevailed over a long period but came into the spotlight after the Competition Commission of India (CCI) raided top media agencies and industry bodies last month, is under stringent scrutiny.

Several advertising veterans told BestMediaInfo.com that the prevalent practice of agencies purchasing media inventory upfront and reselling it to clients at a markup virtually stalled the growth of the Indian media and entertainment industry.

“For over a decade, we have been hearing that agencies are taking up assignments at around 1% commission. This essentially means principal-based trading not only prevailed but thrived over the last decade,” said an advertising veteran.

Explaining the impact of principal-based trading, the veteran said, “The Indian M&E sector is growing on paper, even as Indian platforms across mediums continue to either decline or remain stagnant. Principal-based trading benefited agencies the most in terms of revenues. The practice suppressed advertising rates over the past one and a half decades, thus benefiting advertisers.”

Indian advertising spends may have grown to Rs 1,50,000 crore, according to GroupM’s “This Year, Next Year” report. Breaking it down, digital advertising accounts for about Rs 1,00,000 crore. Considering 85% of this goes to big tech firms like Google and Meta, Indian digital platforms, including CTV, are left with Rs 15,000 crore.

The total advertising revenue for Indian M&E firms across traditional and digital media thus stands at Rs 65,000 crore.

In 2015, GroupM’s TYNY estimated the Indian adex size at Rs 48,977 crore. Over the last decade, the revenues of Indian platforms grew by only 50%.

“Back then, digital was growing at a rate of 30-40%, but it had a smaller share in the entire ecosystem. Today, the medium captures 60% of the overall adex, but a large part of that is cornered by tech giants. While the growth of digital adex is attributed to changing consumer behavior and market forces, tech giants grew due to their scale and capabilities,” the advertising veteran said.

When asked about the role of agencies, the veteran added that the growth of tech giants was largely aided by these agencies.

“How many times have you seen sales representatives of these tech giants sitting with brands or agencies? Agencies largely worked as resellers for these firms in India and diverted most of the ad spends to them through principal-based trading,” the veteran added.

A senior broadcast executive agreed, saying they always suspected something was wrong with how their advertising rates were suppressed.

“Even during the TAM era, it was alleged that the rating agency was suppressing viewership to help agencies and clients. The transition to BARC changed nothing, as buying continued on the basis of CPRP despite the expanding television audience. It was alleged that global brands bought media in India on a CPRP basis but reported it to their headquarters on a CPT basis,” the broadcast executive said, adding that principal-based trading added to the misery of broadcasters.

“The principal-based trading was used to manipulate the market,” the broadcast executive alleged.

Explaining the modus operandi of agencies involved in principal-based trading, the broadcast executive said, “After blocking bulk inventories on Indian platforms, they would create artificial demand-supply gaps to suppress rates.”

“Take, for example, the IPL. You must have heard how JioStar has not benefited much when it comes to effective rates for their inventories. However, the volume has grown due to value addition. About 85-90% of IPL inventories were blocked by top global agencies. It is suspected that these agencies held advertisers back until the last moment, claiming they could secure more inventories due to weaker demand. They would tell broadcasters there were no takers at the rates they wanted to sell their inventories. Such manipulations helped agencies earn about 10-15% of the transaction on IPL spends,” the broadcast executive explained further.

At this rate, the IPL will never break even in the current media rights cycle, the executive added.

“We agree that our audience is moving to digital. But we are there as well. Our content is consumed, but the revenues are not coming to us. There has been a drastic drop in the average revenue per user (ARPU) from advertising,” the broadcast executive said.

A digital media agency head told BestMediaInfo.com that the practice of principal-based trading is skewed toward benefiting a few big brands instead of serving the larger interest of all stakeholders.

“On this point alone, this practice is unethical,” the agency head remarked.

Forensic experts at the CCI's DG office are examining digital data and documents collected during the raids. The Director General (DG) of the CCI has been probing alleged anti-competitive practices in connection with certain commercial arrangements between advertising agencies and broadcasters.

Once the CCI concludes there is a prima facie violation of competition norms, the case is referred to its DG for a detailed probe. The DG, the investigation arm of the fair trade watchdog, has the power to conduct raids after court approval.

Under Section 3 of the Competition Act, the CCI can investigate anti-competitive agreements among enterprises.