Musical Chairs at Aegis' Carat Direct; Will "Prop Trading" Be an Issue in 2010?

Last Updated Jan 27, 2010 12:10 PM EST

The shakeup at Aegis (AGS.L) in Europe continues as Horizont.net reports that Christian Leipacher (pictured) has left Aegis-owned Carat Direct in Germany, where he was managing director since 2006, to become head of WPP (WPPGY)'s Maxus. Aegis Central Europe got a new CEO this week also.

Aegis is at the center of a lawsuit in which former client Danone won a ruling requiring the ad-buying shop to fully disclose all the discounts and rebates it earned from media vendors with Danone's money. Former Aegis president Aleksander Ruzicka and five others were found siphoning credits for free media airtime for themselves. Ruzicka was later sentenced to 11 years in prison for his role.

There is no suggestion that Leipacher's move has anything to do with the Danone/Ruzicka case.

Separately, BMO Capital Markets analyst Daniel Salmon warned in a note to investors that conflicts of interest at media agencies over "prop trading" -- where the agency buys and sells media for itself, like stocks, at the same time as it buys media for its clients -- could become a "hot topic" in 2010. Here's Salmon's comment in full:

Expect advertising "prop trading" to emerge as a hot topic in 2010. To offset the pressure on the traditional "agency" business, we expect to hear rumblings of media agencies taking on a "principal" role and "trading their own book" to offset pressure on traditional fee streams.

This brings about questions regarding conflicts of interest; in this case, it is not the traditional conflict between competing clients, but rather conflicts of client interests with the agency's own.

Interestingly, this development is beginning to bubble to the surface just as the Obama administration proposes financial services regulation changes that would outlaw similar practices in finance. We don't expect ad agencies to come anywhere close to the balance sheet risk (let alone systemic risk) seen in that industry in recent years.
If Salmon's suspicion is true, it once again reminds us that there is seemingly no end to the ways that media-buying agencies find to obscure the market price of media, rooking their clients in the process. You could argue that buying and selling airtime like stock -- snapping it up early when it's cheap and then selling it to needy clients later when it's more expensive -- is simply good business. But media agencies are supposed to be advocates for their clients, not themselves.

And as prop trading can only drive up the price of media -- why do it if the agency might lose money? -- then this is clearly bad for clients. Clients are already largely in the dark about the true price of media, and if their agencies are also trading it on the side then they're doubly in the dark (excuse the tortured metaphor).

Moreover, it raises questions about the relative power of buyers and sellers in the media marketplace. BNET has previously argued that the broadcast networks act in concert in order to keep prices high. The fact that Aegis is now both a buyer and a seller of the media it offers in China further muddies the picture for clients.

The big media agencies could argue that by concentrating their buying power in the form of prop trades the average overall price of media for clients might actually come down. After all, what buying power does a single client have when the nets have thousands of others to turn to as competing clients? It's a good argument -- but only if the agencies and the nets would be willing to let airtime be traded on a transparent real-time exchange, so everyone can see what the price of 30 seconds in a given slot is.

And that's the one thing neither side will ever allow.