Taking the sting out of the digital advertising Tech Tax

Taking the sting out of the digital advertising Tech Tax

The advertising ecosystem is changing as the digital world continues to progress but advertisers must still be wary of the 'tech tax'

Taking the sting out of the digital advertising Tech Tax

The global advertising market is increasingly digital. In mature markets such as the U.K. and U.S., advertisers typically invest more than half of their budget in digital media. This includes digital video (YouTube, Facebook, and digital video on demand, such as ITV Hub), mobile, digital display, search, and social media. Around three quarters of all digital display media inventory is traded programmatically; this includes video and mobile. Once a media strategy is set, increasingly it is automated algorithms and not humans that buy media space.

The digital revolution has provided advertisers with many more opportunities to reach current and prospective customers. More platforms, more channels, more formats. As available media inventory has grown so quickly over the past 15 years, the automation of programmatic media trading has been inevitable to connect advertisers with publishers and ultimately customers. A manual trading system would not have been able to keep pace with the scale of available media.

Before digital, media trading was straightforward. Advertisers bought fixed volumes of media inventory from publishers of different media (TV, press, radio, cinema, outdoor). Sometimes they did this direct. But more usually they did this via intermediary media agencies. Advertisers paid a commission to the agencies, who negotiated cost with publishers. The system was relatively simple and largely transparent.

Increasing complexity of digital

The digital media trading ecosystem is very much more complicated. There are many more links in the transactional chain than simply advertiser – media agency – publisher. Typically, digital media trades involve: media agency of record, trading desk (either independent or owned by the media agency or its parent group), demand-side platform, exchange, and data, creative, ad serving and ad verification platforms. Today, all of these steps come before getting to publishers, which offer their media inventory via supply-side platforms. How very different from the days of Don Draper.

The true cost of the Tech Tax

The World Federation of Advertisers (WFA) estimates that as much as 55 percent of advertising budgets invested in programmatic media buying – that’s 55p in every pound spent – is taken up by these intermediary third parties before any money gets to publishers.  This is known in the advertising industry as the ‘Tech Tax’. The WFA has reported that more than $30bn of the total global investment of $63.4bn in media bought programmatically in 2017 was lost to the Tech Tax.[1]

Figure 1. How value erodes along the programmatic media trading supply chain

In 2016 the first major study of transparency in the US media market was conducted by FirmDecisions working with the U.S. Association of National Advertisers (ANA). The ANA study found evidence of non-transparent practices in media training in the U.S. for the first time and a report was produced recommending how advertisers could build transparency into all aspects of their media trading. This included programmatic media trading of digital media. Figure 2. shows how the Tech Tax can build up across the different trading entities, while Figure 3. details how agency holding companies can accrue mark-ups in programmatic trading. Both charts are from the 2016 ANA report[2].

Figure 2. Programmatic media trading

Why transparency matters

It is obviously a concern for those involved that advertisers may not be investing their market budgets with optimal efficiency and effectiveness. But that isn’t the only problem.

Since the ANA published its report and recommendations, there is evidence of increasing understanding among advertisers about the complexity of the trading ecosystem. There’s also widespread awareness that their spend is stretched further and among more players. The challenge is that in many cases advertisers have no clear line of sight, spelled out in their contracts, of what is being spent on parts of the supply chain and what is being kept by certain parts of the supply chain without the advertiser’s knowledge. As a result, they cannot tell whether individual suppliers are adding or subtracting value from the media trade. What advertisers need is full transparency of what value they receive from every link in the chain.

Figure 3. Agency holding company mark-ups

Media agencies have recently adapted their trading models to encourage their advertiser clients to spend increasing proportions of their budgets on programmatic. Agencies have created new entities – such as agency trading desks – which generate new revenue. This, coupled with the increasing number of links in the supply chain, may or may not be adding value. The problem is, in most cases advertisers do not have full transparency. This means it’s harder for them to know whether this greater number of technology partners is actually delivering better or worse return on investment.

Minimising complexity, creating clarity

Advertisers need transparency in their contracts, both with their agencies of record and their advertising and marketing technology partners. Given the very real rate of change in the digital marketing ecosystem, we recommend that advertisers review their contracts regularly. This can be as often as annually, to ensure that terms reflect current agency trading dynamics.

In summary

The ANA initiative has focused attention on transparency and generated action by advertisers like never before. Advertisers can take two steps to eliminate unnecessary costs and improve performance in the digital media supply chain. First, regularly review and update their contracts. And second, ensure that trading is transparent by auditing agency compliance with the contract. By understanding what different vendors contribute to overall performance, advertisers are now proactively reducing the risk of being stung by the Tech Tax.


Federica Bowman is Managing Director, Digital, at FirmDecisions, the largest independent global marketing compliance specialist.


[1] World Advertising Research Centre (WARC) March 2018, ‘Tech Tax’ cost programmatic advertisers over $30bn in 2017, WARC Data Points – https://bit.ly/2PyoDCI

[2] ANA/K2 Intelligence (2016). An Independent Study of Media Transparency in the U.S. Advertising Industry – Prepared for: The Association of National Advertisers

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