How to pay for global ad production

Tuesday, 21 Jun 2011

Ad Production Payments Practices Across Regions And Why They Matter

Introduction Steve Lightfoot

• Welcome

• Panel Presentation

• Agenda

2

APR Panel

• APR works with global advertisers and their agencies to increase return on ad production spending across the entire media mix: TV, radio, print, outdoor and digital / new media platforms

Alex Blum

Director of Innovation and Strategy

Basil Stephens

Sr. Production Consultant

Pedro Roura

Brand Executive Producer

3

Agenda

• History of Production Payments

• Evolution of the Industry…

• … and New Complexities

• Resonance for Advertisers

• Payment Process and Issues per Region

• Q&A

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History Production Payments

• Historical structure of worldwide marketing function

• Management of production payments traditionally has been a feature of the Advertiser’s relationship with agency / agency network

Becoming concern for advertisers because…

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Evolution The advertising business is changing

• New kinds of Media and Platforms • Exposure to multiple agencies • New kinds of entities developing to address change

Agencies that produce Production companies that do creative Digital agencies Experiential producers …and everything else in between

It’s not just an advertiser/agency relationship anymore

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And… Additional Complexities

• Advertisers with multiple agencies in multiple countries

• Impossible to depend on typical AOR structure

• Projects/assignments awarded on one-off basis to unfamiliar vendors

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What does this mean to you?

• Interaction with potentially unfamiliar parts of process

• Contractual / Legal Issues

• Production Payments

• Greater exposure to financial risk

• Communication gap between Marketing / Procurement / Finance

• Vendor management policy not responsive to Marketing realities

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Unfamiliar Issues Fiscal Realities

Agency

Client

Prod. Company

Unwilling to advance production money without payment from client

Unwilling or unable to assume risk. Significant upfront payments required

Needing to maintain leverage by controlling the payment process

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Larger Issues Affecting Production Process

1. Large corporations and small vendors showing signs of financial distress

2. Vendor consolidation

3. Currency / exchange rate volatility

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Summary / Conclusion • Advertisers need to develop their own policies

around production payments.

• Without understanding the basic principles, it’s difficult to come up with policy.

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Overview of Worldwide Payment Practices as They Exist Today • UK, Europe, Africa, Asia, and Middle East (Basil)

• North America (Alex)

• Latin America (Pedro)

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UK

Typical Payment Scenarios 50-50 75-25

First Payment 50% 75%

Second Payment 50% 25%

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UK Issues

• Contractual payment obligations are often not honoured

• Advertisers are “blamed” for late or non-payment • Leads to bad feelings towards Clients

• Financial burden on vendors leads to less options in market • Advertisers are then more vulnerable to a “sellers” market

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Europe

Typical Payment Scenarios 50-17-33 66-34

First Payment 50% 66%

Second Payment 17% -

Final Payment 33% 34%

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Europe Issues

• Fragmented and varying practices

• Advertisers have contracted directly with production companies

• Inflation & Currency instability

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Africa, Asia, Middle East

In absence of “standard” practice, 50-50 payment structure widely accepted

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Africa, Asia, & Middle East Issues

• Budgets are written to compensate for longer payment terms

• Lack of transparency

• Impact of local practice

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North America

3 Typical Payment Scenarios

50-40-10 50-25-25 75-25

First Payment 50% 50% 75%

Second Payment 40% 25% -

Final Payment 10% 25% 25%

*Payment to the Production Companies is contingent on funds received from CLIENT by the

AGENCY. This is often referred to as “sequential liability.” *75-25 most common for Canada

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North America Issues

• Erosion of trust in payment process because of:

Late payment

Sequential liability

Financial distress

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North America

• SAG Strike (2001) resulted in:

Accelerated offshore production

Large upfront cash outlays needed by production companies

75% upfront required for all overseas jobs

Push for 75% Standard on all jobs!

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North America Trend

• Compressed timelines (6-7 weeks)

• Last minute jobs

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Latin America

Typical Payment Scenarios

50-50 50-25-25

First Payment 50% 50%

Second Payment - 25%

Final Payment 50% 25%

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Latin America

• Dramatic currency fluctuations have a serious impact on the production community.

• These could be significant from the moment the job is awarded to the moment it’s executed (couple of weeks).

• For example: • 2001 Argentina exchange from a 1-1 to a 3.5 to 1 in a week.

• Many productions were awarded under one exchange rate and paid under another

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Latin America

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Latin America

• 2008 Mexico exchange rate went from 10 to 1 to 14 to 1 on a short period of time.

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Latin America Issues

• Agency not always paying the production company within terms

• Client paying direct to production company being more frequently used (under 50-50 model)

• Mexico/Argentina • Final payment sometimes comes in 90 to 120 days after receipt of final

invoice.

• Production companies have private investors in order to manage their cash flow needs.

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Broader Trends & Opportunities

Direct Payment

Preferred vendor / roster deals

Decoupling

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Next Steps

Worldwide Playbook

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Questions?

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Thank you

For more information contact Steve Lightfoot s.lightfoot@wfanet.org or visit www.wfanet.org