Performance marketing insights, discussions and expertise

The truth behind the lack of transparency on the ‘tech tax

By on April 4, 2017

Originally posted by Campaign Live.

The news that the Guardian is to commence proceedings against Rubicon Project for the recovery of non-disclosed buyer fees has not come as a huge surprise to anyone who has been involved in programmatic trading.

This is not to say that Rubicon Project is the only ad trading platform that has been under the microscope for lack of transparency on the “tech tax”..  For a while, questions have been raised on the increasingly concerning percentage of the gross margins which are being hidden or passed over to third parties for technology costs. This happens on both the buy and sell-side and the end result is that publishers receive 30p on the pound, while the advertiser is paying a tech tax as well as buyer costs for the difference between what they spend and what the publisher receives.

On the buy-side, the introduction of ATDs has enabled the agency holding groups to assess and test the most cost effective models that addressed their client requirements, and to see how they could claw back much-needed margin.

These entities were important profit centres for the holding groups and they have used them to manage their optimisation and management of programmatic spend to allow them to internalise the programmatic buys – and protect the tech tax from disappearing out of their own businesses

Many trading desks operate on a variable margin model. This involves charging the agency for an agreed CPM with a baked in tech tax and then aiming to buy the media for the lowest possible CPM and pocket the difference as operating profit and pass on the tech costs to the buyer. However, a new model emerging amongst the independent trading desks (who are competing for spend with the increasingly aggressive in-house businesses), is to operate on a transparent fixed margin of, for example, 30% mark-up on the cost of media + DSP fees.  Therefore, if the media cost is deemed to be £1.10 (£1+10% DSP fees), then the client would be charged for £1.10+30% mark-up.  The client often prefers this model because the trading desk is no longer incentivized to buy only cheap traffic, but rather focus on ROI and quality for the media budget assigned.

It is easiest to consider the money breakdown by following £1 as it is spent, which is depicted below based on an example set of £ and %:

Breakdown Percentage Value
Paid by advertiser   £1.00

Margin for agency (fixed): 15% £0.15
CPM paid to Trading Desk:   £0.85
Margin for TD (variable): 41%  
CPM maximum bid entered in DSP:   £0.85
CPM paid by TD to DSP (2nd price auction):   £0.50
Fee to DSP (fixed): 10% £0.05
CPM paid to SSP:   £0.45
Fee to SSP (fixed): 20% £0.09
Tech tax: 20% £0.09
CPM paid to Publisher:   £0.31

The reason that the Guardian is to sue Rubicon is stated as being about transparency. The above breakdown of the figures might raise concerns for both buyers and sellers about the number of mouths to feed between where the money is spent to what is received at the other end of the chain.

Publishers know that they need to create a programmatic strategy that allows them to access the significant spend now being allocated through this channel and ensure that they can sell to this growing breed of buyer. They, therefore, need to rely upon ad trading platforms which allow them to technically access programmatic buyers.

But, it cannot be fair for the publishers and advertisers to incur the costs of third party technology tools which are used by the ad trading platforms as their USPs. Surely, any technology costs should be covered by the platform itself? Should we not expect the technology to pay for the tools which are the very reason why publishers use them to trade?

If this is the case, then why are the SSPs also passing on tech tax costs to their publishers? If they could sell at £1.30 and actually cover the tech taxes then most publishers would not query the flow of money out of their pockets. This would mean that advertisers will be asked to pay more for the inventory which can happen if every technology and every tech platform justifies their costs and prove that they add value.

Worryingly, this lawsuit from the Guardian is another negative against our industry and is once again calling into question the transparency and ethical trading values within digital ad trading.  Whether there is any validity to these accusations is unclear but we must all ensure that whether you are tech platform, a tech vendor, a trading platform or any third-party provider, you must add real value to both the sell and buy side in order to justify your fees.  Otherwise, we will see a snow ball effect from other publishers which could lead to yet more mistrust in intermediaries and, what’s worse, disappointing and largely undeserved by those that are ethical, brand safe and transparent.

Julia Smith is director of communications at Impact Radius.