Prof. Martin Ike-Muonso
The business scenario in the advertising market is about to witness a tremendous inauspicious leftward shift following its new set of competition-limiting regulations. Ideally, sound market regulations drive, energize and reinforce competitive behaviour that sustainably creates maximum economic value. The reverse stifles the economy or harm the most vulnerable market participants. This principle has universal application and consequences, including regulating the market for advertising consultancy services. Unarguably, like similar consultancy services markets, there are always traces of inadequate transparency while the reputations of some participating firms, at least, seem quite resilient in the face of scandals, stigma and sometimes, work of questionable quality. However, the depths of knowledge involved in the practice of advertising agencies, their dynamism, commercial value and co-produced nature make it hard to assess them effectively. Curiously, therein lies regulatory success, which demands solid structures and systems for effectively assessing market participants capabilities, offerings, reputation, strengths and weaknesses. Therefore, the advertising regulator is effective when it markedly identifies innovative ways of systemically evaluating agencies offerings necessary for informed market decisions rather than the market-hampering protectionist price fixation dotting its recently released rulebook.
By leveraging its incredible capacity to persuade, inform, and expand on consumer choices, advertising has consistently powered significant scale economies and upward demand shifts in goods and services. It taps into market freedom, particularly changing consumer preferences and imperfect information to create robust market competition and opportunities for new product innovation, lower prices, market growth and the prosperity of participants and stakeholders. The informative power of advertising generates rich product and service choices and other information, enabling consumers and producers to purchase and produce more. Advertising, therefore, plays a critical role in job creation and real output growth. The advertising industry intervenes directly in the job market through the job opportunities within its value chains and indirectly through the increase in goods and services triggered by advertising-induced competition. In 2020, above-the-line advertising expenditure alone exceeded N110 billion based on the Media Fact publication estimates. In the same vein, Nairalytics also estimated that the advertising spending of mega-corporations was about N143.7 billion in 2020.
Across history, the free market model of organizing economic production is demonstrably superior in delivering consumer needs and expectations over other forms. Underlying this superiority is its capacity to seamlessly and without any central intelligence process magnitudes of information that enable market participants to make informed decisions. Such processed information comprises choice-making decision variables built on consumer preferences, private incentives, feedback, and informed choices in the advertising industry, enabling efficient determination of pitch fees, advertising rates, payment terms, etc. The success of the advertising industry within a free market economy depends substantially on the freedom of market participants to negotiate and agree to enforceable private contracts. For instance, advert suppliers that fail to keep their promises over time suffer reputation loss and will eventually leave the market. Their customers will have no other option than to penalize them by possibly seeking out alternative suppliers.
Despite its numerous advantages, advertising may also have a deleterious effect on the economy. Such economy-destroying consequences are possible when it impregnates the imperfect information system of the market with deceptive and fraudulent messages that accordingly undermine the capacity of the consumers of the advertised goods and services to make appropriate purchase decisions. Failures of the market based on such factors justify regulatory interference. However, such regulatory interventions should be limited to eliminating the causes of market distortion. In this respect, a good approach ensures efficient consumer information flows, such as setting the requirements for information disclosure and setting standards for goods and services evaluation where most consumers cannot do so. Beyond this limited intervention window, regulatory activities affecting or fixing prices and determining the contract terms between economic agents participating in the market ultimately upsets the balance of forces and harms all stakeholders.
In October 2021, the Advertising Practitioners Council of Nigeria [APCON] released the Advertising Industry Standard of Practice [AISOP], supposedly the industry’s rulebook, to protect stakeholders from unfair business practices. The expectation is that implementing the prescriptions in the rulebook would sanitize the industry and lead to increased growth. As an informed regulator, the AISOP document recognized the market-destabilizing effect of price [rate] fixing and warned against it. Unfortunately, in outright contradiction of the same international market best practice, it unilaterally dictated pitch fee range, specified additional pitch-fee largesse, and prescribed mandatory guidelines for determining media rates based on a thirty-day notice. It also proceeded to interfere in the contracting conditions by dictating the maximum time to settle contractual payments and debts. Undisputedly, APCON has the right to provide regulations that will make the industry progressive. However, dabbling into price-fixing, creating a double-charging condition and interjecting in contractual terms between market participants results in much more market-dampening consequences. Such unacceptable behaviour also cancels out its goals of improving mutual respect, eradicating unfair advantage, unethical competition and inequitable agreement terms between stakeholders in the industry.
APCON’s AISOP is demonstrably inclined to promote the anti-competition market environment in the industry by instituting a horizontal price-fixing and a rates-freeze behaviour. The document prescribes an anti-competition horizontal pitch-fee-fix of between N1 million and N2 million for advert market engagements between agencies and advertisers. The rulebook also mandates the payment of a fixed strategy pitch [rejection] fee of N500,000 and a creative pitch [rejection] fee of N750,000 if an agency invited to pitch does not win. Apart from this regulatory action interfering with competitors’ ability to set their prices within an informed market freedom context, it also unduly blows up the cost of advertising. All progressive societies frown at every market interference conducted either by fixing prices or defining price ranges, establishing a formula for rates of change in prices, and guidelines for competitors’ responses to changes in their cost structures. In a similar trajectory, APCON’s intended regulatory interference in payment contracts and conditions by fixing-by-fiat the number of days within which market participants must settle payments is an unacceptable attack on the foundational principle of freedom to compete in the marketplace.
Let us look closely at the pitch fee fixing. Unhampered, the pitch fee that the free market would dictate can range from N0.00 to N100 million based on the interaction of demand and supply forces. Therefore by fixing the pitch fee range, APCON inexorably orchestrates market distortions in participants subjective valuations as the fixed price range will most likely fall out of line with the constantly changing market-clearing values. The government’s fixed pitch-fee will either be too high or too low relative to their natural levels. This deviation from the market-clearing value always leads to challenges like depressed demand, retarded production, demand and supply glut, and all those consequences that misdirected the market into chaos and gross inefficiency.
Several assumptions seemingly underpin this competition-destroying regulation. First, APCON seems to have assumed that the cost of advert pitch to agencies cannot be lower than N1 million and not higher than N2 million. This assumption, if implemented, will automatically exclude agencies with brilliant innovation whose pitch costs would exceed N2 million. It also means that advertisers cannot shop for and engage agencies that ordinarily would have been comfortable to pitch at less than N1 million. This development will inevitably lead to ‘serial purchasing’, that limit advertisers’ engagement period or projects with a single or few agencies they are hitherto comfortable with and not exploring further expansions in advertising agency engagements. In the former situation, interfering in the competitive behaviour quashes entrepreneurial innovation by placing a wedge on the price [or fee] negotiating system. On the latter, the market excludes many small agencies with a low-cost structure that ordinarily would leverage the pitch opportunities. Second, by specifying additional rejection fees, APCON blatantly blows up advertising costs as agencies that fail the pitch still get rewarded with additional fees. This fee-fixing regulation further dampens innovation and competition. Firms know that the rule compels advert suppliers to take full responsibility for their costs regardless of their performance and possibly leave them with some financial surplus. Again, this unwarranted interference in pitch price determination naturally has restrictive effects on advertising projects’ supply. Such leftward shifts in the supply of advertising jobs can be vastly harmful to the industry. We estimate approximately 17.89% shrink in advert agency induced real national output in 2022 if this rule goes into effect.
Similarly, while contract enforcement is critical for market efficiency and ease of doing business, regulatory interference in this process by handing down contract or payment terms for buyer-seller transaction relationships is toxic. Advertisers and agencies enjoy the protection of the law to negotiate and agree on the conditions of their business dealings without the encumbrances of a regulating third party. In this process, the regulator’s role is limited to ensuring that both parties keep the promises made in the originally agreed terms and conditions. Unfortunately, APCON seems to have assumed that market participants cannot enter into fair deals independently without a regulator as the third party. Yet, only the agreement mutually reached by two consenting parties can be authentically considered fair and equitable.
Consequently, APCON ought to focus its intervention on penalizing either agencies or advertisers who do not comply fully with the understanding reached in their agreement rather than discriminating and protecting a section of the market by determining ceilings on permissible credit days to the unfair advantage of others. Different organizations face different costs and credit conditions, which they usually apply in their engagement with contractors. This cash flow management process has a universal understanding in business. Contractors that are not comfortable with the job suppliers credits and cash flow requirements merely withdraw from participating rather than arm-twisting the other party using regulatory fiat. But interfering by pleasing the contractor and destabilizing or worsening the job supplier’s credit conditions lead to harmful market consequences.
Finally, four ideological errors underlie the AISOP document. The first error is that the achievement of fairness of market prices [or pitch rates] is majorly possible by a nonmarket regulating participant rather than the unencumbered negotiation between advertisers and agencies. This faulty foundation has given birth to APCON’s misguided interference and its launch of horizontal price-fixing in the market. Price-fixing is inconsistent with international best practices, particularly among market regulators who should place a reasonable premium on fairness. Price-fixing by market regulators is degenerating, anti-competition, market destroying, and capable of wiping a substantial share of the contribution of advertisers to Nigeria’s national economic output. The second error is the thinking that the achievement of lower market prices is most effectively through regulatory fiat. This faulty conceptual foundation again compliments the retrogressive price-fixing mentality. Quite the opposite, entrepreneurial innovation and competitive efficiency within the market lead to lowering prices. The third error is APCON’s seeming penchant for addressing the manifestation rather than the root problem in the market. Price inefficiency in the market depends a lot on the degree of information asymmetry and processing time lag, which determines market participants’ quality and effectiveness of decision-making. Accordingly, APCON should instead focus on substantially improving the quality, magnitude and speed of information availability necessary for market participants’ informed decision-making. The fourth error is the regulator’s belief that advertisers and agencies are not knowledgeable enough to work out agreeable terms of the contract and therefore may have to help them. This flawed consideration is market vandalizing as active participants ideally understand the market conditions much better than the regulators and should be able to fashion out more effective and mutually agreeable terms of payment than the one forced on them. Regulators are always on reactive catch-up modes and wield destructive controls such as the ones unleashed by APCON. These have to stop if the advertising industry will have adequate oxygen for sustained, meaningful growth.