Stayzilla — just another petty media defaulter

he history of Indian advertising is a virtual graveyard of failed advertising agencies, because clients defaulted on media payments and sent their advertising agencies to the cleaners. One of India’s best advertising agencies, MCM (Mass Communication & Marketing ) started by the late Kersy Katrak in the 60s, and which attracted the best advertising minds in the country like Mohammed Khan later of Enterprise Advertising, collapsed only because their clients defaulted on media payments. MCM later became a case study for young MBA students on how advertising agencies can fail only because they are inefficient at collecting the money that was due to them from clients.

Another great agency, J Walter Thompson or JWT now, which was the largest advertising agency in India in the 70s, shut down operations in 1974 again for the same reason — clients defaulting on media payments. The expats who ran JWT at the time fled the country in dismay, because they thought it was the end of the company. Fortunately the staff of JWT in those days with the help of Mr Subhas Ghoshal who later was CEO of the company, revived the company with funds mostly from the staff of the company and a little help from bank loans and rechristened itself Hindustan Thompson Associates and got back all the clients they had lost in the shut down. HTA climbed back to being the biggest agency in the country. As a result every employee owned shares in the company. But such cases are indeed rare.

So when I first heard about Stayzilla defaulting on media payments with a small advertising agency in Chennai called Jigsaw, it was hardly a puzzle for someone like me who has spent 39 years in the advertising industry. I said to myself I have seen this movie many times before.

Advertising Agency Economics

The reason why agencies collapse has a lot to do with agency economics. Unfortunately advertising agencies are agents, just like travel agents or any other agent. The bulk of the money that you pay agencies is just passed on to the media, just like the bulk of the money you pay for your ticket to a travel agent is passed on to the airline. When the client defaults, the agency hardly has the wherewithal to pay the principal, which is the media or the airline. Margins have been traditionally thin for agents. In the early days, agencies charged 15% commission — which meant that if a client paid Rs 100 for media, the agency would earn Rs 15. Strangely enough, the 15% commission came from the media and not from the client because of an understanding that agencies had with media and because they were accredited to the media houses.

However that 15% commission broke down a very long time ago — perhaps at the end of the last century. Today agencies are likely to work for 10% or much less for media and creative services. This further got broken down into creative and media commission with the splitting of media and creative services amongst agencies. An agency would be lucky to get anywhere 1–4% media commission on advertising today.

Now lets get back to how Stayzilla might have plundered Jigsaw. Assume that Stayzilla owed Jigsaw INR 7.65 crores at a certain point of time which was long overdue. At 5%, which is a rather high media commission it means that Jigsaw retained only Rs 38 lacs. Now if Stayzilla still has an outstanding unpaid debt of INR 1.56 crores, it means that Jigsaw has still made a loss of Rs 1.18 crores ( Rs 1.56 cr — 38 lacs ) after working with Stayzilla for a whole year. And not only that. Jigsaw still owes the media the balance of Rs 1.56 crore which could threaten Jigsaw’s livelihood. If Jigsaw doesn’t pay, its stands to be blacklisted by the media and will lose its accreditation with the media industry. That can be a telling blow for ad agencies because without accreditation, agencies have to pay the media in advance for any further business. It means Jigsaw might have to shut down operations.

Advertising Agency Trade Bodies

Traditionally ad agencies have had no recourse to recover outstanding debts, but to go to the AAAI ( Advertising Agencies Association of India ) with a complaint against their clients. But the best that AAAI can do is to prevent the media from further accepting media releases of a defaulter and mediate between agency and client. There is no guarantee that the money will ultimately be recovered for the ad agency. However you need to be a member of the AAAI if you need their help. The AAAI website reads:

  • INS: Protection of members interest in matters relating to INS policies, credit periods, Rules for Accreditation and streamlined operations promotion of better production values and effective advertising purchases. ( INS stands for the Indian Newspaper Society the trade body for all publications in the country )
  • Client Disputes: Helping settle disputes through evolution of guidelines, procedures and uniform practices mediating between agency-client, agency-agency and agency-media to ensure quick resolution of disputes

Is it the birthright of start-ups to default?

What is surprising me is how other start-up founders are trying to show their might and support for Stayzilla. How is Stayzilla different from any other company? Would we have forgiven Kingfisher Airlines because it is a start-up? Or is the word ‘start-up’ only to be associated with e-commerce businesses and those that have something to do with the internet? Jigsaw is as much of a start-up as Stayzilla is. Just because Jigsaw hasn’t burnt up $ 30 million from investors doesn’t make it less of a start-up. I wonder what Karnataka IT Minister Priyank Kharge means by tweeting: “Spoke to Dr. Manikandan, IT minister for his intervention in @stayzilla case, I am sure he will help if @YogiVasupal is on right side of law.” Or is he just trying to pay lip service to the IT industry?

Unfortunately advertising agencies don’t have a minister to help them, even if they are on the right side of the law. As far as the facts revealed in the press go, Stayzilla is just another media defaulter. You can’t claim ‘deficiency of services’ when you haven’t paid media. This is a plain and simple purchase of media.

Typically even the large ad agencies have stayed away from legal recourse on their clients, often because the clients are much larger than them, and have more funds and resources to fight a legal battle in court. So Jigsaw accusing Stayzilla of fraud is very much almost a first in the annals of advertising history. May more ad agencies be as tough with their clients. A long time time ago political parties drowned a few Indian agencies by defaulting on media payments. Then the ad agencies took a stance with political parties : to accept business only on advance payments. The ad agencies should perhaps be doing the same with start-ups.

As for Stayzilla, my guess after reading the media reports, is that its just another petty media defaulter.

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