In a previous era, advertising agencies and their clients were joined at the hip. Now, some of the most powerful entities on Madison Avenue are grappling with serious fractures.
A damning report issued last week by one of the ad industry’s most influential trade organizations alleged that many of the firms that allocate billions of dollars on behalf of blue-chip marketers like Procter & Gamble, Coca-Cola, and Apple are being influenced in how they spend that ad cash — and not always by the interests of their clients. A seven-month probe by the Assn. of National Advertisers found what the group called pervasive evidence that media buying firms — the companies that negotiate the placement of commercials everywhere from ABC to YouTube — are getting kickbacks in the form of cash or advertising inventory in exchange for earmarking more of their clients’ money for a particular media outlet.
Bob Liodice, chief executive of the organization, says it “got a lot of support” after the release of the report. “I would say more than I expected,” he notes. The ANA plans to release a new template for contracts by the end of June that would eliminate the potential for such kickbacks.
Advertising dollars fuel much of Hollywood’s engine, and if the report puts the media industry on edge, it’s because there may be less lucre to go around. Marketers and agencies could start to spend time and budgets on auditing activity, which could strangle the flow of advertising funds. “Auditing doesn’t come free,” notes Larry Chiagouris, a professor of marketing at Pace University in New York. “The agencies are going to have to increase their fees to cover the costs associated with putting in additional checks and balances, and everything is going to be more expensive.”
Media buyers were once relegated to the metaphorical basement of the ad agency, while the creative geniuses who came up with snappy slogans and catchy jingles lapped up the lion’s share of attention. That pecking order was a throwback to a different epoch, when commercials were largely distributed among three big TV networks and a handful of national magazines and newspapers. But the rise of mobile devices, social media, and streaming video means advertisers need help to sprinkle their commercials around, and the ad-buying firms, which analyze audience behavior and negotiate ad prices, have in many cases moved to the top floor.
Now they are facing scrutiny. Relying on interviews with 150 people conducted by K2, an investigations firm, the ANA found that media owners paid rebates to agencies “in amounts ranging from 1.67% to approximately 20% of aggregate media spending, depending upon the deal.” In some cases, the percentage of the rebate owed increased along with agency spend, the company’s report stated. The organization found instances in which media agencies could purchase advertising inventory from a supplier, then mark up the price as much as 30% to 90% before passing it along to a client. Evidence suggested that a media agency’s owner, typically one of five or six global holding companies, may have pressured individual buyers to direct a client’s ad money to areas where a markup might be possible, the report stated.
These sorts of arrangements are common in Europe and Latin America but have long been viewed skeptically in the U.S. Some executives suspect that the onset of new ways of doing business in the post-dot-com economy has opened wormholes. Advertisers are fascinated by so-called “programmatic” inventory, which is purchased according to a predefined set of data put in place through software that automates the process. They also are intrigued by private ad-inventory exchanges, which reduce the transparency around the purchase. And they have been wooed by digital-ad players who are only too happy to structure advantageous deals.
Many of the agencies thundered against the allegations, specifically because the ANA released them without naming the rule-breakers. The 4As, a trade group that represents ad agencies, called the ANA report “anonymous, inconclusive, and one-sided” and urged the organization to make available details of agencies potentially deceiving clients.
The world’s biggest ad conglomerates, each of which operates media-buying units, also took issue with the report. Omnicom Group, Publicis Groupe, WPP’s GroupM, and Dentsu Aegis Network were among the companies deriding the effort. Others have tried to eliminate the problem: Interpublic Group in 2005 scoured thousands of contracts in 40 countries and set aside millions of dollars to restore to clients any cash its overseas agencies may have received.
How did it come to this? For decades, ad agencies acted as if they were their clients’ most trusted partners. Indeed, BBDO, an Omnicom ad agency that had a decades-long relationship with Pepsi, was known for banning Coca-Cola products from its offices. Now, observers agree, the schism is a sign of the times: Advertisers and agencies are treading different paths.
In the industry’s earliest days, many agencies were independent operators and hewed close to the spirit of their entrepreneurial founders. Compensation was easier to draw and was often guaranteed. An agency typically received a commission that represented a healthy percentage of the money that the client spent on advertising overall. These days, most agencies get a fee that big corporations try to winnow down by having their procurement departments monitor it.
“Clients are constantly looking to pay their agencies less,” says Russel Wohlwerth, a principal at External View Consulting Group, a company that helps advertisers structure ties to agencies. “The bottom line is that this business has never been more complex to serve.”
Relationships have become more fleeting. As TV’s 2015 upfront market got under way, a pack of Madison Avenue’s biggest names put their media-buying accounts in review. Among the marketers: Procter & Gamble, General Mills, Fox, L’Oréal USA, Johnson & Johnson, Coca-Cola, Citibank, Sony, and Volkswagen. Just last week, AT&T announced that it would review its agency accounts, which are split between Omnicom and WPP.
Most of the industry’s biggest agencies, meanwhile, may work for a soda-maker or smartphone manufacturer, but they must also report to a higher authority: a publicly traded entity that needs to achieve quarterly milestones. All of the ad companies say they maintain policies against rebates and kickbacks, but in a world where advertisers are bidding for inventory in multiple ways, there’s impetus to mine those methods for new revenue.
Both sides would no doubt like to mend the tears in the relationship. For advertisers, that may have to come with a firmer oversight of the revenue stream. “The agency community has not accepted the facts. They’ve just blown them off,” says Liodice. “If we’re going to heal, I think we have to begin by accepting the report’s conclusions, and build from there.”