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A new report into media ad buying from the Association of National Advertisers (ANA) has slammed the lack of transparency around agency practices including cash rebates, raising significant questions about the state of the industry both abroad and locally.
The new report, An Independent Study of Media Transparency in the US Advertising Industry, produced by K2 Intelligence in the US and commissioned by the ANA, claims numerous non-transparent business practices are rife across the US media ad buying landscape and impacting most channels including digital, print, out-of-home and TV. The most notable of these, and the practice which has raised the most debate in Australia, is the use of undisclosed cash rebates from media companies to agencies based on the amount spent on media buying.
The report, which took seven months and was completed in May, claimed it found evidence of a “fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship”, noting a number of non-transparent business practices.
While the report found some contracts between agencies and advertisers had allowed these non-transparent practices to be maintained, it stated transparency and contract compliance were not one and the same in media buying. As a result, advertisers had often been deprived of the information required to make informed decisions, K2 said.
Among the key findings from the K2 report are:
- Cash rebates from media companies provided to agencies with payments based on the amount spent on media. According to K2, advertisers interviewed were not aware of any rebates being returned or had not received any such rebates.
- Rebates in the form of free media inventory credits.
- Rebates structured as ‘service agreements’, in which media suppliers paid agencies for non-media services, such as low-value research or consulting initiatives that were often tied to the volume of agency spend. According to K2, several sources suggested these services were being used to obscure rebates.
- Markups on media sold through principal transactions ranging from 30 per cent to 90 per cent. The report found media buyers were sometimes pressured or incentivised by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients’ best interest.
- Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.
- Non-transparent business practices in the US as a result of agencies holding equity stakes in media suppliers.
- Re-examine all existing media agency contracts and T&Cs, using third parties and expertise to ensure transparency, reporting and analytics and audit rights are clear and appropriate.
- Implement media management training, particularly in contract development and management of the digital media supply chain.
- Confirm and reaffirm the basis on which your media agency is conducting your media business. Ensure there are no conflicts of interest.
- Assess whether the contract permits you to ‘follow the money’ by having full accountability for every dollar invested with a media agency.
“Advertisers and their agencies are lacking ‘full disclosure’ as the cornerstone principle of their media management practices,” said ANA president and CEO, Bob Liodice. “Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners.”
The K2 report is based on 143 confidential interviews with 150 individual sources off the back of 281 requests, 117 of which were directly involved in media buying in the US. Of these, 59 reported direct experience with non-transparent business practices, and 34 claimed to be the subject of rebates. Several of these practices are illegal in the US. However, in Australia, media rebates, commissions, value banks and other incentives may be legal if disclosed.
In response to the report, the Australian Association of National Advertisers said K2’s findings highlighted the ongoing challenge for local advertising and media buying agencies have in providing transparency around value extraction.
The association said it is reviewing the findings and plans to monitor how the US and other markets respond in order to update industry frameworks and guidelines.
“Any best practice guidelines or initiatives that emerge are likely to have universal application, so we will aim to share them with our members here,” said AANA CEO, Sunita Gloster.
However, she suggested advertisers and not just agencies should take heed from the report’s findings.
“Every advertiser’s contractual relationship with its media partner is unique and commercially and competitively sensitive. Individual advertisers therefore have the primary responsibility to ask the right questions of their agency partners so that they can be reassured there is transparency,” Gloster said.
“Whilst the US report reminds advertisers to remain vigilant, it is important that we remember these principles of transparency, disclosure and fairness are central to the reputations of all parties involved. Equally importantly, adherence to these principles is crucial to achieving out common goal, which is to show the link between advertising and business growth.”
The ANA’s decision to commission the report came after Mediacom CEO, Jon Mandel, alleged in a speech last March that media agency rebates and kickbacks were widespread.
Last week, AdAge reported media giants, WPP and Omnicom Group, had sent letters to the ANA asking it to back up claims alleged in its latest report in advance of release, while WPP's GroupM released a statement reiterating its commitment to fair practices with clients.
Liodice noted a fundamental shift in business models for media agencies in recent years, which has created a new media landscape for both suppliers as well as advertisers.
“Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees,” he said. “This has led to disconcerting conflicts of interest and a lack of transparency.”
K2 noted a report by Forrester undertaken for the ANA of 153 US advertisers in 2014, found 46 per cent were concerned about transparency in media guys. Of these, 42 per cent indicated their concerns had been heightened in the past year around specific practices such as rebates, digital programmatic buying and agency trading desks.
In Australia, questions about the lack of transparency and irregularities in media agency reporting came to the fore in December 2014, after GroupM agency, MediaCom, was accused of TV campaign misreporting and wrongful charging. A subsequent audit conducted by Ernst and Young’s fraud division revealed five advertisers, including Foxtel and Yum! Brands, exposed a number of irregularities including manual manipulation of post-campaign analysis reports for TV buys.
The K2 report said it is now working on a list of recommendations, to be released in coming weeks. In the meantime, the report had several pieces of advice for advertisers: