The advertising industry may need a lesson in brand integrity after another few months of less-than glorious headlines.
Back in March, an Ernst & Young review unearthed irregularities in media-buyer MediaCom’s reporting of commercial airtime given to clients including IAG and KFC in Australia.
Soon after, MediaCom’s ex-boss Jon Mandel caused a stir when he told the delegates at the US Association of National Advertisers’ annual conference that shady money making practices at ad agencies are rife in the US.
While he didn’t name any names or cite specific examples, Mandel, who now runs marketing-analytics firm PrecisionDemand, said media agencies “aren't living up to their fiduciary duties to clients” and "cross the line of acceptable conduct in a partnership."
Both incidents reignited a broader media industry debate about the level of trading transparency between media owners (TV stations, newspapers and websites), media buyers/agencies and their corporate advertiser clients.
Negotiations on “value banks” - better known as rebates or annual volume bonuses – have been a sensitive topic for some time and remain at the centre of the argument.
In theory, and in fairness, agencies should pass media rebates along to their clients (advertising brands) to reduce the overall cost of their campaigns.
However, there’s a growing fear that agencies are using free inventory in pitches at the expense of existing clients, or selling ad space on and pocketing the proceeds.
It becomes even murkier when the agencies start dealing back inventory to clients via their own trading desks or sell space in barter deals to pay for the goods and services they need.
This legal grey area is made more opaque by that fact that most of the rebates and other non-transparent dealings occur at the holding-company level, where it's harder to track or audit.
The recent uproar led Brian Wieser, analyst at Wall Street investment advisor Pivotal Research, to downgrade his ratings on the four major ad holding companies - stamping a ‘sell’ rating on WPP (LON:WPP), which owns GroupM, in the process.
Omnicom, Publicis and Interpublic also had their ratings cut, with Wieser suggesting that there is a growing perception among marketers that agencies have been misleading about their media practices “without clients’ full understanding or support.”
“With a drumbeat of negativity to come from marketers only now learning about the issue, we recommend investors move to side lines or exit the sector for the time being,” said the analyst.
Wieser makes a good point, given that media agencies represent 15% to 20% of revenues among the holding companies and have been growing by a low double-digits percentage.
Any clampdown would have a major impact on company performance and signs suggest change is already on the way.
The Association of National Advertisers set up a ‘transparency’ task force in April, formed by a combination of agencies and advertisers.
“We expect this task force to push for maximum transparency over how agencies are remunerated, which could result in further pressure on fees and,” said Berenberg analyst Sarah Simon in a recent note.
Meanwhile, media analytics firm Ebiquity (LON:EBQ) and programmatic media data aggregator AdFin are working on a study to analyse where the margins are being made and by whom (agency, publisher, middleman).
“Both projects (taskforce and independent study) appear to have a similar aim of ensuring that agencies cannot profit unduly from a lack of transparency,” added Simon.
AIM-listed Ebiquity (123p a share) works with over 1000 clients worldwide, including over 90% of the major global advertisers.
The company claims to provide a greater level of clarity to brands through its customised data analytics, online tools and consultancy services.
Six major marketing communications groups, including WPP, still account for over 60% of global advertising spend, which amounts to some US$500bln.
That means it’ll be tough to crack that kind of purchasing power, but Ebiquity’s high tech approach means the market already starting to get a clear picture of what’s going on.
Advertisers themselves are clearly hungry for a new approach and seem desperate to measure and optimise the return on investment from their advertising activities.
Earlier this year Mark Butterfield, head of global media at pharmaceutical conglomerate Boehringer Ingelheim said he had “little or no clear understanding” of what percentage of digital spend is being delivered to the media owner and what is being taken in fees from either the agency or middle men.
“There needs to be clarity in the value chain otherwise clients will continue to question the validity of the digital buy,” Butterfield added.
Meanwhile, the World Federation of Advertisers (WFA), whose members include international brands such as, Coca-Cola, Red Bull, Visa and Johnson & Johnson, recently cited the continued “lack of transparency” in the industry.
Ultimately, for everyone, the goal should come back to making brand communications as powerful as possible to everyone’s benefit.