UK: Well Always Have…

Next week, the advertising industry gathers in Cannes, France for its annual awards celebration. In addition to the much coveted Lion statuette, countless leaders in the industry will be on hand for networking, speeches, and partying. And there will be the usual dose of celebrities as well. Amid all this revelry will be conversations about cutting edge issues, including media transparency. I'm privileged to participate in a panel on Monday hosted by International Advertising Association and moderated by Carla Michelotti, entitled "Presumed Innocent: Finding Clarity in Transparency". With Carla leading the discussion, Emmanuelle Rivet, Cross-Industries Technology Practice Leader at PwC, and I will explore the murky world of media and production transparency.

Before I take flight to France, let me recap some important points worth considering as we imbibe on a few glasses of rosé, the apparent official beverage of Cannes. Readers may also find my last blog – [Happy] Anniversary – on what's happened in the last year of interest as well.

The Schizophrenia of Principals and Agents

Much has been written about the legal status of media buying agencies. Are they buying media as agents for a disclosed principal (the brand) or are they buying media as principals and reselling time and space to their brand customers. My response? When it comes to transparency, it doesn't matter if agencies are acting as principals or agents. The issue is one of transparency, not legal status. A principal in a transaction can be as transparent as an agent if a contract dictates it. So let's stop wasting time using an agency status as a principal transaction as an excuse to reject transparency.

That said, there is a legal difference between agents and principals that brands need to understand. An agent owes a fiduciary duty to act in the best interests of its principal, e.g., a brand, and to account for all monies entrusted to the agent, including any "hidden" compensation. An agent also vouches for the performance of suppliers it selects to deliver on promises it makes to the brand. In the media world, the media agency is the expert and gate keeper. Who they pick in the supply chain, unless contractually disclaimed, is their responsibility.

On the other hand, a principal reselling goods or services to its customers has no fiduciary duty and is free to act in its own best interests and not necessarily act in a manner that is best for its customer.

There is another important side to principal status as well. When a principal sells goods or services, it is liable for the performance of those goods and services and component parts and sub-contractors in the supply chain. Absent an agreement with a customer that disclaims liability for components or sub-contractors, a principal remains responsible. For example, if I were injured in a car accident caused by a defective airbag sourced by the manufacturer from a third party, that does not excuse the manufacturer from liability to me. The manufacturer cannot defend a claim by telling me my problem is with its supplier, not them. That doesn't work. Thus, in a principal transaction with a media buying agency, a brand has every right, absent a contractual provision to the contrary, to expect the agency to take full responsibility for supply chain fraud, bots, viewability, measurement, and placement on websites that undermine brand safety. So if agencies want to resell media as a principal, let's dispense with protestations about being responsible for everyone in the supply chain.

Next up is risk in the context of media buying as a principal. To understand it, I asked an economist for a definition of risk:

"At-Risk Basis" means Agency's payment or commitment to pay for goods or services using Agency Assets. "Agency Assets" means cash, proceeds from credit facilities, or other forms of assets that are not co-mingled with assets that are not the property of Agency or are dependent upon subsequent payments by Advertisers whereby the history of non-collectible accounts receivables from such Advertisers provides the upper limit of "At-Risk Basis" of Agency.

Put another way, without true skin in the game, a media buying agency is not a legitimate principal. Thus when an agency buys space and time relying on guaranteed future payments from its brand clients, where is the risk? How is principal status justified where no true risk exists?

Don't get me wrong. There is nothing illegal about non-transparent behavior as long as a brand agrees to it or is fully aware it is happening and fails to object. But where a brand has not agreed or is not aware of the schemes, there may well be a breach of the agent/principal relationship and, perhaps, the contract between the agency and the brand.

It's Not Just About Media

Since last year's detonation of the bombshells in the K2 Intelligence report, the debate on transparency has expanded. Published and anticipated reports on transparency and potential losses to brands now include digital analytics and production.

Digital Analytics – Brands Can Have All the Ones and Zeros They Want

Supply chain credibility problems in the digital arena have plagued brands for years without a meaningful solution. Non-human traffic, reporting discrepancies via walled gardens, audits, alarmingly high waterfall effects on investments, and brand safety concerns are just a few.

Amid this confusion, much can be learned from two recent ANA reports – Programmatic: Seeing Through the Financial Fog and Bot Baseline 2016-2017 Fraud in Digital Advertising. The programmatic study led by Ad/Fin, Ebiquity, the ANA and the ACA is an investigation of transparency in the buy side (DSP) ecosystem. It proves the proposition that the DSP-side of digital transactions can be entirely transparent. The often heard excuses of confidentiality and ownership of data, among others, are hollow when juxtaposed against the investigation's results. In that regard, I encourage readers of the report to ask themselves why agency holding company trading desks refused to participate. The second report is the ANA sponsored study conducted by WhiteOps outlining what more media buyers and brands can do to address bot fraud. While progress has been made in the last few years, much more needs to be done.

Production – Bidding Déjà vu

A commercial routinely costs hundreds of thousands of dollars to produce. According to a soon to be released ANA report, transparency behind production may be overdue. To a degree, the current debate harkens back to 2002 when some advertising executives were sent to federal prison for production bid rigging. Did that incarceration put an end to the practice? The Antitrust Division of the Department of Justice may believe the answer is "no" and has an active investigation centered on production bid rigging. Watch the press for developments.

In recent years, agency holding companies have also consolidated production and formed subsidiaries that produce commercials and provide other post production work for their clients. One proposition supporting this consolidation is possible savings over what independent production and post production companies charge. That may be a good thing but whether that is true or false, before brands move their production work to holding company subsidiaries, they may want to ask themselves (1) whether they are comfortable adding production to the services menu of the oligopoly that manages more than 80% of global media buying dollars, and (2) how they insure that the comparative costs and any savings are transparent.

What Lies Ahead

Like it or not, greater transparency in brand/agency relations is here to stay. Agencies can no longer avoid greater scrutiny. Assuming ANA reports on media, programmatic, and production are accurate, brands and agencies have questions that need to be answered and systemic changes that need to be made.

How all this will eventually be resolved is a matter of speculation.

Let's talk about it in Cannes!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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