United States: [Happy] Anniversary

Last Updated: June 8 2017
Article by Douglas Wood

A year ago today (June 7, 2016), K2 Intelligence released an Association of National Advertisers' commissioned study entitled, An Independent Study of Media Transparency in the U.S. Advertising Industry.  The painstakingly-researched and detailed report identified numerous non-transparent business practices that were alleged to be pervasive in the U.S. media ad buying ecosystem. Reminiscent of the Barbarians at the Gate and the Big Short, the findings sent shock waves throughout the industry by suggesting a fundamental disconnect between advertisers and their media agencies.  The report disclosed that long-standing rumors of complicated schemes to hide and divert rebates and other incentives were well-founded and that media agencies were not necessarily acting in the best interests of their clients by, among other things, wrongfully retaining rebates and other incentives given to them by media platforms/publishers that were rightfully the property of the advertisers.  Some headlines read "...CEO Alleges Widespread U.S. Agency Kickbacks" and "Kickbacks. Yes.  They're Real."

While non-transparency was an issue well before the K2 Report was released (see WTF is Agency Transparency?), on this anniversary of the K2 Intelligence Report, here's a summary of how the industry has evolved over the last year.

Agency Response

Not surprisingly, in the immediate aftermath of the K2 Report, many agencies refuted that non-transparent activities took place.  Four of the major media buying holding companies (WPP, IPG, Omnicom and Publicis) issued public statements that denied any wrong-doing and criticized the report.  Over the last year, the holding companies have continued to claim, both publicly and in private, that they are acting in a fully transparent manner despite numerous press reports and other allegations to the contrary.  And there have been interesting changes addressing transparency by Dentsu, WPP, and Havas.  While such changes may be improvements, without robust auditing rights throughout the entire holding company structure, verifying true transparency is impossible.  Only independent media buying companies (e.g., Mediasmith, The7Stars, and Horizon) have publicly embraced audit rights that may insure greater transparency across various media platforms.

Despite some progress, several instances over the last year have called into question the transparent nature (or lack thereof) of the media industry.  Some of the more public incidents/examples include the following:

  • Leaked documents from one "top six" agency showed that about 40% of its ad-buying income in 2015 came from hidden kickbacks as well as "other" income.
  • The Wall Street Journal announced that the US Justice Department is investigating whether advertising agencies are engaging in the practice of "bid rigging" to generate work for their in-house production units. Various agencies have been subpoenaed in connection with the DOJ's investigation of video-production and post-production practices.
  • A major holding company reportedly engaged in 633 "suspicious" digital ad transactions affecting 111 clients, including "discrepancies in advertising placement periods either made consciously or by human error, failure of placement, and false reporting regarding performance results or achievements."
  • The former head of digital trading of a "big six" agency stated that agencies make money on deals favorable to the agency that aren't necessarily in the interest of their clients.  Another media veteran claimed that media agencies are in a "downward spiral" and thus have been seeking hidden programmatic fees.
  • A major publisher in the UK admitted to paying rebates to ad and media agencies.
  • A report from WhiteOps revealed that an ad-fraud scam reportedly cost advertisers $3 million to $5 million per day.
  • Australian press reported "Declining Agency Fees And Dubious Profits: Symptoms Of A Broken Business Model?"
  • In Confessions of an ad tech veteran: 'Publishers need to audit their exchanges' an executive reported that, "... the ANA report's focus on rebates eclipsed the fact ad tech tax remains alive and well. In fact, it's getting even worse..."
  • In "Media Trading Transparency: Where There's Smoke...", Media Post contributor Maarten Albarda reported on an ex-agency head of digital trading who claimed, "agencies make tons of money on all kinds of deals that favor their income, but aren't necessarily in the interest of their clients."  The article went on to say that, "The ISBA, the U.K. counterpart of the ANA, said [the executive's] statements were significant and call for scale change in the media industry." while agencies she interviewed said the executive's "allegations were only made for his own benefit, since he had just launched himself as a consultant to help advertisers with agency trust issues."
  • Various reports indicate that programmatic demand-side-platforms and sell-side-platforms engage in non-transparent activity to earn additional fees/payments.

Needless to say, all of this has not helped address the growing feeling of distrust between advertisers and agencies over transparency and other relationship issues. Nor has it helped that the transparency issues are in addition to other supply chain credibility problems that have plagued advertisers over the last year, such as bot fraud, reporting discrepancies via walled gardens, and brand safety concerns. Examples of failed opportunities to resolve some of these concerns are reflected in two recent reports released by the ANA: Programmatic: Seeing Through the Financial Fog and Bot Baseline 2016-2017 Fraud in Digital Advertising. The former report reveals that despite claims to the contrary, the supply chain in programmatic digital buying can be transparent.  The latter report reveals that media buyers can do more to address bot fraud.

Advertiser Response

The K2 report and the incidents listed above have caused many advertisers to take notice of the serious nature of the non-transparent allegations.  Marc Pritchard, Chief Brand Officer of Procter & Gamble Co. has been a vocal advocate of media transparency issues, stating earlier this year that "the days of giving digital a pass are over ... It's time to grow up.  It's time for action."  Some advertisers have taken action and made significant strides towards transparency and accountability. Wall Street Journal columnist Suzanne Vranica reported that large marketers have conducted audits of their media agencies and their agency contracts.  Numerous advertisers have renegotiated or are currently renegotiating their media agency contracts while others have settled with their agencies for past practices and recovered, according to press reports, millions in withheld rebates, incentives, and other credits.  Business Insider claims agencies are secretly settling with clients to avoid audits.  Other advertisers now include specific transparency mandates in RFP's reflecting the terms and conditions in the ANA's Master Media Planning & Buying Services Agreement form prepared by Reed Smith.  Others are embracing the ANA's best practices recommendations contained in the ANA-Ebiquity/Firm Decisions Media Transparency: Prescriptions, Principles, and Processes for Advertisers. One advertiser even reportedly let go of its agency due to a breakdown in trust.

So while there are some positive signs, there is much work to be done.   The just released ANA "Trends in Agency Compensation" reveals that while 75% of study participants were aware of the K2 Report and reviewed media transparency with their senior management, less than half of those who were aware have taken any action to address the allegations.  Assuming this report is accurate, that means more than 50% of the industry is either unaware of the transparency issue or may be failing to deal with it.  In today's world of regulations like Sarbanes Oxley that require adherence to financial controls, that result is astounding.  Thus,  many advertisers, perhaps even the majority, need to come to grips with the issues before they spiral out of control and regulators or shareholders start asking awkward questions.  The question is not, as one agency executive suggested, "Have you heard a lot? Has a major scandal surfaced?".  The questions are what is happening behind the scenes and what, if any, financial controls advertisers are putting in place to insure they are properly stewarding company and shareholder investments in media and production.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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Douglas Wood
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