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Media rebates: What is the industry doing about it?

The WFA has come out to laud ANA on its latest sturdy on media rebates – a practice that gets media agencies rebates and other forms of income from media owners, leveraged by client volume spend. Global media transparency has been a core part of WFA’s focus since its foundation over 60 years ago.

The study commissioned by the Association of National Advertisers highlighted that numerous non-transparent business practices, including cash rebates to media agencies, were found to be pervasive in a sample of the U.S. media ad-buying ecosystem.

KEY FINDINGS

The K2 Intelligence report indicated that non-transparent business practices employed by agencies, some of which may or may not have been contract-compliant, included the following:

  • Cash rebates from media companies were provided to agencies with payments based on the amount spent on media. Advertisers interviewed in the K2 Intelligence study indicated they did not receive rebates or were unaware of any rebates being returned.
  • 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. Sources told K2 Intelligence that these services “were being used to obscure what was essentially a rebate.”
  • Markups on media sold through principal transactions ranged from approximately 30% to 90%, and media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients’ best interests.
  • 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 U.S. market resulting from agencies holding equity stakes in media suppliers.

The study revealed that non-transparent business practices were found across digital, print, out-of-home, and television media. In addition, the non-transparent practices were found to exist across the spectrum of agency media entities.

Results of the study were released by the ANA in conjunction with K2 Intelligence, which conducted the assessment.

“Advertisers and their agencies are lacking ‘full disclosure’ as the cornerstone principle of their media management practices,” Bob Liodice, president and CEO of the ANA.

“Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners.”

Read Also: Is your media agency charging you low commissions? Here’s what lies beneath

The K2 Intelligence study, conducted from October 2015 through May 2016, reveals “evidence of a fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship.”

In general, advertisers expressed a belief that their agencies were duty-bound to act in their best interest. Meanwhile, many agency executives interviewed said their relationship to advertisers was solely defined by the contract between the two parties.

There were systemic elements to some of the non-transparent business practices reported by K2 Intelligence in the report. Specifically, the study revealed that senior executives across the agency ecosystem were aware of, and mandated, some non-transparent business practices. Contracts for rebates and other non-transparent business practices were negotiated and sometimes signed by high-level agency executives.

In addition, K2 Intelligence found evidence of potentially problematic agency conduct concealed by principal transactions; as a principal, an agency (or its holding company or associated company) purchases media on its own behalf and later resells it to a client after a markup.

“From the beginning, this has been a study designed to shed light on certain non-transparent practices in the media-buying landscape — not an investigation or an audit,” said Richard Plansky, executive managing director of K2 Intelligence. “At the ANA’s insistence, this has never been about pointing a finger at any individual or company.”

Plansky said the documentation cited in the report included, among other things, emails between agency executives and media companies in which rebates were specifically discussed in detail.

Liodice indicated that a fundamental shift in the business model for media agencies over the past several years has created a challenging new media landscape for both agencies and 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,” Liodice said. “This has led to disconcerting conflicts of interest and a lack of transparency.”

WFA’s position on this, as established in its Media Charter, is clear:

Advertisers expect agencies to fully declare revenue streams directly or indirectly related to their business, for example, via rebates and ‘arbitrage’ among agency trading desks.

Research from the WFA has previously identified that rebates are less pervasive in the US than in other countries, but that a large share of these are being retained by media agencies.

“We are not against rebates and AVBs in and of themselves but we believe that advertisers should receive a fair share of these and, crucially, that rebates should not create issues surrounding conflicts of interest,” the WFA statement said.

Markets such as China and Ukraine suffer from some of the lowest levels of transparency when considered globally, as identified by WFA research, which it conducts on an ongoing basis. Rebates, unbilled media and market complexities characterised by layers of intermediaries and brokers are all widespread issues contended with by clients around the world.

Globalisation and new media trading practices have amplified and deepened transparency concerns, and the news from the ANA, itself a member of the WFA, confirms that these issues are also taking place in the world’s biggest ad market.

“Media transparency requires constant global scrutiny and WFA is extremely focused on helping clients to navigate and address this complex issue. WFA guidance and best practice guidelines in relation to strengthening media agency contracts, programmatic media, and now ad fraud (see here), help clients to understand and mitigate the costs of an opaque and often inefficient ecosystem.

Stephan Loerke, WFA CEO, said “Transparency has long been considered a critical issue by WFA and remains a priority for its members. We welcome the findings from the ANA and will continue to address the challenge globally, not least in emerging markets where transparency problems can be more acute.

“Advertisers should take the lead in addressing the challenge but WFA also believes in, and calls for, global cross-industry collaboration to find answers. That’s why we have been conducting systematic dialogues between media agencies and clients around the world to better understand the issues and ultimately try and engender greater trust in the marketplace.”

TRANSPARENCY IN CONTRACTS

While the report indicates that some contracts between advertisers and their agencies allowed the agencies to engage in non-transparent business practices, transparency and contract compliance were clearly not one and the same in media buying. Even if a particular non-transparent practice was permitted by contract, advertisers were often deprived of relevant information for optimum decision-making.

Accordingly, K2 Intelligence focused on bringing to light non-transparent practices throughout the media-buying ecosystem, even if those practices were contract-compliant. In fact, the study revealed that, in many cases, advertisers were unaware of details in their agency contracts that addressed the issue of transparency, particularly because some contracts had not been reviewed or updated in as long as 10 years.

“The K2 Intelligence report unearthed a ‘fundamental disconnect’ between advertisers and their media agencies,” said ANA Chairman Tony Pace. “As media practices have become more complex, stewardship and oversight needs to become more precise, more thorough, and more fully transparent.”

RECOMMENDATIONS

The ANA is developing suggested contract language to address media-buying transparency. In addition, the ANA commissioned Ebiquity and FirmDecisions to develop guidelines and recommendations for ANA members to consider based on K2 Intelligence’s findings.

Ebiquity and FirmDecisions did not participate in the interviews that formed the foundation of the assessment and, like the ANA, is unaware of which specific companies and individuals were interviewed. Ebiquity and FirmDecisions’ full report containing a list of detailed, long-term recommendations will be released in the coming weeks.

In the near term, it is recommended that marketers immediately take the following steps in anticipation of the complete set of recommendations soon to follow:

  • Re-examine all existing media agency contracts and meticulously review all terms and conditions. As appropriate, use an expert, independent third party to provide insight and contractual expertise to optimize transparency, upgrade reporting and analytics, and substantially expand audit rights if necessary.
  • Implement media management training, particularly in the areas of 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. Be critically clear and comfortable with the agency’s role as agent and principal. Ensure there are no conflicts of interest, and that there are clear processes in place for resolving conflicts that might emerge.
  • Assess whether contract terms permit you to “follow the money” by having full accountability for every dollar that is invested with a media agency. It is recommended that audit rights cover not only the media agency but the holding company and any affiliated companies that touch your business.

Liodice said these guidelines will help set the stage to take additional steps upon release of the complete set of recommendations by Ebiquity and FirmDecisions in the coming weeks. The recommendations will focus on contract provisions, principles, and re-establishing advertiser primacy in the industry.

Copies of the full report, along with related documents, are available and can be downloaded here.

 

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