ANA Raises Rebate Ruckus, but Do Its Members Care?

There Are Issues Why Marketers Don't Want to Probe Too Deeply Into Their Own Contracts

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The Association of National Advertisers report about media rebates in the U.S. has again plunged the industry into controversy by raising questions about "non-transparent" agency practices. But it also raises questions about how much marketers themselves actually want transparency. And that answer is sometimes as clear as mud, with some signs pointing to an ANA staff that's more aggressive on the issue than members.

The product of a seven-month inquiry by a team of five K2 Intelligence investigators involving 150 anonymous industry sources largely covers, albeit in far greater detail, practices that have been reported for four years or longer, and intensively for the past 15 months. It names no agencies, media companies or marketers involved in any of the deals it describes, which it calls "non-transparent" but not necessarily illegal.

The 4A's and agencies roundly criticized the report for revealing no details of anyone involved in the transactions described and painting the entire industry with a broad brush based on anonymous sources. But ANA CEO Bob Liodice said in an interview it would have been impossible to trace the money flow from media company to agency to client without revealing identities, or to get the information without promising confidentiality. The purpose of the report, Mr. Liodice said, was to prove and describe practices that agencies, holding companies and the 4A's have been roundly denying for years. And he believes the report does so. He dismissed any notion that the ANA staff was out ahead of its membership on this.

"The ANA board of directors championed this, funded this," Mr. Liodice said. "It's quite a substantial investment. This is where the board said, 'Put your money where your mouth is.'" As if to underscore that, ANA board chairman Tony Pace wrote an open letter to members last week supporting the study.

But while the report raises big questions about agency conduct, it also raises questions about how much marketers themselves actually care.

Only two passages gleaned from 29 marketer interviews in the 57-page report show marketers actually conducting audits. And only one alleges an actual breach of contract, in which an advertiser had the right to audit beyond its agency to the global holding-company entities, but said the agency "flatly refused to allow us anywhere near the holding company-level accounts or numbers, so technically they were in breach of contract." The advertiser decided against suing over fears it would hurt the working relationship with the agency. And the marketer said "it would be an enormous task to unpick the various stitches in the tapestry to find out where the gold is buried."

Another passage cites a marketer that conducted an audit of an agency trading desk and, based on what was found, decided to build its own, but made no allegations of contractual breach.

K2 also found cases of marketers that didn't know their audit rights with agencies, hadn't negotiated key audit rights into their deals or decided doing audits wasn't worth the trouble. These interviews were conducted seven to 14 months after former Mediacom CEO Jon Mandel delivered a scathing and widely reported speech to an ANA conference alleging widespread rebates and other suspect practices by media agencies.

So if marketers and ANA members are so worked up about the problem, why haven't they tried harder to find out if they've been victimized?

"This is like the dirty little secret nobody talked about," Mr. Liodice said. "On a one-to-one basis, do you think marketers could say, 'Let me share my contract, and these are my personal frustrations, and these are my shortcomings'? They did not have a basis by which to have that conversation. As such, until they had a level of common knowledge out there, they really didn't understand how significant the issue was."

K2 couldn't look at individual client-agency contracts because they're generally subject to nondisclosure agreements, Mr. Liodice said.

But it's clear that client behavior has been "suboptimized," he said. "They could certainly do a better job collectively to write better contracts. They could have done a better job to have leveraged their audit rights. The behavior on the client side was a little more paralyzed than one would have liked."

Despite a wave of agency reviews last year in the wake of Mr. Mandel's allegations, Bernhard Glock, a former Procter & Gamble media executive and now a consultant who has worked with consulting firm MediaLink on several reviews, said he knew of only one where the transparency issue figured prominently. But as a former chairman of the World Federation of Advertisers, Mr. Glock said the issue is still one the ANA should take up.

"If you don't do that, who else?" Mr. Glock said. "If you see issues, you as an association have to do something, or you are not trustworthy. Some clients may not see what goes on. They may see it and not act. They may think that's just part of the way business has been done. But as a trustworthy association, I think you have to act."

P&G issued a statement backing the ANA's report, while saying it takes a "trust but verify approach" with its own agency that includes regular audits.

Bill Kashimer, an ANA Media Leadership Committee member when the group initially embarked on its transparency probe, including hiring Mr. Mandel in 2014, said the ANA staff appeared to be pushing the issue harder than the board members, who mainly said they were unaware of U.S. rebates.

Now a media consultant, he acknowledged that rebates and other practices described in the report may well exist, but said he still doesn't care much, and doesn't hear much from clients about it either.

"Why should the client be concerned if they're getting the value and paying a fair price?" he said. The only way to discover undisclosed rebates is through a costly audit that he likened to "finding a needle in a haystack. I'm sure it does go on, but I'm not sure it's as big as we think it is."

While the report's executive summary said nontransparent practices were reported in digital, out-of-home, print and TV deals, details in the report focus mainly on digital, particularly programmatic trading through agency trading desks and out-of-home. Collectively, the digital display and out-of-home markets account for around 20% of the $192 billion U.S. media market, according to eMarketer data.

The report does extensively allege deals in which agencies demanded rebates or equity stakes, particularly stock warrants that don't have to be publicly disclosed unless exercised, in return for giving ad tech companies client access. Ad-tech is an estimated $30 billion market, but one where marketers, particularly bigger ones that are ANA members, often deal directly with vendors.

One practice described in the report may help illustrate why marketers don't always care much about transparency. It describes "principal deals" in which agencies take possession of media and resell it to clients at an undisclosed markup, but charge no fee. The agency may make more money than from a fee, but it all shows up on the marketer's books as media spending.

This comes at a time when many marketers are looking to reduce agency fees, or "nonworking media," while shifting more of their spending to paid "working media."

"Marketers do have huge pressure here," said an executive with one ad-tech company who is a former marketer. He believes there may be some "willful ignorance" about how agencies do things based on the notion of "we know we're screwing you guys every year on fees, but we [CMOs] need to show our CEOs that we are making progress, and we know that you'll have to get creative on making up the difference." He also said many marketers "really don't get how the advertising-agency-media sausage is made, and we don't want to get in the weeds. We want to look the other way because digging further adds work to our plate and erodes trust, so can this just go away?"

Most marketing procurement executives are under at least some pressure from higher-ups to reduce agency fees annually, according to a survey last year by Ebiquity/FirmDecisions, which participated in the ANA report along with K2. Yet margins of agency holding companies have been rising, with WPP's net sales margin alone up 1.4 percentage points to 18.8% the past two years.

So why would a no-fee agency deal—apparently approved by the marketer—make any sense? Because it could simultaneously boost the agency's margin, help procurement executives hit a fee-reduction goal and help brand marketers hit their working-nonworking media ratio. It's a true, if perhaps cynical, win-win-win.

But even if they've avoided bashing agencies publicly, some big marketers already have taken action that would steer them away from the most extensively detailed practices in the ANA report involving agency trading desks and ad tech. P&G, Unilever, Kimberly-Clark, Kellogg, L'Oréal, Walmart, Target and many others have built private programmatic digital trading operations in recent years, which, while often operated by or in cooperation with agencies, can be structured to keep out of most or all of the "non-transparent" deals described in the report.

In ad tech, where the ANA report cited numerous cases of agencies requiring rebates or stock warrants to recommend vendors, Unilever has over the past two years vetted 4,500 ad-tech firms directly through its Foundry program rather than relying on agencies. And it's open-sourced some of what it's found for the broader marketing world through its Foundry 50 sessions, which allow anyone to meet reps of top ad-tech companies globally at Lions Innovation sessions at Cannes, such as one next week.

Unilever also backed the ANA's report in a statement, and said it's "actively engaged with our agencies, and the industry at large to exert greater control and responsibility around media transparency."

Then again, Unilever also has held two global media agency reviews in the past five years that ended up largely reappointing incumbents, certainly giving the appearance of a fee-lowering exercise. That's the sort of practice some executives in the ANA report blame for the rise of "non-transparent" media deals.

"If an agency ends up transacting a deal that makes little or no economic sense, then shame on them for accepting it," Mr. Liodice said. "It's not like the procurement guy has a gun to the agency's head. But non-transparent behavior should never be the response to getting less-than-favorable terms from a procurement manager."

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