In most of the world (the U.S. excluded) ad agencies get rebates from media on their "pooled-buying" power. In the most common scenario, an agency gets money back from big TV networks for all the spending done by all its clients. The agency keeps this windfall unless the clients cut a deal to get some for themselves.
How much of the money is passed on to clients varies widely, depending on their astuteness. In many cases, clients allow agencies to keep the rebates so that clients can pay them less in fees.
But how does a client know how much of the rebate flows to its agency? How does a marketer know how much it's entitled to? Does one client worry that other clients are getting a better deal? Perhaps another marketer is demanding a bigger chunk of the pooled-buying dollars yet still negotiating a low media-buying rate?
Lots of questions, too few answers.
Here's another: How do clients know the agencies are truly objective when they pour money into BSkyB or JCDecaux billboards? After all, if agencies hit certain spending targets at some media outlets, they get bigger rebates. One former South American agency exec admitted that he would occasionally succumb to this temptation.
What's more, agencies could theoretically agree to handle a new client's media buying in the U.S. for next to nothing and recoup the loss in countries where they can pocket much of the pooled-buying rebates.
As one prominent former media director told me, it's not unheard of for an agency to offer to buy a client's network TV for zero-CPM increase by spreading the cost over several accounts. He wasn't referring specifically to the pooled-buying effect, but such rebates would make it more economically feasible to favor one client over another.
Each client, of course, negotiates for itself, and maybe one doesn't care what others get as long as the client is cutting an advantageous deal. The client may direct its share of the pooled-buying largess to reduce its fee, but does it care what its fair share of the agency's total media spend amounts to?
Mark Butterfield, global head-media at German-based pharmaceutical marketer Boehringer Ingelheim and former media director at Unilever in Europe, told Ad Age 's Laurel Wentz: "Possibly not all agencies" are forthright with clients about rebates. "It depends how good your auditor is and how honest your agency is ."
A survey of 36 international advertisers confirmed that a good percentage of advertisers allow agencies to keep rebates to pay down their media-buying fee, and even more took rebates in the form of free ad space.
But many in the World Federation of Advertisers survey believe they aren't getting their fair share.
So if advertisers have a nagging feeling they should be getting more of the booty, why didn't they show support for a U.K. inquiry into how TV ad time is traded? Maybe they didn't want to admit they weren't very good negotiators.
The stock answer is that the ad industry wasn't much bothered by the discount system, according to the Guardian.
"The people in the market -- advertisers, agencies and media owners—are not calling for the review," said Bob Wootton, director of the Incorporated Society of British Advertisers. "Most clients set nice, aggressive terms and don't worry about how the agency delivers them. In short, the advertisers know the buyers need profits and don't necessarily mind how they generate them as long as they don't feel obviously taken advantage of ."
In spite of this rather cozy relationship, I was surprised when British media regulatory body Ofcom turned down the chance to pursue the TV-trading probe. It would have been instructive to at least ask some of the questions I've raised here, but Ofcom said it found "no clear evidence of harm to consumers -- whether TV viewers, advertisers or end users of products advertised on TV."
"While we are not able to dismiss completely that bundling of advertising across a broadcaster's schedule could harm competition," said Ofcom, "we have not found any evidence or analysis to lead us to conclude that there was a detrimental effect."
On his blog, Stuart Smith, former editor of Marketing Week in the U.K., never gave the inquiry much of a chance.
"Good luck to Ofcom as it attempts to pry the lid off the £3.5 billion [U.K] TV media-buying market and explore the wriggling multiform life within. ... The fundamental criticism of the current system is that ads/spots end up going to the media owner [that ] offers the best agency incentive rather than the best fit for the client's brand."
Mr. Wootton used the right language when he said that most clients don't care how agencies make their money as they don't feel "obviously" abused.
Maybe the agencies have learned how to underplay the negotiations. As one media agency exec told the Guardian: "There's not one client on the planet who'll disclose his own ignorance about rebates, but most haven't got a clue. And the ones that haven't got a clue are subsidizing the ones who do."
And the ones who don't have a clue aren't going to beef to the authorities (they think they're getting a good deal with some free ads), and the ones who are being subsidized certainly won't be heard from.
So that 's why Ofcom took a pass at looking at things a little more closely.