A report set to be released Wednesday by the Association of National Advertisers claims that advertising agencies and holding companies engage in non-transparent practices when it comes to the production of commercials, music, events and other materials — such as asking independent post-production houses to submit bogus, inflated "check bids" so that agencies can route jobs back to their in-house production shops.
The findings come eight months after reports that the U.S. Department of Justice was investigating whether ad agencies unfairly direct production business to their in-house departments over independent shops. Since then, multiple agency holding companies say they have been subpoenaed by the DOJ over production practices.
The U.S. Department of Justice declined to comment on the progress of its investigation on Tuesday.
The ANA report, titled "Production Transparency in the U.S. Advertising Industry" includes findings by a task force composed of 30 executives from ANA member companies and 12 organizations deemed to be subject matter experts. Those include law firm Reed Smith, independent investigative firm K2 Intelligence, three industry trade associations, five production consultants and two auditors. One auditor is DG2 Worldwide Group; the other was not named.
The report says that 11 of the 12 experts support the conclusion that transparency concerns exist at multiple agencies and holding companies.
This production report follows by a year a bombshell report by the ANA that claimed cash rebates and other non-transparent practices were pervasive in the U.S. media-buying ecosystem. That report drew criticism from agencies and the 4A's, a trade association representing agencies, that claimed the report was "anonymous, inconclusive, and one-sided."
The new report on production describes a commercial production incentive system that may be murky for advertisers, an ecosystem where the use of agency in-house production resources is not clear to the advertiser and a "non-transparent agency-controlled bidding" system exists that can lead to higher costs and inefficiencies for advertisers.
Bob Liodice, CEO of the ANA, says his organization and others have been looking at the "core of the issue," specifically claims that agencies often control the bidding process for production while also competing for projects.
"You don't have to be a rocket scientist to know that's a conflict of interest," he tells Ad Age. "So one cannot be certain that you're going to get a fair playing field out of that type of process. You can't be buyer and seller at the same time."
Though it does not name specific agencies (other than examples of "Holding Company A," "Holding Company B" and "Holding Company C") the report details claims of agency self-dealing, like asking independent post-production companies to submit "check bids" — where independent shops were asked to submit a bid for a project already pre-determined by the agency to go in-house, with a price higher than they would have quoted. This creates a paper trail that justifies an agency's decision to award the project to an in-house facility that comes in with a lower bid price in comparison, the report says.
One person quoted anonymously in the report said his or her independent shop agreed to submit a check bid because the company relies on agencies for business and didn't wish to antagonize them.
The report also claims that marketers are not always aware of the ownership status of an agency unit submitting the bids, since some in-house facilities have generic or unrelated names to an agency.
States also offer financial incentives to shoot commercials in their localities, and the report claims that some agencies and production companies file directly with the state and could potentially receive financial benefits without the advertiser's knowledge or approval. But Matt Miller, president-CEO of the Association of Independent Commercial Producers, says the rightful beneficiary of those incentives has been a point of debate between the ANA and his organization
"These production incentives have all been lobbied for by AICP," he says. The group argues those incentives were created by state legislators to be a means of economic development and employment stimulus as they're vying for production company dollars.
Marla Kaplowitz, president-CEO of the 4A's, did not comment on the specifics of the report, but says her organization "condemns any activity or business practice that is unethical or, of course, illegal."
The report outlines a number of recommendations for advertisers, including suggestions that advertisers be aware that agencies have in-house production resources and know their names. It also suggests requiring agency disclosure when their in-house facilities are being considered for a project and establishing protocol to avoid conflicts of interest.