US Media Agency Rebates, “Kickbacks” and Incentives: What Advertisers Need to Know

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The recent allegations directed at US media agencies regarding the receipt of secret kickbacks and rebates from media properties continues to build.  Within the past month:

• Former Mediacom CEO John Mandel made remarks at a March 5 Association of National Advertisers conference in which he suggested that US media agency rebates, kickbacks and other incentives are widespread, Ad Age reported.  Mr. Mandel cited private conversations with media executives.
• Holding company (and Mediacom parent) Group M responded swiftly, saying that “GroupM and its agencies have not sought nor received any rebates from U.S. media vendors or other parties with whom we do business on behalf of our clients.”
• A follow-up story (“Media-Agency Kickbacks. Yes, They’re Real.”) in Ad Age published on March 23 concluded that “Kickback payments tied to U.S. media-agency deals are real and on the rise, according to Ad Age interviews with more than a dozen current and former media-agency executives, marketers' auditors, media sellers and ad-tech vendors who said they'd either participated in such arrangements or had seen evidence of them.”

From an advertiser perspective, there are several issues that need to be considered within this very complex debate.

• Do these “kickbacks” and incentives exist? While impossible to validate the extent they do or do not exist in the US, the reality is that in the world of media buyers, incentives have always been offered by media properties.  Is an all-expenses-paid a trip from a media network to the Super Bowl an incentive, or is it simply an “industry event”?  A fine line, but a line to be considered.

Is it plausible that such practices have escalated to the point that a media content property at the holding company level is providing incentives to the media agency at the holding company level?  Incentives and rebates are broadly considered to be routine in other parts of the world.  Based on allegations by Mr. Mandel and others cited in the Ad Age investigation it is indeed plausible that agencies are engaging in these practices in the US; however, it is unfortunately also next to impossible to verify.  Incentives which transfer behind the scenes, through various business units and across continents are nearly impossible to track (arguably by design).

The only way in which this debate will cease is when media agency holding companies and their vendors open themselves up to full, global financial transparency, which will almost certainly never happen.

• Should they exist? This really is the larger question.  Years ago, media agencies made their fees from the 15% commission offered by media properties.  These commissions are now returned to advertisers, and agencies are instead compensated directly by Clients at a significantly lower level.

The combination of a fiercely competitive landscape, increased reliance on consultants (many with no media backgrounds or research), and the rise of cost-cutting procurement departments have obliterated the traditional media agency fee structure.  These factors, coupled with pressure from the shareholders to increase profitability have driven agencies and their holding companies to look for new revenue streams.

John Mandel’s recent speech to the ANA made the point that commissions are down from 15% to around 3-4%, and yet profits are literally setting records.  Do the math? Are these margins from incremental revenue, new product offerings or the alleged kickbacks – or a combination of all of the above?

The biggest problem may not be business practices such as “kickbacks” and incentives themselves – but rather the complete and utter lack of transparency into them.  As global media agency holding companies continue to acquire complimentary businesses (research providers, ad tech firms, content creators, etc.) the lines continue to blur.  Is the firm responsible for recommending a Client’s channel mix and executing its media buys doing so in the best interest of the advertiser, or do these companies have conflicting motives?  This is a very reasonable question for advertisers to be asking, given the current lack of transparency.

• What should an advertiser do to protect themselves? Transparency language in your media agency contract is a great first start.  Larger advertisers should request full transparency into all aspects of their business.  While that may be granted, the reality is that no advertiser will have full view into the agency/holding company’s financials.

Language in contracts defining and addressing agency incentive practices with vendors and specifying the Client’s expectations regarding the treatment of any such funds will also add a level of protection for the advertiser.  Similar language surrounding protocols for potential conflicts is also advisable.  Even absent full transparency, identifying expectations and acceptable practices contractually adds a level of protection which is currently lacking from many media agency contracts.

Imposing tight controls can help maximize value for the advertiser’s media investment, although it will not necessarily prevent kickbacks from occurring.  The advertiser should ask some very basic questions:Are the media properties recommended consistent with my goals?

• If a new media property, marketplace, or buying paradigm is introduced, ask for documentation aligning the recommendation with target audiences, goals and objectives.
• As an advertiser, it’s your money, you deserve to know how it’s being spent.

If an outside consultant or “partner” is engaged, what is their role?

• What is their historical relationship with the agency?
• What are their media credentials?
• How are they compensated, and what is the agency’s financial relationship with them?

Do the recommended consultants or outside parties walk both sides of the consulting spectrum, meaning does a media auditing firm also conduct agency reviews?  Do recommended partners, vendors, or trading desks have relationships with the agency or holding company?

• For consultants, what is the track record of their reviews?  Is one agency the leading benefactor?
• For “partner” firms, what value do they add, and how are they compensated?  Does the agency benefit financially by their inclusion in the process?

The irony in all of this is that the entity funding the entire process (to further its marketing initiatives and ultimately its sales) is not getting full value for its investments.  No other industry would tolerate this alleged behavior or the lack of transparency into it.  As an industry, the change agents are the clients.  Unless they demand full transparency, this debate just may continue on for another couple of decades.

If you enjoyed this post, you might also like "What's Next For Media Industry As ANA Media Transparency Results Roll Out?".

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For more information contact:

Steve SmithVP, Client Engagement

‍steves@mediaaudit.com

‍(636) 812-0139