Illuminated facades of Broadway theaters on January 6, 2011 in Times Square, NYC.Getty Images/iStockphoto
In a highly anticipated report, the United States' top advertisers have accused Madison Avenue's biggest agencies of secretly pocketing what amount to kickbacks from media outlets, with ad firms striking back harshly at what they called a flawed and unproductive attack.
The study, commissioned by the New York-based Association of National Advertisers (ANA) – a group representing major advertisers including Apple Inc., Wal-Mart Stores Inc. and General Motors Co. – accused big ad firms Tuesday of what is known in the industry as "rebates" as a reward for buying large blocks of ad space. Those financial incentives are neither disclosed nor passed along to their clients, the report said.
The 58-page study, performed by investigative firm K2 Intelligence, doesn't identify ad agencies or clientsor lay out the size of the rebates the firms allegedly retained. In general, it said, such rebates ranged from 1.67 to 20 per cent of aggregate media spending. The trade group representing the world's biggest ad agencies quickly fired back, saying the ANA's "one-sided" study was not only inconclusive but also threatened to wrongly cause "substantial economic damage to all media agencies."
Concerns over rebates were cited by some as part of the reasoning behind a swath of media agency "reviews" – where marketers examine their existing relationships and put their accounts up for grabs to see if they can improve on those deals – in the United States last year. While the study focuses on the U.S. market, it has implications for Canada's advertising industry as well: The vast majority of media buying in this country is conducted through Canadian arms of media agencies owned by multinational holding companies.
"I would imagine it is an issue [in Canada]. A lot of those relationships are North American, or global," said Aldo Cundari, chief executive officer of ad agency Cundari and board secretary and treasurer for the Canadian Marketing Association, an industry group representing marketers. "A lot of clients know there's a problem, but don't know how to put a finger on it. …I think you'll see it becoming more of a dialogue than it has in the past given that the report has been issued."
"This study...was, at its outset, always going to be divisive, inconclusive and salacious, and has predictably cast a dark shadow over trust, pride and partnership, between many client and agency relationships, which does not serve the common good," Janet Callaghan, president of the Canadian Media Directors Council, wrote in an e-mailed statement Tuesday evening. "Our continued dedication to delivering the best value and an open dialogue with our clients, is unwavering."
The report casts new light on media buying, a high-margin area of the advertising business. Media-buying arms, often connected with big agencies, purchase blocks of advertising from television, radio, print and other outlets, typically reselling it in multimedia packages for big clients. Media-buying agency ZenithOptimedia, which is owned by Publicis Groupe SA, estimates global ad expenditure this year at $579-billion (U.S.).
But media buying has changed drastically as clients have demanded agencies do more with less money, and the agencies' ability to buy ad space in bulk to get better rates for clients has declined.
"Agencies' clout isn't based on volume any more," Mr. Cundari said. "It's based on targeting better, and identifying your customer better. ... That's a whole different way of measuring."
While the existence of such rebates has long been acknowledged by the ad industry in the U.S., the subject has generally been treated as a private matter between agencies and their clients. The ANA's decision to force the issue into the open suggests that a critical mass of advertisers have concerns about what the big agency holding companies are doing with their ad budgets.
"Advertisers and their agencies are lacking 'full disclosure' as the cornerstone principle of their media management practices," said Bob Liodice, 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."
Advertising is less regulated than some other media businesses, with trade bodies rather than government agencies doing much of the oversight on the major ad agency holding companies such as Publicis, WPP PLC, Omnicom Group Inc., Interpublic Group of Cos., Dentsu Inc. and Havas SA.
Rebates between agencies and vendors are accepted in Europe and many other parts of the world. While the rebates aren't illegal in the U.S., some of the practices flagged by K2 might not have been consistent with the contracts binding agencies with advertisers, according to the report.
"Numerous non-transparent business practices, including cash rebates to media agencies, were found to be pervasive" in the digital, print, billboard and television media businesses, according to the ANA.
Those practices included the designation of rebates as "service agreements" in which media companies – for example, TV outlets or websites – paid ad agencies for services such as low-value research or consulting activities that were often tied to the volume of the ad agency's spending.
In other cases where agencies owned their own media inventory, ad agency holding companies directed their buyers to steer their client spending to the in-house media, where markups ranged from 30 to 90 per cent, the report said.
The ANA commissioned the report last year. For the seven-month study, K2 interviewed 150 individual sources with knowledge of U.S. media buying, ANA said.
Only once in recent years has a major ad agency been penalized in the U.S. over the issue of rebates. In 2008, the Securities and Exchange Commission reached a $12-million settlement with Interpublic based on violations of internal controls and books and records provisions of securities laws. One set of violations in that case related to "agency volume bonifications," described as vendor discounts and credits that Interpublic's McCann Erickson unit collected in violation of client contracts.
The world's largest ad agency holding companies, including Publicis, WPP's media buying agency GroupM, Omnicom and Interpublic, all questioned the accuracy of the report on Tuesday and denied that they accept rebates or other fees that are hidden from their clients.
"While the report did not contain any shocking revelations to us given our work on the topic over the past two years, the documentation contained in the report will resonate within the industry for many more years to come," industry analyst Brian Wieser wrote in a report Tuesday. "Over all, the findings are generally damning of the whole industry – even if problematic practices described in the report are not undertaken by all holding companies – which will likely contribute towards negative sentiment towards the whole agency sector."
With files from Globe reporter Susan Krashinsky