Media

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

For an industry that hinges on sensing the zeitgeist, the world's biggest ad agencies aren't handling a slow-burning controversy over their U.S. billing practices with much finesse.

Ad firms such as WPP and Omnicom need to win back the trust of big brands like Coca-Cola, Ford and Unilever quickly or risk eroding their most profitable business, namely placing ads for clients on TV, radio or online.

The Association of National Advertisers, representing almost 1,000 companies, on Tuesday released the results of an eight-month investigation that purports to show how agencies put their interests before their clients' through techniques it called "pervasive" and "non-transparent".

The advertising industry largely works in a two-stage process: the brand-owner employs an agency to come up with a creative campaign; then the agency buys display space from media owners (i.e. broadcasters, newspaper publishers and websites such as Google and Facebook).

It's this second relationship -- between agency and media owner -- that's causing consternation.

Much of that concern has been around so-called "rebates" or "incentives", where media owners offer agencies volume discounts, payment in kind, cash, or even fork out for fake research projects. Such practices are banned in the U.S. unless the benefits are passed back to clients. But rebates are common in Europe, China and Brazil, where cost-conscious clients accept them as a way for agencies to make a margin without charging higher fees.

The problem comes when brands suspect agencies are placing their ads on outlets not because they're best for the client's needs, but because of the profit the agency would make.

Survey Says
Of the 136 people interviewed for the ANA, many reported seeing troubling practices in media buying
Source: ANA report conducted by K2 Intelligence
Conflicts can arise when agencies buy ad space fopr themselves, or act as a "principal", and then resells at a markup

And with the rise of online ads, the market has become almost comically complex, leaving brands with little idea whether they're losing out. Some agencies have even opened trading desks where they buy online space themselves, which they then resell with a mark-up to brands.

The practices are arcane and hard for outsiders to understand, so investors haven't really marked down WPP, Publicis, Omnicom, and Interpublic over the controversy. But they may be underestimating the risk: media buying and planning has driven much of the sector's profit growth in the past decade (see chart below). Media buying generates margins in the mid-20 percent range compared with mid-teens for creative work or market research, says Liberum analyst Ian Whittaker.

Media Buying
Placing ads online, TV, and radio on behalf of big brands is the most profitable part of agencies' business
Source: Liberum Research
Figures are based on 2014 estimates

There's also the chance that the climate of mistrust could push the brands into the arms of Facebook and Google, who already take in most online ad dollars. It's easier than ever for big brands to cut out the agency middlemen and buy their own ad space directly from the tech giants. Talk about an incentive to make peace.

Instead of trading barbs over rebates, the agencies would do better to explain clearly their media-buying practices and stop hiding behind confidentiality. WPP has led on this, even if in limited form, admitting that it will earn a margin on its media buying but rebuffing client demands that it disclose prices. (One WPP executive memorably called this approach being transparent about the things it wouldn't be transparent about.)

Another way to rebuild trust would be collaborating with the ANA and other industry bodies on writing model contracts that show clearly what media-buying practices are permissible.

Lastly, the agencies should let specialized consultancies audit their media buying on behalf of the brands. Such audits are rare now because agencies tend to allow in only big firms such as Deloitte or PWC, who often lack expertise.

None of this will be particularly fun for the ad men (and women). The big brands also need to accept that dubious practices are a response to their own efforts to squeeze the agencies on price. But for WPP, Publicis, Omnicom and the rest, a prolonged war with the biggest ad spenders would be folly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net