Ad Firms Padded Profit at Client Expense, Study Said to Find

  • Yet-to-be released report said to criticize agency practices
  • Former Coca-Cola executive calls for probe by U.S. authorities

Ad agencies and their media-buying firms have systematically enriched themselves at the expense of their U.S. clients, according to a report commissioned by an industry group that represents large advertisers, said a person who has seen the document.

The report is set to be made public early next week by the Association of National Advertisers, which includes companies such as Apple Inc., Wal-Mart Stores Inc. and General Motors Co., according to a person close to the investigation. It will lay out a variety of ways in which global ad agency networks used the combined buying power of advertisers to pad their bottom lines, according to the person, who asked not to be named before its release.

The findings spotlight an issue that has long been hidden in the background of client-agency relationships, opening up a debate over whether advertising conglomerates are agents working on behalf of advertisers or counter-parties in today’s complex media marketplace. Ad agencies have come under pressure from a shift to digital marketing, which threatens to displace them as a middleman between advertisers and media outlets.

The ANA report, which anonymized the identities of the agencies and clients involved, describes ways the biggest ad agency networks took advantage of their buying power to extract extra profits from complex transactions involving digital marketing firms, billboard operators, print media and television networks, the person said.

“We cannot at this time comment on anonymous sources,” the American Association of Advertising Agencies said in a statement. “We have not seen the study, have always preached full transparency to our members and will act accordingly when the details are released.”

The Wall Street Journal reported on the findings about U.S. rebates earlier Thursday.

‘Public Record’

It’s not clear whether the study’s finding suggest any illegal conduct or violations of securities laws, but the report could attract the attention of the U.S. Securities and Exchange Commission, according to one former marketing chief.

"These are public companies, and the SEC should be involved," said Peter Sealey, the former head of marketing at Coca-Cola Co. "The accuracy of bookkeeping is a public record."

Sealey, who hadn’t seen the report, recalled that during his tenure as head of Coca-Cola’s marketing efforts in the 1990s, he had difficulty figuring out where all the money spent by the company went within the ad agencies.

"It’s oblique, opaque and you don’t have visibility," Sealey said in a recent interview. "And now, with web and advertising going online, it’s even more complex, just impossible to audit. You just can’t do it."

The investigation centers on “rebates” that media owners provide agencies that buy advertising space and time on television, websites, print publications and other outlets. Advertisers say the practice inflates their costs because the media owners and agencies are essentially arranging kickbacks, using client money.

The Association of National Advertisers, which represents big U.S. marketers like Wal-Mart and Procter & Gamble Co., hired investigative firm K2 Intelligence and consultant Ebiquity/FirmDecisions last year to look into the practice.

U.S. Rebates?

Rebates have long been employed in some markets outside the U.S., but U.S. advertisers object to the practice as a violation of contractual transparency. They say rebates have spread in the U.S. because of the growth of digital advertising, which has created new ways to buy and sell media space and time, including unregulated online trading platforms.

Another form of rebates involves entertainment programming that media buying agencies have begun co-funding and producing for broadcasters and other media outlets. In exchange for the programming, ad agencies sometimes get free advertising space or a cut of profit -- practices that advertisers say can distort the value of the TV time they’re buying.

Also at issue is the structure of the ad industry, which has consolidated around a group of six large holding companies globally -- WPP Plc, Omnicom Group Inc., Publicis Groupe SA, Interpublic Group of Cos., Dentsu Aegis Network Ltd. and Havas SA.

Some of these holding companies own several different creative and media buying agencies with subsidiaries around the world.

“While we have not seen ANA’s study -- it is disappointing to hear the results are broad-based allegations against the entire advertising media industry,” Omnicom said in a statement. “In order to serve advertisers, it seems to us that the specific findings of the study need to be shared with the advertisers and agencies that are implicated in practices that are indeed identified as troublesome. If such issues exists, how else are advertisers to resolve them with their agencies?”

Client Interests

“We have and will continue to modernize our transparency practices as the industry evolves,” IPG said in a statement. “IPG has been an industry leader on this issue for over a decade, which has resulted in a high degree of clarity in our contracts with both clients and media owners regarding our respective roles and interests. In the U.S., we do not partake in volume rebates with our media partners and do not use any value realized by our media agencies to drive trade credits to other lines of business.”

GroupM, WPP’s media-buying unit, hasn’t seen the report, said a spokesman, who added that the unit negotiates contracts in good faith, serves its client’s best interests and acts “not only lawfully but ethically.” GroupM said it wouldn’t comment on anonymous and unspecific allegations.

“If there are allegations that are specific to GroupM, we will demand to see the details so that we can fully investigate and fulfill our contractual obligations,” the GroupM spokesman said in an e-mail. “If the details are not forthcoming, we will take steps to compel the ANA or their investigators or their advisers to provide the material.”

Publicis, in a statement, said it wouldn’t comment on a report it hadn’t yet seen.

In April 2015, after the question of rebates was brought up at an industry conference, Brian Wieser of Pivotal Research Group LLC downgraded four ad-agency stocks, based on the possibility that the controversy could cut into profit margins.

Advertising is less regulated than some other media businesses, with much of the work being done by trade bodies rather than government agencies.

A lot of cash is at stake. In the U.S. alone, ad spending across all media totaled $187 billion in 2015, according to research firm Strategy Analytics. Media-buying agency ZenithOptimedia, which is owned by Publicis, estimates global ad expenditure this year at $579 billion.

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