Down the Media Buying Rabbit Hole

By Manuel Reyes

Our Take on the Federal Probe into Ad Industry Media Buying Practices

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If your job has anything to do with advertising media buying and your boss reads the Wall Street Journal, we suggest you read this.

In late September, the Wall Street Journal reported that Federal prosecutors in Manhattan opened an investigation into media buying practices by advertising agencies. This is, by far, the most important news on the media transparency front to come out since the ANA (Association of National Advertisers) published its report on media transparency two years ago.

Why this changes the game:

• Subpoena Power: Investigators are now empowered to compel disclosure across all holding company units and any other party or vendor involved in the supply chain.
• Digging Power: They will be able to follow transactions across the entire ecosystem, starting with the advertiser, through the agency (and affiliates) to media vendors, other downstream re-sellers, and publishers. They will not be limited by any advertiser/agency contract and have the full resources of the U.S. Government at their disposal.
• Perjury Power: Investigators will also be able to interview all parties involved. The FBI is looking to ascertain truth. (It is not a good idea to lie to the FBI.)

It will be interesting to see how far they go in looking at holding company units outside the U.S., as it is possible that payment of rebates and self-dealing (buying from a party controlled by or related to the holding company) might have taken place via a non-U.S. party.

While many advertisers are reporting unprecedented low levels of trust toward their agencies, let's be clear that not all agencies are engaging in mischief and not every advertiser is affected. However, it is likely that investigators will find instances of unsavory practices at some of the advertising holding companies.

What they are likely to find:

• Rebates: Rebates may have been paid to agencies and not returned to advertisers as required by contract. Even if the advertiser/agency contract does not require the return of rebates, this could be an issue if the agency was acting as agent for a disclosed principal.
• Revenue from Opt-in Transactions: Agencies are making money on opt-in media buys, where the advertiser has agreed to forego transparency, the agency buys as principal, and the advertiser understands that the agency is likely to make a margin. Provided that the advertiser opted into this, the agency is likely to be in the clear. However, if they were careless and the advertiser was not asked to opt-in, this could also be an issue.

Up to this point, we don't expect agencies to have a major financial exposure since most have been very careful to enter into contracts that clearly state how rebates and principal transactions should be managed, and agencies have made efforts to govern themselves accordingly. However, they may face significant reputational risk if these practices are further exposed by the investigation. Government contracts could present additional complications for agencies.

Wait, we are not done yet. They may also find:

• Self-Dealing: Agencies are sometimes buying from themselves when they were supposed to buy from independent third-party vendors in the open market. This could be even more problematic if this was not disclosed to and accepted by the advertiser before the purchase was made. Keep in mind that some holding companies have an interest in media vendors or resellers, particularly in the digital space.
• Disguised Rebates: Some agencies have been selling "services at a premium" to the same vendors from which they buy media. While these services may be legitimate, this could also be a way to provide minimal services in exchange for disproportionately large payments. This could be seen by investigators as a mechanism to disguise rebates. Some types of "discounts for early payment" provided by media vendors to agencies or other "financial services" provided by agencies to media vendors could fall in the same category.
• Commingling of Media Buys: Negotiations done by agencies acting as agent for a disclosed principal on behalf of advertisers may have been commingled with negotiations done as principal for the agency's own account for resale. One could envision a situation where an agency is negotiating a $200 million agent-based upfront buy for its clients while contemporaneously negotiating its own $50 million buy as principal for resale. The agency could ask for a reasonable deal on the agent-based buys while separately asking for an outstanding deal for its own buys for resale. This could result in a transfer of value from advertiser buys to agency buys. It is unlikely that any paper trail would exist on this, but there may be vendors or ex-employees who may be willing to cooperate.

We will see how far investigators get down the media rabbit hole. It's a big one. We are not holding our breath as this could take a while. In the meantime, advertisers should review their agency contracts and set up regular and complete audit programs to protect their interests. A strong contract and a tight audit report now may come in handy later depending on the outcome of the investigation.

Manuel Reyes is the founder of Cortex Media and has been providing media auditing and consulting services to top-tier advertisers in North America, Latin America, Europe, and Asia since 2001.

The views and opinions expressed in Marketing Maestros are solely those of the contributor and do not necessarily reflect the official position of the ANA or imply endorsement from the ANA.