Holding companies have all been on the defensive since the June release of the Association of National Advertisers’ media-transparency report, while big ad spenders like J.P Morgan Chase, Allstate and AT&T are all reportedly auditing their media contracts. For this Digiday Confessions, we talked to an ad tech veteran who said that most agencies are involved in rebates and the low margins are not a valid reason for them to do so.
We granted anonymity in exchange for honesty. Excerpts lightly edited for clarity.
Do agencies actually collect rebates?
Of course, everyone knows that they do. In Europe, rebates are fine, and it’s not always illegal in the U.S. — there’s no law prohibiting you from having discounts or loyalty programs. The problem is that it’s easy for the five holding groups to shovel money and their clients may end up paying four or five times more than what they are supposed to. Nothing is transparent and clear — you have no idea how much should be charged.
What is the typical rebate conversation like?
In our case, what we see commonly is agencies require different reporting on what the actual expenses are. The most important line in an agency discount agreement is “In effect, the supplier agrees to deliver the media as contracted in the insertion order and only apply the discount percentage on the invoice, thus not affecting delivery in any manner.”
We show the client insertion order if needed, and we have an actual invoice for the agency. For example, if we run a $100,000 campaign for an agency at a discounted price of $85,000, we will write at the full price on the IO and the discount on the invoice that goes to the agency’s accounting department.
Usually we are contractually blocked from ever revealing any details of this discount or the real invoice to the client directly and must only show the IO if asked.
Do vendors like this? Why didn’t anybody say anything before the release of the ANA report?
Of course, vendors don’t like this but they don’t have a choice. I mean, they can either take what they can get or they go out of business.
Jon Mandel, former CEO of Mediacom, actually made a big reveal about rebates a few years back, and he’s probably the only one at his level of reputation to do so. The problem is that there’s much momentum in ad tech – billions of dollars — so you don’t want to rock the boat. Although there are hundreds of agencies, they are just different names — the ad business is essentially controlled by the five holding companies, and they want more money.
But the argument could be that clients are pushing down the margin.
Being squeezed is not a valid reason for agencies to pocket rebates. The problem is that they need to fix their billing model. When you are selling a technology, you can use a software licensing model; when you are selling service, you can charge by billable hours, just like the legal, consulting and financial services industries.
The media business has a weird percentage model, tying the compensation of a campaign to metrics like impressions. This model doesn’t make sense anywhere else because it doesn’t reveal the true cost of a business. Agencies need a certain amount of money to get things done. Why not just tell clients that they need the money? If they are concerned that people don’t want to pay for their service, maybe it’s because they cannot provide something that people want.
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The ANA report shows that agency trading desks are the biggest beneficiaries. Should clients depend on trading desks?
Trading desks are basically a consolidation play. I think the concept is fine because not everyone needs to have their own DSP. The problem is, again, the opaque billing model.
Isn’t it up to clients to fix this by paying more attention to their contracts? More marketers are auditing their contracts.
It comes down to the sophistication of the clients’ marketing team and how much money they’re spending. These audits can be expensive, so they still have to be considered if they’re worth doing and what can really come out of it. Also, with the media-fee pricing models and hundreds of agencies within each holding company, it’s hard to really change anything of consequence. As said before, what choice do clients really have? The best would be to [moving programmatic] in-house (and some brands are doing that), but that’s a big step that many don’t want to take.
What has to change to bring in more transparency?
The only solution is regulation. I don’t think ad tech is fundamentally broken, but the existing billing model is. Ad tech is such a free market with little oversight. For example, publishers can easily buy traffic from ad exchanges, and nobody knows if that traffic is valid.
The Federal Trade Commission is a good start, but its guidelines don’t work for ad tech. I think the industry needs a dedicated government agency like the Securities and Exchange Commission in financial services. We make industry groups all the time, but we really need to get things done.