The media agency rebate debate: Schrodinger’s Cat

This post is by Tom Denford, Founding Partner of ID Comms – a member of the Marketing FIRST Forum, the global consulting collective co-founded by TrinityP3

Are there rebates in the giant U.S. media market? Depending on who you ask, you will likely receive one of two firm responses; “absolutely!” or contritely, “absolutely not!”

Wanted Dead or Alive-Schrodingers Rebate

It’s hard to explain these opposing positions when rebates are widely acknowledged to be part and parcel of the media trading landscape in almost every other country in the world.

Better posts than this will lay out the case for each side, but what I hope to do is deconstruct the confusion and give agencies the opportunity to provide the missing clarity that continues to frustrate advertisers in the U.S.

This is a market where the vast majority of billings are controlled by a small group of media buyers, soon to become smaller. The combined heft of Publicis and Omnicom agencies is, according to Recma, 41% of all advertising spend in the U.S.

The major advertising holding companies have created media trading organisations such as Magna, GroupM, Publicis Media and Opera (the media buying groups within the main communications groups IPG, WPP, Publicis and Omnicom respectively) to take advantage of the principle that aggregated client media budgets create additional negotiation leverage. Why else would they exist?

The important question that hangs over the market now is what form does the reward for that additional leverage take? And if there is a clear reward, how is it distributed to the clients whose billings are being used to create it?

Recently John Billett (founder of Billetts International, latterly called Ebiquity and a small shareholder in my company ID Comms) gave a stark reminder to U.S. advertisers that they must seek to get their fair share of the advantages created by volume negotiations by their agencies.

It’s a perfectly reasonable suggestion, if as we should all expect, these advantages do exist.

However, the response to his article in MediaPost was ire from senior U.S. agency leaders resolutely denying that “rebates” existed.

“If this is in fact happening (and I strongly say if because I’m not convinced it does) advertisers have no one to blame but themselves. I am unaware of any such rebates.”

— Comments to John Billett’s MediaPost article “U.S. Advertisers Need To Take Action On Rebates” Feb-18-2014

John is not alone in his assertion that rebates do exist. Research for the ANA in 2012 found that 28% of respondents to a survey were aware of rebates and incentives being given in the U.S. Sixty-four percent of those surveyed had no provision (or were unaware if they did) in their contract for rebates to be returned. In late February, the World Federation of Advertisers published their Global Media Transparency Index, supported by a white paper, which clearly highlights some areas for concern over the “incentives” paid to agencies in the U.S.

In light of this continued discussion around U.S. media rebates, how can there be such a significant, durable disagreement between two parties of educated, articulate, intelligent media experts in a digital age where it is impossible to keep secrets?

Why is the debate so fiercely black and white? Much like the fate of Schrödinger’s poor cat, we can’t prove either case without fully “opening the box” (so to speak) of media agency trading.

Since that’s not going to happen, I would venture to suggest that what is at play here is not whether rebates exist or not (because as we have observed they must at the same time both exist in the minds of some and not exist in the minds of others) but that there is confusion over how we define rebates.

It is this confusion over definition that lies at the heart of our dilemma.

ID Comms Advice:

We strongly advise advertisers in the U.S. to use different questions instead of simply asking whether rebates exist in the U.S. media market.

Concerned marketing directors and procurement experts should be prepared to ask the following questions of their agency leaders. The answers will help them judge what’s happening with their media spend.

– Do media vendors ever offer incentives to media buyers?

– Are these incentives ever accepted by the media buyer?

– Does the media buyer document these in a transparent way?

– Can the advertiser be reassured that his or her agency is passing back these incentives in full?

– Does the agency ever generate a benefit (cash or something of value) from a media vendor as a result of passing over some of their clients’ budgets?

– Do they return these benefits to clients in full?

– Does the agency make any financial gain (directly or indirectly) as a result of their transactions with media vendors?

– Does the agency holding company or trading group leverage agency billings to generate financial upsides for the parent company, trading group and or the agency?

As you will guess, most clients would be inclined to consider many of these as some form of rebate generating behaviour.

Rebates don’t have to be cash payments

We can identify around 20 ways these days that media agencies can generate additional income from media transactions. There are probably more.

John Billett’s article cited the case of media agencies developing and selling programming to TV networks at opaque prices, as just one example of how money can flow between media vendor and agency without being seen by the traditional media audit. Such occurrences might not be normally labeled a rebate but the material result can be the same.

Given concerns about SOX compliance, it is understandable that cash rebates would be considered corporate bribes and almost universally be rejected.

“To suggest that nobody in the history of selling media in America has ever said to an agency buyer “if you give me more X I’ll give you a bit of Y” is at best naive. ”

We desperately need to move the debate about rebates forward before agency reputations are further tarnished in the hunt for financial transparency. We need to review these entrenched battle lines and make the conversation more productive and less frustrating for both agencies and advertisers.

If we could agree upon some common terminology and definitions it would help. The positive leadership of the trade organisations such as WFA could be critical in finally achieving common ground on this issue.

At this stage, the only thing we can say is that, unlike the cat, this issue is certainly not dead yet.

About Tom Denford

Tom Denford is a global media performance expert and founder of the ID Comms consultancy.
ID Comms is an international strategic media consultancy, working with leading brands around the world to improve the productivity of their media investments. With offices in London and Singapore, ID Comms offers best practice in global media agency pitch management, agency performance management and media governance.

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