Commentary

U.S. Advertisers Need To Take Action On Rebates

For many years I was an active participant in U.S. media trading, establishing and growing Billetts, one of the first media tracking and evaluation companies, working exclusively for advertisers.

We operated a service for advertisers, working alongside but independent of media agencies, benchmarking media qualities and prices paid versus those purchased from media owners by aggregate competitive sets of advertisers.

Since I sold the business -- still thriving under the new name Ebiquity -- I have provided consulting services to advertisers, agencies and media owners.

It's been fascinating to observe and monitor the U.S. media-trading scene from a detached but inquisitive perspective.

What I see are two key phenomena: One is an unchanging reluctance to measure value. The other is a failure to update methods and procedures in order to cope with the radical polarization of media-buying points.

The average U.S. advertiser continues to operate a strange oversight of the way their advertising media money is spent. On the one hand, many profess to care deeply and profoundly about their relations with the media and become very enthusiastic about the location and quality of the editorial material surrounding their advertisements.

On the other hand, when it comes to the more rigorous business of addressing, operating and evaluating the value for money delivered, many advertisers behave like ostriches with their heads in the sand.

Most advertisers profess to have an intimate knowledge of media trading, but despite fiscal pressures I estimate that no more than a third of U.S. advertisers undertake any media audit of their media trading finances.

That’s unfortunate because in recent years a sea change of enormous proportions has taken place on the agency side of media trading. In simple terms there are now no more than five media buyers. With the forthcoming merger of Publicis and Omnicom, that will reduce to four.

These media buyers are using their scale not only to demand larger discounts from media owners for the benefit of their advertiser clients, but are also using that scale to secure better trading conditions for their own benefit.

In principle, there is not too much wrong with that. But the evaluation processes fail to recognize that this opaque trading method is wide open to exploitation. Rebates, which had previously thought to be something that happened in markets like Brazil or Eastern Europe, have now become established in the U.S.

A recent Association of National Advertisers survey highlighted the many challenges that advertisers now face. To pick one figure from the results, only 28% of advertisers were aware of rebates being paid by media companies to media agencies but not given back to advertisers. A massive 72% seem blissfully unaware of this phenomenon.

The ANA response was to demand openness and transparency in media trading. Quite right too. Unfortunately, opacity in media trading is rampant.

Media agencies can now blur true media pricing through their increased focus on procuring programming and other editorial content.

We now understand that media-buying groups, in addition to purchasing space and time from a media owner, are now also purchasing and creating editorial content, which they then sell to media owners.

In that situation the media procurement rate is completely disguised. The agency could be charging the advertiser anywhere between 0% and 200% of the right price.

The fact is that media agencies are the new media owners. The agency holding companies know media trading is their most profitable business and enjoys the highest margins.

What the majority of U.S. advertisers fail to appreciate is that the aggregate of their spending is delivering savings and discounts, much of which are not being returned. And where the discounts do benefit the advertiser, it's the media agency that decides which of their advertisers enjoys these benefits.

With only a minority of advertisers using any media or financial audit system, the agencies are having a very profitable field day.

I suggest U.S. advertiser procurement managers adopt two new procedures to best protect their interests.

First, require a contract with both the media holding company as well as the media agency that specifies access to all media deals with key media suppliers.

Second, build direct trading contracts with your five major media partners and demand access on an ad hoc basis to invoices from other media suppliers.

U.S. advertisers who don't change the way they do business will come under increased pressure from competitors, who will be able to pay significantly less for media inventory.

The competitive advantage this delivers can be seen from the fact that the media spread of pricing for similar inventory in the U.S. is the widest anywhere in the developed world.

Right now, too many U.S. advertisers are paying too much for their advertising media. Too many media holding companies are enjoying the benefits.

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7 comments about "U.S. Advertisers Need To Take Action On Rebates".
  1. Neil Ascher from ZenithOptimedia , February 19, 2014 at 11:08 a.m.
    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. Procurement departments with little understanding of what their marketing collleagues actually require of their agency have squeezed so hard on compensation that the staff required cannot be afforded. Furrther they demand the right to establish the agency's overhead rate and profit margin. Would they ever allow their customers to do this to them? I sincerely doubt it. I have even had a client ask why we need to give our staff raises. All the while they demand more complex and sophisticated services and strategic thinking. Sorry, but there is no free lunch
  2. Fraser Elliott from Opinions expressed herein are solely my own , February 19, 2014 at 11:59 a.m.
    I'm with you, Neal, regarding your skepticism. Furthermore, John, if you're really operating from a "detached but inquisitive" perspective, then name some names, and let's get this out in the open. As it stands, your piece amounts to office crop-dusting.
  3. Andrew Lowdon from ABF PLC , February 21, 2014 at 6:19 a.m.
    Having worked both sides of the fence, media agency and procurement, I believe media agencies are often misunderstood by procurement, however agencies are often their own worst enemy in this arena. I'm not going to fuel the 'detached but inquisitive' debate but I strongly believe there's a negative cycle in play and has been for many years. Media agencies have found ways of protecting revenues and profitability and not always in the most transparent way. As examples of ‘client value’ being retained come to light, procurement share this information, unsurprisingly without the detail or all the facts. With their new found cynicism of agencies, but often without the knowledge, the easiest place to hit agencies becomes compensation. This in turn pushes agencies to retreat further into managing profitability elsewhere in less direct forms. Why is auditing on the increase? There has to be value in it for the client otherwise they wouldn’t invest in it. Having negotiated media agreements with various industry sectors across the global it’s clear to me that procurement, and I generalise, has a distrust of media agencies, something I don’t think will be changing anytime soon. Procurement supported by auditors will force greater transparency in the media area. My belief is as this happens new ways to retain or increase profit will be developed and the cycle continues to spin. Agencies are no different to most businesses, they’re in business to make a profit, and once profit is established nobody gives it away willingly. The game of ‘cat and mouse’ will continue. Content ownership, trading desks, inventory media, etc. is the new language and as procurement gets a greater insight and understanding they will chase these areas with the help of auditors. Are they wrong to? Probably not. Greater transparency is required enabling a client to feel confident that all areas of their media investment is being optimised. There has to be a better, more open, more lucid way of working than what currently exists.
  4. John Billett from Johnbillett.com , February 22, 2014 at 1:16 p.m.
    It's remarkable that such a senior media agency Director should claim first not to be convinced that media owners rebates exist but then second go on to explain the outcome of rebates. Having his cake and eating it is bad enough but then to put the blame for his difficulties firmly on his customers, the advertisers, compounds his misfortune. Doubtless the Zenith Optimedia clients are taking note and will vote to consider going elsewhere with their budgets
  5. John Billett from Johnbillett.com , February 22, 2014 at 1:24 p.m.
    Fraser Nelson invites me to name names. I shall refrain from naming media owners in public preferring to do so for advertisers who request my services. But I am ready to highlight and identify the forthcoming merger of Publicis and Omnicom to create a massive media buying group POGS. Does Fraser imagines this will be solely for the benefit of their advertiser customers? If so he is living in cloud cuckoo land.
  6. John Billett from Johnbillett.com , February 22, 2014 at 1:27 p.m.
    Apologies to Fraser Elliott for getting his name wrong and also to Fraser Nelson the journalist for inadvertently referring to him in this item
  7. Neil Ascher from ZenithOptimedia , February 22, 2014 at 3:29 p.m.
    John, I am unaware of any such rebates. ZentihOptimedia's clients receive superior pricing and world class strategic counsel. That said, there are some (not all) clients of agencies who demand unrealistic levels of support yet are completely unwilling to pay for it. My point has nothing to do with whether or not any such rebates exist. Rather, it is that clients should be willing to fairly compensate their agencies for the services that they expect to get. Agencies continually attempt to create and deliver new services to both better serve their clients, but also to recover compensation that has been squeezed out of their agreements.