There Is A Bear In Madison Avenue's Woods, And It's Kicking Back: Analyst Says Agency Rebates Are No Bull

On the heels of last February’s Omnicom downgrade, BMO Capital Markets analyst Dan Salmon this morning downgraded Publicis to “perform” from “outperform” and another influential Wall Street analyst -- Pivotal Research Group’s Brian Wieser -- issued downgrades for both those holding companies, as well as two others: Interpublic and WPP.

Wieser, who lowered Interpublic’s stock to a “hold” from a “buy” rating, and reduced Omnicom, Publicis and WPP to “sell” from “hold,” tied at least some of his downgrades to a controversial development in the ad industry: the growing awareness that many big agency holding companies make a significant amount of their profits from various media kickback schemes.

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“Emerging concerns among marketers around different forms of agency rebates in the United States causes us to partially (if slightly) re-assess some of our views on long-term holding company growth,” he wrote in an equities research report to investors, adding: “With a drumbeat of negativity to come from marketers only now learning about the issue, we recommend investors move to sidelines or exit the sector for the time being.”

Wieser went on to point out that new revelations about the size and extent of agency media rebates -- a subject that gained significant traction at the Association of National Advertisers’ media conference, where former Madison Avenue media chief Jon Mandel turned whistleblower -- is significant enough to have tempered his long-term positive view on the advertising agency business.

“Behind our favorable long-term view on agencies over the years was the notion that fragmentation and reliance on digital advertising helps agencies -- especially those with heavy exposure to media trading -- given the reliance on labor required for digital media, and value-added services such as branded content production, barter and programmatic trading,” he wrote, adding: “However, we have reassessed our view in recent weeks with growing awareness of the topic of undisclosed agency rebates (aka “kickbacks”) in the United States.

“The volume and specificity of allegations by aggrieved media owners, former agency executives and marketers are difficult to ignore. Rightly or wrongly, there is a growing perception among marketers that agencies have been misleading, transferring value associated with media volumes without clients’ full understanding or support.”

Wieser implied that the real issue isn’t the nature of the rebate arrangements per se, but the fact that few marketers “fully understand the specific arrangements their agencies undertake with media owners.”

Among the big agency holding companies, he opined that WPP probably is “most immunized” from the problem, mainly because WPP’s management has been vocal and explicit about the non-transparency surrounding its business relationships with media suppliers.

In fact, WPP actually changed the accounting methods of its profitable unit Xaxis over the past year to reflect that it isn’t just buying media for clients, but takes possession of it and resells it.

Alluding to a famous position taken by GroupM Global CEO Irwin Gotlieb about being “transparent about being non-transparent,” Wieser wrote: “This is an appropriate position to take, even if under-paying clients don’t like to hear it.”

He characterized the fact that other agency holding companies have not made similar disclosures about rebates, spreads, margins and the overall lack of disclosure between their “gross revenue vs. revenues net of media trading” as “unfortunate,” and implied it puts them in especially vulnerable positions vis a vis their clients.

“How much of a haircut to growth might follow is subjective, not least as we don’t know the scale of revenues and cash flows at risk,” he continued, adding that the situation is serious enough to at least warrant a 0.5% reduction in the long-term growth of Madison Avenue’s Big 3: WPP, Omnicom and Publicis. He downgraded Interpublic’s long-term growth by 0.25%.

“As marketers become more vocal about undisclosed rebates and more specific allegations come to light, a drumbeat of negativity will build around the sector over the course of this year,” he concluded, adding: “Given this risk, we’d recommend that investors move to the sidelines or exit the sector altogether while it all plays out.”
9 comments about "There Is A Bear In Madison Avenue's Woods, And It's Kicking Back: Analyst Says Agency Rebates Are No Bull".
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  1. Douglas Ferguson from College of Charleston, April 13, 2015 at 9:08 a.m.

    When is "60 Minutes" planning an exposé of kickbacks? This secret practice does not pass the smell test, but media watchdogs are not barking very loudly. Why is that?

  2. Mike Einstein from the Brothers Einstein, April 13, 2015 at 9:42 a.m.

    Could this digital accountability genie be any further outside the bottle? What a mess we've made of things.

  3. Ted Mcconnell from Rocket Fuel, April 13, 2015 at 10:19 a.m.

    ... or maybe more like the 3 bears, as advertisers, wondering who ate their food, and the Agencies as the seemingly innocent Goldilocks, unable to control herself when encountering the unprotected possessions of others. A cautionary tale. 

  4. Henry Blaufox from DragonSearch, April 13, 2015 at 11:09 a.m.

    Will the problems with rebates, arbitrage and lack of transparency about agency stewardship of client budgets speed up the shift of digital media buying from agencies to marketers' in house specialists? Even if marketing executives who own the budgets want to maintain cordial relationships with their agency counterparts, pressure from the finance and legal units may add to pressure for cutting agencies out of the buying process. Agencies will be left with the creative - someone has to do the ads, and they have to be done well. Perhaps media planning as a time and materials based consulting service will also remain at the agencies. But the technology exists to implement buying proocesses and train a new type of internal staff expert to manage the buying tasks.

    The ad tech vendors can add value by providing the expertise to work with marketers, and they haven't damaged trust with the corporate clients the way some agencies may have done.

  5. Ed Papazian from Media Dynamics Inc, April 13, 2015 at 12:55 p.m.

    If the advertisers decided to take on the media buying function---including not only digital, but "legacy media" as well---who would they hire to handle these new duties? The agency media folks---of course? But aren't these the "guilty" ones in this scenario---along with the greedy agency top brass and their shifty-eyed "bean counters"?And what media person would want to go to an advertiser in-house buying operation when there is no path for advancement within the organization? As for media planning and media research along with billing and traffic, the advertisers would, no doubt, have to take these functions on, since the agencies, now reduced to "creative" boutiques, would not want to be saddled with such functions. It certainly would be interesting to see such a scenario playing out. The media would, of course, take maximum advantage as the advertisers' in-house "shops" would no longer have the wider industry perspectives of the large, multi-client media agencies, who know what the going rates for time and space really are. Net, net---let's not get carried away on speculation about gross misdeads and lack of transparancy. If there are some cases where something shady may have transpired, I'm sure that the agencies will quickly respond and clean up their act----they can't afford not to.

  6. Tom Cunniff from Tom Cunniff, April 14, 2015 at 9:52 a.m.

    I have long been predicting the rise of in-house agencies -- not for everything, but for most routine work. In media, not so much to avoid real or perceived monkey business, but because a) there will be so much first-party CRM data involved; b) "always-on" marketing is easier when everybody is under one roof with one agenda; and c) projected savings will be nearly impossible to resist. Agencies will continue to exists, but I predict that one day there will be far fewer -- and those will have truly distinctive capabilities that are hard or impossible to replicate in-house. On the plus side for the remaining agencies, the most distinctive will have real pricing power because they will be much harder to replace.

  7. Augustine Fou from Marketing Science Consulting Group, Inc., April 15, 2015 at 3:57 p.m.

    I agree with Tom, more clients (advertisers) are moving functions back in house. Take social media for example -- the brand needs to be "the voice of the brand" not some PR agency.  And in digital media, with the rise of programmatic buying and optimization, can no longer be adequately optimized by humans; high speed algorithms are needed to place and optimize, in ways that no humans can do in spreadsheets any more. 

  8. Ed Papazian from Media Dynamics Inc, April 15, 2015 at 4:09 p.m.

    I wouldn't be surprised to see more and more advertisers moving certain media functions in-house as a way to save on agency fees. Once again, we need to distinguish between promotional and branding budgets. Where it may make perfect sense to go in-house for promotional/search digital media buys using "programmatic" means, it is unlikely that the same can be said for "linear TV", which is quite a different kettle of fish. Not only isn't there a workable "audience" targeting base for TV but the sellers will not readily agree to lose control of their"impressions" inventory, let alone their "premium" content. As regards radio and magazines, it's difficult to speculate. Of the two, I suspect that the former is the more likely bet, but radio is a small part of most national ad budgets so were it to go the automated buying route, this is hardly a big deal.

  9. cara marcano from reporte hispano, April 15, 2015 at 4:56 p.m.

    Ahh the net net net net convo and the media planner and buyer who hates media. 

    If you love it and you value it and you know about content and ROI, you know how to talk Net without being a net-net-net-net, not-nice-guy.
    Grow sales and be creative or get out of the way.

    There shouldn't be so many nets ; ) 

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