Since GroupM confirmed it was carrying out an investigation on auditing irregularities on client accounts for its MediaCom unit, client transparency and and questionable media agency behaviour have been the most talked about topics across the industry.
Looking at the wider ad space - from kickbacks and bribes to dummy invoicing, fudged figures, value banks, secret offshore accounts and more, AdNews has delved into how ad fraud, or misusing a client's money due to a lack of transparency, is operating across the booming ad tech sector.
With such intense competition and increasing budget pressures, how much of the ad underworld is driven by conspiracy around fraudulent activity? And have things gone too far for those involved to ever really turn the corner?
Before GroupM releases an official statement on the MediaCom audit, or results of Foxtel’s separate investigation into MediaCom's activities are out, we thought it useful to look into just what it is people mean when they talk about dodgy agency behaviour - or less than transparent handling of brand media budgets. How and where can it occur within the agency and media owner relationships and just how prevalent is it?
A number of sources AdNews has spoken with have suggested that while MediaCom is taking the heat, it is in no way alone in the alleged misreporting.
Industry sources, who do not want to be named, say the manual misreporting of accounts is likely to be the tip of the iceberg in ad land.
While a majority of businesses may be clean, numerous industry players have made it clear to AdNews there is much going on "under the hood".
The detail in this story is based on off-record conversations and information seen first-hand, such as in emails, where all of the tactics covered below are part of daily business – so much so they are even detailed on internal company presentation slides (something AdNews was shown by one source).
We have broken the alleged activity down into the most lucrative areas, which AdNews understands are the most prevalent techniques used by some media agencies and media owners as outlined by industry players.
The sections are headed up Mark-ups, Kickbacks and Bribes, Misusing a Client's Money, and Buying/False Invoicing. All are largely applicable to big advertisers which work with media agencies.
Mark-ups:
What? This, AdNews is told, is the main source of fraudulent income for media agencies and represents tens of millions of dollars in undisclosed revenues.
With the rapid increase of digital channels and ad tech systems comes more smoke and mirrors. While media agencies commit to negotiate the best deals for clients, some create DSPs and spin-off sub-brands - not to give clients more choice, but to force “heavily marked-up” channels on to them.
“Programmatic has rocketed overnight and is making millions for agencies," says one player. "How can this be when the product they are selling is no different to the exact same product they were selling the day before, only programmatically? It's because the mark-ups made on programmatic are huge.
“Ultimately it’s the clients and media owners themselves that are funding it.”
It is true that media agency trading desks have all but wiped out the old online ad networks which used to profit handsomely from aggregating unsold publisher inventory and onselling it to agencies and advertisers. A good slice of agency trading desk growth has come from squeezing out that part to the advertising supply chain.
But it also occurs when agencies commit to sourcing the best digital out-of-home deals for advertisers. By either squeezing partners or striking pre-negotiated deals with their recommended partners, advertisers are pushed down a route which the media agency knows contains marked-up offerings. The question then is: Does the media agency have the client's interest at heart or is it instead seeking to fulfil its own deals it has negotiated?
In a recent opinion piece on AdNews, CEO of Atomic 212º, Jason Dooris, stressed “over and over again” that he sees agencies pushing clients to DSPs, not because this is necessarily the best strategy for the client, but because the DSP is an agency-owned product, which brings higher margins into the business.
“The cloak and dagger approach currently surrounding DSPs is unsustainable and unacceptable,” Dooris said.
“There are plenty of better alternatives. The industry could instigate standardised regulatory practices.”
Why is this bad practice? Because agency DSPs, or, for example, a digital out of home (OOH) business it may have as an offshoot, is part of the same company. Claimed neutrality and "no-bias selling" is questionable.
While many groups state that a sub-brand is 'separate' to an agency business (and may even be housed in a different location), the agenda is the same. Indeed many, if not most of the in-house DSP systems now in operation across Australian media agencies, are built specifically to allow agencies to adjust the bought cost of media with fields built in for the agency staff or management to add new, often inflated rates.
When it comes to digital OOH, the kickbacks and misdemeanours outlined are also said to be creeping in here, too, with agencies doing deals with preferred media owners - preferred because they provide kickbacks to agencies.
This has not been well received by the OOH community, who often feel that the mark-ups applied by the larger agencies render their medium less competitive than other media. In a channel still growing and evolving, the impact on competitiveness is concerning for the OOH industry at large.
Scenario: A media agency network’s DSP arm recommends to an automotive client that they switch TV budgets into online video placements bought through their proprietary DSP. The goal is to generate vehicle test drives. The cost is attractive to the client compared to TV and other media. The client trusts their agency and readily agrees. The agency recommends more and more as they are buying at very low rates and discretely marking these rates up by up to 400% in some cases. The margin to the agency is at an unprecedented level. The client’s advertisements appear on a range of quality websites but also a range of overseas media, gambling sites and other off-strategy, irrelevant channels. The media has no impact on vehicle test drives and the budget is wasted. The agency performance media or programmatic buying arm posts record profits.
Within the programmatic industry, false impressions are also big business. One source says: “Media agencies cannot get a handle on this. False impressions are big business so why would they want to?”
Advertisers trust their media agencies to monitor this, but AdNews understands that while some aren't concerned about cracking down on this, many agencies are unable to keep up with the traffic bots creating false impressions. They simply don't have the skills or tools to.
Kickbacks and cash incentives:
What? This is the second main questionable source of income for agencies. Media agencies, and more commonly, agency group buying networks and media owners, make annual deals (for the year ahead) whereby cash incentives are exchanged for a guaranteed share of the media agency's group media spend.
It's important to note that AdNews is not saying all Australian agency groups do this – but it is alleged many do.
Usually media owners and media agencies make negotiations annually – for the year ahead. These negotiations involve the promise of a media agency's client budget share to the media owner's assets in return for a discounted rate off market rate-cards - and often undisclosed cash incentives for the media agency.
The media agency must commit to spending a set share with the media owner or they will not get the kickback at the end of the year.
Scenario: A media owner, say a TV network, may negotiate with a media agency group for a 45% share of the group's total client TV ad spending. Before knowing if TV network 'x' is the best option for its clients (in many cases before annual planning has occurred) the media agency will commit to putting business their way.
Why? What's in it for the media agency?
AdNews understands there are two key drivers. First, each deal comes with an attached and significant agency kickback, worth potentially millions for the larger operators. For the TV networks they command greater negotiation power due to larger media billings. If an agency fulfils the commitment to give the media owner a 45% share, they get their kickback cheque at the end of the year.
Second, such big deals means the media agency gets a good discount for buying so much space or airtime – thus making them look good to the clients as they have negotiated a discount. The reality is that the full discount is not passed on to the client and that difference, even 5%, can mean millions in extra cash to the media agency.
If the agency needs to make up its promised share to a media owner it will force placements to areas that it may not be suited to.
A number of sources have commented that many advertisers across the sector are likely to be considering reviewing their accounts and many will wonder why they find their ads running in certain media because of deals their agency has made.
For an agency to get a bigger discount they normally agree to taking a bigger share from the media owner, or even agreeing to lesser discounts than could be achieved for the client.
Scenario: A media agency has a young female beauty client that wants to advertise on TV station 'A' as it has a strong female demographic. If the agency is falling short of meeting its pre-negotiated share agreement with TV partner B, despite the client strategically benefiting more from being shown on A, it will place it on B.
These cash incentives are negotiated by what some call the 'bagman' or 'bagwoman' - which could be a senior exec working within investment at a group level.
This is a decades-old practice and involves a high level of conspiring. The critics say it's about ensuring the agencies' and media owners' interests are met – not the clients'. The funds are audit-proof as they go under miscellaneous items such as 'consulting fees' or 'research'.
As an agency nears the end of its annual deal with a media owner, pressure intensifies if they are not in line with what was promised and where inventory is more likely to be forced to TV spots that are not optimal.
Kickbacks and cash incentives is where the so called "value banks" come in. This is where agencies are given discounted rates or free spots after bulk buying deals. It can include onselling to clients at a higher rate or creating fictitious discount scenarios – a claim might be they have secured the advertiser a 70% discount, when it was given free to them anyway. The Australian has looked closely at value banks.
Misusing a client's money:
What? There are two methods used under this heading and both involve a media agency pocketing a client’s cash, but in different ways. The first involves the media agency keeping the cash difference in invoices between what a client pays for, and what the media owner bills the agency for.
Scenario: The advertiser pays the media agency for 100 TV spots, the media agency then books those spots with the media owner and then, once aired, the media owner bills the agency for this.
Frequently, due to oversight by the media owner, or other reasons, the client's requested ads were not shown, or simply in error, those booking requests were not billed for correctly by the media owner.
This means the media agency receives an invoice from the media owner for less than the amount the client paid for. This is common for big clients and can result in a cash windfall for agencies.
The surplus funds are banked in a separate 'special' or offshore account and are left there before being added to the media agency's bottom line. Agencies used to leave such funds in these accounts for seven years, as a precaution, but due to increasing financial pressures and stricter P&L targets, the extra cash is recycled back in and added to the bottom line far sooner – two or three years is now common.
Another way some media agencies can utilise a client's cash for their own benefit is when they complain to media owners about a client's inventory not appearing as it was anticipated. This results in the media owner apologising and offering free spots, pages or impressions to the media agency. The media agency banks these free advertisements, or rebates and does not pass this on to the client.
Scenario: An agency books and the client advertiser pays for one full colour page in five state capital cities. In one city the page appears poorly with the printing a bit smudged.
The newspaper offers not to charge the client and also offers a make-good page the following day. The agency fails to tell the client, keeps the money and only passes on the free make-good page to the client. The same could apply to a TV spot first-in-break that appears centre break instead. The agency negotiates the misplaced spot for free, but still charges the client. This is particularly common for larger clients with countless spots that go unnoticed or tracked.
The deception occurs when this discount is not passed back on to the client. The client has paid full price for this and is unaware that it is entitled to a rebate.
Commenting on this aspect, one TV advertiser says: “If we have paid for an advert and that money was returned for some reason, and a free ad given, we would expect to be aware of what we were entitled to so that we could make this call ourselves. Rebates can add up and in times where marketing budgets are spread far thinner than in previous years, then having budget returned is always welcome.
“We have a long-standing and trusting relationship with our media agency and can only hope and trust that it is doing right by us.”
In contrast to this, speaking to AdNews at the recent Twitter TV ratings Upfronts, one marketing exec who did not want to be named, said: “The media agencies can get a far better deal than us if we tried to negotiate ourselves, so if they have to cut corners and keep some back for whatever reason then that's fine by me.”
Buyers/False bookings:
What? This is possibly the simplest of all. The media is simply not bought or at least not all of it. While this is rarely the case for smaller clients, larger clients with thousands upon thousands of spots simply cannot track the odd spot not booked. If the agency is billing $700m dollars a year, which is millions of spots, this rapidly builds up into thousands of dollars.
This also shines the light on auditing firms which are employed by clients, and paid vast sums, to ensure that reporting is accurate and correct. In the case of MediaCom, irregularities were discovered with three separate clients, each already represented by auditing firm Ebiquity. A number of sources have questioned the auditor’s role in it all suggesting that the processes of the auditors should be “ripped apart”. Critics of the auditors have long argued they are so obsessed with price that the system can be gamed too easily - lower-cost ad spots appearing in low value environments has been considered a lead benchmark for effectiveness and media agency performance benchmarking.
Scenario: A client is invoiced for 5000 spots on radio and TV. Only 4570 were booked and the client is charged for spots that never aired. False bookings are common and it's hard to trace for big advertisers.
Playing the game – and changing it
It's important to note advertisers bear some responsibility for why the industry is facing systemic pressure. Equally, some anti-agency agitators see lucrative new business opportunities in continually pushing dodgy practices to the frontline of industry debate.
While not all agencies operate in the manner mentioned above or even have the scale to force media owners to “play the game”, AdNews understands the issue involves a string of well-known names in the industry.
While the actual figures and protocols are tightly held within agencies, seen only by the most senior executives, the activities are widely known by many.
One source said that it happens due to “a combination of direct intervention by senior execs, together with the practise of adopting a more plausibly deniable approach, encouraging unethical behaviours in key investment and financial staff - through no-questions-asked bonuses and audit protection (clients audit their own accounts not the agencies).”
How can this change and whose responsibility is this? AdNews approached several industry execs but was largely met with ‘no comment’ responses or off record quotes. Some feedback is below - feel free to share your views.
One media agency executive says: “While we have all heard about some of these things, false invoicing and media bribes is news to me.
“Most big agencies are part of listed companies and are contractually obligated, so to carry out things like this would be stupid.
“We can't really comment on what other agencies are doing, but it's important to remember that if things like this are happening at some media agencies then it will be in isolation, and I can only guess would be related to smaller 'backyard' clients.”
Atomic 212º's Dooris, says that when the media buyer doubles as the seller, “bad things can happen” and that in surprising corners of the industry greed has overtaken need. He adds that if you are spending more but selling less washing machines then something is wrong.
“The whole industry knows that it's rife – from the smallest clients to the biggest – most are being impacted by elements of media ad fraud," says Dooris.
“From mark-ups to DSP fraud and more, it's no secret within the industry that this happens.”
Dooris argues that with today's new world of constant innovation and technology-driven consumers, media agencies are expected to do and know far more than they did in the mid 1990s, yet clients often want to pay less than 15 years ago, despite getting more than they used to.
“Some agencies have adopted rather creative means of compensating for this while others take this to another level again in order to meet regional targets or maintain boom-time bonuses,” he adds.
“The upshot is clients need to pay agencies a fair fee for doing their job well and they also need to be asking more questions about transparency when it comes to working in murky areas like DSPs, trading desks and programmatic buying.
“The industry is due a reset. Let's hope it happens soon.”
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