Advertisers to probe media agency deals

By Paul McIntyre | 16 February 2011
AANA chief executive Scott McClellan.

EXCLUSIVE: Media agencies are resisting an advertiser push for more “transparency and disclosure” in their dealings with media owners under an industry-wide “Media Charter” proposed by the Australian Association of National Advertisers (AANA).

The AANA’s move comes at a delicate time for media agencies as they apply increasing pressure this year on media owners to buy spurious agency services and products to bolster their margins and revenues.

Several media owners have confirmed to AdNews that backroom deals have been tabled by media agencies which link their spending on particular media with the take-up of paid agency services – the value can range between 2% and 5% of the annual billings a media agency allocates to a particular media owner.

“Just about all of them are doing it,” said one media executive. “We said to one group we couldn’t do it and since then it’s been death by a thousand cuts [in marketshare from that agency].”

Avoiding kickbacks and disclosure

Media owners say in some cases agencies want to avoid bonus advertising kickbacks in favour of selling research and other “services” to media owners which can generate immediate revenues for the agency and technically avoid client disclosure requirements. Generally, any bonus ad inventory an agency receives must be declared to advertiser clients.

“A few of them have realised they need to clean up their act by making their research and services more legitimate,”  one media owner said. “But those services are tied to [media agency] spends. Absolutely and directly. If you don’t hand out, you don’t get the share you might deserve."

The practice by media owners of allocating bonus advertising inventory to agencies in return for revenue share deals still continues, however.

There are reports in the TV sector of a major media buying group which directly links the level of bonus airtime it receives from TV networks to the share the TV networks get from the media buyer.

The collective deals are said to be worth upwards of $30 million in airtime. The agency’s airtime slush fund is then used to lure-in new business and lock down accounts which may be shaky.

AANA chief executive Scott McClellan confirmed he had approached the Media Federation of Australia to endorse a Media Charter, using the World Federation of Advertisers code as a starting point.

“The fundamental issue for us is transparency and disclosure of the detail of any financial arrangement the agency has with media owners,” he said. “The advertiser pays for all this and has a right to an understanding of what those agency arrangements are.”

However, chairman of the Media Federation of Australia, Henry Tajer, said the industry body was cautious about backing the initiative. “Scott asked us to endorse it which we can’t do,” Tajer said. “It’s hard to endorse something the AANA puts out because that could be seen the wrong way by trying to enter into a discussion about how individual clients operate.”

Agencies desperate, not gouging

These controversial media agency practices will not impress corporate advertisers but it points to serious challenges media agencies have in generating sufficient margins to reinvest in their businesses.

“I don’t think the agencies are gouging,” said one media owner. “They’re just desperate. Client fees are horrible and they keep paying less. No-one is making any money so they’re trying to find it through other means.”

One way media agencies could address the problem is to “stop dropping their prices” to win new business or retain existing accounts, said one industry stalwart. “Agencies have got to stop the practice and if they don’t they have to find entirely new ways to earn a quid or they will be out of business. That’s what we’re seeing now.”

The fear of media agencies is the moment they are forced to disclose diversified revenue streams not directly linked to client business, marketers and procurement departments will seek to force agency remuneration down further.

Advertisers pillaging agency fees

“There’s not much attention being put back on advertisers in this debate,” one media agency boss said. “Unfortunately this story, rightly or wrongly, will give more ammunition for advertisers to screw on price. It will be more justification for them to pillage.  And I don’t see advertisers being put in this situation where they have to open their books up to their customers.”

The AANA’s McClellan said it was “no secret” that agency remuneration fees are under pressure. “We have been hearing that from media agencies for some time so I’m not surprised to hear that they are looking for ways to become more profitable,” he said.

“Do I have a problem with that? Not in principle but I think the value of it needs to be disclosed and how it’s justified needs to be disclosed. That’s all we are looking for.”

McClellan said to make the AANA’s proposed Media Charter “valuable” it would need the support of media agencies. “We have to make sure they’re comfortable with the terms of it,” he said.

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