Opinion

Media agencies and their numerous conflicts of interest: a recipe for disaster

In this guest post, Nico Neumann argues it's time the AANA and MFA pushes for tougher transparency guidelines, ideally in the form of accreditation requirements or new laws enforcing disclosure.


With the latest fraud scandal of Dentsu, the transparency topic has made it back to the news headlines.

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Many potential issues in current media practices have been discussed, such as appropriate agency fees and the role of undisclosed rebates.

Surprisingly, there still is a lot of confusion around which information agencies and other middle men should be required to reveal.

For example, some people argue that it would not be fair to be completely transparent about how an agency makes money since supermarkets or successful companies such as Apple don’t tell you the exact profit margins of their products either (scroll to comment here).

Sadly, this argument misses one critical point. Apple is a technology/software company and a supermarket is a retailer. Its value generation is in producing a product or distributing it. These are well-defined roles without conflict and it matters less how much their margin is (though retailers have been criticised for promoting their own store brands too much).

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The same applies to media: no advertiser really cares what exactly the costs of ‘operating media buying’ are (overheads, equipment, etc.). You set a price and customers can accept your offer or not.

However, if media agencies only performed media buying and pursued no other business opportunity, we wouldn’t have the current mess and debates.

Specifically, in the case of most big media houses, it has become the norm to wear many hats simultaneously, often without being transparent with clients. Unfortunately, this comes at the cost of integrity and violates essential principles of an agency-principal relationship. Why?

Because you simply cannot be consultant, agent/ broker, trader, reseller/ distributor (thus media owner), speciality service provider and auditor at the same time.

Let’s review these roles:

Consultant

Provides advice on what to do and is often hired to solve a particular problem for which a client lacks expertise. A classical management consultant rarely implements a recommended solution. Consultants typically receive a fee and should not have any financial relationships with suppliers (e.g., through commissions).

Agent/ broker

Is authorised to act legally on behalf of clients. The work often involves practical support and expertise (e.g. preparing request for proposal documents). A broker is a type of agent who tries to match buyers and sellers to enable transactions. Agents and brokers typically receive a commission (which may or may not be subject to approval from a client).

Reseller/ Distributor

Purchases goods or services with the intention of selling them to end users. A reseller has no inventory (as opposed to a distributor) and may add extra services, such technology support. Usually resellers buy at a volume discount and resell to their customer at full price, pocketing the difference.

Trader

Buys and sells with the goal of making profits, often based on value differences given by market fluctuations. Traders can use their own money or someone else’s and are often paid on a commission basis for transactions.

Auditor

Checks the accuracy of business records and transactions and typically receives a fee. Auditors tend to work on budgeting and performance evaluation, risk management and selections of financial investments. Financial auditors need to be independent from the investigated organisation by law.

Specialist service provider

Manages a customer’s highly specialised requirements, such as technology systems or creative productions. Often it’s a function that is outsourced when it’s not cost efficient to do this yourself. Typically specialist (managed) services involve [subscription] fees. A contractual agreement dictates the performance metrics that will govern the relationship.

Now let’s look at the advertising ecosystem.

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Upfront deals – when agencies become distributors

Large agency groups regularly make upfront deals to leverage their buying power. For example, IPG committed to buying US$250m of Youtube inventory in the US this year.

Unless each client has agreed a priori to chip in a fixed amount (creating group-buying demand a la Groupon), this deal makes IPG a distributor or trader of Youtube ads. If media agents now suggest to run Youtube ads, clients will be left to wonder whether this recommendation is made because it’s the best strategy for them or because IPG must fulfill their promised quota.

Unfortunately, the Youtube case is just one example. Most media groups make upfront deals with print or TV broadcast networks too. The same concern applies – the agent becomes a distributor.

Offering platforms and software – when agencies become resellers

Today most media agencies are resellers for marketing products, such as Google Analytics (GA) Premium (costs: $150K USD per year). Note that resellers can get a discount of up to 50%, depending on the purchased volume.

Many agencies then offer GA Premium to clients for the market price (150K), but add ‘free’ implementation and maintenance. Of course, the extra service is not really free but funded by pocketing the discount (question: has this been disclosed to you?).

Moreover, this source of income may again create a conflict of interest for an agent who recommends shifting money to online advertising (which may require a tool like GA Premium) or when evaluating the effectiveness of SEM campaigns (which frequently happen to be executed by the same agency).

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Analysis of your media spending – when agencies become their own auditors

Another major conflict of interest occurs when an agency conducts attribution or marketing mix modeling to examine their own media buying. The potential risk in budget shifts away from sister groups (e.g., trading desks or paid search optimisation unit) is a significant problem that raises serious questions about whether such an analysis is done neutrally.

Trading desks and inhouse productions – when agencies sell specialised services

Agency-owned content productions (social media, creative, content) or trading desks represent further red flags. Once again, it is difficult to determine for external parties whether a suggested inhouse specialist service was chosen because it is the best solution or because the agency [group] makes money through this channel.

Violating the foundations of the agency-principal relationship

Using an agent always implies a controversial relationship that can be plagued by a natural dilemma – does an agent represent my or its own interests more? This is neither new nor does it apply only to media (think of mortgage brokers who may prefer certain banks because of a higher commission). Yet, two characteristics seem to stand out in the advertising industry:

  1. Multiple conflicts of interests

When the media industry moved away from the commission system, agencies became also distributors, resellers, auditors and speciality-service providers to generate additional income (and they make greater profits than ever). However, they also created numerous conflicts of interest by doing so.

  1. Lack of disclosure

Other industries, such as real estate or finance, have strict legal requirements to disclose any conflict of interest. Interestingly, even though the media industry suffers from the same issues, it does not have the same obligations. Sadly, this lack of transparency has been exploited multiple times by bad actors.AANA

To improve current media-buying practices, the ANA recommended full disclosures of all conflicts of interest in the US following the findings of widespread malpractice. It is therefore high time that other associations, such as AANA and MFA, push for tougher guidelines in our region, too, ideally in the form of accreditation requirements or new laws enforcing disclosure.

Only when all conflicts of interest are disclosed, these can be managed by clients.

Of course, disclosures don’t guarantee protection. The safest way for clients to reduce concerns of malpractice is to avoid any conflict of interest at all. How? Have each key role – agent/broker, consultant, reseller, auditor, specialty service provider – executed by a separate organisation.

Given the history of trust exploitations and fraud revelations in media, this is probably a good idea anyway.

By Nico Neumann, senior research analyst, University of South Australia

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