Tom Denford
By Tom Denford
Jan 19, 2014 4:56:17 PM

Media Tradings' Own Libor Scandal Is Coming


There are uncanny parallels between the Libor scandal and the way media is traded today. John Billett calls on the industry to solve the problem.

The Libor scandal (London Interbank Offered Rate) already seems a long-solved, distant mystery to most folk and certainly irrelevant to the advertising media world.

Banks have been fined, executives fired and inquiries held. But before we cast it off into memory, it’s worth a look at the similarities between the broken Libor system and the current media trading landscape.

A UK advertiser may have been significantly overcharged for media despite audits indicating otherwise. This is because of the way that data is provided to auditors excluding some if not all of the discounts holding companies enjoy from deals with media owners.

If the details of the Libor scandal now seem distant, here’s a quick primer to allow you to see the parallels with media trading.

Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating their submissions to produce an artificially high average rate. This allowed traders to profit from trades at actual rates well below the average Libor quote.

Banks were supposed to submit the actual interest rates they were paying in order to provide a total assessment of the health of the financial system. Instead, the provision of unaudited claimed rates, created a false market.

It was not just the unwary financiers who were disadvantaged. Since mortgages, student loans, financial derivatives and other financial products often rely on Libor as a reference rate, the manipulation of submissions used to calculate those rates had significant negative effects on consumers and financial markets worldwide.

Let’s now bring that scenario into the media trading landscape. The prices charged to advertisers by media agencies for media owner contracts may well be artificially inflated. Few advertisers to my knowledge have contracts with both the appointed media agency and that agency’s media holding company.

Media discounts, media deals and media trading are now handled at agency and holding company level. The holding company deals (and the financial value they represent) with media owners can be allocated however that company wishes.

The result is that the prices advertisers actually pay and which get audited will certainly exclude a significant proportion of the deals negotiated. This means that clients could be overpaying for their media because of an inflated margin.

Sounds familiar doesn’t it. Essentially, the submission of artificially inflated prices has now become endemic in media trading. Transparency has disappeared. If some of the negotiated deals are withheld from view, then advertisers are in the same place as mortgaged house buyers – paying an artificially inflated price for their goods.

The Governor of the Bank of England commented in 2008 "Libor is not a rate at which anyone is actually borrowing". Let’s face it, the media audit is not a rate anyone is actually paying.

The New York Federal Reserve in 2012 released documents going back to 2007 which showed they were aware that banks were lying about their borrowing costs when setting Libor and chose to take no action against them at that time. The media industry knows the truth but also chooses to take no action.

A Barclay’s employee told the Fed "We know that we’re not posting an honest Libor, and yet we are doing it, because if we didn’t do it, it draws unwanted attention on ourselves. I have heard that on more than one occasion from several media traders.

The bottom line is that many operators in the media trading market are fully aware that the media trading market has become akin to a pre-scandal Libor market but no one seems to want to recognise the fact, let alone do anything about it

My hope is that those involved will quickly see the irreparable damage this false trading market is doing to the integrity of media trading as well as the damage being caused to the ability of brands to create cost-effective advertising.

As the Libor scandal encouraged bank customers to interrogate the way banks are run, so too could this potential media pricing scandal encourage brands to increasingly interrogate the way their agencies are being run.

The media owner deals that I have seen in the UK suggest that commission of around 25%, that’s 10% more than standard agency commission, is quite common. That additional commission is currently rebated to advertisers or withheld by the holding company on the basis of what will most benefit the media agency brands by the way of performance bonuses.

It’s clearly happening beyond the UK as well but wherever this occurs the clear losers are the medium-sized advertisers and those bigger spenders who don’t pay attention to what’s occurring.

Advertisers need to protect themselves and this can only happen where they have a contract not just with the media agency brand but also with the holding company.

Specifically that contract must allow them to have access to the detail of media owner deals so that they can independently calculate both the price they should be paying for spots and space as well as access to the rebate.

This article was originally posted on MediaWeek on 08-Jan-14