Alex Morse
By Alex Morse
Jan 16, 2015 11:30:20 AM

Should Marketers Ever Fully Trust Their Media Agencies?

 

Marketing services appeared to be largely immune from corporate financial scandals in 2014 but there is still reason for brands to be wary in their dealings with agencies. Alex Morse explains

A year has passed since John Billett’s thought-provoking comparisonbetween the fraudulent practices brought to light in banking’s Libor scandal and the opacity inherent in today’s media industry.

The last 12 months have not been pretty in the corporate world. In the banking sector, cumulative Libor fines reached at least $10bn with agreements settled for, among other charges, money laundering, tax evasion, and collusion.

Tesco, the world’s second-largest retailer, is facing a criminal probe into hundreds of millions of pounds of misreported revenues related to supplier payments.

GlaxoSmithKline has been fined $490m in China for bribery, with executives given suspended jail sentences. Rolls Royce faces investigation over bribery and corruption allegations in both China and Indonesia.

Over a decade since Enron and Worldcom, and the rebate-related accounting scandals that blighted the media industry from the US to Germany to Asia and beyond at the same time, issues of market manipulation, coercion and bungs are once again in the spotlight.

Bumper profits

In fact, the industry had a relatively uneventful 2014 barring the demise of the $35bn merger of equals between Publicis and Omnicom. Instead, the dominant narrative of 2014 was one of accelerating digital transformation, bumper profits, the occasional celeb-selfie and a few, cooling ice bucket challenges.

What didn’t cool off were the marketing service agencies’ financial performances. In the face of challenging conditions, we saw record organic revenue expansion, profit margin growth, and unprecedented “shareholder value” being enjoyed.

A snapshot from the latest results shows Omnicom reported double digital increases in its bottom line, whilst WPP revenues were up more than 11% in dollar terms. Agency holding company share prices consistently outperformed their composite indices. IPG gained 18%.

Despite uncertainties on all fronts of the global economy it seems business will keep on booming: IPG will enjoy ongoing “financial strength”, whilst newly “modernised and transformed” Publicis is going after the “$1 trillion-plus prize”(see slide 23).

At a time when marketing belts are being tightened, and most of the significant media markets are headed for only modest growth, this bullish optimism seems counterintuitive. In December, GroupM, ZenithOptimedia and IPG’s MagnaGlobal all made downwards revisions to their 2015 ad spend forecasts citing Eurozone weakness, slowing US growth and the fallout from instability in Russia.

Volume rebates

The clues to the holding companies’ continued success whatever the conditions can be found deep in their annual reports. For those who reached page 195 of WPP’s 2013 Annual Report, for instance, you will not have been surprised to read that “The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients.”

Nor will you have been alarmed to read on page 33 of IPG’s report that “client contracts…include provisions for incentive compensation and vendor rebates and credits”. Dentsu’s report contains a similar acknowledgment.

None of this is necessarily controversial to marketers, provided that their media agency contracts explicitly covers how they benefit from these volume rebates. Omnicom, Havas and Publicis do not make such declarations around rebates or volume discounts in their equivalent reports but that doesn't mean the same philosophies don’t exist there.

It continues to be very difficult to identify the specifics of individual media agency financials because, as part of larger publicly traded companies, their actual results are typically rolled-up into larger reporting. This removes the details that could give better insight into the levels of volume rebates occurring.

The real goldmine for marketing services in 2015 and beyond, however, is likely to be digital where agencies are increasingly buying media on their own accounts for resale. Omnicom’s intentions to “make financial return” by marking up media prices via programmatic digital trading, for example, has been made clear – to analysts.

WPP’s annual report now illustrates this policy very clearly: “The [WPP] Group’s Media Investment Management sector is increasingly buying digital media on its own account and, as a result, the subsequent billings to clients have to be accounted for as revenue as well as billings” [p29 WPP 2013 Annual Report]

Public data

All of this illustrates the rapidly evolving world of media trading practices and commercial agreements. But there is very little by the way of public data to quantify the direct impact of these changes.

Agencies are, of course cognisant – in no small way driven by the scandals of the past and the pressure applied by savvy clients – of the need to be transparent. But from a legal and commercial perspective, these lucrative revenue streams seem all but sewn up.

The dilemma for marketers is that business practices that benefit the bottom line of agencies could also have a damaging impact on communication strategy. Where we once pondered which half of our advertising dollars are wasted, we now need to question what proportion is used purely for the benefit of accelerating agencies’ profit margins and shareholder value.

Acknowledging their desire to be valued business partners, successful partnerships between agencies and advertisers that deliver great results still require a very close eye on the money flows and constant monitoring.

For all the excellent work being done by great talent within the agency brands, the revenue models being demanded of them by their parent companies make it harder (and more expensive) for clients to always trust them fully.