The Nitty Gritty
The nontransparent business practices found by K2 come in many flavors, including rebates conveyed in the form of cash, free media, debt forgiveness and equity. Occasionally they are not paid directly to the agency for which the business was conducted, but through another agency or subsidiary of the same holding company.
Some of the practices mentioned have their roots in programmatic buying methods, ad tech and agency trading desks, though the scope extends into nondigital channels as well.
At their most straightforward, rebates are structured as cash paid to agencies by media suppliers as bonuses for high spending. But other structures have been employed as well, including consulting fees billed by agencies for offering overpriced services of little value. The size of these consulting fees is often tied to volume of spend, K2 found.
The report contained several specific rebate examples, detailing how agencies and their tech and media suppliers structure deals that provide agencies with benefits in noncash form.
K2 wrote that in one such instance, "a certain level of aggregate spend ... triggered the award of a quantity of free media." That level was in excess of $5 million, and the free media rebate amounted to 10% of that sum – or about $500,000. "The executive stated that he understood that the free media would be allocated to the clients whose spending generated it, though he did not know how it was ultimately apportioned."
While rebates existed in all media channels, from out-of-home to TV to digital, the study singled out the programmatic trading desk as a particularly powerful vehicle for nontransparent agency practices.
In a well-documented practice, some agency trading desks make money by securing inventory at a price unknown even to the agency of record, then adding a markup when it passes it on to the client's agency of record.
K2 found that with “principal transactions,” where the holding company acts as a media supplier, media markups range from 30% to 90%. One source declared some agency trading desks were mandated to generate margins in the 30% to 50% range.
The report also noted that agencies have made money from by repackaging outside ad tech. One K2 source described ad server markups of 200% to 250% that were not disclosed to clients. Another source mentioned that the agency would add bid-level markups to DSP transactions. In other cases, they marked up the entire DSP service.
Agencies also generate additional revenue through private marketplaces, according to K2. A C-level exec at an ad tech firm observed agencies pushing spend through private marketplaces that were overpriced, leading the source to suspect that “agencies are receiving incentives to utilize certain mid-tier media suppliers.”
When agency holding companies take equity positions in media suppliers or ad tech companies, that’s also cause for concern. In such situations, the two companies are able to strike mutually favorable rates, further encouraging media buyers to funnel spend through the preferred vendor and reducing price competitiveness among vendors.
While some of these equity stakes were disclosed, agencies also requested stock warrants – similar to stock options but which don’t require the same level of disclosure – from ad tech companies in exchange for what they euphemistically called “access,” a K2 source said.
K2 made clear that, in at least one case, rebate programs were conceived and formalized not by agencies but by the media supplier. This large supplier set up an incentive program to encourage agencies to direct more spend toward certain ad formats. The program was open to individual agencies, and the media seller that created it paid cash rebates for both overall spend and year-over-year growth.
An executive with this media supplier told K2 he believed rebates from his company were “absolutely” passing the benefits back to clients, but admitted he had no evidence.
The existence of this incentive program directly contradicts some statements by agency executives who have flatly denied the existence of rebates in the US. One holding company executive told K2 the difference between “rebate” and “discount” was a “semantics game." This person said the agency is “ultimately making the same amount of money off of a client.”
The report's sources often articulated the disconnect between clients and agencies in nonbusiness terms. Agencies carry a "moral responsibility of trust." They owe advertisers "not only a legal, but an ethical duty." But others disagreed, including one unnamed holding company CEO who said, "There’s nothing wrong with something if the contract agrees to it.”
Leading up to the announcement, many agency holding companies issued fierce denials. Some mentioned that their actions were always compliant to advertiser-agency contracts.
K2, however, did not investigate if actions were compliant with contracts or even legal. Indeed, it found that sometimes such nontransparent actions were compliant with an advertiser’s contract. Its goal was to bring such practices into the open.
The ANA wants to use the findings to address all marketer transparency concerns and create a “fully open, transparent environment,” Liodice said, adding that the change could be good for the digital players and the ad tech world too.
“If we are able to get more information out into the marketplace that allows different parts of the LUMAscape to be more transparent in what separates one versus the other, marketers will be able to select the best-in-class [solution].”
Zach Rodgers contributed.