The hidden truth about media rebates: Agencies are paying settlements but they are not being disclosed

2 weeks ago

The general counsel of the Association of National Advertisers says there have been settlements stemming from audits of media agency contracts. The CEO of the 4A’s, the leading U.S. agency organization, says nearly a hundred audits have taken place, but agencies have yet to give any money back.

The fact is, both of them are probably right, and that’s part of what’s wrong with U.S. media buying and client-agency relations today. Since the U.S. media rebate issue exploded in 2015, rumors of audits and legal settlements between media agencies and marketers have bubbled up consistently.

An investigation into the issue by Ad Age conducted over several months, including interviews with dozens of industry players, indicates that those audits and settlements really are happening. But people familiar with the matter say they may remain secret forever—because neither side has much interest in making them public.

Why and how such deals are made says a lot about how complex dealings have become among agencies, marketers and media companies in the wake of a 2015 speech to the Association of National Advertisers by former Mediacom CEO Jon Mandel alleging widespread undisclosed media rebates in the U.S., and a subsequent report commissioned by the ANA and conducted by K2 Investigations alleging transparency problems in far greater detail. 

Lifting the cover

Two things could ultimately lift the cover off agency-client settlements, according to people familiar with the matter. One is a continuing federal investigation into U.S. media practices, should it ultimately produce indictments. Another is the prospect of two settlement negotiations of unprecedented nine-figure scope, which are likely to involve cash payments and other terms that would require public disclosure by public companies. 

But nothing has happened yet. And in an industry that can’t agree on much when it comes to media buying practices, disagreement remains about whether there even have been true legal settlements over rebates and other supposed transparency transgressions.

ANA General Counsel Doug Wood, partner in the law firm Reed Smith, confirmed in a public meeting of the group’s Advertising Financial Management Conference in April that such settlements have happened. Wood declined to estimate the dollar amount involved, but said they “would allow you to buy some really nice homes.” Contacted later, he declined to elaborate, citing client confidentiality requirements.

Yet 4A’s CEO Marla Kaplowitz recently told Ad Age there have been nearly 100 client audits of media agencies since the ANA began its campaign for media transparency, and agencies have not paid marketers any money. And by all accounts from others familiar with such dealings, Kaplowitz is correct.

How client-agency deals work

Three people familiar with recent agency-client settlements describe them as non-cash arrangements designed to avoid public disclosure, with non-disclosure agreements covering all parties involved. 

These people say the deals involve payments to clients from agencies in the form of media, with the stipulation that clients can’t audit the media provided in the settlements.

The media is assigned a dollar value commensurate with any undisclosed rebates or other issues discovered in the original audit. But, without audit rights on the settlement media, it’s impossible for clients to know exactly how much the media agency paid for it or how it was obtained.

Despite the moral indignation that sometimes surrounds the rebate issue in the U.S., people familiar with the deals say agencies generally aren’t fired following these audits and negotiations.

Sometimes there’s a new contract, or a review leading to a new contract, but the marketer keeps the agency on the theory that what was discovered in the audit, and the risk of public disclosure, provide leverage that leads to a better deal.

Indeed, not firing the agency is one key to keeping disputes and their resolution from having to be disclosed publicly under Securities and Exchange Commission or other nations’ accounting rules, says one person familiar with several such deals. Since there are no formal legal claims or lawsuits filed, the transactions can be styled as part of ongoing business relationships that don’t trigger disclosure requirements. 

‘No incentive for CMOs’

Advisors to marketers involved say they’ve pushed for stronger terms, particularly provisions allowing the media involved to be audited. But as one person familiar with the process described them, the deals help marketers “meet their KPIs [key performance indicators] and CPMs [cost per thousand]” target, which in turn looks good to bosses or improves their performance bonuses. The new contracts drawn up might appear more favorable to the client, too. 

“There’s no incentive on the CMO side to fix this,” he adds, because the deals actually might help boost CMO bonuses even if they don’t solve the underlying transparency problem.

Procurement, chief financial officers or other senior executives on the marketer side are either uninformed about details or convinced they’re the best way out for them as well.

One initial concern among marketers years ago, this person says, was that the pool of media that agencies had on hand to pay settlements would dry up as audits and settlements increased.

That hasn’t happened, he says. And he points to another issue of concern: Agencies appear to have a nearly bottomless pit of media to draw upon, even though under most contracts they’re supposed to be doing business mainly as agents of clients rather than taking possession of media in their own accounts and re-selling it in so-called principal transactions.

That there’s still so much media available to agencies to trade away suggests either that it’s of questionable value or that agencies have stepped up their efforts to secure free media for themselves, says Stephen Broderick, CEO of consultancy FirmDecisions, a unit of Ebiquity, which created the new model agency-client contract recommended by the ANA in 2016.

‘This is just crazy’

“Some clients are settling small claims and saying, ‘I’ll take the $2 million or $5 million or $20 million in free media,’” Broderick says. “And I’m saying to them, ‘This is just crazy, because it’s free media, and you can’t value how much it’s worth, because it’s free. Secondly, how do you know it’s not your free media that you’re now taking in settlement for what they’ve done wrong?’”

In other words, the deals might simply mean clients are accepting free media that agencies obtained by using the client’s own buying power in the first place, then placing an imaginary value on that media in order to settle a claim that the agency accepted rebates it didn’t pass along.

“I understand the need for some clients to have closure and say to their boards or whoever that ‘we’ve come along great, we’ve found there was a problem, we got a settlement of $20 million, we ticked the box,’” Broderick says. “That’s great. I get how that looks good. But the reality is you’re just buying more of the same nonsense you got involved [with] in the first place.”

One recent settlement involving a global marketer doing business in Western Europe and North America began with an audit triggered when a junior employee of the marketer discovered it was being invoiced by an overseas unit of the media agency’s holding company that wasn’t supposed to be billing the marketer, according to a person familiar with the matter who declined to be named or identify the parties involved, citing contractual obligations. 

The audit uncovered an eight-figure pile of rebates or other considerations, like free media, that should have been passed along to the marketer, but were not, this person said.

But while the audit triggered an agency review, the compensation for the rebates discovered ultimately came in the form of free media that couldn’t be audited. The review ultimately kept the same media agency in place under new terms. Neither the company nor the agency disclosed the audit findings or settlement publicly.

Where the media comes from

The bountiful pool of free media available for settlements also points to how media rebates have shifted from cash payments by media companies to free or discounted media instead, Broderick says. Agencies are getting media, he says, in “commingled buys” that leverage the collective buying power of their clients but aren’t tied to any specific client’s account. 

The Ebiquity/ANA model contract, and some marketer contracts, try to prevent this by prohibiting agencies from making deals on their own accounts with media companies that are better than deals passed along to clients.

But auditing and enforcing those provisions is difficult, since it potentially requires access to records of every deal every agency holding-company entity does with every media company.

Broderick and other consultants say the commingled deals can also be made without any explicit quid pro quo. Agency negotiators might first conclude tentative terms for their collective client base, then move straight into discussions about buying media on the agency’s own account, without explicitly tying the two.

‘Everyone is assumed guilty’

In a follow-up interview, Kaplowitz said her comment about there having been “100 audits and no one has paid money back” was based on what she’s heard from agency members. Kaplowitz said she’s unaware of any settlement deals like those described above.

“The challenge with these incidents is that they are isolated, but they are assumed to be pervasive and therefore everyone is assumed guilty,” Kaplowitz says.  

Ad Age reached out to spokespeople for seven agency holding companies to comment on whether they had been involved in post-audit settlements like those described. Spokespeople for WPP and Interpublic Group of Cos. declined to comment. Spokespeople for Publicis Groupe and Omnicom said their companies had not been involved in such deals. Spokespeople for Dentsu Aegis Group and Havas didn’t respond to requests for comment by press time.

An MDC spokeswoman said the company has “issued no rebates or refunds, and no discrepancies or deficiencies have been documented in more than 20 audits over the past five years.”

MDC Media Partners and Assembly CEO Michael Bassik said in a statement: “We are not entrapped in the rebates and murky practices legacy agencies have long benefited from. In fact, we launched Assembly just five years ago to be the first fully transparent media agency, and we are proud to maintain this commitment to transparency for our clients.” 

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