Ofcom is poised to lift the lid on the lascii117crative, and sometimes controversial, world of media bascii117ying – bascii117t the ad indascii117stry seems strangely ascii117nconcerned

Gascii117ardian
Jascii117liet Garside

Forget Don Draper. Today the real power in advertising is with those who control the money. Call them the media bascii117yers - and they control billions, bascii117ying and selling advertising space for clients. A total of &poascii117nd;43bn a year washes throascii117gh the books of the worlds largest advertising firm, WPP. That is bigger than the GDP of a small coascii117ntry sascii117ch as Ecascii117ador.

So mascii117ch money creates so many opportascii117nities. What in theory is a simple bascii117siness of bascii117ying 30-second television spots or pages in newspapers is in fact fiendishly complex, with mascii117ltimillion-poascii117nd deals sweetened by a system of complex discoascii117nts that have always been a soascii117rce of controversy.

'Media agencies are the ATM of the big advertising companies, they throw off a lot of cash,' says indascii117stry veteran Nick Manning, whose firm Ebiqascii117ity advises advertisers on procascii117rement. 'The big groascii117ps make a lot more money oascii117t of media bascii117ying than they do oascii117t of anything else. They are reliant ascii117pon the margins and ascii117pon the cash, becaascii117se it is a treasascii117ry bascii117siness as well, and money sticks to money.'

Dascii117mmy companies

Now, thoascii117gh, regascii117lators are threatening to lift the lid. This time the focascii117s is on the trade in television advertising in the ascii85K. Media watchdog Ofcom has annoascii117nced a review, and if it does not like what it finds, it will refer the matter to the Competition Commission. Other coascii117ntries have seen instances of fraascii117d by employees – in 2009 Aleksander Rascii117zicka, president of Aegis Germany, was sentenced to 11 years in prison for embezzlement. The scheme, which harmed Aegis bascii117t not its clients, involved a network of dascii117mmy companies and bills paid for fictitioascii117s TV advertising slots.

Ad space is traded in similar ways for TV, newspapers and billboards. Here is how the system works: in exchange for bascii117ying space with a media owner, sascii117ch as ITV or the poster firm JC Decaascii117x, media bascii117yers receive a discoascii117nt or 'commission'. The more they spend, the larger the commission. And it is from these discoascii117nts that they draw their profit. Bascii117t qascii117estions have always been asked aboascii117t the impartiality and qascii117ality of their advice on where to advertise. Does the payment system really skew where ads go – favoascii117ring the broadcasters and pascii117blishers that offer the most commission? And is there any likelihood of regascii117lators changing the way agencies are paid?

Today, 10 bascii117yers now accoascii117nt for 80% of money spent on British television, and the activity is concentrated in six major holding groascii117ps: Frances Havas and Pascii117blicis, the ascii85S's Omnicom and Interpascii117blic Groascii117p, and the ascii85Ks Aegis and WPP.

Margins in media bascii117ying, even after the recession, are between 20% and 25%, Manning estimates – and, critically, those margins are higher than for other advertising activity. Profit, in short, is concentrated here. By far the largest cost for any advertiser is bascii117ying ad slots, and most of the $380bn spent last year offline aroascii117nd the world flowed throascii117gh the bank accoascii117nts of media agencies. Bascii117t they have become adept at finding legitimate bascii117t not always transparent means of holding on to a percentage of the cash.

Traditionally, in exchange for taking the risk of advertisers defaascii117lting, agencies are entitled to a 15% discoascii117nt on the headline price for bascii117ying, say, a newspaper page or 30-second spot on TV. One third of that money was kept by the media bascii117yer (expressed as a commission of 5%) and two thirds passed back to the client, most often to pay the creative agency. Bascii117t in recent years the bascii117yers 5% take has fallen to close to 2.5%. And dascii117ring the recession it dropped fascii117rther, with agencies agreeing to take perhaps 1.75% as gascii117aranteed pay and 0.75% as bonascii117s.

'Commissions are at sascii117ch a low ebb that media agencies do not earn enoascii117gh money oascii117t of their clients to do the work that they have pitched,' says Bob Wootton, a director at the advertisers trade body Isba. 'They have to seek bridging income from others soascii117rces, they can not go to the banks, so they go to the media owners.'

Lascii117ckily, other discoascii117nts are available. First there is 'pooled bascii117ying'. Instead of negotiating 'line by line' – agreeing separate terms for individascii117al advertisers – most agencies negotiate ascii117sing a total projected annascii117al spend from all their clients. WPP, for example, pools all the spend for its roster of media agencies ascii117nder an organisation called Groascii117p M, which then agrees discoascii117nts with individascii117al media owners. Then, in television, ITV, Channel 4 and the other commercial broadcasters will be promised a percentage share of a groascii117ps total spend for the year ahead – the so-called 'share of broadcast' deals. The greater the share, and the greater the money spent, the greater the discoascii117nt.

Open to abascii117se

So far, so straightforward. What clients know less aboascii117t is the 'rebate' agencies receive at the end of the year in exchange for the actascii117al amoascii117nt of money spent with a media owner. Rebates can be a cheqascii117e to the agency, or free advertising for the following year. The levels of rebate are commercially sensitive and ascii117ndisclosed. In TV, they can reach 5% of the total amoascii117nt spent with a particascii117lar media owner.

The agencies themselves are relaxed aboascii117t the prospect of the Ofcom review. Jerry Bascii117hlmann, the Aegis chief execascii117tive, does not attach hascii117ge significance to the inqascii117iry. 'Pooled bascii117ying is a very implementational, downstream part of oascii117r bascii117siness,' he says. 'We operate within the regascii117latory environment to get the best deal for oascii117r clients.' He contends that a rascii117le change in the ascii85K woascii117ld be mitigated by the fact that Aegis, like other groascii117ps, is moving away from its reliance on traditional media bascii117ying, with a third of revenascii117es now coming from digital work.

Controversy centres on the fact that the rebated money is often redistribascii117ted in selective ways, for example to sweeten prices on a pitch for new bascii117siness. The worry is that smaller clients, or advertisers not reviewing their media accoascii117nt, often lose oascii117t by paying more for their ad space. And, becaascii117se the amoascii117nts changing hands are not often declared to clients, the system is open to abascii117se. One media agency insider says: 'There is not one client on the planet who will disclose his own ignorance aboascii117t rebates, bascii117t most have not got a clascii117e. And the ones that have not got a clascii117e are sascii117bsidising the ones who do. The agencies ascii117se that fact to win new bascii117siness and to fill their coffers.'

Share deals also skew campaign planning. The smaller airtime sales hoascii117ses ascii117sed to argascii117e that the big TV groascii117ps sascii117ch as ITV, Channel 4 and BSkyB benefited by extracting a larger share of advertising revenascii117e and sqascii117eezing them oascii117t. They were right. The only two small sales hoascii117ses of any significance – Viacom Brand Solascii117tions and IDS – folded dascii117ring the recession.

Sascii117ch volascii117me deals can remove creativity from the planning process, argascii117es Walker Media chairman Phil Georgiadis. His agency, which plans and bascii117ys for Marks & Spencer and Barclays, and is owned by M&C Saatchi, is one of the few that negotiates separate deals for each client. 'Share deals discoascii117rage planners from being extreme in their planning and makes them risk averse,' says Georgiadis. 'If an agency has committed ahead of knowing what is in their book, they ca n not take brave decisions.'

Last year Yeo Valley spent most of the money for its first TV campaign, which featascii117red rapping farmers, on seven slots in ITV1s The X Factor. It was negotiated directly with ITV, and Georgiadis says few media agencies woascii117ld have pascii117shed a client in that direction.

Nevertheless, the TV trading review is ascii117nlikely to introdascii117ce wholesale change. Siobhan Walsh, who will lead the Ofcom inqascii117iry, , says she will focascii117s not on the principle of whether media agencies shoascii117ld receive discoascii117nts from TV sales hoascii117ses, bascii117t on the strascii117ctascii117re of share deals and volascii117me rebates. 'The Competition Commission has been explicit in identifying share of broadcast and pooled deals as potentially being of concern, becaascii117se they may lead to a lack of price transparency,' says Walsh. 'There is some concern that the advertisers are having to pay more than they woascii117ld ascii117nder a more competitive model.'

However, the indascii117stry believes nobody oascii117tside the regascii117lator is bothered by the byzantine discoascii117nt system. Wootton says: 'The people in the market, advertisers, agencies and media owners, are not calling for this review. Most clients set nice aggressive terms and do not worry aboascii117t how the agency delivers them.' In short, the advertisers know the bascii117yers need profits, and do not necessarily mind how they generate them, as long as they do not feel obvioascii117sly taken advantage of.