Chuck Ross

Bombshell: Former Major Media Agency CEO Says Kickbacks Totaling At Least $100 Million Are Pervasive Among U.S. Media Agencies. How This Became a Top Priority for the Association of National Advertisers. We Talk to a Source Who Says Yes, the Allegations Are True. And We Interview Jon Mandel, Who Gave the Blistering Presentation Last Week That Set Off this Bombshell. It’s a TVWeek Media Investigation

Mar 13, 2015

If the courting of controversy got Ted Turner dubbed the Mouth of the South, Jon Mandel is easily the Mouth of Madison Avenue.

For more than 30 years Jon was at Grey Advertising and then its media agency, MediaCom, where he was CEO. Nine years ago he left the media agency business. But while he was in it, Mandel never shied away from controversy. For many reporters who covered the media department and then the media agency beat, such as myself, Jon was our go-to guy for any big media story. He was smart, articulate and never failed to deliver the most memorable quote about most media situations.

For the past six years Jon has run his own consultancy, Dogsled Enterprises, and has not been much in the spotlight.

That changed, suddenly and dramatically, last Thursday, March 5, in Hollywood. Florida, that is.

The occasion was the Association of National Advertisers (ANA) Media Leadership Conference, and Mandel gave a presentation that Jack Neff of Advertising Age described as “blistering.”

Here’s the opening paragraph of Sarah Sluis’ story about Mandel’s presentation that she filed for AdExchanger: “Agencies are not transparent about their actions. Agencies recommend media that is off-strategy when it works for their gain. Agencies accrue media earned by advertisers’ spending and resell it to other advertisers. Agencies demand pay-for-play from vendors in order to be recommended, and cross the line in partnership relationships.”

The story adds, “’It’s been happening in a big formal way for a decade,’ Mandel said, saying he estimated kickbacks are in the nine figures annually across the industry. ‘It’s gotten so big that agencies have developed new divisions just to monetize all the gains.’”

And this: “Mandel presented a variety of evidence to support his claim. Perhaps the most damning was an actual contract between an agency and seller, which showed a 2% commission and an additional 9% to the agency. ‘It used to be you got creative, market research and trafficking for 11%. This is 11% just for placing your media,’ Mandel said.”

Adds Neff in his Ad Age report: “’Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?’ Mr. Mandel said. He said that advertising spending broadly has long stayed within a narrow band of 1% to 1.25% of gross domestic product globally. ‘So if agencies are growing at a higher-than-GDP basis, the money is coming from somewhere.’

“Most of the rebates and other non-transparent dealings occur at the holding-company level, where it’s harder to track or audit, Mr. Mandel claims.”

We will turn to an interview we conducted this week with Mandel in a few minutes. First, let’s trace the path that resulted in Mandel giving his presentation at the ANA conference last week.

According to a people familiar with the timeline, it started in 2012, when one of the board members of the ANA brought to the attention of the ANA staff the issue of media rebates. That’s a process wherein a media company gives a media agency money so the agency will direct business to that media company. The ANA staff asked whether the board member was talking about Europe or Brazil, where such practices are common.

The board member said no, I’m talking about here in the States.

That spurred the ANA, in association with its outside counsel, Reed Smith, to send out a survey and follow that up with a White Paper, the latter of which TVWeek has reviewed.

The White Paper, titled “Media Rebates/Incentives Require Full Transparency,” noted: “From late May to mid-June 2012, ANA members were surveyed to uncover:

● Awareness among advertisers of media companies providing incentives to agencies for referring client spending towards that media company.

● The specific media involved.

● Whether clients have language in their media agency contracts that addresses incentives.

● Whether clients conduct periodic audits to ensure that undisclosed rebate/incentive activity is not occurring with their agency.

One hundred eight-eight members responded to the survey.”

Of the 188 respondents, 32% said they knew rebates/incentives happened outside the U.S. But only 28% realized it was going on inside the U.S. And a whopping 51% were not aware of the practice at all. (The exact question that was asked was: “Are you aware of an industry practice of media companies providing rebates/incentives to agencies for referring or influencing client spending towards that media company? By rebates/incentives, we are referring to money paid or volume discounts granted by a media company to an agency that are not reimbursed to the client. Check all that apply.”

Next, the 28% of the respondents who said they knew rebates/incentives were going on in the U.S. were asked, “What specific media have been involved? Check all that apply.” Television was checked off by 27% of those respondents, followed by radio (17%), online (14%), magazines (14%), newspapers (12%), outdoor (10%) and yellow pages (5%).

The White Paper ended with suggested language from Reed Smith for discounts and record retention that clients could put into their contracts with their media agencies.

Then, last February, the ANA, in conjunction with Forrester, sent out the “2014 ANA/Forrester Evolution of Media Buying Survey” to 153 of their members. That was followed up by a White Paper in May 2014, a copy of which TVWeek has reviewed.

In a section called “Why read this report,” Forrester wrote, in part, that the survey was done “to better understand how marketers in charge of important media budgets are coping with this evolution [of media] and its impact on the transpanency and measurement of media buys.”

Three areas were surveyed: Media transparency, progammatic buying and metrics.

One question asked, “Do you have any concerns about the level of transparency between you, as the client, and your media agency or agencies?” 46% said yes, 36% said no, and 18% said “not sure.”

The next question asked, “Over the past year, concerns about transparency have increased, stayed the same, or decreased.” Forty-two percent answered that their concerns had increased, and only 13% said their concerns had decreased. Forty-five percent said their concerns had stayed the same over the past year.

A third question asked clients how concerned they were about transparency related to certain issues. The top five issues marketers were most concerned about were “Served versus viewed impressions,” “Media rebates to agency,” “Digital ad placement,” “Lack of visibility: Targeting data,” and “Agency arbitrage.”

A month later, in June 2014, the ANA set up its Media Transparency Task Force, consisting of about 20 ANA members whose identities (of course) are confidential.

Two of the major issues the task force is concerned with are rebates and programmatic buying. In regard to the rebates issue the task force spoke to four consultancies, including Mandel’s Dogsled Enterprises. That led to Mandel’s company doing its investigation and preparing a presentation for last week’s ANA conference. ANA staff reviewed Mandel’s presentation before he delivered it.

We were not at its presentation last week, but we spoke to Mandel by phone earlier this week. An edited transcript follows:

TVWeek: Why did you agree to do this?

Jon Mandel: I want it fixed. The ANA had been working on this for several years. Last summer they had decided to put together a task force to look into this. So they asked if they could hire my firm to be a consultant. I said yes.

TVWeek: We read that you said in your presentation last week that kickbacks were one of the reasons you left the agency business almost a decade ago after 32 years at Grey and MediaCom.

Mandel: Yes, that’s true. When I left the agency business, pretty much the only thing that was similar to this was time banks. What happened was that I saw the expansion and fragmentation of media. At the same time I saw that at a good number of agencies what was going on overseas [was kickbacks and rebates and such]. And I saw people being moved to what I’ll call ‘trading positions’ here in the U.S. from overseas, where this was running rampant.

I’ve always been pretty good at calling a market, and I called the market as this was going to be something that I didn’t want to be a party to, because of the way I was brought up and my ethical and moral compass. I didn’t want to be sucked into this vortex of bad stuff, so I decided to get the hell out of Dodge.

TVWeek: Bringing us up to date, you were hired by the ANA and your company investigated. And you said at the ANA conference last week that kickbacks are widespread here in the U.S.

Mandel: From an industry standpoint, what I will say is that agencies that do this, and I’m not commenting on any specific agency, are playing a very close game. They will demand payment and kickbacks to be paid to a foreign affiliate. So therefore it becomes very easy for them to say that they return all the money they receive in the U.S. Because they didn’t receive any money in the U.S. — they received it in some island nation or something. They ignore the fact that agencies that don’t take money but take inventory in their pools or their barter operations, that inventory is priced at zero, so how could they possibly return any money to a client? So they turn around and resell it.

As I have said before, not all agencies do this, and the ones that do all seem to do it differently. My firm has collected enough examples, enough evidence from media companies, from people who used to be at agencies, from people who are still within agencies, and from clients, to have proof that this is going on in the U.S.

TVWeek: And on the other side of the table? What online players are involved, what TV networks? What are you willing to say about the other side of the table?

Mandel: I’m not. This is an industry problem. It varies by media type. It varies by agency, and by agency holding company. There are some media that do it hardly at all and some media that do it a lot. A number of people in agencies and a number of media sellers have used the same three words over and over again to describe this. Those three words are “It is pervasive.” Newspapers are probably the cleanest category. As someone who is not in the newspaper business argued, that’s probably part of the reason newspapers are dying. It’s not just a leadership issue.

TVWeek: Are you surprised at the blowback you’ve received so far on this.

Mandel: No. It’s pretty much what I anticipated. People say it’s not true; that I’m exaggerating; they are suspicious of some sort of hidden agenda I might have. I don’t have one. And I have no interest in going back to an agency again. As I said, I’d like to see this fixed.

TVWeek: What do you think is a realistic time frame to see that happen?

Mandel: “I don’t know.”

Reaction to Mandel’s charges was swift on at least two fronts last week. GroupM’s Chief Digital Officer, Rob Norman, said in a statement: “In the US, rebates or other forms of hidden revenue are not part of GroupM’s trading relationships with vendors, and its agencies have not sought nor received any rebates from US media vendors or other parties with whom we do business on behalf of our clients. In other markets around the world, rebates are sometimes part of the buy-sell relationship between agency and vendor. GroupM returns those rebates to advertisers in compliance with and as required by our client contracts.”

And according to Ad Age: “In an e-mail statement, Nancy Hill, CEO of the American Association of Advertising Agencies, said: ‘The 4A’s and the ANA are, and will continue to be, in deep, high-level discussions on this issue. But as of right now, we have not been shown any data or information that warrants such allegations. Our position is that the financial arrangements between agency and client are just that, between those parties and confidential.'”

In reaction to that, this week the ANA said, in a statement: “At ANA’s Media Leadership Conference, statements were made which suggested that material agency transparency issues (i.e., undisclosed rebates) were a considerable concern in the industry. While ANA cannot specifically identify the breadth and scope of such practices, we regret any impression that agencies in general are engaged in questionable activities and apologize to those who were offended. It was certainly never the intent of the ANA to make any sweeping statements of widespread agency participation in any questionable practices.”

According to people familiar with the ANA, its next step is considering engaging a third-party consultant to help determine the scope of this issue. The ANA wants to work with the 4A’s and wants clients to once again be able to trust their media agencies. The ANA feels the best way for that to happen is for agencies to commit to transparency.

To get a reality check on Mandel’s allegations, we spoke with a source who confirmed to us that some of the activities Mandel alleges had indeed been going on for quite some time, and explained to us how it works. This is a source I’ve known for several years. One of my first conversations with this source was about a pharmaceutical company, so I’ll call this source Sore Throat (and yes, I’ve been waiting years to be able to use that moniker for a source …).

Sore Throat: One aspect of the kickback game is payment terms. If you have long, extended payment terms, back when interest rates were healthy, you could make more money on payment terms than on client commissions and agency fees. So payment terms are sort of another form of kickbacks. It’s sort of the most accepted form here in the U.S. Back when we started, that was one of the areas we actively pursued, both on the client side and the media vendor side.

We had certain clients who would audit us, and the day the money came in to the account, it had to go out to the vendors. But we had other clients who didn’t do that, and we made it part of our agreement terms that you pay us on the first of the month, and when we pay the vendors is our business. So we were transparent that that’s what we were doing. So with a lot of our newer clients and our smaller clients they accepted that. Think of it this way: If you are doing a billion dollars in placements a year, if you can hold that money for six months, that’s the equivalent of having $500 million in the bank and back then you may have been getting 4% or 5% on it; 5% is $25 million, over 6 months. So if you could hold money all the time for six months, you can make millions a year for your company.

The other thing people were doing with kickbacks was bonus units. Bonus units would go into a pool that the agency could disperse. Some agencies sell those to clients. If you have 100 bonus units for CNN and the average rate is $3,000, you put them on the client schedules and charge them for it.

There is always the issue of transparency. If you are working with a small dot.com and your arrangement was that you pay me on the third of each month, and when I pay the vendor is my business, I’m being transparent on that. And then, if I also tell that client that I guarantee that your schedule will be bought at below-market rates, and that we’ll get there any way we need to get there — which means we get bonus units and charge you for them — and the client accepts all that, what’s the matter with that? Because being with you, a big, powerful media agency, is better than a deal that client can get anywhere else — why isn’t that a fair way to do business? Other people may call it kickbacks, but if you do it the way I just described, it’s transparent.

TVWeek: Someone else in a position to know told us they thought some holding companies had ways to disguise some forms of kickbacks that could be shut down so quickly, with no paper trail, that no one would ever find out.

Sore Throat: That sounds right to me. It takes it a step away from the people who work with the client so they have plausible deniability. If you think about it, think of the media agency companies that came here after having grown out of Europe, where kickbacks and this kind of thing has been part of the media landscape and culture for such a long time. They know how to do this kind of thing in their sleep. And a lot of offices of agencies in lots of countries that were then bought by holding companies that also have big U.S. operations, they were doing this too. So there is no loss of expertise on how to do these things.

There is no doubt in my mind that when it was just media departments who were dealing with the three networks, none of this went on. They would not let you mess with the payment terms, and they wouldn’t let you mess with the bonus spots. It had to go to one particular client. But then with the proliferation of cable with their much smaller audiences, generally, and the increase of inventory, people got, shall we say, creative, and all sorts of deals started being made.

This isn’t an issue for the big-spending clients, the mega-clients. It’s not going to happen to them. It’s really an issue for the medium and smaller clients. At the end of the day you have to pay all the salaries in your own media company. And if client fees are getting squeezed so much because there’s so much competition, the CMOs at the media agencies are going to find a way to make money.

In a 15% commission universe, agencies were golden. What really put the squeeze on was when we started negotiating fees. As the media agency business was getting more and more competitive, the fees would go down. We had negotiations with clients where we’d say to them we’ll only charge you X, but these are the payment terms and this is the degree of transparency you get with your schedule. And for some clients that would be great, because what they were accountable for was just really the agency fee. So the media person at the client needs to be sure the fees he pays his agencies are competitive, and that the media the agency buys for him is competitive. And whether or not the media agency gets kickbacks, he’s not accountable. He gets a paycheck and he or she takes care of their family.

As far as the agency getting caught for doing something illegal, if the contract is written explicitly about what the agency is going to do, it should not be a problem. And as long as the agency doesn’t do any monkey business tax-wise, the government shouldn’t be a problem.

Sore Throat’s comments concluded with this: “I don’t think that this stuff is immediately wrong or immoral in any way. It all depends on the understanding the two parties have, the client and the media agency. It’s the transparency that’s key.”

Another source, whom I will call Knowledgeable Executive, had this perspective:

Knowledgeable Executive: Do I believe that agencies try to figure out how to make a buck? Yes. Do I think that they would say they don’t have their client’s best interest at heart? No. If I’m agency X, I get a fee for placing the media for client Y. And then there is Z, the place where the media is placed. And now let’s talk just general business. Not necessarily the media business.

In this scenario, if you listen to the agency tell the story, they say, “It’s really hard for us to be the middle man these days. Why? Well, the CMO of our client will be there for 18 months because CMOs have a shelf life of 18 months these days, and then they get fired. So then the new CMO comes in and the first thing the CMO does is fire the ad agency. Why? Because they can. Sales are down? Let’s fire the ad agency.

There is no other business in the world where you can walk in and say, well, you’ve been with me 25 years, and it’s been great, but we have to change things up, so you Mr. or Ms. ad agency, are fired. And the ad agency is thinking, gee, we have shareholders too, so how do we make money? How can we have consistent revenues and profits that we can point to that allow us to be a well-traded stock? So they will do all sorts of things, like come up with new businesses. So here’s a business where we are advising sports marketers as to the best way to do this or that. Anything that can give us predictable revenues. So then they will aspire to be arbitragers. Other companies involved in trading, such as Nasdaq, they get a piece of the trade, so maybe we should too. Where is that wrong? If it’s disclosed it’s not wrong.

TVWeek: The question is what is transparent, what isn’t transparent, and what needs to be transparent.

Knowledgeable Executive: Part of the rub here is that advertisers, with electronic trading, are saying they can be the intermediary. But smart CMOs might be thinking differently. So media agencies are fearful that their value add goes right out the door. That somehow justifies a lot of potential behavior with the agencies saying hey, this is just our way of preserving our value. And we take a little piece for that value. Other people who do electronic trading do this. It’s just another way to skin the cat. But if you talk to anybody who is at an ad agency now, it’s like everyone for themselves. It’s not a great time to be in the agency business. Clients say last year you bought my media practically for free and this year I want it for free or I’m out the door. It’s not pretty.

One Comment

  1. Newspapers do not pay commissions to agencies-radio and tv stations do
    Agencies do not need to mark up the cost for radio/tv. So clients pay the same rate for radio/tv if placed by agency.
    Similar to travel agents and airlines a thousand years ago.

    Greed did in the newspapers-that and the Internet.

    Steve Schollnick
    Schollnick Advertising

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