• by Brian Wieser , July 11, 2014

Last month’s advertising festival in Cannes featured a notable panel discussion with senior executives from four of the world’s most important agency trading desks and agency-owned programmatic platforms. That the contrast in business models and marketplace positioning between several of these entities came up was unsurprising. But the topic of undisclosed rebates came up, as well, and was very surprising. Rebates have generally been a sensitive topic for the industry. The fact that even the word “rebate” was uttered - in public - was a source of much discussion for the remainder of the week.

Why undisclosed rebates matter warrants a brief primer on the topic. In many countries around the world media agencies commonly negotiate with media owners to generate a rebate, alternately called an “agency volume bonification” (AVB). This usually amounts to the media owner returning some share of the incremental spending the agency directs to the media owner back to the agency in the form of cash or media inventory.

The agency may 1) return some share of the accumulated rebates back to their bigger clients 2) use the rebates to reduce the reported cost for media for specific clients, such as those about to go into review or 3) keep the cash or sell the inventory as a form of direct revenue.

In countries such as Spain, China or Brazil, rebates feature prominently in the agency compensation model. In others such as the U.K. and Germany, rebates are less important, but still very much a part of the economics of the business. In other places such as the United States or France, rebates have not generally existed as a part of the media agency model: in France in particular, a law was put in place in 1993 to ban the practice outright.

Concerns around the practice include the following:

• Rebates may be undisclosed, which means marketers may require ongoing audits on the part of the marketer to understand the scale of the rebates

• The practice may distort where media budgets get spent

• From the perspective of companies who sell media, this is a cost of doing business they would rather do without, as it can depress their profit margins

• Most critically, many marketers are unaware of the practice to begin with. A 2012 study by the ANA (the US-based marketer trade group) indicated that only 14% of marketers surveyed were aware of un-reimbursed rebates in online media within the United States and 27% surveyed were aware of the same issue globally. The figures are not likely much higher today. This level of awareness is problematic if the marketer considers their agency or its corporate sibling business unit to be their…er, agent

The agency perspective as to why rebates exist is that marketers have not generally expressed an interest in paying the full costs involved with what they ask of their media agencies, and so it behooves the agency to generate the incremental revenue elsewhere. Further, agencies would argue that they are businesses, too, and have every right to seek revenue wherever they can so long as they balance conflicting interests appropriately. Many large and sophisticated marketers (and especially global ones) understand the issues around rebates well, and as indicated above, if they have enough clout with their agency they seek to get back the rebate associated with their spending. They may choose to make the agency whole with a compensation model that mirrors conventions in other markets, such as paying agencies on the basis of a conventional FTE-driven fee.

The rise of programmatic media trading has made auditing rebates a much more complicated affair, as programmatic media makes it easier for agencies to avoid disclosing rebates at all. What constitutes a rebate can go well beyond cash or inventory. For example, technology companies with media platforms can offer additional consideration of value to the agencies or trading desks they work with in order to encourage a flow of spending. Rebates may be provided in the form of free or discounted technology or engineering staff, which can enter a grey area regarding the definition of a rebate.

Other “less grey” tactics we learned about from suppliers over the past few weeks include:

• A trading desk may only work with “preferred vendors” who ostensibly meet certain criteria that an agency or its clients require to do business. Providers of rebates may skip the line to become preferred vendors

• Inventory (or cash, technology or engineering staff) may be provided in one country in exchange for trading activity in another, which can have the effect of obscuring efforts to audit

• Pools of inventory may be separated so that clients who audit extensively only buy “clean” inventory involving the media owner as the vendor; advertisers who do not audit may end up with inventory that is part of the agency’s inventory bonus pool

We now believe that these issues are among the reasons why some marketers are bringing programmatic trading in-house and implicitly threatening to partially disintermediate their agencies. That tactics such as mentioned above exist are not particularly surprising, especially given prior research by marketer trade groups such as the World Federation of Advertisers, which has highlighted how common rebates are in digital media in many countries around the world. But what has surprised us is that the tactics are allegedly being employed in markets where we thought undisclosed rebates were absent, including the US and France (in the French instance, we understand that an exemption from the law has now been secured to allow for rebates in France in digital media). We know the reaction of marketers who become aware of undisclosed rebates is unfavorable, to put it mildly, and as more marketers become aware their reactions may accumulate into something more meaningfully negative. It is not unreasonable to conclude that the presence of undisclosed rebates in the industry is one of many factors in the debate around whether or not agencies will be disintermediated as technology companies make bringing media buying in-house to be easier and easier. Our view has been and remains that few marketers are likely to possess or acquire and sustain the people and capital investments required to maintain in-house programmatic trading capabilities. Overall pricing for trading is probably going to be lower when an agency manages programmatic buys and applies best-in-class insights and skills towards programmatic trading. But if marketers don’t trust their agencies in this area to begin with, or if their procurement and finance teams have concerns about tracking rebates, this will be a factor that makes disintermediation more likely, especially as more and more digital media (and media in general) is bought programmatically.

The scale of undisclosed rebates in programmatic trading probably represents a trivial proportion of holding company revenues at this point in time; thus it would probably be better to make sure marketers have a fuller understanding of the related trade-offs associated with undisclosed rebates before they become more meaningful. From our conversations on the topic, the aforementioned practices are perceived to be small in aggregate. But the practice of not disclosing the presence of rebates – especially in a market such as the US where it is taken for granted that undisclosed rebates do not exist – is a problem because there is already a growing lack of trust between marketers and many of their agencies. Marketers have some expectation that unless told explicitly otherwise the businesses affiliated with agencies are agents and not some hybrid of principal and agent.