• by Dave Morgan , Featured Contributor, June 11, 2015

Anyone who doesn’t believe that the digital advertising industry has real issues with fraud, viewability and rebate-like vendor payments either has their head in the sand or really doesn’t want to know the truth. The purpose of today’s column is not to convince you that these issues exist -- evidence isn’t hard to find if you really want to look -- but to point out that the root cause of all three is the same, and is solvable.

We have those issues because many of the contracts and expectations between advertisers and their media-buying agencies are out of touch with reality.

Over the past seven or eight years, when reviewing or renewing their contracts, many advertisers placed their primary emphasis on cost savings, mandating that less money be spent on planning and buying media, and that the media itself be cheaper on a per-unit basis. This cost-centric focus, combined with the willingness of a number of large agency groups to win new business at all costs, has brought us where we are today.

Many media agency contracts today are done at below cost. Yes, the fees paid to the agency are less than the agency pays to hire, train, retain, house and equip their planners and buyers to do the work.

If this wasn’t bad enough, the demand to lower the unit cost of the media bought, particularly in digital media, is totally inconsistent with the realities of media supply. Highly desirable inventory, such as premium digital video, just doesn’t exist at the volumes that folks want it -- and particularly not at prices lower than was paid for it last year.

Thus, you frequently end up with media agencies operating businesses where they are barely paid what they spend  -- and expected to find media inventory at volumes and costs that just plain don’t exist naturally.

What happens? The market wakes up one day to find that significant volumes of the inventory that it consumes have been artificially “created” (read fraudulent), and sold through networks and programmatic exchanges, where it’s hard for anyone to truly be able to either monitor it or really know its provenance — a problem exacerbated, of course, by the fact that lower buying fees mean fewer people for oversight.

Along the same lines, it’s been hard for buyers to be too picky when it comes to viewability. It seems that everyone wants to buy unlimited amounts of premium digital video ads, but many are only wiling to pay $10-15 CPMs for it. Ad servers count all ads served, whether they are playing below the fold, on a tab that’s out of view, or on a single pixel of the page. So it’s no surprise that many ads are not getting delivered, and are counted, whether or not they could actually be viewed.

So many folks are so eager to shift TV budgets to digital -- who doesn’t want to be digital-, mobile-, social-, or video-first these days? -- that they don’t want to be bothered with the hard questions about whether or not there is truly inventory at the volume and price that they imagine it. Nor are many of their agents and suppliers willing to give them the bad news: digital ad inventory is just not there at the quality, volume and price that many want it.

Rebate-like vendor compensation paid to agencies or related companies? If a public company with investors who expect quarter-over-quarter revenue and profit growth is paid below or at cost, it’s going to make up the money somewhere. It has to. So it’s not hard to imagine a world where agencies seek and get “consulting” fees, reverse-technology licenses, below-market loans, time banks, low/no-cost inventory for their barter or performance marketing businesses, and many other rebate-like creative compensation models. Where else do folks think that the subsidies come from? Can agencies make up money-losing activities on volume?

It’s time for our industry to recognize that many of the cost-cutting efforts of advertisers -- and low-ball bidding of business by agencies -- has brought us some unintended consequences: fraud, ads that are not viewable, and creative compensation models funded by suppliers with no or little disclosure to clients. The symptoms won’t go away until we cure the cause. Let’s fix media agency compensation and cost-expectation issues before they fix us.

What do you think?