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Unilever and the U.K. May Be About to Lift Veil on Dubious Ad Agency Billing

Two recent events -- Unilever's (UL) move to a "preferred vendor" list of TV commercial producers and the British government's probe of TV ad buying -- have me hoping that Madison Avenue may be forced to clean up its act. Both moves could make it difficult for agencies to continue to collect "volume discount" rebates from producers and media vendors.

It's an issue that ad agencies hate talking about and clients don't understand: Who, exactly, gets to keep client money after it gets spent on the production and placement of ads. The Guardian had an excellent explanation of the issue in its business pages recently:

What clients know less about is the "rebate" agencies receive at the end of the year in exchange for the actual amount of money spent with a media owner. Rebates can be a cheque to the agency, or free advertising for the following year. The levels of rebate are commercially sensitive and undisclosed. In TV, they can reach 5% of the total amount spent with a particular media owner.
... the system is open to abuse. One media agency insider says: "There's not one client on the planet who'll disclose his own ignorance about rebates, but most haven't got a clue. And the ones that haven't got a clue are subsidising the ones who do. The agencies use that fact to win new business and to fill their coffers."
A less systematic system has operated among commercial printers (most notoriously with Grey Group in London and New York) and TV commercial producers (whose lobby group recently offered volume discounts to Procter & Gamble and Reckitt Benckiser if they abandoned their preferred vendor lists).

The probe by the U.K.'s Ofcom watchdog is aimed at figuring out how TV media buying works. It could have serious consequences. In Germany, prosecutors convicted the former president of Aegis (AGS.L) for keeping media credits for himself; Danone successfully sued Aegis to get its media rebates back; Haribo sued Interpublic (IPG) over the same issue; and IPG was forced to refund $250 million in rebates to clients and restate its accounts after the SEC caught it keeping volume discounts. The Brits are also looking at bizarre practices in the outdoor/billboard business.

Unilever's move is more about saving money (or "efficiencies," in the words of Jorgen Bartsch, VP-marketing services). The producers don't like it. Here's their official complaint:

... Steve Davies, the chief executive of the Advertising Producers Association, slammed the move. He said: "It is the job of advertising agencies to come up with the best production companies. Essentially Unilever haven't explained why they are doing this and until they do, it is the open market that serves advertisers best."
Why on earth would producers reject a closer relationship with clients? My unofficial interpretation of that is that Unilever's list will make it harder for producers to increase the prices they charge in order to cover any volume rebate they may be required to offer ad agencies to get the work. By having a set list of producers instead of asking ad agencies to take open competitive bids on each new job, Unilever can get a more consistent idea of how much it actually costs to make commercials. That consistency will make it easier for Unilever to control prices and harder for ad agencies to take an under-the-table price cut from producers willing to play ball.

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Image by Flickr user quaziefoto, CC.
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