The ANA Report on Media Transparency

The Association of National Advertisers (ANA) recently released its report “An Independent Study of Media Transparency in the U.S. Advertising Industry.” I've attached the report itself if you're interested. As many pundits and insiders had predicted, it revealed widespread rebates and other non-transparent practices that may or may not be in the best interests of the advertisers themselves.

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The report described a number of tactics that it found misaligned with the ANA's principles. A simple example is a media agency buying media in bulk at a discount and selling it to its customer at market price - without necessarily disclosing the cost for which the media was originally purchased - and keeping the difference. Other examples include partnerships with media companies for rebates (or "service agreements" with no services provided) based on amount spent, without necessarily disclosing the rebates to the advertiser; buying through affiliated intermediaries and allowing the intermediary to markup the media; and dual rate card negotiations - where a holding company negotiates a lower rate for an ATD and a higher rate for the agency, and then purchases through the ATD can be marked up for an internal margin whereas those that bypass that ATD have worse rates (and lower margins for the holding company).

The ANA report describes these practices in a rather unsavory light. Indeed, it's not hard to find unethical interpretations for much of this behavior. That said, it's worth considering what's going on at a deeper level. The majority of the employees at ad agencies are doing actual, productive work in the greater interest of their advertiser customers. And they tend to have a particularly large number of employees doing a significant amount of manual work. With every account review, advertisers push for the agency to take lower margins. This means one of two things - either worse service or the margins come down. No one wants to offer worse service (and they'll lose the business if they do), and the agencies are generally public companies that have to deliver certain margins to their investors. So things happen and eventually you get an ANA report on transparency in the media industry.

This is actually a very complex principal-agent problem. If an agency is paid as a percent of media spend and it could achieve the same results with half the media spend, the incentives aren't aligned. If an agency were completely transparent about its fees in this case, it would choose to buy the same media at the highest price it could to net the greatest fees. If the fees were completely opaque, it might negotiate a discount and pass along some - but not all - of the savings to its customer. One could argue that it would obligated to get the best discount for its client and pass on all the savings to its customer, but this isn't exactly a realistic portrayal of human nature in the aggregate, nor of publicly traded companies. Similarly, an agency trade desk might design algorithms to drive conversions at a lower price. The more effective the algorithm, the less money the agency would make. Finally, it's really quite hard to tell how effective an agency actually is. Did it buy the "right" media? Did it get the "best" prices? An advertiser has basically no way of knowing.

So it's an interesting question: if the ANA report results in advertisers demanding full transparency, what will happen to the agency world? Will the agencies refuse? The report details at least some agencies refusing, with justifications including the fact that the ATDs have costs that are spread among all the clients, so you can't allocate costs or transparency to a particular client. But beyond that, if there were transparency - would that simply mean decreased margins or lower service levels? Is that actually what the advertisers want? It's very possible (and ironic!) that, by demanding and obtaining a lower and transparent margin from the agencies, advertisers might actually be hurting their overall media performance.