Global agency stocks waver as kickback controversy grows

Influential Wall Street analyst issues warning about growing awareness of media rebates

Jeff Fraser April 16, 2015

The big four global agency holding companies are facing growing criticism over rebates they receive from media companies.

On Monday, industry analyst Brian Wieser said in a note to investors that marketers are becoming increasingly aware of how widespread media rebates are, and it is beginning to affect the agencies’ business outlook.

“Emerging concerns among marketers around different forms of agency rebates in the United States causes us to partially (if slightly) re-assess some of our views on long-term holding company growth,” he wrote. “With a drumbeat of negativity to come from marketers only now learning about the issue, we recommend investors move to sidelines or exit the sector for the time being.”

Wieser, who wrote on behalf of Pivotal Research (and whose columns appear on, downgraded all four of the major agencies. He issued “sell” recommendations for WPP, Omnicom and Publicis, and “hold” for IPG.

All four companies’ stocks began a slow slide on the exchanges after Monday’s guidance. On the NYSE, Omnicom fell 0.7% from Monday’s open to Wednesday’s close, while IPG fell 0.8%. During the same period, the NYSE Composite index rose 0.5%. On the LSE, WPP fell 1.6% and on Euronext Publicis Groupe was down 2.1%.

On a long-term outlook, the downward trend may be no more than a blip – all of the holdcos’ stock prices remain well above their three-month lows – but the market reaction underscored Wieser’s statements.

For many years, it’s been common for media companies to grant incentives to media agencies with a lot of buying power in order to secure commitments to buy a large volume of ad inventory. To sweeten large media deals, vendors may offer cash discounts on inventory, extra free inventory, exclusive access to new ad units or technology, vendor-funded services and consulting, and even an equity stake.

Agencies have been accused of using these incentives to improve their bottom lines at the expense of clients, by pocketing discounts and passing the full cost of the media on to clients. As for free media acquired up-front from a vendor, the worry is agencies will push this inventory on clients regardless of whether it suits their needs. Media vendors feel squeezed to offer bigger incentives to attract and retain long-term buying partners.

Not everyone interprets these activities as rebates. The term “rebate” or “agency volume bonification” is more commonly applied outside the U.S., where it is often standard practice. Though most agencies deny accepting rebates in the U.S., it’s not always clear which practices this covers.

Though rebates have never been popular (in a recent online poll, 74% of Ad Age readers said they think the practice is unethical) criticisms reached fever pitch last month when Jon Mandel, former CEO of Mediacom, took to the stage at the ANA Media Leadership Summit and accused the top agencies of normalizing kickbacks. During his provocative presentation, he estimated U.S. rebates bring in nine figures annually for agencies.

“It’s been happening in a big formal way for a decade,” he said. “It’s gotten so big that agencies have developed new divisions just to monetize all the gains.”

According to AdExchanger, Mandel showed an actual contract between an agency and vendor that agreed on a 2% agency commission plus a 9% fee on top. He also pointed to “dark pools,” which agencies allegedly use to mask the source of inventory acquired through rebates, and programmatic trading desks, which are notoriously non-transparent and difficult for clients to audit.

Wieser wrote Monday that even if media company incentives are an appropriate way for agencies to grow their revenues during a difficult period for the industry, they should expect the growing backlash against rebates in the U.S. will hurt their business. “The volume and specificity of allegations by aggrieved media owners, former agency executives and marketers are difficult to ignore,” he wrote, alluding to Mandel’s talk. “Rightly or wrongly, there is a growing perception among marketers that agencies have been mis-leading, transferring value associated with media volumes without clients’ full understanding or support.”

He said as clients demand more transparency from their agencies, media trading revenues will be scrutinized and likely take a “haircut” as a result.

None of the four holdcos currently break out revenue from inventory trading in their financial reports, or disclose their net income from rebates, media consulting fees, and trading with equity partners. However, Wieser said WPP stands apart because it “has been most vocal in defending the notion that agencies deserve to get paid, and that they have the right to be ‘transparent about being non-transparent.'” WPP, its media arm GroupM and its programmatic trading desk Xaxis have vigorously defended the group’s policy of not disclosing programmatic media pricing to clients.

Wieser said having made this policy clear, WPP has the best chance to weather the controversy without significant impact on its bottom line.