Hidden mark-ups, opaque metrics, ad fraud denial, feckless industry groups. Hey ad industry, why is this acceptable?
Advertisers are paying dearly for decades of media industry sins. You should demand answers. I have your questions.
This is Part 1 of a 2-part media wake-up call to advertisers.
Today » How we got here.
Next Week » What you can do about it
It all started when Martin Sorrell began pulling media services out of WPP’s ad agencies in the 1980s, standing up separate media operations reporting into the holding company. (Spoiler alert—it was all about the money, not client service.)
Ad agencies were rattled—it was like losing a leg.
I was shocked, then pissed years later when I had to work this way.
All the holding companies followed the Martin-money, and clients bought the pitch.
Here’s what advertisers were promised:
“Higher returns on your ad dollars!”
“Independent, out-of-the-box thinking!”
“Holding company leverage & clout!”
“Unmatched efficiency and effectiveness!”
“Innovative, higher-value planning and buying!”
“Superior metrics!”
“Ad placement & context trumps ‘creative’—the media is the message!”
While some of this actually happened, here’s what ultimately went down:
Hidden media agency and holding company mark-ups and profits to counter the death of lucrative agency commissions
Rampant ad fraud that siphons off 75-95% of programmatic ad buys while industry leadership and watchdogs refuse to seriously address it
Proliferation of confusing, conflicting and opaque results metrics
Declining client trust and increasing media agency churn
How did we get here?
Let’s first go back to Sorrell’s original play: If you’ve been reading AdLandish, you know I’m not his biggest fan; but pulling media out the ad agencies was a savvy move—both financially and emotionally—because the original financial model was about to get shut down.
The death of the lucrative “15% flywheel”
Sorrell likely recognized that the commission model was headed for the graveyard.
But oh, what a sweet ride it had been: The 15% agency media commission rate, on top of decades of 15% media price inflation, lifted the agency revenue and profit tides handily for decades.
I call this “the 15% flywheel,” creating an accelerating increase in agency profits—flat at first, but up-curving exponentially as budgets grew as media costs rose.
How the “15% flywheel” worked
If a TV campaign was successful, the client would boost the ad budget.
The ad agency could run the same or similar TV spots the following year, earning 15% commission on the 15% higher media rate with little additional labor
That exponential effect could deliver a 95%+ profit margin on the additional spend
Case in point: The agency I worked for in the 80’s, Backer & Spielvogel, rode that model from launch to sale in 9 short years, by far the most lucrative agency trajectory in history. (They were already wildly profitable before “selling themselves twice” at the end—a story for another day…)
Clients push back—and P&G has the big idea
Come the 90’s, growing advertiser resentment over agency profit margins killed the commission model. While clients bought into the new independent media agency model, they wrestled with what should replace commissions.
P&G proposed a brilliant solution: A “pay for performance” model that incentivized shared success.
The agency answer? “No.”
I discussed all this with Matt Seiler last week, an old friend from my Omnicom days, who ran ad agencies and media operations for both Omnicom and Interpublic before his subsequent career in the talent industry. He’s been an advocate for performance-based compensation for decades:
“Agencies answered the wrong way when they said no. This would have aligned agency compensation with client business success.
“It has taken decades for agencies to finally recognize the folly of their response way back when.
“That’s because how the clients’ business is doing is the only measure that matters.”
Agencies chicken out and opt for “hourly pay”
Agencies paid dearly for this mistake. They accepted “hourly pay” instead: fee-based models that guaranteed base compensation but eliminated any meaningful upside—and the opportunity to truly partner with their clients.
Time was, clients were proud of successful agencies
I heard Carl Spielvogel answer criticism several times of Backer & Spielvogel’s financial success—including his extensive art collection in his Park Avenue home—with versions of the below:
“When Barbaralee and I entertain clients in our home, we are able to toast our partnership surrounded by the rewards of our mutual success. After all, if the agency is doing well, that is evidence of the much bigger success that our clients enjoy.”
Meanwhile, media agencies grab the cash flow
Clients’ media money began flowing through the media agencies—not the ad agencies. They not only wrested strategic and financial control of the budgets, but more aggressively engineered profitable—and evermore secret—workarounds.
I’ll get into the details of these financial stunts next week
The emotional engine of the independent media agency movement
The newly independent ad media operations didn’t just deliver the freedom media professionals had earned—it also delivered the retribution they craved and likely deserved.
Sorrell’s media move wasn’t just smart financially—he also leveraged the resentment media people felt for being treated as second-class citizens in ad agencies for generations.
As the “Id of the Industry,” Sorrell was perfect casting to deliver this revenge.
Media professionals’ resentment was justified
I’ll cop to their mistreatment myself: When I entered the ad agency business in the early 80’s, first as an account guy, then a copywriter, we relegated media people to the lowest caste in the agency pecking order.
In presentations big or small, the media portion was always teed up last, and we often ran out the clock with our blather before media folks got a chance to present their work.
Direct client contact at last
Having lost the internal fight for respect with their ad agency overlords, media planning and buying professionals were now free to work directly with clients and even wrest strategic leadership from weaker ad agencies.
But their revenge was over-served and misdirected.
Clients pay the price, holding companies successfully hedge their bets
Independent media agencies ultimately served financial revenge on clients—not ad agencies—and started decades of secret dealings and unethical behavior through their new-found control of clients’ media dollars.
While ad agency profits declined, the holding companies retained the lucrative media budget cash flow, laughing all the way to the bank ever since.