This week, the Wall Street Journal reported that the FBI issued subpoenas an advertising agency for issues related to rebates and transparency. What was once considered by some to be a minor annoyance has gotten real.
Industry publications rushed to provide their take on the news:
- “Feds Probe Agencies Over Media Transparency” (MediaPost)
- “Federal prosecutors investigating shady media-buying practices in the ad industry have reportedly begun issuing subpoenas” (Business Insider)
- “Feds media-buying probe is ‘cloud that will hang over the industry’” (AdAge)
Even for a high profile industry sector like advertising — which is second only to Hollywood for its number of awards shows and overall narcissism — this kind of news serves as high drama. And the stakes are high, particularly given whispers of sex worker allegations and the Cambridge Analytica mess.
All Publicity Not Necessarily Good Publicity
The current attacks on U.S. intelligence agencies notwithstanding, FBI investigations are generally regarded as credible. (Why else would they allocate scarce resources to them?). And when asked by Congress to report in on its activities, the FBI unsurprisingly points to successful investigations as proof of their worth, using words like “takedown,” “scheme,” and “rampant.”
Obviously, these kind of investigations create buzz that’s bad for business. This kind of FBI attention from is catnip for industry watchers and general business press alike. This only increases the likelihood of the significant collateral damage, regardless of the investigation’s outcome.
Agencies Scramble To Find New Ways To Make Money
The rebate and transparency issue was outed years ago, and there’s been sort of a slow burn since to address these problems. Along the way, agency executives have slogged through difficult conversations with their peers (and clients) at brands to address questions and explain remedies.
The larger issue is that, even buried in the financials, rebates serve(d) as a profit stream for agencies — an industry that generates income at approximately an average rate of 13%. For comparative purposes, Omnicom generated $2 billion in net income up against $15 billion in sales (13%), while Bristol-Myers Squibb reported $5B in profits on $20B in sales (25%), and Goldman Sachs yielded $11B in earnings on $32B in revenues (34%). By this measure, the agency business is not a particularly attractive category.
That’s not to suggest that potential fraud in advertising is unworthy of examination. Far from it. The U.S. advertising industry topped $200B last year, so just a small percentage of that equates to huge dollars. However, it is nowhere near as profitable as sectors such as financial services or software, where profit margins are 3X compared to advertising.
Not Going Away Anytime Soon
The challenges associated with rebates and transparency are grouped, fairly or not, with viewability and fraud (almost exclusively related to digital). These topics have received a good bit of attention in the advertising industry as a whole in recent years, though they’ve not dominated conversations. Of course, there are plenty of other things driving change in the business, from social media and video to influencer marketing and virtual reality, which have been far more interesting for everyone involved.
That’s all about to change, unless the FBI investigation reveals no wrongdoing and the effort is quietly shut down. Not many industry veterans think this is likely, however. In fact, many are preparing for the worst case scenario. An official FBI report, which would most certainly include indictments for most or all of the big agencies, could put the entire industry on its heels for years. And that makes this topic worthy of close attention by industry executives in advertising, publishing, and adtech.
This article was originally posted on InContext, which is published by Digital Content Next—the only trade organization dedicated to serving the unique and diverse needs of high-quality digital content companies that manage trusted, direct relationships with consumers and marketers. Follow Digital Content Next (DCN) @DCNorg and subscribe to their email newsletter.
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