Part 2: Will Advertising Corruption Scandal Explode?

On March 5, Jon Mandel, former CEO of Mediacom (owned by WPP) told an audience at the Association of National Advertisers Media Leadership Conference about widespread U.S. agency kickbacks.

He presented a document which purported to show how some of the kickbacks work...

"...a media agency agreeing with an unnamed media vendor to an industry-standard 2% commission, but as much as 9% in volume-based incentives." (Ad Age)

Since then, reports of kickbacks have appeared in The Wall Street Journal, and several other venues including a front page story in Ad Age, that reported...

" 'It's really ugly and crooked,' said one ad-tech executive who described receiving such requests."

" 'It's the reason I left,' said a former U.S. media-agency executive."

Ad Age reports,

"U.S.-based marketers are being kept out of the loop about billions of dollars that agencies make back from deals on clients' behalf, according to industry executives, whether in the form of opaque markups, kickbacks or undisclosed rebates."

Mandel said,  

"Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?"

According to The Wall Street Journal...

"Marketers say they’re increasingly worried agencies are allocating ad dollars in ways that best suit their own businesses, as opposed to those of their clients."

Brian Wieser, Senior Research Analyst at Pivotal Research Group says...

"...most of the activity involving undisclosed activities is likely concentrated in digital." 

But kickbacks are only the tip of the iceberg of fraud and corruption in the digital ad business.

As we have said on several occasions, ad agencies have become the web's lapdog -- irresponsibly exaggerating the effectiveness of social media marketing; ignoring the abominable results of display advertising; and glossing over the fraud and corruption that has contaminated the web. Why? Follow the money.

Online advertising is a gold mine for agencies. WPP, the world's largest agency holding company, gets 30% of its revenue, over $5 billion, from digital. It is aiming for 45% over the next few years.

Perhaps the most astounding part of this incipient scandal is that the victims seem determined to hush it up.

While Ad Age reports that "hundreds of millions" of dollars are being siphoned from advertisers, a few days after Mandel's talk, the Association of National Advertisers issued this pathetic statement,

"...we regret any impression that agencies in general are engaged in questionable activities and apologize to those who were offended."

Gag me with a volume-based incentive. Mandel never claimed these practices were universal.

Apparently the victims are afraid that a thorough investigation will expose them for the clueless buffoons they are. After all, if their corporations lose a few hundred million here and there, big deal. Just as long as they don't lose their jobs.

The big question is whether this will erupt into a full-fledged scandal or just fade away behind a curtain of double-talk and indecipherable accounting? The answer lies in discovering whose interest would be served by exposing the corruption of the current system:

-The agencies? Hell no.
-The online media industry? Hell no.
-The marketing doofuses who have been asleep at the wheel? Hell no.

None of the principles have much of an incentive to make trouble. The only hope lies with the press.

If the mainstream press gets on it, and governmental agencies take notice, something useful might happen. Otherwise, corruption as usual.

By the end of this decade online advertising will be as big as TV advertising. The advertising and marketing industries are too deeply invested to make much of a fuss about its unsavory, criminal underbelly.

Will the advertising corruption scandal explode? Count me as officially skeptical.