A sinner repenteth…but he has an axe to grind
A former MediaCom USA boss has sparked concern amongst Wall Street analysts over different forms of agency rebates. Could this be a defining moment on the issue of media kickbacks?
We all love a sinner who discovers the error of his or her ways, signals their contrition by self-flagellating with birch twigs, then goes public about their Damascene repentance. Hallelujah!
Whistleblowers don’t receive the same universal approbation.
Most of you will be aware by now of the story of Jon Mandel, former chief executive of MediaCom USA, who last month stood on a conference platform in the US and announced that, and I paraphrase here, that he had been so disgusted by the things that went on during his time in medialand that he just had to quit and tell the world why.
He then went on to detail a shopping list of egregious media agency practices, including value banks, dark pools, cash kickbacks and money held by holding companies in offshore accounts.
At this point, it only seems fair to point out that a) Mandel left MediaCom in 2006, so it’s taken him nine years to realise the error of his ways and b) he now runs a media consultancy called Dogsled which, and this won’t surprise you, advises clients on media budgets and relations with media agencies.
This, of course, does not invalidate his basic message – that media agencies are taking clients for a ride – but it may mean he is prone to exaggeration.
So which is Mandel? Reformed sinner, or whistleblower?
Naturally, none of what he said really surprised cynical Europeans, where these practices have gone on for years (who remembers the old French system?), but it does seem to have shocked the Americans.
And one group in particular, who last week made their first public pronouncements on the issue, in a development that will send a chill through the big holding companies.
Two Wall Street analysts have now downgraded the four main holding companies, Omnicom, WPP, Publicis and IPG”
These are the Wall Street analysts who, behind the scenes, wield enormous influence. Two of them, Dan Stewart and Brian Wieser, between them downgraded the four main holding companies, Omnicom, WPP, Publicis and IPG.
Wieser wrote: “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. 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.”
Don’t you love that phrase…’a drumbeat of negativity’?
What were a few individual drummers tapping away in isolated fashion in the woods, like Brian Jacobs, Nick Manning of Ebiquity, and Bob Hoffman, is now turning into a marching band.
But it is two things that will really bother the likes of John Wren and Martin Sorrell. The first is that the chorus of complaint has spread to America. There, the money is so much bigger, and it is also where the CFOs of a significant number of multinationals live.
The second is the awakening of the Wall Street analysts. They are a strange breed: curious, sharp, and amoral (a bit like journalists, only much more numerate and sceptical). By and large, as long as it is legal, they don’t care how the companies they cover make their money.
Moves are afoot to take the temperature among CMOs of the biggest global advertisers”
But they do care about consistency of earnings, and if they think likes of WPP and Omnicom have been running a secret cash-generating machine that is about to be rumbled, they take action. Hence the downgrades to the share price. And when they go sour on a sector, they really go sour.
The share price governs the ability of the holding companies to make acquisitions and, more importantly, the pay packets of the CEOs. So if you want to kick one where it hurts, it’s in the share price.
What gives the intervention of Wieser and Stewart added piquancy is that we are soon to start the Q1 holding company reporting season.
If all the Wall Street analysts – and they are prone to follow the herd – start poking around, don’t like what they see and go negative, then we will have arrived at a defining moment in the issue of media kickbacks.
What happens next? I understand that moves are afoot to take the temperature among CMOs of the biggest global advertisers. They in turn will be finding out what their CFOs think, and the CFOs will be thinking: “How come we are paying our agencies less and their profits and margins are going up?”
In fact, this process seems to have started already. Back in early February the World Federation of Advertisers convened a private meeting at the Shell offices in Canary Wharf attended, among others, by Martin Sorrell (plus entourage, naturally), Havas’ Yannick Bollore and a clutch of big advertisers.
I wish I could tell you more, but it seems that the WFA has sworn everyone who attended to Mafia-like omerta, and they are all taking its strictures seriously.
I don’t know what the WFA has to contribute, but since this is now a global issue (remember the MediaCom fiasco in Australia just a couple of months ago), it may well be the best forum to represent advertiser views.
In the short term, I suspect advertisers will look to tighten up legally on their media agencies. This will mean contracts that properly cover the issue of kickbacks, commission and so on, and also permit more rigorous scrutiny and auditing of the agencies’ books, particularly those of their trading desks.
Longer-term, as Nick Manning points out in this blog, they may look to change their business model – or have it changed for them.
Either way, that is not a prospect that will thrill them. But it may be unavoidable.