Ad agencies probed over contracts to produce commercials

By - CTL
December 8, 2016

Our American friends have just turned the blowtorch on advertising agencies and their dubious practice of promoting their own, in house production services. An investigation is long overdue as to whether the entire process is transparent, or simply collusion designed too increase agency profits at the expense of their client’s best interests.

For years there has been a heavy push in Australia by Agencies for use an in-house production companies. It is a bit like Solomon sitting in judgment on Solomon. The concern has always been that should a problem develop, who would be the independent arbitrator?

Well the US Justice Department has decided that it needs to have a good hard look at the whole shebang. One wonders what sort of skeletons they might uncover? It is interesting that most of the major Agencies have declined to comment. Do they have something to hide?

US Justice Department Examines Whether Ad Companies Rigged Bids In Favor Of In-House Production Units.

ctl_01Justice Department attorney Rebecca Meiklejohn has been investigating whether ad companies manipulated the pricing of contracts for producing advertisements. PHOTO: BLOOMBERG NEWS

By  SUZANNE VRANICA and BRENT KENDALL Wall Street Journal Dec. 6, 2016

The U.S. Justice Department is investigating whether advertising agencies inappropriately steered business producing commercials to their in-house production units over independent companies by rigging the bidding process for those contracts, according to people familiar with the matter. Rebecca Meiklejohn, a government antitrust attorney based in New York, has been interviewing ad industry executives on the subject over the past few months, the people said.

The production and postproduction of commercials is a roughly $5 billion business in the U.S. that involves services such as directing, sound editing, special effects and color correcting. Hundreds of independent companies compete for those contracts. But the giant ad agencies whose creative teams conceive commercials also have been ramping up in these areas in the past several years, pursuing a growing revenue stream.

The Justice Department is investigating whether ad agencies are manipulating the bidding process, urging independent companies to inflate their prices so that contracts could be awarded to the agencies’ own production and postproduction outfits, according to the people familiar with the matter.

Price-fixing and bid-rigging are prohibited under federal antitrust law.

It isn’t clear which agencies are the subject of the government’s inquiry. Many of the big agency holding companies, including WPP PLC, Omnicom Group Inc., Interpublic Group and Publicis Groupe SA, have in-house production and postproduction divisions. Representatives of WPP, Interpublic, Omnicom, and Publicis declined to comment. Nancy Hill, chief executive of the American Association of Advertising Agencies, a trade group that represents agencies, said in a statement: “It goes without saying that we require our member agencies and their staffs to follow the letter of the law.”

The Justice Department’s probe adds a layer of controversy to an industry in which trust between the major parties in the estimated $529 billion global ad business is already fraying. In June the Association of National Advertisers, a trade group that represents big advertising clients, released the results of a seven-month probe that found agencies are shortchanging clients through nontransparent business practices. The group’s report, which didn’t point to specific ad agencies, detailed a range of suspect practices, such as agencies getting rebates from media sellers for reaching spending thresholds on behalf of their clients. Big ad companies have denied wrongdoing. The report has caused marketers to launch a wave of audits of their media-buying contracts with agencies.

Ms. Meiklejohn’s inquiry has some ties to the ANA transparency probe. Shortly after the group’s report was released, she contacted people close to the probe to see if they uncovered anything related to the bid-rigging allegations she was already investigating, said several of the people familiar with the matter. K2 Intelligence, the corporate investigation firm that conducted the trade group’s probe, uncovered allegations of bid-rigging in the postproduction business, according to people briefed on the matter. That material was spelled out in an early draft of the report but didn’t make it into the final version, which was focused on the media-buying business. The trade group currently has a task force looking into the issues it discovered in the postproduction sector, according to a person close to ANA. Ms. Meiklejohn held discussions with people involved in the probe and obtained the information about bid-rigging allegations, the people said.

The language in the early ANA draft claimed that “some creative agencies” are increasingly directing “postproduction projects to affiliated companies within the same Agency Holding Companies,” according to documents reviewed by The Wall Street Journal. The relevant passage said six producers and editors from independent production firms reported being asked to submit so-called “check bids” on projects that agencies had already determined were going to their in-house outfits. The postproduction companies were urged to inflate their bids “to create a paper trail that justified to the advertiser its decision to award the project to an in-house facility, which provided a rival bid at a lower price,” the draft ANA language said.

Ms. Meiklejohn also has subpoenaed K2, the investigative firm, to gain additional information, one of the people familiar with the matter said.

Independent production firms have begun making a case in public about their grievances. In October, AICE, a trade group that represents independent postproduction firms, sent a statement to its members that accused advertising companies of engaging in unfair business practices to keep advertiser postproduction work in-house. The AICE memo said independent firms often feel coerced into providing check bids “for fear of alienating an agency and risking future opportunities for work.”

While ad agencies have been offering production and postproduction services to some extent for decades, they have doubled down on this area of the business over the past few years to find new revenue streams and to help address marketers’ growing need for more ad content because of the rise of social media.

Madison Avenue is familiar territory to Ms. Meiklejohn. Following a 2002 federal investigation into alleged bid-rigging in the advertising, printing and graphics industries, the Justice Department, with the help of Ms. Meiklejohn, sent several executives to jail for antitrust violations and tax fraud.

Courtesy By SUZANNE VRANICA and BRENT KENDALL Updated Dec. 6, 2016 Wall Street Journal and CTL

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