Frenemies

The Epic Disruption of the Advertising Industry (and Why This Matters)

Ken Auletta

• Publisher: HarperCollins
• Year: 2018
• ISBN:
  9780008297015
• Topic: Betriebswirtschaft
• Subtopic: Werbung

1.

THE “PERFECT STORM”

Characterizing the rebates as “criminal extortion,” he said of the giant advertising holding companies, “At least four of them, maybe five, are doing this.”

—Jon Mandel, March 2015 speech to the Association of National Advertisers

Former advertising colleagues were shocked when Jon Mandel morphed into a whistle-blower. Mandel had been a member in good standing of the advertising establishment for nearly four decades, a former chief executive officer of media agency powerhouse MediaCom, a reasonably popular joke-cracking executive with a chubby, beardless face and a full head of dark hair. But he seemed a different person on March 4, 2015, when he stepped onstage before his former clients, the Association of National Advertisers, or ANA, at their annual Media Leadership Conference in Florida. He looked different to old colleagues. He was rail thin and almost completely bald, with a trim grey beard that gave him a severe, almost Mephistophelian look. Before the very advertisers that fund his former agency, Mandel trembled, knowing that former coworkers would “try to kill me professionally” when he accused them of corruption. Agencies, he declared, engaged in a “pervasive” practice of demanding “kickbacks” from media companies and platforms like magazines, newspapers, TV, radio, and Web sites in exchange for their ad dollars. “There are cases where there are rebates that should be going to clients that are instead going to agencies.”

The assertion was atomic to this audience: the ANA represents about seven hundred companies, including Coca-Cola and Procter & Gamble, which spend more than $250 billion annually in the United States to advertise over ten thousand brands. Moreover, Mandel was placing a cloud over the many billions spent worldwide on marketing as well as advertising. Coupled with the ongoing disruption of the industry by Facebook and Google and the Internet, the controversy threatened to upend the flow of monies that finance the public’s news and entertainment.

Wearing a dark suit and open-necked grey shirt, with tiny eyeglasses perched on his bald dome, Mandel spoke out against what he depicted as the rot in the agency world, the world in which he’d spent his entire career. Now, he and his marketing consulting firm, Dogsled Enterprises, were paid by the ANA to prosecute the case against agencies. Most of Mandel’s career had been spent at Grey Advertising, and when WPP, the giant marketing holding company, acquired Grey in 2004 they retained MediaCom and he had served as CEO of this media-buying unit, reporting to GroupM global CEO Irwin Gotlieb.

The practice Mandel accused agencies of is common, and legal, in countries like Brazil and China. It once was common in France and Western Europe, before being declared illegal. Speaking in a high-pitched nasal voice, Mandel claimed that the practice had spread to the United States. The “kickbacks” or rebates, he said, come in several forms: in cash; in a gift of additional ad space that giant advertising holding companies hold on to and resell to other clients; in the form of promises of a larger future media buy in exchange for an ownership stake in the vendor by the agency; or “in the worst case,” the agency resells the purchased ad time to the client and makes money on it. “Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?” Mandel asked the audience. He estimated that media and digital companies kick back 18 to 20 percent of the media buy to the agencies, and that the agencies hide kickbacks that total “well into nine figures across agencies.”

Mandel’s blast helped stoke “a perfect storm,” in the words of Andrew Robertson, the CEO of the BBDO agency. Advertising clients were already uneasy with their advertising agencies. They had long complained about steep agency costs and a lack of transparency about how agencies made money. Clients were pleased that the agencies that dominated media buying had leverage over media platforms and could demand better terms, but they worried that agencies kept secrets from them. The trust issue was even more acute because advertising clients were under greater pressure to curb costs and were insecure about the digital disruption that shook the very foundations of their business—from smartphones that turned their banner and pop-up ads into annoyances; to ad-blocking software consumers were embracing to repel ads; to a younger generation grown accustomed to ad-free YouTube and Netflix, and to ad-skipping digital video recorders (DVRs). Mandel’s allegations reinforced these anxieties.

His assertions were damning, but Mandel did not cite a single agency by name. In a presentation sweeping in its condemnation of agencies for their lack of transparency, he was hardly transparent himself. Not about the 18 to 20 percent kickbacks. Not about the figure of at least $100 million in kickbacks he said were collected by agencies. His clear implication was that most agencies were guilty.

When Mandel concluded his remarks, ANA CEO Bob Liodice came onstage and energetically shook his hand. “That was fascinating and frightening,” he said, and was “very courageous.” So, Liodice asked, “What should clients do to gain greater transparency?”

“You’ve got to go in somewhat doubtful.”

“You’re saying a prenup is not enough!” Liodice said.

“Yes, and beware: you’ve got to audit not just the agency but the holding company,” Mandel declared.

The stakes are huge, for advertising and marketing dollars subsidize most media and Internet companies. Today, the amount of money spent on advertising and marketing is up to $2 trillion worldwide, says Pivotal Research Group senior analyst Brian Wieser, perhaps the industry’s most widely respected marketing analyst. Based on a Publicis Groupe study, this estimate was backed by Maurice Levy, the CEO of Publicis, and separately by Adam Smith, GroupM’s futures director, who says the estimate “is in the ballpark.” WPP CEO Martin Sorrell insists the true number is close to $1 trillion. Irwin Gotlieb cautions that the figure could be higher, or lower, because these were “soft numbers,” guestimates. For example, Sorrell’s guess does not include marketing awards programs, free coupons, or marketing messages in McDonald’s food tray liners; Wieser’s guess does.

Over lunch some months later, Mandel sipped from a glass of Pellegrino and calmly described the changes in the business that had led to what he considers kickbacks. Agencies, he said, were once “a trusted adviser, just like your lawyer,” and were paid a handsome 15 percent commission. But agencies became part of today’s dominant advertising holding companies—UK-based WPP, U.S.-based Omnicom Group and the Interpublic Group (IPG), France-based Publicis and Havas, and Japan-based Dentsu. Two thirds of global ad expenditures flow through these six companies and through privately held Horizon Media. “What has happened is there is a certain need to grow to show increased profit year to year. At some point the agency business model changed because of the financial pressures. It wasn’t just no more commissions. It was, ‘I don’t care how you make your money. You just better show me ten percent year to year.’ They were incented financially to worry more about themselves.” Over time, clients began to ask, “Is what you’re recommending to me good because it will be great for my business? Or is it because you will be making more money?”

He characterized the rebates as “criminal extortion,” and said of the major holding companies, “At least four of them, maybe five, are doing this.” At lunch Mandel changed his estimate of the unit of money involved from millions to “billions,” which did not inspire confidence. The one company he identified by name as guilty was WPP, for whom he worked before moving in 2006 to take a new job at Nielsen. WPP, he continued, “wanted me to actually set up the thing, ironically, that years later I’m now known for condemning: all those kickbacks. I said to Irwin [Gotlieb], who’s a personal friend—though since March ‘personal friend’ is on the back burner … He wanted me to set this up, to basically take what was going on in Europe and bring it to the U.S. I said, ‘That’s not right.’ He said, ‘We need it to compete.’” His accusations, he admits, are “hard to prove. It’s like sex crimes: ‘He says, she says.’” Gotlieb flatly denies that he had ever encouraged Mandel to set up a rebate system at GroupM’s MediaCom: “Not true. Find one person or one company who would support that statement!”

Michael Kassan was not in the audience when Mandel delivered his broadside, but when he saw the March 6 headline in Advertising Age—FORMER MEDIACOM CEO ALLEGES WIDESPREAD U.S. AGENCY “KICKBACKS”—he knew it would ignite a wildfire. Kassan was troubled. “I felt like the ANA had endorsed his position without evidence,” he says. But Kassan knew Mandel’s assertions would “light a fuse,” and the resulting blaze would produce new business firefighting opportunities for his company, MediaLink, for which he was grateful.

As the CEO of MediaLink, the company he founded in 2003, Kassan is arguably the supreme power broker in the advertising and marketing industry. With a staff of 120, MediaLink serves as a hub, linking clients like publishers who seek ad dollars with the agencies and brands that dispense them, and linking brand advertisers to new agencies. MediaLink’s blue-chip client list includes Unilever, AT&T, L’Oréal, Bank of America, Colgate-Palmolive, American Express, NBCUniversal, the New York Times, the Walt Disney Company, Viacom, 21st Century Fox, Verizon, Condé Nast, Hearst, the newspapers of News Corp., including the Wall Street Journal and the New York Post, the Washington Post, Gannett, iHeartMedia, Turner Broadcasting, Bloomberg, Flipboard, and Vox Media, among others.

Anything that provokes clients to seek a new agency is good for Michael Kassan’s business, for MediaLink conducts agency reviews, orchestrating the entire process from helping choose the competing agencies, defining what the client seeks, helping judge the agency’s creative and strategic pitches, to participating as the client reaches a decision. MediaLink also performs a headhunter role, linking executives to vacant agency and client positions. It also introduces start-ups to investor capital, performing as an investment banker. It serves as a sherpa, making introductions between agencies and Silicon Valley and Hollywood, taking clients on tours of Google, Facebook, Twitter, and Microsoft, all companies it has represented. MediaLink also represents agencies, arranging speakers for various advertising conferences, where Kassan induces them to cosponsor MediaLink parties and arranges for their executives to appear on panels. Agency and client executives are regularly invited to record one of Kassan’s one-minute daily radio interviews syndicated on iHeartMedia, which he tapes in bulk once or twice a month.

The ever-affable Kassan, then sixty-four, is a pear-shaped teddy bear of a man with a soft, round, tanned face, the sunny smile of a practiced politician, and the jokey shtick of a stand-up comedian. In an increasingly insecure business assaulted by change and rife with mistrust, “they are a bridge company,” Charlotte Beers, former CEO of Ogilvy & Mather, says of Kassan and MediaLink. “The way we used to talk to each other now needs an interpreter, and that’s MediaLink.” Baffled by the digital revolution, clients seek guidance from what they think of as “a neutral corner.”

If one thought of concentric circles of power within the marketing and advertising world, Michael Kassan belongs in the center, alongside a few others like Martin Sorrell, CEO of WPP, the world’s largest advertising and marketing holding company. Kassan’s influence would place him ahead of most of the CEOs of the other five major holding companies and ahead of their clients. Yet outside of advertising and media industry enclaves, Kassan is virtually unknown. Create a Google Alert for WPP’s Martin Sorrell and up to a dozen stories appear daily; a Google Alert for stories about Kassan generates maybe one mention per month.

After Mandel’s ANA speech, MediaLink’s neutral corner became a destination for the world’s biggest brand advertisers. It was nothing short of a stampede. Starting in the spring of 2015 and running through 2016, advertising clients announced they were putting up for review a total of $50 billion of advertising business, and clients knocked on Kassan’s door asking him to organize agency reviews. In all, MediaLink was hired to orchestrate two thirds of these reviews. Unilever, Procter & Gamble, Coca-Cola, L’Oréal, Kraft Foods, Mondelēz International, Bank of America, General Mills, Sony, 21st Century Fox, Johnson & Johnson, and CVS were just some of the advertisers who put their agency business up for review.

Mandel’s kickbacks speech was a spur for the reviews, but it was hardly the only one. Indeed, its timing was exquisitely awful because advertisers were already being buffeted by change, facing disruptive forces in practically every sector of their business. As Alvin Toffler wrote in Future Shock, any industry bombarded by menacing changes endures “the dizzying disorientation brought on by the premature arrival of the future.”

MediaLink brands itself as a neutral Switzerland, positioned comfortably in the middle, which is an odd definition of neutrality since MediaLink often represents all sides at a negotiating table. Kassan has been strategically shrewd. “He doesn’t do agency reviews because they are wildly profitable,” his friend Irwin Gotlieb says. “He does reviews to gain information and because it gives him influence in the business. He has a small headhunting operation. That makes money. But it also gives him influence because key people in the business know that if they’re going to make a career move they should talk to him. The reason he is able to galvanize people in the industry is that everybody knows he is going to be conducting a review, so they don’t want to piss him off.”

The agencies were indeed pissed off about Mandel’s speech and agonized about the subsequent tsunami of reviews, which were akin to an audition to keep your job, knowing that your competition would be auditioning to take it from you. Clients putting individual agencies up for review was common; the torrent of reviews was not. The “pitchapapalooza” reviews meant a cruel summer of long hours and canceled vacations in order to create new pitches to clients. Top agency executives frantically tried to reassure and soothe clients. Laura Desmond, then the global CEO of Starcom MediaVest, the media agency arm of Publicis, estimated that over the summer of 2015 the reviews consumed eighteen thousand hours of her agency employees’ time. Agencies had to prepare creative and strategic presentations for current as well as prospective clients. Presentations are time consuming and expensive—about $1.5 million for each, Bob Greenberg, the founder and CEO of R/GA says—and the expense is shouldered by the agencies, not the clients.

The advertising agency community reacted angrily to Mandel’s speech, no one more so than Irwin Gotlieb. He had had a paternal relationship with Mandel, once recommending him as his successor as chairman of a prestigious industry committee. He denied Mandel’s assertions, saying that he had removed Mandel from a trading role at the firm because they had a trading head and “you can only have one head of trading.” So, he continued, “Why would I have a conversation about rebates with someone not involved in trading?”

The day after Mandel’s speech, Gotlieb had GroupM’s lawyers deliver a letter to Mandel accusing him of violating his separation agreement and the “significant compensation” received in return for agreeing not to disparage GroupM. The law firm warned that it was “considering its options,” and urged him to keep his mouth shut. Martin Sorrell suggests that when Mandel left WPP’s employ he did not do so voluntarily; instead of saying he was terminated, Sorrell said, “He was exited.”

The near universal complaint from agencies was that in his speech Mandel named not a single transgressor, and thus was making a blanket condemnation of all agencies. It was not uncommon to hear agency executives accuse Mandel of McCarthyism. “It was irresponsible,” charged Bill Koenigsberg, founder and CEO of Horizon Media, the largest privat...