Frenemies: The Epic Disruption of the Advertising Industry

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 privately held advertising and marketing agency, and the chairman of the American Association of Advertising Agencies (the 4A’s). “It should not have been allowed in a public forum to paint an entire industry with a broad brush without any evidence.”

Yet there is certainly smoke here, if not fire. Rebates are common outside the United States, and media buying is an increasingly global process. And as more and more advertising is being done by machines (called programmatic advertising) across a large number of media platforms, the opportunities to conduct speculative price arbitrage to bank lower prices for ads for later use arguably becomes reasonable business practice. The clients want to share the rewards. The agencies say clients are unwilling to share the risks, so why shouldn’t agencies be rewarded for taking risks?

Of course, the issues raised by this controversy were broader than just rebates. Is advertising a relationship business, where accounts are won and lost on the golf course and over three-martini lunches, as had been caricatured for decades? Or is it a creative business, where consumers’ hearts and minds are captured by big, original ideas articulated with aesthetic brilliance, as the doyens of the Creative Revolution claimed? Or is it, increasingly, a science, in which leadership will gravitate to those who can capture and analyze the most data, as Silicon Valley and its digital gurus claim?

Did Gotlieb’s WPP, which is headquartered in the UK, hide U.S. rebates?

“We don’t do rebates in the U.S.,” Gotlieb firmly answered, leaving no doubt that it was not a practice with which he or WPP were involved. But he left a clear impression that maybe others partook in the United States. Dave Morgan, the CEO of Simulmedia, a marketing technology company that uses data to target TV ad buys, believes most do it. “Mandel is telling the absolute truth,” he says. “Kickbacks are massive in the U.S. I’ve been shaken down constantly. They tell us that if I get fifty million dollars, I have to pay them five million.”

In a public conversation with Liodice weeks after Mandel’s speech, Gotlieb made a larger point, one that illustrates how the relationship between agencies and clients has changed. He challenged the ancient assumption that agencies had an obligation to “put your clients’ interests before your own.” The client is under increased pressure to produce profits, and so are the agency’s public holding companies, he said. Clients insist that the agency be paid based on the clients’ sales performance. “I don’t control the result, so I’m taking a business risk. It renders the term ‘agent’ redundant. You cease to be an ‘agent’ the moment someone puts a gun to your head and says, ‘These are the CPMs [cost per thousand viewers] you need to deliver over X period of time.” If GroupM’s contracts with clients specify that its costs or the amount of rebates received overseas are to be disclosed, GroupM complies. But if the contract is silent, so is GroupM.

On whichever side of the argument one falls, it is inarguable that Mandel’s assault came at a fraught moment and struck a raw nerve. Taken aback by the irate agency reactions, the ANA quickly did damage control, issuing this statement: “We regret any impression that agencies in general are engaged in questionable activities and apologize to those who were offended.” A few days later it appointed a joint task force with the 4A’s to study the issue.

The ANA issued an open, competitive RFP (request for proposal) to locate a firm to conduct the study, ultimately choosing K2 Intelligence, an investigative cyber defense and compliance firm owned by Jules B. Kroll and his son, Jeremy, which employs former prosecutors and law enforcement professionals like former New York City police commissioner Ray Kelly. The ANA also chose Ebiquity, an auditing firm that has a history of challenging agency spending practices on behalf of brand clients. Seething that the ANA made this decision on its own and chose a prosecutorial firm and, in Ebiquity, what he perceived as a business adversary, Martin Sorrell declared, “They went unilateral.” Koenigsberg was equally livid, saying of K2 Intelligence and cofounder Jules Kroll, who helped build his estimable reputation by tracking down the illicit activities of dictators: “Bringing in a spy agency didn’t send the right message. It kind of sounds like a witch hunt.” The rupture between the ANA and the 4A’s ended their joint task force. By the winter of 2016, K2 and Ebiquity were deep into interviews and jittery agencies feared the worst.

Michael Kassan was not nervous; he comfortably settled into his friend-of-all-sides stance. On the one hand, he said, Mandel “painted the industry with too broad a brush. … I’m a firm believer that this industry is made up of good people.” The ANA wrongly “staked out a position” they should not have by embracing Mandel, Kassan says he told Bob Liodice. On the other hand, “If you’re a CMO and your CEO sees an allegation in the press that agencies are getting rebates and undisclosed kickbacks, you’re going to insist on knowing whether your agencies are doing this.” He encouraged clients to do so. Agencies, he agreed, were not sufficiently transparent, particularly about digital ad purchases. “Media agencies began to create trading desks for online purchases of media. And they were doing it without fully disclosing the amount of online media they bought. They did this because they were buying in bulk and reselling and taking a principal position. They were not wrong. If I’m an agency and I say to you, ‘This particular inventory is being bought on a nondisclosed basis, meaning I am not going to tell you what I paid but I am telling you I will get you a really good price, and I’m telling you I will make money on the spread but I’m not going to tell you how much’”—as long as this was stipulated in the agency contract, he thought it was OK. It would fail the transparency test, he says, if it was not part of the contract.

To conduct MediaLink’s agency reviews, Kassan leaned on Bernhard Glock, who for twenty-five years as a senior executive at Procter & Gamble orchestrated more than one hundred agency reviews, and fellow senior vice president Lesley Klein. The process they shaped began with an in-depth discussion with the client as to what was expected of an agency, after which MediaLink would help narrow the choices of prospective agencies to a handful, who were invited to meet with the client for what MediaLink vice chairman Wenda Millard calls “a chemistry meeting. It’s like a first date. If I don’t like you, no second date.”

MediaLink then prepared a dozen-or-so-page single-spaced RFP to send to the contending agencies. The RFP took time to answer, for it sketched a timeline for the review process and imposed upon the agencies a number of key requirements: specify who would staff the account; specify the fee structure the agency would employ and the methodology to be followed to arrive at a fee; delineate the proposed marketing strategy; sketch the agency’s digital, technology, and e-commerce prowess; share the agency’s media-buying capabilities and data strategy; specify the transparency guidelines to be followed to assure, for instance, that the client shares in any rebates; give a detailed account of the agency’s work on other accounts and its approach to innovation; and it stipulates the return on investment, or ROI, targets the agency expects in return for a bonus and, if the target was not met, the size of the agency penalty. After the client digested these answers, agencies were then invited to offer their proposed creative presentations and marketing plans. The RFP always specified that the agency alone is totally responsible for any costs they incurred during this process.

The process MediaLink followed was explored in the fall of 2015 during the weekly Monday afternoon staff meeting at their 1155 Avenue of the Americas office, with employees from the Los Angeles and Chicago offices joining via videoconference. On this Monday, Wenda Millard devoted the meeting to a presentation by Bernhard Glock of the agency reviews MediaLink was coordinating. Standing in the middle of an eighth-floor conference room crowded with staffers, Glock spoke of what the process taught about the changing dynamics between client and agencies. “There are six key components we hear every time from advertisers,” he said. “The first question the advertiser asks is, What are the cost savings the agency promises? Increasingly, they ask a fresh question: Will the agency agree to peg its pay to how the marketing campaign performs? More and more I see performance sneak in as part of the compensation.” Why? “Because there are more and more procurement people in the reviews.” The difference between the chief marketing officer and the procurement people, he said, is that the CMO tends to focus on building the brand and the procurement officer on cost savings.

The agency’s marketing strategy is a second key component; increasingly, he observed, the client is mistrustful of agencies, and he no doubt exaggerated when he added, “They rely on us” to help shape the strategy.

Operations and efficiencies are a third client concern. Clients ask: How fast can we move? How do we communicate with each other? How do we integrate the planning and buying and creative realms?

Partly because of the Mandel speech and the ANA inquiry, transparency became a fourth component, he said. Our clients “want to know: Can I still trust my agency? Do I get to know of kickbacks or rebates?” Are these shared with the client? Inevitably, the increased wariness of clients “leads to tighter contracts.”

The fifth component is the agency’s use of data and analytics and how it measures performance. Clients commonly ask, “Who owns my data?” They want to know the competence of the agency in new machine tools like programmatic advertising. And they want to know if they are paying for fraudulent clicks.

Finally, and as central to the client as are costs, they want to know about what talent will be assigned to their account. “What I see happening more and more is advertisers want guarantees on key people,” Glock said. They worry whether the agency has enough scale to service the client. And the client defines talent more broadly. “It used to be a given that only the creative agency sat at the table. Now that has changed. Public relations agencies sit at the table. Media agencies sit at the table. Digital agencies sit at the table.”

“The problem agencies have,” Millard interjected, is that cost pressures from clients “is causing agencies to pay less to their employees. Because of that, they’re not as attractive. Why would I go to an agency that looks like a dinosauric entity rather than go to Google, or Facebook, or LinkedIn? Why would I do that, and be paid what I would be paid to work in a sweatshop around lots of unhappy people?” Contradicting Mandel’s thesis that agency margins swell, Millard said, “It’s a real problem for agencies because they can’t make any money. Their margins are getting squeezed. This is a very bad scenario for everyone, including the clients who are not getting the best work out of agencies because they are not getting the best talent.”

“I remember,” she explained over a cup of tea in her office after the meeting concluded, “when I was growing up in this business the pride General Foods and Young and Rubicam would have when they’d say, ‘We’ve been in business twenty-five years with Jell-O. We built this business together. This is a partnership, a great cause for celebration.’ That’s gone. Agencies live in great fear that they’re going to go into review at any moment. Agencies are now treated as vendors.”

Millard described a meeting she had that morning with one of her clients, Time Inc. Executives there complained of not being able to “have a strategic discussion with an agency. It’s all about pricing.” She says the same is true of MediaLink’s other media clients who want to sell space to media-buying agencies. She offered this example: “If Time devises an elaborate $3.5 million sale of space for its multiple magazines, the agency says, ‘I need $1 million.’ You’re having a price conversation before you even finish telling them what the idea is. All they know is that they have to skinny you down because they’re being skinnied down. They’re being judged by how well they’re doing on pricing.”

Little wonder clients turn to MediaLink, Millard said. “We don’t have a dog in this race because we love each agency equally. And we’re going to help the brands through some of this decision making because we don’t care if they choose Omnicom or Publicis. But they can’t go to Omnicom and ask, ‘Am I in the right place?’ They are more likely to come to us and ask, ‘Should we be working differently with our agency? Or should we put our account up for review?’”

The tidal wave of accounts up for review swept through the agency business. Agencies lost part or all of the business of longtime clients. Publicis, for instance, lost Procter & Gamble and General Mills, as well as Coca-Cola, Mondelēz, and Delta; it gained Visa, Bank of America, and Taco Bell. Omnicom lost Johnson & Johnson, Bud Light, and Adidas; it gained Procter & Gamble, Delta, and Subway. WPP lost AT&T, as well as Bank of America and Coors; it gained General Mills and Coca-Cola. IPG lost American Airlines and Kmart; it gained Johnson & Johnson, Bank of America, and Chrysler; Havas and Dentsu gained slightly more client dollars than they lost.

Publicis lost more accounts than its rivals, but the loss that especially rankled Maurice Levy of Publicis was an Omnicom win. The company he had embraced as an equal merger partner in 2013, only to watch the merger collapse the following year, took what a senior Publicis executive described as “a $100 million haircut” to snatch the P&G business away from Publicis. On the other hand, Levy was overjoyed to best the man he regularly trades public insults with, WPP’s Martin Sorrell, by winning part of the Bank of America account.

More was at stake, of course, than relations between advertisers and agencies. “Advertising works as a value exchange,” Andrew Robertson of BBDO, says. “In exchange for advertising, consumers get free or reduced content costs.” Or needed information. It is easy to be cynical or dismissive about the role of advertising in a consumer economy, but its role can hardly be overstated. Commerce and most forms of communication would shrivel without it. Many retail stores would shutter, the number of new products would dwindle, financial service companies would sputter, consumers would complain they are shopping blindfolded. Google, with 87 percent of its $79.4 billion in 2016 revenues supported by advertising, Facebook with over 95 percent ($26.9 billion out of $27.6 billion) in 2016, and Snapchat with 96 percent from advertising, would—like the TV networks and most radio—cease to be “free.” A prime reason U.S. newspaper employment plunged from 412,000 in 2001 to 174,000 in 2016 is that advertising dollars—which account for more than half of all newspaper revenues—dropped from $63.5 billion in 2000 to $23.6 billion in 2014, the last year the Newspaper Association of America released newspaper revenues. Facebook’s advertising revenues alone exceeded the combined ad dollars of all U.S. newspapers. Overseas, in that same span, newspaper ad revenues sank from $80 billion to $52.6 billion.

Advertising and marketing “provides the oil for the economy’s energy,” Martin Sorrell says. Princeton professor Paul Starr, whose authoritative history of the media, The Creation of the Media, credited advertising with assuring journalism’s independence: “American journalism became more of an independent and innovative source of information just as it became more of a means of advertising and publicity.”

A 2015 study on the impact of advertising by IHS Markit, a London-based financial services company, concluded that in the United States each dollar spent on advertising alone spawned nineteen dollars in sales and supported sixty-seven jobs across many industries; they predicted that by 2019 advertising would kindle 16 percent of all economic output. A 2016 study of Western Europe for the World Federation of Advertisers, based in Brussels, concluded that each euro spent on advertising equates to seven euros of economic value. Predicting the exact impact of advertising on consumer behavior is not an exact science—though this book will demonstrate that going forward data will yield better evidence—but by anyone’s measure, advertising and marketing packs a mighty economic wallop.

Naomi Klein chose to measure the impact of advertising in a very different way. In her book No Logo,1 first published in 2000, she portrayed advertising “as the most public face of a deeply faulty economic system” that promoted sweatshops to produce their often unhealthy products, and that propped up global companies that held sway over politicians to advance globalism, which exported jobs. Her harsh critique of advertising as addictively manipulative was echoed sixteen years later by Tim Wu, whose book The Attention Merchants2 argues that by demanding their content be “free” and refusing to pay subscriptions or micropayments, consumers invite intrusive ads and receive inferior journalism and content.

No question: without advertising many citizens would feel liberated from annoying and often misleading interruptions. But what’s indisputable is that advertising and marketing dollars serve as an underlying subsidy for much of the media and the Internet—in other words, for our information ecosystem and, often, for the architecture of our everyday lives. Without this free ATM machine, many companies would be doomed. But as any good advertiser knows, asking someone to sit through all the ads in the TV show they’ve recorded because those ads fund the channel the show is on is just about as thankless as asking people to pay more for a product because it’s good for the environment. Some percentage of consumers may make that choice for the greater good; many more will not. Today, the consumer is in control, and increasingly the challenge for advertisers is to create experiences that people will want to have because they will no longer have to have them. That is a tectonic shift for a once comfortable industry, and it is worth a look back at how this economically essential industry got here.

2.

“CHANGE SUCKS”

“I’m prepared to eat our children, because if I don’t somebody else will!”

—Martin Sorrell, WPP CEO

The word advertising derives from the verb advert, which means “to give attention to.” All markets or competitive economies rely on advertising. Thousands of years ago, advertising consisted of Egyptian, Greek, and Roman wall paintings or rock scrawls. Five centuries ago, farmers selling produce relied on word of mouth; villagers selling a service put up signs like TAILOR or BLACKSMITH. With villages transformed into cities as the Industrial Revolution swept across the nineteenth century, sellers of products turned to a better means of communicating with potential buyers. Thus advertising agencies were born.