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Ad agencies in America have been increasingly buying stock in media companies to secure slots for their clients’ ads. Nothing would be wrong with that if they remembered one thing: to tell their clients, the advertisers, what they actually own.

Back in the old days, the advertising sales unit and the newsroom in major independent newspapers were two separate departments. Sometimes people in the two parts of the newspaper wouldn’t even be allowed to meet. The idea was to insulate the newsroom from the pressures of some advertising agencies who wanted inches of flattering coverage in exchange for spending ad dollars in the newspaper. The ultimate goal was to secure independent reporting.

Those days are gone. Advertisers, ad agencies and media companies collude more than ever these days.

But when ownership control is involved, this relationship is worrisome for independent media, particularly when equity deals between ad agencies and media companies are not transparent or are overtly used to move ad spend to preferred media outlets.

The American ad agency seems to be marred by such practices. A recent report from the Association of National Advertisers (ANA) representing major ad spenders such as Apple and Unilever found evidence of non-transparent business practices in deals involving ad agencies taking equity in media companies. The management in ad agencies often put pressure on their underlings to directly spend on media in which the ad agency has an equity stake, according to the survey, which was run by the consultancy K2 Intelligence. They canvassed 150 people from the industry during a period of seven months.

Pick Your Favorite

Stock purchases in exchange for ad deals are not new; in fact, they are becoming a norm. Last year, the publicly owned broadcaster Channel 4 in the U.K. announced that it began offering start-ups ad space on its programs in exchange for equity stakes in their companies. One of the first companies that took up the offer was Deezer, a music streaming service that wants to challenge Spotify’s position in that market. Channel 4 cooperated in this project with the German television group ProSiebenSat.1, which was offering similar deals in its home market.

In the U.S., many ad agencies and media groups are part of conglomerates under the same ownership, a model that has been long criticized by some media experts and journalists there. To take an example, iHeart group owns over 850 radio stations, the outdoor ad company Clear Channel Outdoor, one of the world’s biggest, Premier Networks, a major American radio network, and Katz Media Group, one of the prominent media sales houses in the U.S.

News Corp, another behemoth, owns a slew of TV stations in the U.S., including the Fox network, newspapers such as Wall Street Journal and several marketing and advertising companies.

However, the lack of transparency about equity deals between ad agencies and media is a growing worry for advertisers, according to the ANA report. It says that some advertising companies funnel business to ad tech companies or media outlets where they own shares. The problem is that they don’t tell advertisers about their interest there. In the industry jargon, ad techs are those companies that offer advertisers various types of analytics to target their audience.

Interestingly, those most hurt by these deals seem to actually be the advertisers, as they truly don’t know which pockets their ad cash ends up in. Another problem is that advertisers’ cash is sprayed among the numerous suppliers of services. Industry experts say that up to 90% of the ad spend ends up in the supply chain.

A Wakeup Call

Often, deals between ad agencies and media companies come in a package with a slew of favors included. For example, one respondent in K2’s survey said that ad agencies that spend on specific media companies receive not only stock in the media company but also lower ad rates.

Sometimes, however, the equity deals can have an unexpectedly adverse effect on third parties. An executive at a technology company told K2 that following the purchase of a stake in his company by an ad agency, his tech company lost business from that ad agency’s competitors.

The K2 survey delivered a hard blow to the advertising industry in the U.S. Its own lobbying body, the Association of Advertising Agencies, bristled at the report, which they found “anonymous, inconclusive and one-sided.” 

The equity deals and many other non-transparent business practices the K2 report unveiled show how the ad cash is often lost on its way to media outlets at a time when advertisers pinch their marketing pennies.

These revelations are a wake-up call for both advertisers and the ailing media industry, badly ravaged by a decade or so of deep crises.

Photo: Andrés Nieto Porras