WPP's GroupM Is Like a River In Egypt..

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One of the oldest jokes in world is that “de Nile is not just a river in Egypt,” and one that certainly Rob Norman, chief digital officer of WPP’s GroupM, has heard many times. But he must believe de Nile is a river in Egypt when he says, “In the U.S., rebates or other forms of hidden revenue are not part of GroupM’s trading relationships with vendors.

Here’s the background: Last week, Jon Mandel, former CEO of Mediacom, a unit of WPP’s GroupM, detonated a bomb of an accusation at the annual Association of National Advertisers (ANA) annual Media Leadership Conference when he said, “Media agency rebates and kickbacks, long thought to be something that happened overseas — or only in pockets of the U.S. market — are actually widespread.”

WPP is the world’s largest ad agency conglomerate, with $18.956 billion in revenue in 2014, as announced by WPP’s CEO Martin Sorrell this past week.   WPP’s profit margins seemed to grow more than its revenue, including “$600 million … generated by trading platform Xaxis.”  

It’s hard to determine from WPP’s revenue announcement how profits (EBITDA) grew at a higher percentage than revenue grew. Maybe WPP cut expenses. But the profit growth had to come from somewhere. Maybe the profits came to some degree from trading desk Xaxis, a unit of WPP’s GroupM?

So how does a trading desk like Xasis make money? By buying digital and mobile inventory low and selling it higher (often 50-100% higher) to GroupM clients. In addition to selling the inventory at higher rates than it bought it, Xasis can sell inventory GroupM got free (assuming Jon Mandel and his ANA investigating team are right) as rebates or kickbacks from media, thus increasing its margins even more.

Kickbacks and rebates or giving warrants or options by many, often the more desperate, media companies and other vendors have been commonly known skeletons in the closet for years – since the era of “Mad Men” at least.

As ad agencies began consolidating into large conglomerate holding companies, they began pooling their media dollars into ad-placement units separate from ad-creation units to gain clout in negotiating with the media. For example WPP’s J. Walter Thompson would do the creative for Ford, but the media buying would be given to GroupM that would pool Ford’s media investment with some of P&G’s brands and, say, Burger King’s and a 100 other brands’ media dollars. Then GroupM would use its huge aggregated dollar pool as clout in negotiating with TV, radio, magazines and digital media in order to get discounts or rebates.

Discounts by contract have to be shared with clients, but under-the-table rebates or kickbacks in the form of inventory might go directly to the media agency involved. Media prefer giving up inventory rather than giving dollar discounts, especially media companies that are undersold, such as low-rated cable networks or radio stations or websites below the top twenty-five in monthly unique visitors.

 
 

 



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