By Suzanne Vranica

Association of National Advertisers has been dialing up pressure on ad firms to better disclose practices

The Association of National Advertisers said a new study has found a variety of nontransparent practices in the advertising production business, a conclusion that likely will add to mounting concerns about how business is conducted on Madison Avenue.

The trade group, which represents big advertisers such as AT&T Inc., Procter & Gamble Co. , Wal-Mart Stores Inc. and General Motors Co. , didn’t single out any advertising firms by name.

But it detailed a range of improper behavior, including allegations that some agencies have steered production contracts to their in-house production and post-production outfits by urging other companies to inflate their prices during the bidding process.

In other cases, ad firms allegedly try to disguise their ownership of production outfits, so their clients aren’t aware of the affiliation.

“The system is compromised by the fact that the agency is not only controlling the bidding process but is also part of the bidding process and that is a conflict of interest,” said Bob Liodice, ANA’s chief executive.

The report also zeroed in on the production incentives some states offer for filming in certain locations. About 39% of advertisers surveyed who were eligible for production incentives in the past two years either didn’t receive those benefits or didn’t know, the study said.

Marla Kaplowitz, chief executive officer of the American Association of Advertising Agencies, an industry trade group that represents ad firms, said in a statement that the group “condemns any activity or business practice that is unethical or, of course, illegal.”

“We haven’t seen a final version of the report, although the ANA did circulate a draft version some months ago, which we thought was flawed in several material ways,” ad holding company WPP PLC said in a statement. “It would not be appropriate to comment on this final report until we have seen a copy.”

MDC Partners Inc. declined to comment because it had not seen the report. Omnicom Group Inc. and Publicis Groupe SA also declined to comment. I​nterpublic Group of Cos. didn’t return calls for comment.

The process of how commercials are produced and which companies are hired for the work is already under scrutiny. The U.S. Justice Department has been investigating whether the bidding process for contracts has been manipulated, The Wall Street Journal has reported.

Subsidiaries within several big ad holding companies were subpoenaed by the Justice Department and have said they are cooperating with the probe.

Over the past few years, the ANA has been dialing up the pressure on ad companies to better disclose their business practices.

Its probe last year of the media-buying sector alleged ad firms were being rewarded with cash rebates from media companies for spending a certain amount on behalf of clients. Big ad companies have denied wrongdoing. That report, which also didn’t name specific agencies, led many marketers to audit agency contracts

The ANA’s latest task was to pull the curtain back on the production business, which is made up of hundreds of companies that offer services such as directing, editing, special effects and color correcting. Annual spending on video commercial production is about $6 billion in the U.S.

The study began in August of last year and included a dozen sector experts including corporate-investigations firm K2 Intelligence, production consultants, various trade groups and auditors.

Over the past several years, ad agencies have more aggressively pushed into producing ads by building out extensive production and post-production capabilities in an effort to increase their revenues and keep up with demands from marketers for more digital video. The move has caused agencies to compete with the production firms they once hired.

Agency production services have become “profit centers for agencies and holding companies,” the ANA said in its latest report.

The new ANA study included information from K2 Intelligence, the firm that conducted the earlier probe of the media-buying business. That investigation discovered problems in the production business, but those findings weren’t included in the publicly released report about media-buying transparency, the ANA said. K2’s records have been subpoenaed, the ANA said, confirming an earlier report by the Journal.

The ANA said the new report is “not a conclusion that the behavioral concerns laid out in the study are engaged in by every company in the ecosystem.”

However, the trade group is urging advertisers be more diligent with their agency contracts and to better understand how the ad production industry works.

“Marketers must step up their supervision and understanding of the production ecosystem,” Mr. Liodice said

Feature Image: Bob Liodice, chief executive of the Association of National Advertisers, at an industry event in New York in 2012. Photo: Charles Sykes/Invision for Advertising Week/Associated Press

By Suzanne Vranica

Write to Suzanne Vranica at suzanne.vranica@wsj.com

Sourced from The Wall Street Journal

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