Are the ad holding companies becoming vampire squids in their search for production money?

Back in 2009 Rolling Stone’s Matt Taibbi called investment bank Goldman Sachs “a great vampire squid…relentlessly jamming its blood funnel into anything that smells like money.”

Goldman’s reputation has never really recovered. Could the same be said today of the advertising holding companies?

The US Department of Justice is investigating bid-rigging by the big holding companies, soliciting quote from independent production and post-production companies that they know they can undercut to steer the work into their own, rapidly-growing facilities.

It’s almost certain that this happens in the UK too although less certain that it’s actually illegal here (US anti-trust laws are written in stone, the UK’s aren’t). Steve Davies, CEO of the Advertising Producers Association, has demanded that stricter guidelines for such auctions, saying that agencies shouldn’t be involved at all in the auctions if they’re pitching too. Fair enough, you shouldn’t be able to mark your own homework.

IPA director-general Paul Bainsfair, a former agency man, has said he’s unaware of such practices but wouldn’t condone them. He says: “agencies are entitled to provide in-house production work and should be free to do so. Any agency considering pitching for a piece of production work should make its intentions known to any third party it has invited to pitch as well.”

Which is probably as far as he can go, given that the likes of WPP and Omnicom are the biggest contributors to the IPA’s coffers.

Once upon a time agencies were happy to use external production companies, marking up their invoices happily in the process. The work was (usually) good and everyone (bar some clients) was happy enough. But then the cost consultants took over and the margins began to disappear.

The upshot was that the big agencies sought to bring more work in-house. First this was the unglamorous heavy lifting carried out by the likes of independents like Tag, more likely to be print than TV.

Then digital came along and, all of a sudden, some clients were commissioning yards of video. This hit TV commercial production budgets and some agencies thought; why we don’t we do this ourselves? But agency margins (and, by extension, holding company margins) were still under pressure so they thought: why don’t we do all of it, including the fancy big budget stuff?

The consequence – and this is where our friend the giant squid comes in – is that a whole industry (reckoned to be worth $5bn in the US but very probably more) is under threat. This matters in a wider context too. For decades production companies subsidised their work on small budget films and other creative projects by commercials work. If commercials work goes, so will they and the independent productions that depend on them.

Now the ad holding companies, as the IPA’s Bainsfair says, are perfectly entitled to pursue what work they can. WPP’s GroupM Entertainment is reckoned to be the biggest co-funder of TV programmes in the UK, usually paid in TV airtime.

But it’s a big structural issue for the creative industries as a whole.

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.