Supervision of Excessive Commissions in the Advertising Market

Motion for the Agenda 2, January 2013

“Excessive commissions” refers to the commissions paid to large advertising firms by the suppliers in the advertising market (that is, by the advertisers) and by the companies that provide the media (that is, newspapers and the commercial television and radio stations).

These excessive commissions increase the profits of advertising agencies at the expense of the other players in an anti-competitive  fashion, in that they are paid to these agencies because of the dominance of the media-buying companies—the companies that purchase advertising space or time from the media outlets and are controlled by the agencies. The advertisers, for their part, are unaware of the size of this payment and thus are not able to demand reimbursement.

The phenomenon of excessive commissions raises the issue of information failure in the advertising market, which stems from vertical integration and horizontal concentration. Vertical integration means that the advertising agencies control the media-buying companies; horizontal concentration means that the media-buyers have entered into arrangements that centralize the market.

Excessive commissions also exert a major influence on the regulation of the media market. High fees decrease the ability of the media agencies that pay them to invest their capital in other areas (for example, television concessionaires’ investment in original productions) and certainly influence their economic stability.

The issue of the professional regulation of excessive commissions involves several considerations, with regard both to competition and to the media (in the broad sense of the term). This sensitive issue is situated in the range between the major advertisers, the large advertising agencies, and the relevant regulatory agencies.

Our proposal includes two stages. In the first stage, we recommend that the relevant government official take a series of immediate steps and apply modes of action that have not been pursued in the past: more intensive use of the authority to require consultations about exemptions and mergers; a demand for broader justification of commercial actions; and the use of authority to issue an advance opinion so as to conduct a proactive study of the competitiveness in the market. We recommend that these steps be taken in collaboration and coordination—and not only consultation—with other regulators, so as to formulate a more comprehensive and transparent policy than exists at present.

In the second stage, and should it turn out that the steps taken in the first stage are not sufficiently effective, in light of the market’s desperate state, legislation should be enacted to decrease centralization in the advertising and media-buying market and increase transparency, as per the outline below:

  1. It is essential to formalize the cooperation among regulators in the field of excessive commissions. We propose a statutory definition of collaboration among all regulatory agencies, rather than of the size of commissions or a ceiling on the volume of media purchases, which are too specific to be regulated by inflexible legislation.
  2. A government official must be granted explicit authority to examine competitiveness in the advertising industry, as part of the Competitiveness Division. This division, established in 2011, is authorized to continuously monitor competition in various markets and is the most appropriate agency to wield the authority to be granted under law.
  3. A requirement for written documentation and transparency needs to be imposed on business transactions in the media-buying market (in the triangle of advertisers, ad agencies, and media companies). This sort of oversight is critical to increase the information available to those contracting for these services.

We do not believe that the proposal should include price controls or limit the amount of media space that can be purchased. Even granting the Communications Minister the authority to set a maximum commission rate that media outlets can pay media agencies could have undesirable ramifications—such as pressures applied to the minister, an inability to respond fast enough to a changing market, and inefficiency. If the Minister of Communications is granted authority to intervene in the market or to set the commission rate, his decisions should require the consent of the Antitrust Commissioner. We do not believe it appropriate for this regulation to be implemented by specific legislation. It should be implemented by relevant professionals with statutory authority to do so.
In an era of severe crises in commercial television and the print media, it is essential to regulate excessive commissions in the advertising market without delay.

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