Case of the Sun King casts shadow over advertising

By JON REES AND ALLAN HALL IN BERLIN Updated: 06:33 EST, 3 July 2011

When Aleksander Ruzicka, president of the German arm of media-buying agency Aegis, was jailed for 11 years for taking kickbacks, the advertising industry condemned him.

Ruzicka was known in the German media industry as the Sun King. He was fond of high living and he enjoyed meals in Michelin-starred restaurants.

Last year he was found guilty of siphoning free media airtime destined for clients and selling it for his own private gain.

Guilty: Aleksander Ruzicka siphoned free media airtime and sold it for private gain

He claimed that such kickbacks from media owners were standard practice, but the court disagreed and Ruzicka now spends his days sharing a wing of a prison near Frankfurt with rapists and murderers.

Britain's media regulator, Ofcom, is launching an investigation into competition issues in the TV advertising market in a move that is expected to encompass wider practices.

Ofcom's move was not prompted by the Ruzicka case and there is no suggestion that any sly money is going into the pockets of advertising executives in Britain.

But it follows on from a series of regulatory and parliamentary investigations that have exposed some concerns that advertisers are not getting everything for which they have paid.

Submissions must be made to Ofcom by July 22 and the regulator could refer the whole issue to the Competition Commission.

'It's about television airtime sales, but Ofcom has also identified related broader issues about media agencies' practices,' said Bob Wootton, director of media and advertising at the Incorporated Society of British Advertisers.

John Billett, a veteran media consultant who has worked for all sides of the business, is blunter. 'The advertising sales market is massively open to abuse,' he said.

'We have seen a growth in backhanders, additional discounts, surcharges and rebates, which are paid by media owners to media agencies. They are untraceable – not auditable – and some advertisers get poor value for money as a result of this distortion.'

The media agencies are owned by a tiny number of players, which have developed an extraordinary grip on the advertising market in Britain.

Just six main companies now effectively control access to all television, newspapers, posters and online business – Aegis and WPP from Britain; France's Havas and Publicis; and US firms Omnicom and Interpublic.

They buy advertising space on TV, in the newspapers, online and on billboards for clients and negotiate deals on their behalf and skim a little off the top for themselves.

It is possible this powerful club could get even more elite. Aegis is selling its Synovate market research arm for a probable £500 million. It is in exclusive negotiations with France's Ipsos. And after that is expected to be sold itself, probably to Havas, which is owned by Aegis's biggest shareholder, Vincent Bollore, who already has a 29 per cent stake in the firm.

Such a deal would make the management of Aegis very wealthy indeed. Chief executive Jerry Buhlmann last year received £1.05 million in remuneration while his own considerable shareholding in the group could net him millions in the event of a deal.

He owns 265,890 shares in Aegis already and will be entitled to a further 5.2 million if certain performance targets are met.

It is not clear what would happen to those share options if there was a change of control at the company, but on his present shareholding he would walk away a wealthy man and if all his share options were included his payout could reach near to £10 million. Aegis shares closed last week at 161.2p.

Advertisers rarely deal direct with media owners any more. Instead, agencies like Aegis, which along with others contacted by Financial Mail declined to comment, have become the gateway to advertisers for media owners and as such wield immense power.

In theory, it is a complex market in which everybody tries to beat down everyone else in price and various parties might at different times hold the whip hand.

'I think it stinks,' said Professor Patrick Barwise of the London Business School, who advised the House of Lords in its own recent report into airtime sales.

'There is a little cosy club of buyers and sellers and if you replace it with a truly transparent system, who will pay for their skiing holidays and house extensions?'

Barwise has called for the system to be replaced by an online auction, something the Lords suggested. A leading advertiser said: 'There is little doubt that many media owners offer media agencies incentives to increase the business they do with them.

'It is a case of, ''If you spend with us, we will kick you something back''.'

It is often weaker media owners that indulge in this practice to shore up their own market position, and the weakness of the advertising market overall has probably led to their increasing frequency.

So the days of backhanders and backscratching may be coming to an end for the advertising sales industry.

That would make it very much harder to generate the profits and the windfalls that Buhlmann and his colleagues are looking forward to.