A wake-up call for Indian advertising as CCI cracks down on cartel

The CCI raids are a rap on the knuckles - but how did Indian advertising agencies end up here?

Last week, sleuths of the Competition Commission of India (CCI) “raided” all of India’s top media agencies. Charges? Cartelisation and collusion. Since then reams have been written in the media about what allegedly triggered the antitrust watchdog’s action. But no one has really delved into why this collusion ever happened (if it did), and when this sordid saga began — because this murky episode is likely to leave Indian advertising bruised and scarred for a long, long time, and understanding its genesis is important. 

 

The advertising business in India was a comfortable 15 per cent commission business for decades and decades, patterned on global precedents and practices. Since the business was fun and the money was good, graduates from top business schools happily joined the advertising industry. My own boss at Rediffusion, Diwan Arun Nanda, was the gold medallist of the first batch of IIM Ahmedabad in 1966. Mr Nanda’s partner at Rediffusion, Ajit Balakrishnan, was from one of the first few batches of IIM Calcutta.

 

Rediffusion itself has been home to advertising stalwarts Conrad Saldanha, Ambi Parameswaran, Harsha Bhogle, Partha Sinha, Apurva Purohit, Vishnu Mohan and many more IIM alumni. Other ad agencies too had their fair share of top B-school talent. The advertising folks, back in the day, were looked upon with awe and respect. They had high intellectual calibre and were known to be incandescently bright.

 

When Mike Khanna or Alyque Padamsee went visiting a client, the CEO would surely be there to welcome them and host them. And it was deemed an honour, and a privilege, for a client to be invited to dinner at Billy Kapoor’s or Ranjan Kapur’s home. They were gracious hosts, and their parties were the envy of the corporate world.

 

Trouble started in paradise in the late 1980s. Doordarshan’s flagship programmes of that era, Chitrahaar and Hindi Feature Film, had limited commercial time on offer, and clients began getting all their roster agencies to place bookings for sponsorships of the scarce inventory. So, for example, at HMM, we at HTA would try for sponsorships for Horlicks and Boost, but Ogilvy, which handled a much tinier Eno, too would place requests for sponsorships. If allotted, the bulk of the free commercial time (FCT) on the Eno sponsorship would be consumed by Horlicks. So that brought up the issue of income sharing on such media spots, as these media buying arrangements had become the norm at all large clients, including Lever. The Advertising Agencies Association of India (AAAI) was asked to step in. The AAAI mandated a commission split of 12.5 per cent for the creative agency and 2.5 per cent for the “release” agency. Mind it, the 2.5 per cent was for the “release” of the spots, not for media planning and buying.

 

But a decade later, when Philips appointed its global agency Carat as its Media AOR — Agency of Record — the 2.5 per cent became the official remuneration for media planning and buying. Other multinationals followed suit at 2.5 per cent-3 per cent. And with that, the slow death of Indian advertising began.

 

The fact is that 2.5 per cent as compensation (some agencies are known to quote even lower to win pitches) is grossly insufficient to cover the cost of talent, rents, infrastructure, IT hardware and software, and expensive data subscriptions. Talent quality was the first to be compromised. Bye-bye IIMs. Agencies then started exiting South Bombay to move offices to cheaper suburbs. There were still significant income deficits.

 

And that is where “collusion” was born — aggregation of volumes across clients to leverage them with media owners for lower rates, or a volume discount, that would not get passed on to clients. To partially officialise this, most media agencies set up “trading desks” to buy-and-sell media inventory for a media plan without disclosing individual publication or channel rates, turning media into a commodity.

 

Meanwhile, the reins on media buying slipped out of the hands of the marketing teams at clients, and their purchase/commercial departments took over the “negotiations.” No agency, including the biggies, had the guts to stand up and combat the supply chain sharpies who used pitches, auctions, and “benchmarking” to scare everyone into meek submission. Agency partners became “vendors.” The CEO tête-à-tête? Mythology!

 

But no client could prevent off-kerb volume and below-market rate deals, which were cleverly camouflaged by media agencies under different heads to avoid compliance clauses in global contracts.

 

This cannot go on. Sure, the CCI raids are a rap on the knuckles. But without any other incomes (earned or extracted), a media commission short of 7.5-8 per cent is pure hara-kiri.

 

The author is chairman of Rediffusion