More than one billion dollars was spent on advertising in the US last year. Yet advertising is less regularly than some other media businesses, with trade bodies rather than government agencies, doing much of the oversight. But now the US Justice Department is investigating the industry, specifically possible bid rigging in
video advertising production. WPP, the world's largest advertising company, is the fourth of the Big six ad agency holding companies to admit its subsidiaries have been subpoenaed by the Justice Department. The Antitrust Division of the Justice Department is investigating whether ad agencies manipulated bids for making TV commercials in order
to steer business to their own units. According to people briefed on the matter, our guests are Jennifer Ree, senior litigation analyst for Bloomberg Intelligence, and Daniel Crane, professor at the University of Michigan Law School. Jan there have been years of tensions between big advertisers and their ad agencies. Was this investigation by Justice propelled in any way by
a June study commissioned by the Association of National Advertisers. Well, June, thanks for having me first, and before I answer that, I do need to disclose that My husband works for j W JW T, which is an ad agency that falls under w PP, the agency you were just talking about, and he does hold stock options. So before I get in, I just have to disclose that. UM. Now, what's been reported, at least we think, is that a report by this UM, this company K two, that was commissioned by the Association
of National Advertisers. This is a trade association that represents the brand companies or the advertisers. UM suggested that there was a lot of non transparent activity going on in these ad agencies that wasn't really working out to the benefit of the advertisers, but working out to the benefit
of the agencies. And it seems that they mostly were focusing on media companies media suppliers, but and not so much production, which is what the d OJ is looking at here, but that they did have some finds that might not have fallen into their final report that suggested there may be this kind of bid rigging activity going on in which the ad agencies agree with some of these outside production companies not to compete essentially UM and try to get the business in house because they own
some of their own production facilities in house. They want to give the advertisers several bids. Looks like they're competing. You know, here are three bids. We've come in lower than these other two bids, which at the end of the day all of them were artificially high. At least, this is what you know, looks like what they're investigating. Um, and it gives legitimacy to the ad agency's bid because it comes in lower than the others. But they've all
agreed to put in these artificially high bids. Daniel Crane, I'll make a confession, I didn't know all that much about the advertising business before this morning. Some if I understand this correctly, is the idea that there are separate markets for the advertising contracts UH in general and for the video productions, so that if an ad agency gets a contract, it can't necessarily use its own production facilities.
Is that the idea right? So, the idea is that there is a separate market for the production of advertisements, and that can be done by the vertically integrated shop of an ad agency or could be done outside by an independent video production company. As I understand it from media reports, the investigation is centering on allegations that the ad agencies, which already we're dealing with clients to sell advertising.
Uh In Media had some sort of a kickback or collusive agreement with independent video production companies that the video production companies would submit bogus bids to the client and that the ad agency would therefore be able to come in and win the business for its own in house video production shop, but doing so at inflated prices. Jen, we know that four of the big six ad agencies have been subpoenaed. More might have been what stage are we at here, Well, you know, this is very early on.
These things take time. Um. This subpoenas really mean that they're they're collecting documents, they're collecting evidence at the d J that is is collecting evidence and information now and these things can take several years. You know. By way of example, we know that there have been some recent informations issued by the DJ in the generic drug world that's like an indictment um um that two people have
been involved in price fixing for generic drugs. And this is what shook out of subpoenas that were issued back in two thousand fourteen, and we're just hearing about some of the results of that investigation now, So that and and there's also something similar happening with auto parts that
took many, many years to conclude. So this is at the beginning, and it's going to be a while before we understand what's happening here Dan Beyond what we've discussed, are there other things you you might think that the Justice Department might be looking into? Or is it primarily that issue of these these uh potentially uh uh I guess fake are are are inflated uh bids that are being genda. So my understanding is that would be the
focus of this particular investigation. Obviously, as as the lead comment on the show made clear, there's been lots of of of concern in the advertising business about, for example, kickbacks from from media companies or to to ad agencies that were not passed on to consumers, or to two companies buying ads. That would probably will not raise an
antitrust issue. It also wouldn't necessarily raise an anti trust issue for a vertically integrated ad agency simply to steer business to its own video production unit, as long as they don't collude with competitors. So, as I understand this investigation, it's really centered on allegations of horizontal collusion between competitors for video production, and that would be a serious antitrust violation if that were shown to be true. Jen explain
the difference between vertical and horizontal. Oh, sure, So in the horizontal you're basically competing at the same level of distribution. The same service or same product is provided, and you're competing to provide that service or product. Vertical would be at a different level of the chain of distribution. You might be an input maker, um, and you don't compete, let's say, with the manufacturer of the final product that
uses that input. So essentially here the ad agencies are vertically integrated where they come up with the ad ideas, but then they might have their in house production, which is, you know, another level of in that chain of the final product and and um. So it's in the sense they can steer you know, it wouldn't be an antetos violation. Just just try to steer work internally. You're just capturing internal work. This is one of the benefits of being
vertically integrated. But where they have that division, that production division that then competes and they're also hired, might be hiring some of these outside production companies for some jobs. That's where they're also horizontally competing with these production companies, and that's where the conspiracy can't take place. We have just about thirty seconds left. Is this a good area
dan for there to be more complying, more regulation. It's an advertising is an area where it's sort of looking
at itself through its own groups. Right. So one thing we don't just know right now, though, it's what's going to happen when the Trump administration comes in on January twenty and so you ask is it a good or bad idea just in terms of predicting where things are going to go in the next four years UM In an ordinary year of transition from a democratic to Republican administration, you would expect it to be a high level of continuity on issues like collusion. This is anything but an
ordinar year, though. And one thing we just don't know yet is what antitrust enforcement will look like under the Trump administration. The business community is guessing about President elect Trump's anti trust policy position because it's an area he has said very little about. Trump has accused several companies of violating antitrust laws and vowed to regulate their conduct. For example, the A T and T Time Warner merger
as an example of the power structure of fire. A T and T is buying Time Warner and thus CNN a deal we will not approve in my administration because it's too much concentration of power in the hands of too few. Yet, the people on his transition team advising him on anti trust have records of conservatism. We've been talking with Jennifer Reese and your litigation analyst for Bloomberg Intelligence, and Daniel Crane, professor at the University of Michigan Law School.
Jen what's your analysis of what the Trump administration policy and anti trust might be? Well, I really don't have one, because, as you said it, everybody's guessing about this. I mean, with the comments that he made on the campaign trail about A T and T and also there were some about Comcast, an, nbc U, and Amazon. You know, it's
unclear are these part of his populist message? Is this is this what he intends the direction he tends to go on anti trust or you know, or is this just his anger at the media, you know, and his isn't a desire to lash to the media or or or scare the media. Um, it's really unclear. And and the people he has advin Now we don't know who will be appointing at the Department of Justice or Federal Trade Commission, but the people advising him on these things
are two gentlemen. You know, both have records of conservatism. One was a former FTC commissioner who all of his votes were quite conservative. Another one and worked for the Department of Justice under George Bush, you know. And I guess i'd say that if you look at their records and things they've said publicly, that they're more typical. They take a more typical Republican approach, which is generally to let businesses regulate themselves, you know, a little bit more
hands off. I think in some areas that there's really been a bipartisan consensus that we need to go after the really egregious antitrust activity, like what we were just talking about, bid rigging and price fixing. But sometimes these mergers, when they're evaluated, you know, they're really difficult. It's a very difficult decision. They could be borderline. Sometimes they might have the potential to put you know, harmon market to some extent, but they also might have some very great
synergies and pro competitive benefits. And I think when you have those sort of on the borderline, there those deals that are difficult calls. That's where you might see Democrats and Republicans coming out differently. And that's where we have a record for, for instance, Josh Right, who's advising on the FTC, coming out differently than some of the Democratic commissioners. What's your take on that, Dan, Are we gonna see a typical Republican administration when it comes to antitrust law? Well?
I think Jennifer is right that to the extent that we measure our predictions by the people directly involved in the transitional antitrust it'll look like a fairly conservative antitrust regime, both at the Federal Trade Commission and the Justice Department. The one thing we don't know, of course, is to what extent Donald Trump himself would be personally involved in making decisions about antitrust enforcement at that the case specific level.
I mean for the last the thirty or four years, that's really been a big no. Now, presidents have stayed very much removed from the the the enforcement decisions as to particular cases to be brought or not to be brought in the that's really a decision made professionally in
the Justice Department, in the Federal Trade Commission. Um. But with you know, with Donald Trump, you just don't know what sort of a managerial style he'll have, whether he would become much more active in saying here are particular cases we should bring or not bring, and at least
as to the Justice Department. Uh, you know, if he has a be in his bonnet about a T and T time warner and really wants to communicate to the Justice Department that they should put up a fight, uh, he might make with President and and and actually give that kind of direction. So I think part of the just the guessing game here we really don't know is not only we don't know who will be in the leadership at a d O J and FTC um my my working guests, as those will be fairly typical Republicans.
But the real question is to what extent will will will Donald Trump and Jeff Sessions actually take more of a personal managerial role with respect to some of these matters, And if so, it might might surprise us. All We certainly have been surprised by a lot recently. Thank you both for being on Bloomberg Law. That's Daniel Crane, Professor at the University of Michigan Law School, and Jennifer Ree,
Senior litigation analyst for Bloomberg Intelligence. And for more of Jennifer's antitrust analysis, you can go to be I go on the Bloomberg terminal.