Arnon Milchan: Advertising Agencies Are Operating a Cartel

The owners of Channel 10 are fed up. And the Antitrust Authority report that revealed the reason that the advertising agencies Shalmor Avnon Amichay, Young & Rubicam and Reuveni Pridan have been blocked from continuing to operate as partners in the media company United, has fallen into their hands like ripe fruit.

Following the report, Joseph Maiman and Arnon Milchan, shareholders of Channel 10, told TheMarker that they have no intention of cooperating with the prevailing rules governing advertising fees in Israel. Channel 10, they said, will pay no more than 20% in ad agency fees.

"There is a new economic situation all over the world," Milchan said. "The 30% fee rate currently paid to advertisers is now hurting television channels. And at who's expense? We will go no higher than 20%. It's time to tell advertisers: take it or leave it."

Milchan announced that the new fees will be effective January 1, 2009.

"And this is still among the highest rates in the world" he said. "It's a cartel, from top to bottom. All of the advertisers say 'if you can't give me 30% I won't advertise with you'. We will end up in a position where we can't meet programming standards because all of the money has gone to advertisers. No television channel will survive, including Channel 2. Advertising agencies are paid 10%-15% all over the world. I don't understand why we haven't woken up yet."

Joseph Maiman echoed his sentiments.

"Our investment in the channel is close to NIS 1.4 billion," he said. "This situation is simply intolerable. Television stations in Israel would be more balanced if advertisers earned rates more in keeping with standards prevailing all over the world, and we could make television. We are being squeezed. It's a cartel. We speak on behalf of Ron Lauder as well when we say we won't pay."

Maiman and Milchan have a bellyful of bile about advertisers in Israel. They are sick and tired of "burning money" without seeing any results, they say. The billionaire businessmen hesitate not at all to blame their lack of success on the fees that the station is being forced to pay advertising agencies, and the Antitrust Authority report has provided them a hurricane force tailwind for their complaints.

Maiman says that the shareholders are pouring NIS 12 million into the channel every month.

"The numbers are simple," he said."Annual costs for advertising have never reached the levels forecasted before Channel 10 was introduced. It was always less than 30%. When the channel was launched, they were talking about advertising costs reaching $500 million after about four years. In actuality, it reaches about $350 million annually, and spending on advertising is expected to fall."

If Maiman's figures can be trusted, about $100 million annually go to advertising agencies in the form of fees. Milchan and Maiman say that all of the channels would be in better shape if the amount was substantially smaller.

"Arnon, Ron and I have decided that we are putting an end to this madness," Maiman declared. "The reality is that more than 50% of our revenues are spent before we even begin working. When we add up the franchise fee and costs due according to the authority, and then another 30% that go to advertising agencies, the total leaves us with expenses that make it impossible to operate a business." Maiman said. "Advertising agencies and media companies need to get connected with the real world, and understand that budgets need to be tightened. We have decided on the price that we are willing to pay. Take it or leave it. Advertisers bear the responsibility for the results, and the people who will be left jobless if the channel shuts down."

Maiman suspects that even Channel 2, which is in a better situation than Channel 10, is starting to fold under the burden of the fees.

"I think that they are starting to hurt as well" he said. "And when someone is hurting, he takes something for the pain. We estimate that they feel the same as we do about fighting the cartel of advertisers."

Advertisers serve a function, Maiman said. The problem is that they have crossed the line.

"Ron Lauder told me that no television station in the world has ever heard of such fees," he added.