FirmDecisions is the largest independent global marketing compliance specialist. We provide financial transparency in the client-agency relationship to the world’s biggest advertisers.
Tony Newcomb, Partner - Managing Director Latin America
The complaint one hears most commonly about Brazil from both Brazilians and outsiders regards the country‘s bureaucracy and burdensome laws and regulations. At first glance, the statutory burdens appear unnecessary at best, and wasteful at worse. But further review reveals the law‘s apparent intended purposes, and further scrutiny identifies their unintended consequences. The Brazilian marketing and media industries provide a good example of this pattern. The laws regulating the financial relationship between advertiser, advertising agency and media provider date to 1965 (Law n. 4.680/65).
First, some background on Law n. 4.680/65. The regulations specify:
- The services the agency must provide. For example, the agency that produces the advertisement for the client must buy the media. The requirement essentially bans media buying companies from operating in the market.
- That agency remuneration must range from 15% to 20% on gross media costs. · The discounts the media provider must grant the advertising agency. The media provider is to offer a 20% trade discount to the agency.
- That the additional financial incentives received by the agency from the media provider are not to be shared with the agency‘s clients. Nor are these incentives to be disclosed to the clients. This law makes it legal for the agency to maintain a conflict of interest between its client and its media provider. The law also makes it illegal for the agency to be transparent with its client.
The law effectively cuts off Adam Smith‘s invisible hand. (Well, it was invisible.) Nowhere else in the world is the financial relationship between advertiser, advertising agency and media provider so regulated. In all other markets, free market competitive forces pressure the agency‘s pricing to the advertiser.
The law‘s intended purposes were to establish a:
- Robust media environment, in particular the fledgling TV market.
- Vibrant advertising community to support media
- Minimize pricing competition between advertising agencies
- Limited transparency between advertiser and advertising agency
The unintended consequences (both good and bad) were:
- Media Concentration
- World class advertising agencies
- Lack of advertising innovation
- Minimal advertising saturation
The focus of this article will be on telenovelas and media concentration. Future articles will discuss the law‘s impact on the Brazilian advertising community.
One intention of the law was to establish a robust and diverse media environment. Up until the 1960‘s, print media, in particular newspapers, were the primary medium in Brazil. Broadcast TV was a fledgling media. The law, via the financial incentives offered by the TV stations to advertising agencies, made advertising on TV a viable alternative to newspapers. Additionally, the influx of advertiser spending provided funding for the long form telenovela. Prior to the mid-1960, telenovelas lasted no more than 15 minutes per day as compared to today‘s 50 minute version. One can thank the Brazilian government for one of Brazil‘s favorite pastimes and addictions, the nightly viewing of the telenovela. The form is so successful that Rede Globo airs daily telenovelas during the 6PM, 7PM, and 9PM time slots. Reality makes an appearance during the 8PM national news broadcast.
Broadcast TV is the dominant medium in Brazil. Its revenues exceed all other combined media in the market. A comparison of advertising spend by media to the United States is provided below.
The dominant player in broadcast TV is Rede Globo. Thanks in large part to the success of its telenovelas; Rede Globo is the largest in network the Western Hemisphere and the fourth largest in the world. Rede Globo started TV broadcasts on April 25, 1965, the same year as the law in question. According to the international marketing research company, Millward Brown, Rede Globo receives nearly 50% of all advertising investments in Brazil. Almanaque Ibope estimated the 2008 advertising investment totaled R$58billion, of which about 50% went to Rede Globo.
While the concentration of media power with Rede Globo has resulted in the production of some outstanding telenovelas and other programs; news coverage and programming diversity is severely limited when one organization has such dominance.
The intent of the 1965 law was probably not to create one dominant media organization, but rather to establish broadcast TV as a viable medium. So the next time you are waiting in line at Guarulhos or Galeão International Airports clearing immigration control at Police Federal or having a document authenticated at a cartório, think about what a great sub-plot the cutting off of Adam Smith‘s invisible handwould make for a telenovela.
Tony Newcomb is the São Paulo based partner for FirmDecisions, a firm that specializes in performing advertising agency contract compliance audits for email@example.com
Published on www.gringoes.com October 2009