FTC allows business as usual

Corporate Japan enjoys both ending the old year and starting the new year with a party - out with the old, in with the new. Consequently, when the advertising industry learned last January that Japan's Fair Trade Commission had embarked on a major investigation of business practises in the advertising industry there was hope that this would lead to major reforms. Smaller agencies, international agencies, and many advertisers had often voiced criticisms in private of the power exerted by Dentsu and Hakuhodo DY Partners , the two largest agency groups who hold a combined market share over 42% and buy 56% of all TV time. The lack of transparency of invoicing procedures, and the mountainous misty surface of the playing field were among many problems attributed to the sway held by these two giants.

According to one executive familiar with the enquiry, the FTC planned to explore is whether large agencies and advertisers used their massive buying power to disadvantage smaller companies via secretive pricing or discount arrangements. The study grew out of an earlier investigation into the relations between agencies and their sub-contractors where the FTC found that failure by large agencies to provide proper contractual agreements for work they commissioned led to abuses.

On November 8th, the FTC delivered its long awaited verdict ( http://www.jftc.go.jp/pressrelease/05.november/051108-1.pdf - Japanese only). The FTC's findings painted an unflattering portrait of the advertising industry's anticompetitive business practices, but it failed to find actual breaches of the law. While the commission recommended changes in how the Japanese ad agencies do business, it stopped short of any legal measures to force change and said it currently had no further plans for additional investigation of the industry. Consequently, the concerns of many advertisers and agencies about transparency and the billing procedures of large agency remain unaddressed.

Speaking almost to the same script, both Dentsu and Hakuhodo flatly refused to answer questions about the implications of the report. “ Since it is an investigation initiated on the business practices of Japan's advertising industry as a whole, we don't have any comments,” said a Hakuhodo spokesperson.

While Western agencies and advertisers now generally follow fee-based compensation systems, Japanese agencies still bill clients gross amounts for their media and creative services. One consequence is that, according to the Japanese Advertisers Association, many advertisers don't even know what commission they are paying their agencies, because invoices from Japanese agencies usually don't provide any supporting details.

“ It is hard to image that the FTC report is going to alter in any way how advertising is traded in Japan,” commented Michael Johns, CEO of SPI, a Tokyo marketing communications consultancy within the Aegis Group.

“ It looks like the status quo is going to prevail for some time to come, at least when it comes to the media companies and ad agencies. So advertisers will just have to just work within the system the best they can as they have been doing. However, the FTC did point out that advertisers, in general, needed to raise their consciousness with regard to ad effectiveness and costs. To that end, advertisers could apply more sophisticated methods and techniques to measure the ROI of their ad investments. Also, the FTC hinted that the Web ad market is currently more 'fair' than the mass media ad market. So Web advertising might be a good opportunity for some advertisers to compete with even much larger competitors on a more level playing field,” added Johns.

Of course there will be New Year celebrations at Dentsu and Hakuhodo DY Holdings, but elsewhere the festivities will be more muted.

by David Kilburn

Published in the Internationalist, December 2005

You can also click here for the FTC Report (only in Japanese) as a PDF