It’s no secret that Japan’s advertising market is one of the world’s largest. Indeed, the world’s biggest advertising firm is a Japanese one.
In 2006, the top 10 Japanese advertising agencies billed clients ¥6 trillion (37 billion euro), according to Dentsu, Japan’s leading agency. Although the overall figure has been stagnant for the past few years, it still constitutes a more-than-significant sum.
What remains a secret for many, though, is exactly how their market operates.
A lot of European and other overseas companies would love to replace the lack of transparency in the Japanese ad industry with better insights into its inner workings.
One key difference between Japan’s market and others is the dominating influence of a handful of large players, who have for decades, more or less, controlled the industry by using practices and conventions that would be unacceptable elsewhere. One key example is billing practices.
Japan’s ad agencies have no legal obligation to itemize fees they charge advertisers, for example, the cost of placing an ad on the inside cover of a glossy monthly magazine or airing a 30-second TV commercial. Moreover, the agencies buy these spaces and times long in advance and sell them off as they wish, without disclosing how much it actually cost them in the first place.
The agencies then present their clients with a bill that states a single sum — and then expect no questions to be asked.
In European countries, such a practice is either discouraged or flatly outlawed. This is the case in France, where agencies are bound by law to declare all such charges or face fines of up to 300,000 euro (¥48 million). In addition, it is prohibited for agencies to purchase advertising anywhere without an express order to do so from a client.
Another aspect where agencies in Japan enjoy tremendous advantages comes with the widespread acceptance that they manage competitive accounts at the same time. Hence you can see a large agency simultaneously handling the accounts of various car manufacturers without anyone thinking it’s strange. The issue of conflicts of interests is not raised.
As a result, certain agencies have been able to grow massively large, creating a monopolistic market where advertisers have no choice but to follow.
Some agencies have become so predominant that publishers have been known to violate contracts with advertisers rather than risk falling out of favor with their agency’s partners — or perhaps, as some might say — “patrons.”
Agencies in Japan are vertical players, which further strengthens their control. The auditing and monitoring firms — whether public or private — are either directly controlled or indirectly influenced by the agencies. Since media buying practices can only operate where there is an understanding of how media is consumed, it is quite fruitful for the agencies to have this option at their disposal.
Regardless of who actually runs the circulation-auditing firms, it is a fact that auditing itself is not enforced in Japan, nor do advertisers seem to insist on it. Only 5 percent of all magazines in Japan are audited, compared with 21 percent in Britain. It is a similar situation with newspapers: Japan audits 57 percent of its titles, while Britain audits more than 80 percent.
The comparative lack of reliable circulation figures again gives the upper hand to the ad agencies.
Despite these drawbacks, foreign advertisers have been making larger and larger expenditures in Japan. No doubt this reflects their overall interest in the market rather than the openness of its advertising industry. The share of foreign expenditures in magazine advertising, for example, rose from 19 percent in 2001 to over 21 percent in 2005, according to the Japan Magazine Advertising Association.
In other words, more than 20 percent of these marketing expenses are paid by foreign firms.
Of course, it isn’t just the foreign ad firms that are suffering from the closed-door practices of Japanese ad agencies, but they are the ones most vocal in their opposition to this business model. The Fair Trade Commission has looked into the subject, but apart from noting some unfairness in the system, it has not yet suggested any legislative solutions. The status quo prevails.
In light of this situation, and given the increasing clout of foreign advertisers, calls for change are growing and becoming increasingly organized. Although a true consensus among foreign advertisers remains to be seen, various industrial groupings of foreign companies are studying the issue.
Japanese ad agencies could look at such critics as threats to their economic hegemony, but the truth is that a move to a more open playing field will benefit them as well. For despite the local preponderance, Japanese agencies have not done massive business overseas, where markets are more competitive.
If they can learn to fly without the help of shadowy contracts and compliant media outlets, these agencies can seek out and win clients anywhere they choose. And that’s no secret.
Jochen Legewie is president of German communications consultancy CNC Japan K.K.