ANALYSIS: Dentsu towers over its arch rivals

Dentsu's recent snaring of the entire US$90 million McDonald's Japan account is seen as the first salvo in an intensifying struggle for media-buying dominance in the world's second-largest economy.

The business was previously split among Dentsu, its strengthened arch rival Hakuhodo and Asatsu-DK, the country's third-largest agency. Until the beginning of last year, Dentsu had long been the undisputed market leader in the country with a 24 per cent share, while Hakuhodo came a distant second at 12 per cent.

Last autumn, however, the challenger closed the gap to just seven percentage points with the establishment of a new holding company that included Daiko and Yomiko, the fifth- and sixth-largest agencies respectively in Japan, to form Hakuhodo DY Holdings (HDY) and an associated media unit, Hakuhodo DY Media Partners.

More recently, sources report that both Dentsu and HDY have been courting Asatsu-DK, which holds a market share of about six per cent.

On the one hand, industry observers insist there is nothing unusual in McDonald's realignment with Dentsu.

After all, the US fastfood giant has a strong global relationship with Publicis' Leo Burnett agency. Dentsu, in turn, owns 15 per cent of Publicis and is also a partner in Beacon, the Burnett-networked agency in Japan, which will also work on the business.

But the flip side speaks volumes of Dentsu attempting to further increase its media dominance, not simply because of HDY's ambitions. This is underlined by the 2002 opening of a massive, 48-floor headquarter building in Tokyo, for the exclusive use of thousands of Dentsu staff, served by more than 50 shops and restaurants. The purpose of the glass and steel structure is to bring together the agency's many widely-dispersed offices under one roof. Asatsu also has a similar HQ building but on a smaller scale, while HDY has plans in the pipeline.

Notes Universal McCann Japan executive vice-president and executive director of media strategy Ron Pullem: "We see Dentsu's current game plan driven by the need to acquire volume in a chronically stagnant ad industry and it will seek to take business from any source."

Adds J. Walter Thompson Japan president and representative director Ambar Brahmachary: "While in the West, size is often (associated) with slowness and lack of creativity, in Japan it is a measure of strength and respectability."

This appears to be Dentsu's strategy as well as HDY's. Between them, the two agencies control about 80 per cent of primetime TV advertising airtime in the country.

The immense clout that comes with such overwhelming control ostensibly allows them to offer highly attractive - some say unbeatable - rates to clients, multinationals and locals alike, so much so that advertisers are willing to overlook client conflict issues.

The top agencies, Asatsu included, incorporate multiple independent business units which enable them to handle conflicting accounts from the same industry.

Chinese walls and human resources policies ensure that sensitive knowledge does not leak among teams working on different accounts. And since both Dentsu and HDY have more than 5,000 employees in Tokyo alone, such feats are easier than elsewhere in the world.

Since most staff are lifetime employees, shared goals, a strong culture and a sense of discipline all help to avoid conflicts that would normally fracture huge agency structures.

Consequently, for example, Dentsu is able to handle Toyota, Honda, Daihatsu, Subaru, Yamaha, Mercedes Benz and Ford, a pattern which is repeated in other industries and with other major agencies but to lesser degrees.

But if the top two appear to be heavily focused on media, signs are appearing that this model might not last for the long term. Dentsu president Tateo Mataki says his vision for the company is based on the concept that every single employee must be actively involved in promoting the company's business.

"As this new way of thinking takes root, we will strive to move one step closer during the coming year towards realising our group vision of becoming true communications partners in creating new value," he explains.

At HDY, the vision is still at the evolution stage, but group president Toshio Miyagawa says that the corporate goals include providing advertisers the optimal services to add value to their business.

But while Dentsu and HDY are forging new strategies, Asatsu has been attempting to outflank its main rivals by offering Western-style transparency to all its clients. This has become more apparent since WPP took a minority interest in the agency in 2000. Asatsu's evolution is likely to accelerate following its announcement earlier this month of an innovative partnership with JWT Japan, which it believes will allow it to bring the best of Japanese and Western approaches to its local clients both domestically and internationally.

Koichiro Naganuma, the English-speaking president of Asatsu, acknowledges the criticism leveled at many Japanese agencies by saying that his network works for clients rather than the media. Naganuma insists that Asatsu's primary role is to further its clients' business rather than maximise media commissions.

And it is this accountability and transparency that both local and international clients are seeking.

Asatsu has very few minor investments in media companies and vice versa.

In contrast, both the Asahi Shimbun and Yomiuri Shimbun newspapers owned large shareholdings in HDY when the company was formed because of their respective equity stakes in Daiko and Yomiko. Dentsu for its part has minor investments in a number of media companies, some of which also own Dentsu stock.

Since both Dentsu and Asatsu are listed companies, there is an open market for their shares, which is not the case for HDY.

Dentsu's media power stems from its ongoing role in creating concepts for many TV programmes and acquiring the sponsorship rights for them.

As the first Japanese agency to recognise the power of television, it also has so-called 'grandfather rights' to continue with media buys on shows it first developed many years ago.

Lower down the scale, many local, Japanese agencies are wholly or partly owned by media companies but none are rivals to the big three.

But transparency is becoming the key issue in Japan, made all the more urgent because its stagnant economy is forcing businesses to demand a measurable return on investment.

However, the big multinational agencies believe the chances of being crowded out of the Japanese market are unlikely to happen.

TBWA regional chairman Keith Smith says the current scene is "indicative of a huge scramble for volume" but adds that if the media domino starts to fall, there will be increasing consolidation along with a trend to offer more than just media.

"That will mean an increasing tie-up with Western agencies because we have a very strong history of producing campaigns based on strategic and creative insights. In that respect, the West is probably 20 years ahead of Japanese agencies," said Smith.

Universal's Pullem adds: "Our media buys (at McCann) are the outcome of proprietary consumer insights and a well-defined strategic media planning process. We have no client conflicts and we are accountable for our results."

JWT's Bramachary believes if change is to occur, "the industry is going to need to go for more open books and a clear rate card for media than clients currently have access to, which may not be in the interest of large agencies".

But he also believes that a duo-poly in media might not necessarily be a bad thing: "Why not use a large agency for media buying? They have the scale and resources to ge what you want and, hopefully, the integrity to charge a fair price and the skills to make the right buys."

Additional reporting by David Kilburn

DENTSU - STILL NO.1 BUT HDY IS CLOSING THE GAP
                       Dentsu         HDY             Asatsu-DK
Capital                 Y58,967m       Y10,000m        N/A
Billings (2002)         Y1,369,346m    Y961,061m       Y334,915m
No. of employees        5,621          5,608           1,873
Market share            24%            16.9%           5.9%
Major clients in Japan  Kao            Asahi Brewery   AIG
                       Matsushita     Matsushita      Kirin Brewery
                       NTT DoCoMo     Mazda           Mitsubishi Motors
                       Toyota         Nissan          Nintendo
Sources: Dentsu, HDY, Asatsu-DK