Live Issue... Ad fire-sale threatens Japan agencies

With the Japanese fiscal year fast approaching its end, the market’s major domestic agencies are scrambling to offload unsold TV and print inventory at rates reportedly discounted by more than 40 per cent on last year.

In some instances, agencies are understood to be offering free space as an alternative in an effort to avoid cutting rates, as well as selling bundled media packages.

The situation - the likes of which have never previously been witnessed in Japan - follows reports of a fall in domestic advertising spend of around 15 per cent, and revenue declines of 10 and 18 per cent within the TV and newspaper industries, respectively. The downturn has seen several major TV players enter the red for the first time. 

Takeshi Takeda, chief executive of DDB Japan, said the situation particularly favoured new clients, while provoking some resentment from existing clients that continue to pay a higher, contracted rate.

Yet there is no let-up in sight. “The cost keeps getting lower,” says a source at an international media agency, adding that while rates may rise with the start of the new fiscal year in April, the willingness of big advertisers to spend would be doubtful.

Drastic cost-cutting by firms such as Toyota, Sony and Panasonic are felt hardest by Japan’s three principal domestic media buying entities - Dentsu, Hakuhodo and Asatsu-DK. Largely following a commission-based model, a major revenue stream comes from bulk discounts for consolidated buying running at between three and five per cent, leading to commission earnings of up to 20 per cent on full-service accounts.

“Panic has set in, and people are just trying to keep spend in the market,” says Jonny Shaw, chief executive of Naked Communications in Tokyo. He argues that agencies’ concern runs deeper than short-term finances, and that the discounts are primarily an effort to maintain adherence to the recognised operating model. “It’s in the agencies’ interests to discount in the short term as the most important thing for them is to protect the system.” 

But Shaw suggests that while times may currently be difficult for international players and smaller Japanese firms, their future may be more attractive. “Perhaps the real fear is that if clients evaporate from mainstream marketing, they may not come back. The market here has been false for so many years. But now we’ll see more experimentation - a serious change in the way people do marketing, not just in the agency model.”

With no sign of a quick upturn in the Japanese economy, a prolonged crisis could force real change, according to Blair Currie, CEO Japan and Korea, Aegis Media, who argues that “things will never be the same.” Those sentiments are echoed by Kevin Ramsey, president and chief executive of McCann Worldgroup Asia-Pacific. “I think we’re going to see a radical change in model from Japanese agencies. We’ll see continued consolidation among international agencies, but the market’s going to come out of this year fundamentally re-shaped.”

Nonetheless, nobody expects the commission-based model to disappear overnight. Sources in the market argue that innovation will be tough at first for more traditional agencies, where clients have become accustomed to new initiatives as a value-added service and would not be prepared to pay, particularly amidst the downturn.

And Western-owned agencies can’t assume they can step into the breach as domestic players suffer. As Starcom’s recent decision to scale back in Japan shows, some global players are finding the market tough too. Ramsey points to continued consolidation among international agencies hit by cuts in fee levels from multinational clients. Attracting local business will be a persistent challenge for non-Japanese agencies.

That said, there is no doubt that agencies outside the top three smell an opportunity. “There will be a big consolidation of media into a simpler, less monopolistically controlled pie, and the emergence of more creative marketing,” says Shaw. “We’re hoping this will make way for people who want to experiment and collaborate, rather than protect.”