The New Year festivities of Japan's advertising industry came to an abrupt end this January when executives learned that Japan's Fair Trade Commission intended to conduct a far-reaching inquiry into their business practices.
The investigation, which will also probe advertisers and media companies, was sparked by growing con-cerns that time-honoured ways of doing business might be incompatible with today's laws and international trade agreements, a suspicion that many advertising agency people believe is well-founded.
In a letter to chief executives dated 30 January, Akihito Watanabe, the manager of the Trade Practices Department in the Economics Affairs Bureau at the FTC, wrote: "In other investigations, we have found that in the advertising transactions between the advertiser, ad agency and media (agency), there was room for improvement in assuring fair trade, such as the status of documenting contracts."
He continued: "We have decided to survey mainly the trade involving advertisers and media companies to identify the actual conditions of the market structure and the trade practices of the advertising industry, with regard to the anti-trust law and competition policy."
The problem of the lack of written agreements for transactions has raised its head before. In 1989, the FTC slapped agencies' wrists for the way they did business with film production companies. Among other faults, agencies were deemed guilty of demanding changes to commercials and then refusing to pay for the extra work involved.
"These problems have been complicated by the agency habit of commissioning work and agreeing prices solely on the basis of oral instructions. As projects develop, it becomes less and less clear what has been agreed and what price will be paid," Hidekatsu Hirabayashi, at the time a divisional director of the FTC, said.
On that occasion, agencies escaped sanctions with a mea culpa. Seemingly, traditional business practices are robust enough to survive at least a mild rebuke from the FTC.
The new survey, which will use detailed questionnaires and interviews, will ask 300 companies, including advertisers, media companies and agencies, to provide evidence. A published report is expected around August this year. FTC officials declined to discuss the project.
According to an executive familiar with the inquiry, one topic high on the FTC's agenda is whether the big players - both agencies and advertisers - use their buying power unfairly. Big companies, the insider points out, have been squeezing smaller shops, collaborating in secretive pricing or discount arrangements that disadvantage the smaller companies in their dealings with media owners.
The new study stems partly from an investigation last year into the relations between agencies and their sub-contractors, such as TV commercial production companies. The FTC found that failure by Japanese agencies to provide proper written contracts for work they commissioned led to abuse of the system, much as it had done in 1989.
Pressure from advertisers demanding greater transparency in their dealings with agencies was also a contributing factor. In 2003, the Japan Association of Advertisers published a report, Remuneration System for Advertising Companies Aiming for Fair Transactions, which called for greater openness.
"Advertisers need to know how much compensation is being paid (to the agency), for what kind of service the compensation is being paid and whether the compensation is an appropriate amount for the service," Masanori Hieda, the general manager of Nestle Japan Group's Media Control Department, says.
Hieda, an executive director of the JAA, was a co-author of the report.
A further report, published last year, reiterated this same point.
"The reports opened the discussion between advertisers and agencies about compensation. Up to that point, it was almost taboo to discuss this in the traditional Japanese agency/client relationship," Michael Johns, the chief executive of SPI, a Tokyo marketing communications consultancy within the Aegis group, says.
"There has also been an increase in fee-based remuneration and a reduction in the number of agencies an advertiser uses," he continues.
"JAA members typically used between eight and ten agencies, but now they are moving towards using a single central media buying agency for media. When you consider that the practice of invoicing and paying only gross amounts meant that more than half of advertisers had no idea what they were paying their agencies in 2003, this is a seismic shift for Japan."
Many agencies outside the big three of Dentsu, Hakuhodo DY and Asatsu-DK are now studying fee-based models, as they watch their traditional media commissions disappear. For many, this means a reappraisal of what services they can sell to clients, often for the first time in decades.
Some smaller shops are now trying to focus their services, either geographically or into specialisms such as real estate, financial services and healthcare.
For the many smaller Japanese agencies that are losing business through consolidation, there is a natural tendency to blame the aggression of Dentsu and Hakuhodo for the threat to their survival. However, these market forces have already re-shaped the industry in the West. Japanese agencies have long been protected by a prevailing industrial model that has favoured "fair shares for all" over lean efficiency.
Hopes that Dentsu and Haku-hodo will be reprimanded for taking business from small agencies are likely to be frustrated. While the big agencies are often castigated for their lack of transparency, the problem pervades the entire industry.
Only Western multinational agencies and WPP's Japanese partner, Asatsu-DK, provide transparency as a matter of course. On the record, agencies had no comment to make on any of the matters raised by either the FTC or the JAA. Privately, sources said they understood Dentsu was prepared for change and had already developed a computerised billing system that would provide more transparent invoices. Dentsu declined to comment on this.
The traditional bounenkai ("forget the year") and shinnenkai ("new year") parties that are held in Japan either side of the New Year bid adieu to the old year and celebrate a new dawn, their meaning roughly equivalent to "out with the old, in with the new". Whatever the outcome of the FTC's investigations, the next winter party season is likely to mark the beginning of a new world for many ad agencies and advertisers in Japan.