Dentsu in the News, Part 2: The Bad News

The Japan Communist Party flexes its awesome research muscle:

Dentsu Takes 40% of Government Public Relations Contracts
Representative Yoshii Presses Officials on Connection with Golden Parachute Scheme

At the May 11 Lower House Committee on the Cabinet, it was revealed that Dentsu is substantively monopolizing contracts for “government public relations” that the Cabinet Public Relations Office prints in newspapers, with the company garnering nearly 40% of the total value of contracts. The situation was brought to light via a survey conducted by JCP Representative Hidekatsu Yoshii.

According to the survey, of the 13.2 billion yen in contracts government PR placed in newspapers from FY2001-2005, Dentsu was the top recipient with 4.9 billion yen, or 38% of the total. Hakuhodo, the second largest recipient, received 2.4 billion yen (19%), while other companies all received less than 10% apiece.

In response to a request from Yoshii for disclosure of the expected bidding prices, Director Yasuyuki Takai of the Government Public Relations Office refused the request, stating that the office “uses regular competitive bidding.”

Yoshii pointed out that there are too many advertisement placement companies that participate in bidding but later withdraw. For example, from FY2001-2005, Nihon Keizai Co. (printers of Nikkei Shimbun etc) withdrew the most times, 101. The fewer times a company won bidding, the more times the company placed a bid but later withdrew. Yoshii concluded: “This is just too unnatural. I suspect this is a case of ad industry-related bid-rigging intended to maintain Dentsu’s unipolar control.” Takai repeated that “Withdrawal from bidding is the bidding company’s decision.”

A survey by the House of Representatives Research Bureau shows that as of April 2006, 12 [retired officials from the Govt PR Office] were in post-retirement jobs at Dentsu, while 5 were at Hakuhodo. Yoshii pointed out that this practice of “Amakudari” was likely behind the rigged bidding, and emphasized, “If [the current govt] says it will reform the public servant system, it should first thoroughly reveal the true state of amakudari.”

In other news:

Dentsu “Pale” in Apology for Retooling Reds Stadium Seats
May 10, 2007

The Japan Football Association revealed on May 10 that it had granted advertising company Dentsu permission for a Kirin Beer commercial that made unauthorized modifications to a photo of Saitama Stadium filled with supporters of the Urawa Reds without noticing the changes.

The Association claimed it had not received an explanation of the changes from Dentsu, who was in charge of the production. The modifications violate the J-League’s rules for commercial use of photos. JFA Executive Director Kozo Tajima commented, “This is very regrettable and unpleasant. I cannot express how sorry we are to the supporters of the Japan National football team.” The morning of the same day, a representative of Dentsu visited the JFA to apologize. The advertiser, Kirin, reportedly was also not made aware of the changes.

The advertisement that caused the controversy was part of a rally campaign for the Japan National team. The seats in Saitama Stadium were changed from the Urawa’s red to the Japan National team’s blue, and the ads were seen in newspapers nationwide from April 27.

Also, former Dentsu executive and noted novelist Iori Fujiwara (known for the Naoki award-winning Terrorist’s Parallel, a story of the men and women who gave their lives in the 1960s student communist movement) has died of esophagal cancer at age 59.

Dentsu in the News, Part 1: The Good News

Lots of Dentsu-related stories in the pipeline these days. But first, the good news:

* Dentsu reports revenue exceeding 2 trillion yen, but sees slower growth ahead

From Asahi:

On May 11, Dentsu reported 2.939 trillion yen, or a 6.7% boost, in consolidated revenue for the 2006 fiscal year, the first time the company’s total has ever topped 2 trillion. Revenue in the major media (TV, newspapers, magazines, radio) all slightly dropped, but ticket sales for the 2006 World Cup in Germany, which was undertaken by a Dentsu subsidiary, pushed up the total.

Operating profit (which is mentioned last in the Asahi report) grew at a similar pace of 6.9% (30.6 billion yen or approx $1.7 billion). To compare, OmnicomGroup, the largest Madison Avenue ad company, posted $11.3 billion in revenue and $1.5 billion in operating profit.

Revenue in the 4 mass media, which make up 65% of the company’s non-consolidated profits (or 48% of consolidated revenue, which would mean that the Dentsu parent company’s total of 2.169 trillion make up 73% of total Dentsu group revenue), dipped 0.7% to 1.410 trillion yen.

A surprising note in this profit announcement is that Internet ads are not Dentsu’s biggest growth area, as earlier reports from Dentsu might have seemed to indicate. Internet ad growth of 14.8% (21.5 billion yen) lost out to outdoor ads, such as train ads, grew 19.2% (43 billion yen) with the rise of ads coordinated with web content (infrared bar codes, search keywords). Note, however, that these two areas remain small compared to Dentsu’s traditional businesses. However, Dentsu is predicting huge growth in the Internet sector in general, and sees its share in the Net ad market going from a present 15% to 20% by the end of FY 2009.

But the overall outlook for Dentsu is for slower growth, for reasons which an AP’s report goes into more detail about (unsurprising for an article aimed at investors):

Dentsu, the world’s fifth-biggest advertising company behind Omnicom Group , WPP Group , Interpublic Group and Publicis, said growth might also be held back by a wave of mergers among its client base.

The company, whose rivals in Japan include Hakuhodo DY Holdings Inc. and Asatsu-DK Inc., forecast group operating profit to rise 1.6 percent to 63.8 billion yen ($532.2 million) in the current business year to March 2008 on sales of 2.107 trillion yen, up 0.6 percent.

The profit estimate is in line with the consensus of 64.2 billion yen from a poll of 13 analysts by Reuters Estimates, but the forecast for sales growth is decidedly below the expected growth rate of about 2 percent for the Japanese economy.

The seemingly conservative forecast also comes with Japanese corporate profits at a record high.

“We are always told that our forecasts are conservative, but one factor probably at play here is the fading correlation between corporate profits and the economy on one side and growth in advertising spending,” Dentsu Managing Director Setsuo Kamai told a news conference.

Kamai said the trend could be explained by a handful of factors including booming industry consolidation in Japan, which leads to fewer advertisers, and a move by an increasing number of companies to lower costs by combining their brands.

For 2007/08, Dentsu expects its revenues to get a boost from the IAAF World Championships in Athletics Osaka 2007, elections in Japan and the Tokyo Motor Show, but no event on schedule is likely to match last year’s soccer World Cup in Germany.

Dentsu logged strong revenue gains to the information and technology, food and retail sectors, which offset declines to makers of cosmetics and toiletries, producers of home appliances and electronics, and consumer finance firms.

Speaking of profits, Hakuhodo just posted its first loss (due to lower than expected real estate revenue and dips in auto ads and government PR work) since converting to holding company status in 2003. It posted a 2% loss in revenue (1.884 trillion yen) and a 1% loss in operating profits (24.4 billion yen). Bad news for Hakuhodo, good news for Dentsu.

A new president will be leading Dentsu:

Dentsu to name Takashima president
Kyodo News

Dentsu Inc. is set to appoint Executive Vice President Tatsuyoshi Takashima as president of Japan’s biggest advertising agency, while the current president, Tateo Mataki, will become chairman, company sources said Saturday.

He is expected to accelerate a shift in Dentsu’s business base from newspapers and television to relatively new media such as the Internet by continuing the efforts of Mataki, who aggressively concluded capital and operational tieups with startup companies specializing in Net advertising.

Meanwhile, Dentsu is consolidating some of its various Net ad subsidiaries (in the affiliate advertising section [similar to the Amazon Associates program]) to form a more unified strategy:

Dentsu to Merge, Amalgamate Action Clip
May 10, 2007

Dentsu and Cyber Communications (CCI, a member of the Dentsu Group) announced that they intend to merge Dentsu subsidiary Action Clip and CCI subsidiary Criteria Communications.

CCI will continue to exist but will amalgamate the two companies in a cash tender offer. The ban on cash tender offers to shareholders in the case of an amalgamation merger that absorbs the target company was lifted as of May 1.

Action Clip’s affiliate operations will be united with Criteria’s advertisement distribution network with the goal of consolidating the Dentsu Group’s affiliate business.