Bright lights: Advertising in Tokyo’s Shibuya neighbourhood
Bright lights: Advertising in Tokyo’s Shibuya neighbourhood © Batchelder/Alamy

Every January, the ballrooms of Tokyo’s Imperial Hotel play host to the lavish partying of Dentsu Day — a chance for Japan’s most influential company to thank its clients for the past year of business together and to assure them that they will be thanking them again in 12 months’ time.

Despite the casual circulation of A-List celebrities, the expense of the sommeliers’ wine choices, or the subtle presence in the kitchens of some of the world’s great chefs, the annual Dentsu bash is not some crude showcase of adman glamour and largesse. Instead, it is a masterclass in the fostering and exercise of power in Japan. Participants have described the event as Japan’s Davos.

On paper, Dentsu is a $15bn company with an innocuous 25 per cent of Japan’s advertising market. But those figures obscure its scale and influence. The second player, Hakuhodo, is less than half Dentsu’s size. The rest are nowhere. Its tentacles spread via more than 700 subsidiaries. For most of Japan’s biggest companies — from SoftBank to Toyota, Suntory to Coca-Cola — the only route to their customers runs through Dentsu’s imposing glass tower in Tokyo.

The revelation that Dentsu has been caught overcharging on its digital advertising business — by Toyota, no less — has sent a frisson through corporate Japan. The same problem has been identified at more than 100 other customers. But while rivals scent an opening, those who know Dentsu’s reach into the worlds of sport, politics, entertainment and media doubt the scandal will deter customers for long.

“It is not like any company in the world,” says a board member at one of Dentsu’s biggest clients. “You are the customer, but they are the master. Nobody ever says it, but over the years, you need them more than they need you. It is like an addiction.”

Last month, Dentsu held a press conference to apologise — a brief bow to the cameras by a few senior managers and the admission that the company was investigating 200,000 potential other cases that date back to 2012. It is a very big deal, say ex-Dentsu executives, but one that will melt away unless media pressure continues.

Potentially more embarrassing for Dentsu than the overcharging incidents, though, is the way it has exposed weakness in digital advertising — a segment of the business that was seen as a test of its ability to evolve from the old world of advertising and embrace the new.

More than just an ad agency

Dentsu is whatever its Japanese clients need it to be: marketer, advertiser, researcher, lobbyist, rainmaker, problem-solver. It is engaged, via relationships that have barely shifted over decades, to be creative, co-operative and cunning. It is, by wide acknowledgment, very good at making TV adverts that suit Japan — a market parcelled into 15-second slots that reward the bright and bubbly. But it is more than a mere advertising agency.

The Dentsu operation, along with its broader cultural impact on Japan, was described in interviews with current and former employees of the group plus board members of four client companies that have relationships with the agency dating back at least five years. A range of senior figures who have worked outside Dentsu but within the Japanese advertising industry for more than a decade also contributed. These descriptions were put to Dentsu by the Financial Times but the company declined to comment.

 Chart showing Japan Ad expenditure

Several quirks make Dentsu unusual, but the mother of them all is its role as distributor of TV advertising slots in Japan, a role that dates back to its founding in 1901 as a dual news and advertising agency by war correspondent Hoshiro Mitsunaga. It is a top 10 shareholder in several major TV companies and its control of prime TV inventory gives it leverage over broadcasters and advertisers alike. Dentsu, in effect, negotiates with itself over the price and distribution of a commodity for which it holds the mining rights.

“Dentsu started out 115 years ago representing both advertisers and media sellers, mitigating risk on the sale of ad space for media owners, and pioneering a new and vibrant market for advertisers,” says Christopher Demetrakos, head of digital marketing company Manzanita and a former Dentsu employee. “This arrangement may look like a conflict of interest from a western perspective, but this is a very important cultural distinction that has evolved in complexity over the past century. Dentsu may be called an ad agency, but it is much more.”

The company’s unique relationships do not stop at media. It is, for example, the gatekeeper to sponsoring the 2020 Tokyo Olympics. So far, Dentsu has helped Tokyo 2020 sign up 37 sponsors, and in a break with tradition, multiple companies from the same industry have been permitted to join the party. Ryu Homma, a former staffer at ad agency Hakuhodo who now writes about the industry, estimates his old rival will clear billions of yen in commission even before the cost of ad space or producing commercials.

Or consider entertainment. A critical asset to secure loyalty is access to the actors, singers and other “talento” who colonise the TV airwaves said James Hollow, Japan president of digital marketing agency MullenLowe Profero.

“Dentsu is by a long way the most powerful figure in a kind of cartel that is made up of the TV stations, the talent agencies and the advertising agencies,” he says. “Outsiders assume Dentsu’s dominance is based on its ability to offer clients exclusive access to media, but actually it is just as much to do with controlling access to the celebrities.”

Like other influential agencies, Dentsu plays a role in Japanese politics, helping to keep the ruling Liberal Democratic Party in power for all but a few of the past 60 years through adroit advertising. Prime Minister Shinzo Abe’s wife, Akie, worked at Dentsu until she married and a number of LDP politicians have the company on their CV.

All those nodes in Dentsu’s network make it an indispensable ally, giving it a pre-eminent role in shaping the way business is done, goods are consumed, media is produced and corporations are perceived in postwar Japan. But structure is only part of the story. At least as important are Dentsu’s people, its culture and its hard-charging approach to getting things done.

Chart showing Japan advertising market share

“They have excellent people and they do quality work,” Mr Homma says, noting that the reliability brought by huge manpower is important to risk-averse clients. Dentsu recruits heavily from university sports clubs, particularly rugby. Staff need to be athletic, say former executives, to out-party the client and outwork the competition.

But, Mr Homma adds: “The big thing they have in addition is fantastic connections.” How those connections are cultivated offers a window into the ways that money, influence and publicity are distributed in Japan. For example, according to Dentsu staff and clients, in any given year of graduate intake, a substantial percentage are the sons and daughters of company CEOs, politicians or even minor royalty. Notables include relatives of the former heads of Toyota, Kao and Fujiya. Mrs Abe’s father was the president of Morinaga — a confectioner and long time Dentsu client.

Equally important, though not unique to the company, are the expense accounts. Dentsu staff come armed with a generous monthly entertainment budget even for quite small clients. In most cases, the Dentsu staffer will be entertaining a marketing department salaryman on a modest annual income. The expense account — blown reliably on restaurants, drinking, concert tickets, front-row seats at baseball games — can create a corporate friend for life.

Amplifying that hospitality is corporate Japan’s peculiar habit of rotating its armies of salarymen through different departments on short two- to three-year cycles. Because many staff in the advertising and marketing departments are therefore fairly new to the job, it is the ad agency that becomes the caretaker of institutional memory. No salaryman wants to look bad, which may make the wisest strategy simply to trust that Dentsu knows more about what the client wants than the client itself.

Despite its dominance, Dentsu is unforgiving with the competition. There is a priority list of rival firms that need wiping out. In attacking the highest ranked of these — the so-called “double circle” targets — Dentsu executives are allowed to pitch for business on terms that effectively give away a part of the creative work for free, while continuing to bill for the TV slots themselves.

Reading minds

This status quo has endured for a long time, despite the efforts of foreign competitors in particular, to puncture it. “For many, many years the decline and fall of Dentsu — the chief bully in this old-boys’ playground — has been confidently predicted but it has not happened yet,” says Mr Hollow.

For now, the industry remains divided on whether the $2.3m overbilling of 111 companies will galvanise Japanese corporates and agencies to abandon a set up that has allowed both sides to flourish over the past century. Sceptics, such as JPMorgan analyst Yumi Tanaka, say old practices are difficult to let go: “It’s not enough of an incentive to switch allegiances over a few million yen when relations with Dentsu date back years and decades, to a point where you know each other so well that you can read each other’s mind.”

Dentsu executives bow to apologise for overbilling clients for online ad services
Dentsu executives bow to apologise for overbilling clients for online ad services

It is extraordinary that the scandal came to light at all, says an advertising executive with close ties to the company. And Dentsu’s defence of its position will come from the same place as the scandal itself: the company’s concentration of influence and the propensity of even big brands not to take it on.

It is only because a company with the clout of Toyota has opened the door that other clients have the confidence to raise their voices. “You have to be as big as Coca-Cola, P&G or McDonald’s. If your company’s net worth is less than $50bn, you won’t have a chance against Dentsu,” says the executive.

Dentsu has ruled for decades as a one-stop purveyor of the means both to grab the public’s attention and to make it look the other way, according to clients. Dentsu’s style of networking and power-broking, say rival advertising agency heads, has established the “norm” in a Japanese advertising and media market that resembles nothing elsewhere. It is the reason, they add, that Japan consistently ranks as the most opaque major media market after China.

There will be pressure for that to change. Some international brands have called for clarity on agency fees.

“This problem [the scandal] underscores the incredible lack of transparency in business transactions carried out by Japan’s advertising agencies compared with global standards. I have been discussing this issue with Dentsu since I became CEO (in 2010),” Kozo Takaoka, chief executive of Nestlé Japan, wrote in an online comment. “What’s most troubling is that even Dentsu was not aware of this problem until it was pointed out by the client.”

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