Budget 2001: A Primer

The move left the 20-year-old joint venture, Dentsu Young & Rubicam, thefourth-largest agency among non-Asian ad agencies in the region, playingsecond fiddle to the new organisation. Now people in the industry sayprivately some DY&R clients may defect to Bcom3. Both Dentsu and Young &Rubicam say they don't know of any imminent departures.

Dentsu, one of the largest advertising concerns in the world with $15billion in billings last year, has yet to make a dent beyond Asia. DY&Rhasn't either, although it has had offices for years in the US, where itoperates the Lord Group. With a handful of global giants buying up smallerad agencies, Dentsu must keep growing to fend off the behemoths. Since itgets only around 5 per cent of its billings overseas, and the Japanesemarket has been shrinking until recently, overseas markets are a logicalplace to seek growth. Dentsu is planning an initial public offering of itsshares this year that could raise between $1 billion and $2 billion, saybankers familiar with the situation.

Bcom3, in theory, helps by giving Dentsu a place to send Japanese clientswhen they need work done abroad. Clients seem content to let Dentsu provideservices to them and their competitors at the same time in Japan, but that'snot the case overseas. For instance, Dentsu does business with three ofJapan's top five car companies in Japan, but auto makers hesitate to allowthat elsewhere. So Dentsu, which has 3,000 clients, including many ofJapan's blue-chip companies, represents far fewer of these big corporationsabroad.

"Bcom3 is a global partner," says Mr Fumio Oshima, a Dentsu managingdirector. "DY&R is a limited partner. Our top priority, since we've made amajor investment in Bcom3, is to make sure we don't create cracks in ourrelationship with them."

Competitors say Dentsu is likely to let DY&R quietly whither away. Dentsuhas been doing that already, they say, by operating its own Dentsu branchesacross Asia that compete with DY&R. In 1999 the companies agreed to splitthe 50-50 partnership differently. Dentsu got a bigger stake and ran theoperation inside Japan, while outside Japan, Y&R had the bigger stake andoversaw that business.

Naturally, DY&R disputes the contention that its days are numbered. "Untilthree years ago, when I was competing against DY&R in Tokyo, I used to saythe same thing," says Mr Peter Steigrad, an Australian who now runs DY&Routside Japan as chairman of Young & Rubicam Asia Pacific. "People have beensaying it for a long time - 10 or 15 years. But I see neither Bcom3 nor WPPas cause for disruption." Mr Steigrad once worked for a WPP company inTokyo.

WPP Group also rejects the idea, and says it wants very much to be inbusiness with Dentsu, via its newly acquired Y&R unit. WPP Group companiesare among the biggest ad agencies in most Asian countries except Japan andSouth Korea, whose own big homegrown agencies have managed so far to fendoff the foreigners. WPP sees an alliance with Dentsu as a way to crack theJapanese market that Dentsu dominates. Dentsu controls almost 25 per cent ofall spending on advertising in Japan, the world's second-largest advertisingmarket at more than $52 billion last year.

"One of the reasons we bought Young & Rubicam is because of the Dentsurelationship," says Mr Martin Sorrell, chief executive of WPP Group. MrSorrell helped to start the wave of mergers washing over the globaladvertising industry with hostile takeovers of J Walter Thompson and Ogilvy& Mather more than a decade ago. "WPP and Y&R are very keen to continue thatrelationship."

That could be tough because WPP companies and other Western agencies havesniped at Dentsu for years, saying it uses its stranglehold on prime-timetelevision advertising slots to unfairly keep foreign agencies small inJapan. (Dentsu says that's just a smokescreen to hide the foreigners'inferior service.)

WPP is also in competition with Dentsu through WPP's 20 per cent stake inJapan's third-largest advertising agency, Asatsu-DK. People in the industrysay privately it's only a matter of time before DY&R clients outside Japanstart jumping ship in favor of Bcom3. Dentsu says it isn't trying to hurrythat process by encouraging them.

"We've done business together for all this time with Y&R, and we've trustedeach other," says Mr Oshima, the Dentsu managing director. "There's no waywe could say goodbye to them tomorrow, just like that. But if WPP'srelationship deepens with them, naturally there will be more frequentcompetition with Bcom3. And if J Walter Thompson, Ogilvy and Leo Burnett areall pursuing a client, Dentsu can't say it will help everybody, can it?"