The boom days in the Taiwan advertising market are over. Now smaller budgets, lower prices, and heightened competition characterize the market...
By Richard Dobson
Trimming the Fat
The boom days in the Taiwan advertising market are over. Now smaller budgets, lower prices, and heightened competition characterize the market.
Advertising is often seen as a bellwether of an economy. When business is good, companies become expansive with their ad campaigns. But when times are tight, they pare spending. This rule of thumb has proven true -- in spades -- for the advertising sector in Taiwan. After years of living off rich advertising budgets bloated by a soaring economic climate that lasted from the late 1980s through the mid-1990s, advertising agencies in the last two to three years have felt the sting of recession as companies have slashed advertising budgets to cut costs.
Since 2000 when total advertising spending (or ad-spend) in the market was estimated to be NT$100 billion (US$2.87 billion), the market has shrunk by almost 20 percent. Last year the figure fell to NT$82.9 billion (US$2.38 billion), according to data compiled by the marketing and communication monthly, Brain [italics] magazine. "Many of our clients and I suspect many of our key competitors' major clients are necessarily cutting their budgets," said Stephen Mangham, managing director of Ogilvy & Mather Advertising.
As companies slice their budgets, they are driving prices for advertising down, squeezing the creative agencies, the media service companies that buy time and space for ad campaigns, and the media owners themselves. Clients have begun to look carefully for the most efficient ways to divide their advertising dollars among the five major media channels of terrestrial TV, cable TV, newspapers, magazines, and radio. While overall ad spending across the board dropped by 13 percent between 1998 and 2002, advertising on cable television has soared by 38.5 percent since 1998, according to the media research firm of Rainmaker Industrial.
The number of cable channels and the variety of programming they offer has lured viewers away in droves from the several terrestrial television stations that used to dominate the Taiwan market. Given cable TV's soaring ratings and its adoption of a pricing policy that charges advertisers based on viewership, that medium has now captured two-thirds of total ad-spend in the television market, according to Nielsen Media Research Taiwan, another leading media research organization.
Increased competition has also been evident in the jostling for a larger piece of the pie among multinational creative agencies and media service companies, which last year led to some large-scale mergers. BBDO, the largest agency in the U.S.-based Omnicom Group, in August acquired Harvest Advertising as part of its plan to expand in Taiwan and boost its level of service to local clients, according to Raymond So, chairman of BBDO Asia Pacific. So said the addition of the strong team at Harvest made it possible for BBDO to win the business of food maker AGV Products, whose products include tomato juice and canned congee, and of Kawasaki which is promoting its heavy roadbikes in Taiwan.
International merger activity among major media conglomerates also affected the makeup of the Taiwan market. In November last year, D'Arcy Taiwan was folded into Publicis following the September merger of France's Publicis Groupe S.A. (which also owns Saatchi & Saatchi Worldwide and Leo Burnett Worldwide) and D'Arcy's parent company, U.S.-based Bcom3.
"The big must keep getting bigger, that is the trend," said Eliot Lin, CEO of McCann-Erickson Communications Group Taiwan. That tendency could spell trouble for smaller companies who could find themselves elbowed out of a market increasingly dominated by the larger companies. While admitting that size is important in a small market, Lin maintains that smaller firms are still able to carve out a place for themselves. "There are still going to be niche opportunities for small-to-mid-sized agencies by focusing on providing strong creative work," he said.
But while the overall drop in ad-spending and increased competition could be viewed merely as symptoms of harder times, most tend to see it as the pricking of what had become an outright bubble. "There was slack to be squeezed," said Neil Hardwick, CEO of Saatchi & Saatchi in Taiwan. The heavy spending was driven by high annual economic growth rates that averaged 8.1 percent annually throughout the 1980s and 6 percent through the 1990s. It was especially visible in the heady days after martial law was lifted in 1987, when media outlets suddenly grew in number and size and when multinational firms with new brands to sell poured into Taiwan's freshly opened markets. "The economy was good, everybody was rich, and there was tons of money floating around," said BBDO's So.
The previously limited advertising space -- with television in the pre-cable era confined to the three terrestrial stations and newspapers restricted to a maximum of 12 pages -- expanded exponentially. "Before, even when people wanted to spend money, they couldn't buy the space," he said. Then, between 1988 and 1993, total advertising volume began growing yearly by double digits and the major multinational advertisers began pouring into the market.
That kind of boom was impossible to sustain. "Previously there was quite a lot of fat upon which everybody was chewing, and everybody was happy. Nobody was asking questions about prices," said Andreas Vogiatzakis, managing director of Mindshare Communications Ltd. Taiwan. But in the last two years, as the economy has reeled from the effects of the global downturn, the advertising industry has felt the pinch. Ad-spend in the five major media channels declined annually from 1998 to 2001, when the fall reached a trough, hitting minus 10.3 percent year-on-year.
This environment has led clients to pressure media buyers -- agencies which negotiate and buy ad spots on behalf of advertisers -- to lower their prices. "In the last 12-18 months I've seen more pitches that are completely price driven than ever before," said Vogiatzakis. Creative agencies have also seen cuts in their production budgets, with total spending on production dropping 20 percent year-on-year in 2002. "Instead of paying the creative agency NT$2.5 million, they're paying them NT$2.1 million to save NT$400,000," said Saatchi & Saatchi's Hardwick.
But such moves are misguided, since "the campaign that cost you NT$400,000 less ends up performing 20 percent less," he said. Hardwick says the best way to get more from one's advertising dollar in a tight market is to invest more heavily in creativity. "You might be able to buy 1 percent more efficiently by using a different media agency, you might be able to squeeze an agency's commission by half a percent here or there, but a great creative ad will be 10 times more visible than a bad one," he said.
Eliot Lin of McCann-Erickson agrees, saying that the "cost to run a great 30-second commercial and a poor 30-second commercial is the same, [but] to make an effective ad you have to be great creatively." But instead of boosting their creativity, many companies in Taiwan have retreated further towards conservatism, a trait many see as the defining characteristic of advertising production here.
"There's a tendency for people to become cautious when the market is difficult," said BBDO's Raymond So. "You want to take the safe approach so you won't affect your own job." The problem, however, is that "in most cases good advertising -- good creative work -- will involve a certain risk element," he noted. Consumers may respond positively to certain ads just because they have never seen anything like it before.
McCann-Erickson's Lin says that while some marketing directors and country managers may appreciate the value a creative ad may contribute to a brand, they will avoid such creativity unless convinced that it will directly impact sales. Instead they tend to stick with the more conservative approaches they are familiar with.
The heightened competition is also contributing to pushing down prices. The creative agencies are aggressively going after whatever ad campaigns become available -- and offering to slash commissions to make their pitches more attractive. But even when an agency wins the bid, it may find the benefit of winning negated by the reduced revenue at its disposal. Those narrower commissions translate into fewer resources with which to court other potential clients or even to manage the workload for existing clients.
"I think a pitch is all about building a relationship with a client," said Ogilvy's Mangham. "You can't do that with a client who's talking to ten agencies at the same time. It becomes a lottery." Manghan suggests that claims by some companies that they are being courted by a host of creative agencies are simply designed as bargaining tools to reap the most favorable terms.
Another way companies are changing their habits to lower prices is to group advertising for all their products through one media buying company. In this way they can increase the volume of advertising space being placed, boosting their bargaining power when it comes to discounts.
This approach to media buying has allowed advertisers to cut costs, while also spurring a change in the hierarchy among media vendors -- or media owners -- in terms of their revenue from advertising. In the decade since the legalization of cable-TV broadcasting in 1993 and the advent of the Internet shortly thereafter, the readership of newspapers and the audience for terrestrial TV channels have plummeted.
Newspaper readership has declined from around 75 percent of those between the ages of 12 and 60 in 1990 to around 50 percent today, according to survey data from Nielsen. The four terrestrial television stations -- now including Formosa Television, which was inaugurated in 1997 -- saw their ratings tumble and their market share shrink from 46.2 percent as recently as 2000 to 33.1 percent in 2002, according to the data.
Market share for cable TV channels, which now number 62, has climbed from 53.7 percent in 2000 to 66.9 percent in 2002. Advertisers began shifting their media budgets to cable, attracted by the mounting viewer ratings (fueled largely by the high penetration rate -- over 80 percent of households in 2000) and the sheer variety of programming.
Further sealing cable's dominance of the market was the move in 1997 by most cable companies to alter their pricing structure. Under pressure from big volume advertisers, the cable companies implemented a system of determining rates according to the size of the audience actually watching, instead of the traditional "spot buy" of selling advertising time for a set price. Terrestrial TV channels have maintained the spot-buy formula, keeping prices for advertising on their channels high.
Cable's cost-per-rating-point (CPRP) system bases costs on the media's effectiveness in broadcasting the ad to a specific audience size. The cable companies guarantee a certain level of ratings for the time slot of the particular commercial. If the ratings fail to reach the agreed level, the advertiser becomes eligible for a certain amount of free advertising to make up the difference. The end result for advertisers is cheaper spots for TV ads and more efficient use of their media dollars.
The search for ways to stretch the media dollar while boosting advertising exposure has also brought an increase in the usage of both big impact outdoor advertising and high-volume, low-cost advertising. The complete wrapping of the empty building at the intersection of Nanking East Rd. and Dunhwa North Rd in a banner of a semi-naked woman to promote the launch of the new Apple Daily newspaper is the just the latest example in a growing trend.
"Before, outdoor had always been neglected, but now there are a few very aggressive outdoor advertising companies that are bringing in new technologies from overseas and professional management to give outdoor ads real impact," said BBDO's So. Taipei's Mass Rapid Transit system has also seen increased advertising spending, with some of the trains also getting the wrap treatment from advertisers. Executives see the ads as creating a buzz as part of a larger ad campaign, and these media are generally cheaper or at least more cost-effective than other more mainstream advertising channels.
In the last year, the volume of ads dispersed via SMS messaging over phones has increased by 900 percent. Point-of-sale devices -- including new devices such as motion-reactive flat TV screens that run ads when customers approach or that are attached to cash registers -- also saw a 10 percent jump last year, according to Brain data. While such devices currently account for but a tiny slice of the ad market, they are becoming more viable options at a time when cost-effectiveness is key.
Murky Market for Media Services
In the absence of accurate pricing information, clients are increasingly suspicious that they are paying too much.
Operating a media service company is a complex business. Tasked with planning and buying advertising space, it is wedged among the often-conflicting interests of the client, creative ad agencies, and the media owners. "To keep everybody happy, we've got to be a little bit of a magician," said Andreas Vogiatzakis of Mindshare Communications.
Independent media agencies first appeared in force in Taiwan in the late 1990s when ad agencies began separating their media buying and planning services from creative services in an effort to consolidate buying volumes and develop more professional specialization. In Taiwan their work has been made even more difficult by the increasingly cut-throat competition evident in the market. As well, a surge of merger activity added to the competition last year as major international firms wrestled for a larger slice of the estimated NT$25.1 billion (US$721 million) worth of annual billings in Taiwan.
As clients cut advertising budgets, some media agencies have reportedly been offering to do the buying work without any commission just to secure the business. Their ability to earn profits then depends on squeezing greater discounts out of media vendors based on the volume of advertising they can muster. "The last six months have been incredibly intense as agencies have become willing to do anything to get the clients in their pot," said Vogiatzakis. "It's become more and more of a price war."
Some companies are said to have gone overboard in their promises of lower prices, winning the pitch but later being unable to deliver the media purchase at the agreed-upon price. "It's a very short-run-oriented market, with some agencies reverting to practices that aren't really good for the market, and that end up damaging the industry and themselves in the long run," said Vogiatzakis.
As the agencies slug it out, major clients have proven that in tighter times they can be fickle, switching media companies readily to take advantage of better deals. Procter and Gamble, the number one advertiser in Taiwan, recently changed agencies, ditching Mediacom Worldwide (part of the Grey Global Group) and hooking up with Starcom MediaVest Group (a subsidiary of the Paris-based Publicis Groupe).
Another coup was achieved by Initiative Media, which entered the market only in July. It then proceeded to snatch the account of the second biggest advertiser in Taiwan, Unilever, away from Mindshare, the largest media service company in the market. Despite shrinking 5.7 percent in 2002, Mindshare remains the largest firm in the country in terms of billings.
Further complicating matters is Taiwan's opaque pricing system for media buying. The lack of clear information released by media owners and media agencies on pricing -- especially on the size of discounts available for large-volume purchases -- has sown mistrust between clients and agencies. Unlike the practice in the United States and Europe, media owners and agencies do not reveal the actual prices at which advertising space is sold. The price cuts and rebates that may clinch the deal are unknown to the clients, who are left to guess how much of their advertising dollar is actually going to the media and how much is being pocketed by the agency.
"It's a mess and it's getting messier," said Neil Hardwick of Saatchi & Saatchi Taiwan. "It impacts business relationships and creates uncertainty. We sell a service -- you should be able to know what you're getting and how that's structured." As a result of the uncertainty, media and creative agencies have had to fend off demands for steeper price cuts from clients unsure of how much of the discounts offered by the media is being passed on to them. "The clients are pushing the agency to cut the commission or accept less pay because they think the agency is making money (on the media sale) -- there's no transparency and it's created a vicious cycle," said Raymond So of BBDO Asia Pacific.
Lack of accurate information about even the most basic information on ad-spending patterns has prompted marketing information company Nielsen Media Research to begin monitoring media spending patterns. From the beginning of April, Nielsen launched its Advertising Information Service, staffed by a team of 80 people, which promises to provide accurate numbers on what is being spent on advertising in Taiwan. Linda Chang, Nielsen Asia-Pacific executive director, says there is strong demand for accurate research and that the data her team delivers will significantly increase the transparency of the ad market.
The clearest example of the confusion in adspend data is evident in the annual unaudited reports that agencies release about their billings. In its February issue, Brain magazine reported that total adspend in 2002 was NT$82.9 billion (US$2.4 billion), 6.7 percent less than in the previous year. But in its March issue, when the magazine added up the billings reported by creative and media service agencies, the sums showed growth of 11 percent and 24 percent respectively. Brain explains the discrepancy as being due to huge problems in the way agencies report their numbers, inflating their billings and growth figures.
As price competition has heated up, the multinational media service companies have sought to consolidate their positions in the market through acquisitions of smaller local firms and by mergers among the media departments of their Taiwan subsidiaries. The massive Interpublic Group (IPG) established a branch of its Initiative Media Worldwide by combining the Taiwan media departments of advertising subsidiaries Lowe & Partners Worldwide and Foote, Cone & Belding. This new office expands the IPG presence in Taiwan even further, as another subsidiary, McCann-Erickson WorldGroup, already operates a local branch of its global media agency, Universal McCann.
"The reasoning behind the merger activity is that it improves cost efficiency and consolidates client billings," said Eliot Lin of McCann-Erickson Communications. "If you're handling more client billings, you have more buying power and therefore more negotiating room, enabling you to provide clients with better service."
Another recent new entrant was Mint Media. Formerly a media firm created by a trio of local partners including Harvest Advertising, Mint became 100 percent owned by BBDO when BBDO acquired Harvest late last year. This move further strengthens the position of the Omnicom Group. Through a collaborative effort between its advertising subsidiaries BBDO and DDB, the group has also been operating another media service company here, OMD. Lin predicts that the multinational agencies will continue to consolidate their positions, making it increasingly difficult for smaller firms to survive.
Rough Times for PR
The economic downturn is causing problems, but the market for more sophisticated services is gradually growing in the long-term.
The business of public relations in Taiwan is a tough sell. Built predominantly on servicing the promotional needs of consumer-related companies, the PR sector has felt the sting of slow times economically. As companies slash their marketing budgets, PR firms are having to reevaluate the types of services they offer.
"There's less money available for consumer promotions and high-profile events and event marketing because budgets have gotten very tight with the recession," said David Chard, managing director of Edelman Public Relations Worldwide, Taiwan. "Five to 10 years ago, everyday there was an opportunity to help a client launch a product with a high-profile media event. Those are much, much fewer these days."
Many clients are seeking either to bring certain aspects of PR work in-house -- such as promotions, internal communications, media relations, and longer-term communications strategy and corporate image-building -- or do them on the cheap. That is pressuring PR firms to deliver more for less.
"It's a daily struggle," said William Lue, CEO of Pan Asia Communications. "Many companies are facing the dilemma: Do we lower ourselves to become an event-management company by not disagreeing with the client, just getting the case but forgetting about the long-term image building?"
Further compounding the problems, some companies have been altering the way they remunerate their PR partners, employing them on a case-by-case basis rather than using a retainer system as before. As one industry source explained, during a boom it may be the case-by-case clients who provide the big profits, but during hard times the income from retainer clients is what keeps a PR practitioner going.
International PR firms operating in Taiwan have long faced an even more difficult challenge. While fed a solid diet of business from the local branches of multinational companies, PR firms have had relatively little success convincing Taiwan enterprises of the value of their services. Due in large part to the relative newness of the industry in Taiwan, domestic companies generally have little understanding or appreciation of the full range of services and benefits available from international-class PR firms.
Shunning higher-end services such as corporate and investor communications, and crisis and issue management -- which are the bread and butter of major international firms in developed markets such as the United States -- domestic clients have traditionally engaged PR firms mainly to manage promotional events and handle media relations on an ad-hoc basis.
But there are signs that conditions are changing as the market matures and senior local executives adopt a more modern outlook. Industry statistics show steady growth in recent years in demand for high-end services -- a development that offers the PR sector a chance to expand its scope and open new revenue channels. Contributing to that trend is the development of a younger generation of business leaders. Many of them have been educated in the West and feel more comfortable than their elders in working with PR firms.
Before 1987 few international public relations firms maintained operations in Taiwan. But the lifting of martial law that year and the consequent easing of previously stringent media controls created a more conducive environment for PR activity. The number of newspapers increased, as did the number of pages they could publish. Limited to 12 pages per issue under martial law, some papers grew to 40 pages in the early 1990s. Television channels and radio stations also began to multiply.
As these channels and clients for publicity and promotion services increased, PR firms appeared in growing numbers in the late 1980s and throughout the 1990s.
"All of a sudden we had a mushrooming publicity industry in Taiwan," said William Lue. But the new market also brought teething problems. While multinationals welcomed the services offered by the international PR firms, local companies saw little need for the more specialized services and took issue with the pricing policies. "Most companies here care only about whether communications will bring them actual business," said Pauline Leung, CEO of Compass Public Relations. "So all they require is marketing communications and not the higher level of consultancy."
"In the United States, most public companies have to have PR companies supporting them because they need a lot of information released to their stakeholders," she said. "All the big companies understand communications, but here it is another world."
While some PR firms have profited by servicing foreign companies exclusively, others made it a priority to cultivate domestic clients and cater to their less complex needs, such as promotions and event marketing. When it first started in Taiwan in 1987, Ogilvy Public Relations Worldwide exclusively serviced the foreign accounts. But Yang Ching-ping, general manager of Ogilvy PR in Taiwan, said it soon became clear that surviving in the local market for the long-term required cultivating local clients. To do so, Ogilvy began aggressively hiring local staff whose knowledge of the market and of Taiwan business practices proved to be the keys to success, she said. Currently local clients -- including such well-known names as China Airlines and TECO Electric and Machinery Co. -- make up roughly 50 percent of the client list
But in dealing with local companies the multinational PR companies encountered another major problem -- the unwillingness of domestic clients to accept the standard global practice of hourly billing rates and insistence instead on drawing up a one-off budget for services rendered. Attempts to adhere to international billing norms and to focus on services little valued in this market took its toll on the Taiwan operations of two major players in the international PR scene. Burson-Marsteller closed its Taiwan office in 1997 and Hill and Knowlton, a fellow member of the UK-based media goliath WPP Group Plc, called it quits in 2001.
"They were trying to sell services that people don't want here," said Diane Wu, managing director of Golin/Harris International Taiwan. "They wanted to have a whole retainer based on crisis management or investor relations. The market in Taiwan is not mature enough for that -- [companies here] don't want to pay somebody US$1,000 per hour to consult with them on something they don't feel they need," she said.
Those pull-outs, however, did benefit some smaller players in the market. Compass, for example, was picked by Burson-Marsteller to serve as its affiliate from January 1 this year. And APEX Communications and its sister companies, Elite and Key Concepts, have been providing full-service support to Hill and Knowlton since its local departure.
But while some firms may have stumbled in this market, others have continued to expand. Last July Ogilvy's parent, WPP, bought a 70 percent stake in local PR firm Era Public Relations Co. The move added 40 staff to the Ogilvy/WPP PR network here, bringing the total to 100 and making it the biggest on the island. The move was aimed at increasing Ogilvy's ability to assist local high-tech companies to expand their operations into China and develop their own brands internationally.
According to Ogilvy's Yang, brand-building abroad is a major trend to watch. "Previously we mostly did corporate awareness and image-building for Taiwan companies at home. But in the last two years we've observed a new trend among Taiwanese companies -- a desire to go overseas to build corporate image."
Many of the multinational PR firms have expanded in this market by buying up local counterparts. Profiles Corporate Communications, founded by David Chard in 1992, was bought out by Edelman in 1997, for example. "It does make a lot of sense for companies to acquire successful local players in a market that you're not familiar -- and Taiwan is a very challenging place to do public relations," said Chard.
Edelman, whose clients overwhelmingly are multinationals, expects to expand its current staff from 25 to 30 in the coming year. Golin/Harris has added five staff this year, raising its headcount from eight in 2000 to 21 today. The company started operations in Taiwan in 1999 under the name Weber Group Inc. Taiwan.
Disagreeing with competitors who bemoan the current climate, Golin/Harris' Wu says that her company's client roster for the year is already full and that she has had to turn away business. If clients elsewhere have been switching from retainer to project-based work, she maintains, it is simply because they are unhappy with the quality of the service they have been receiving. "Most of the PR firms pay too much attention to getting new clients," she argued. "If you want to keep your retainer, you should be looking at what kind of crises [existing clients] might experience, what kind of PR services they might require -- not wait for clients to tell you what to do."
Taking an aggressive and committed approach to serving clients' current and future needs helps build trust and gives clients a greater understanding of what PR can do for them, said Wu.
Despite the recent economic hardship, industry executives agree that demand is growing for such services as crisis and issue management, media training for spokespersons, and lobbying. "The democratic system is evolving," said David Chard of Edelman. "As it becomes more robust and interactive, there are more opportunities for strategic PR to influence or persuade particular groups of people that certain policies are a good idea." As a case in point, he noted Edelman's recent coordination of an anti-piracy campaign for the Motion Picture Association of American in conjunction with a number of local movie distributors and production companies. The campaign to toughen laws to combat intellectual piracy won Cabinet backing and legal revisions now await Legislative approval.
With corporate crises growing more frequent at the same time as democracy is flourishing, opportunities for PR practitioners seem likely to grow.