ADVERTISING Overview According to the U.S.

-based trade journal Advertising Age, Korea is among the worlds top ten largest advertising markets. In 1992, Koreas advertising market was opened to 100 percent foreign agency equity participation. The 1997-1998 financial crisis and the resulting decision by many large Korean companies to restructure their operations and divest themselves of non-core businesses provided further avenues for foreign advertising companies to enter. All major international agency networks are present in Korea, representing over 50 percent of the monitored Korean advertising market. All major advertising mediums are also available in Korea. There are three broadcast networks. KBS (I and II) are owned and operated by the Government, while MBC and SBS are independently operated. There are also regional and local stations, major daily newspapers and a multitude of special interest newspaper and magazine titles. Internet and outdoor mediums are available, although controls on the latter can be quite restrictive and subject to local government rules or discretion. The Korea Broadcast Advertising Corporation (KOBACO), a government sponsored organization established in 1981, is responsible for terrestrial TV and radio airtime sales. As of December 2003, approximately 266 foreign and Korean companies were registered as advertisers with KOBACO. KOBACOs policies are aimed at achieving a fair distribution of airtime to advertisers. This serves to stem the likely dominance on television of the large corporations or chaebol, thereby allowing small and medium sized firms access to broadcast time. Other policies are aimed at ensuring advertising revenues contributing to the public good (with funds allotted for art and cultural development). TV rate cards are structured broadly on audience rating performance. A combination of up front sales, as in the United States, covering up to 50 percent of sales volume in prime time, as well as short-term (monthly) buying is available. A Unified Broadcast Law was passed in 1999 in order to clarify policy and provide direction to the Korean cable and satellite TV sectors. Cable television is currently estimated to reach 10.5 million households. As of April 2003, 119 system operators and 47 program providers served the cable industry providing such diverse programs as business, news, sports, music, religious, games, shopping channels, etc. Korea Digital Broadcasting (KDB), a subsidiary of state-run Korea Telecom, was awarded the contract for digital broadcasting in December 2000 and is currently broadcasting 75 TV satellite channels with about 120 expected by 2005. Korea established broadcast satellite television in digital format in 2002, with a current audience estimated at 1.0million. In January 2004, the Fair Trade Committee announced their intention to terminate existing airtime sales practices, presumably in favor of independent media sellers. This eventuality or timing has not been confirmed. If independent selling is introduced, it is anticipated that card rates will dramatically increase since demand for prime airtime constantly outstrips supply. Sales practices will be profoundly changed to the extent that most advertisers and agencies other than the major chaebol will find it difficult to gain access to quality airtime at affordable

prices. Broadcast Advertising Censorship Issues Broadcast advertising censorship presents a continuing source of difficulty for all advertisers and agencies doing business in Korea. The censorship committee, KARB, is comprised of representatives of various organizations who change regularly. Television and radio advertising has to be submitted in its final fully produced film format for censorship by KARB. This censorship process contributes significantly to the risk and costs involved in developing new advertising campaigns and introducing new brands. The committee requires that substantiating testing be repeated in Korea, disregarding claim substantiation accepted in other countries. The fact that a new commercial is approved by KARB does not mean that the claims are guaranteed against other legal constraints. In some product categoriesfor example cosmeticsthe Ministry of Health and Welfare requires that advertising copy be additionally approved by the local manufacturers association in advance of airing or publication. Efficacy claims for pharmaceuticals/OTC medicines are also not permitted. This makes advertising of superior technology products less effective and ultimately contributes to the discouragement of innovation. In addition, restrictions on the use of the English language exist and should be reviewed in line with Koreas quest to become part of the global economy Recommendations: Move to a system of industry self-regulation, which occurs successfully in many other countries (e.g., the Advertising Standards AssociationASA in the United Kingdom). Establish a transparent, independently funded and internationally accepted ASA Korea, administered by a professional staff. If this is not feasible, existing censorship must be standardized and relaxed: 1) allow censorship approval at storyboard stage; 2) increase consistency in censorship decisions by developing and recording guidelines and precedents; 3) increase censorship committee member consistency and caliber to ensure more consistent decision-making; 4) permit use of internal or overseas verification data; and 5) eliminate inordinate restrictions on use of the English language.

TV Media Advertising Issues There is no discrimination against foreign advertisers and agencies in terms of market accessibility, cost or any other terms and conditions. However there are changes in government policies that should be considered. Current regulations limit TV advertising airtime to six minutes per hour, resulting in a continual excess of prime-time demand. In line with the practices of most developed markets,

a greater amount of time should be allowed for advertising. This could be achieved either within the current format, or preferably, via the introduction of in-program advertising, which continues to be proposed. Given the shortage of advertising airtime availability, KOBACOs continued investigation of ways to achieve more flexible TV airtimeincreased spot buying availability, reduction or elimination of packaged selling of TV with radio airtime and greater availability of 30 second length commercials at a price relative to 15 second lengthsis welcomed. Restrictions also remain on brand or company exposure in television programming content. Recommendations: Extend broadcast time for advertising contentto least 10 minutes per hour in line with most developed markets in the world. Consider the introduction of in-program advertising. Restrictions on brand and/or company exposure in TV programs be relaxed.

Print Media Advertising Issues In Korea, there is a serious discrepancy between the actual circulation figures of the print media and the circulation figures claimed by the publications. Currently, only three newspapersChosun Ilbo, Joongang Ilbo and Dong-A Ilboand a few magazines have their circulations audited by the Audit Bureau of Circulations (ABC). This means that advertising and public relations companies advising foreign clients interested in leveraging print media are forced to reveal that the claimed circulation figures of the media lack veracity. Even though transparency is becoming a major issue in other sectors of the Korean economy, the importance of this concept has not, thus far, penetrated the printed media. This impacts their credibility and damages their image. Recommendations: As it is in the interests of media transparency and credibility, all major national print titles should be required to subscribe to the ABC in order to verify their circulations.

Advertising Agency Issues Three areas of business practice in Korea are of concern to multinational advertising agencies operating in this market. Firstly, agency commission rates for TV airtime purchased in Korea are lower than in most countries, where 15 percent is the accepted base or norm for determining agency financial viability. Currently, agency commission is around 11 percent. Second, foreign (and local) agencies not listed on the Korean stock exchange are subject to significant cost penalties in the purchase of TV airtime for their clients due to the high level of bank guarantees required. Finally, local finance practices can create serious cash flow challenges for advertising

agenciesof which payment terms by clients in excess of 90 days and an over reliance on promissory notes are prime examples. Recommendations: Eliminate discriminatory practices of requiring bank guarantees from agencies not listed on the Korean stock exchange and institute standard practices for all agencies to ensure that payment obligations to the media can be fulfilled. Establish 30 days as the standard payment term from clients to agencies Establish 15 percent as the basic television commission rate to agencies.