What is Holding Back Digital Advertising Adspend in China?

The past five years have seen a dramatic increase in the amount of adspend going from traditional media to online advertising. In the UK last year, for the first time, the amount of adspend on the Internet overtook television advertising. This is a reflection of the fact that the audience is now spending more time on their computers, mobile phones, iPads and other connected devices than on their TVs or reading print newspapers and magazines. With the launch of more connected devices, and more powerful content publishing options, this trend is bound to pick up speed.

China is no different from the rest of the world; large parts of the population, especially the under-30 age group, no longer watch TV on the couch in the living room. Instead, they go to their Internet cafes, or, they increasingly access the Internet, chat with their friends on QQ, or play games right from home. As China becomes affluent, more Chinese can afford their own computers and connected devices from home. Their main activities may be more slanted to games, socializing and entertainment activities than North Americans and Europeans, but they are accessing the same Internet.

If that is the case then, why are online advertising revenues so much lower than in the west? In the west, Japan and South Korea, digital takes 15-20% of overall adspend and is climbing. In China, it has climbed too, but is still in the 3-5% range. Are there factors holding back the growth of digital advertising?

In China, online gaming and virtual goods have had a much longer history than in the west. While Second Life was struggling to find a business model for success, companies such as Shanda, which were influenced by South Korean game publishers, built thriving virtual goods markets. At first, these companies started with a subscription model, but then changed to free to play, but charging money for weapons and magic powers. This model has been tremendously successful, and for many Chinese, has been their first introduction to online transactions.

Unlike in the west, China’s Internet has been social almost from the beginning. This social role has been dominated by QQ, China’s leading instant messaging service and owned by Tencent, which charges a subscription fee for many services. Lately, a new and highly successful player has been Sina’s Weibo, which is a Twitter clone with a huge user base.

For e-commerce, Alibaba and Taobao’s auction model have helped in the development of the online e-commerce model. Chinese like to haggle over prices, and Taobao had certain functions built into it which enable people to haggle over items for sale. In order to push this model, Taobao waived all listing and transaction fees, making money just from advertising. Can you imagine eBay in the US waiving listing and transaction fees just to gain market traction, and just relying on advertising income to cover operating costs? This is the combination of scale and low labor costs only a large Chinese company can pull off. Faced with higher labor costs and competition, it is likely that they will have to start charging for premium services now, but many Chinese will feel confident enough with the system to go along with the fees.

Display advertising (banners) have always been popular for brand advertising, and have been popular with China’s leading news portals (Sina and Sohu) as well as vertical portals focused on real estate, cars, leisure goods, etc. Display advertising has been particularly popular with non-Chinese consumer brands fighting to grab Chinese consumer mindshare.

If China’s Internet has a dark hole, it is search advertising, which I discussed in some detail in a previous post. To a large extent, a failure to provide reliable metrics has held back the growth of Internet search advertising because keyword auction prices are largely opaque.

While many who come from traditional advertising like to talk about creativity, advertising is in fact a volume business. An old saying says that “If you can’t measure it, you can’t bill for it.” The Internet is all about data, and virtually everything can be measured; the problem has been that advertisers and agencies often didn’t know what to measure. Display marketers fought with search marketers who fought with social media marketers. This was in contrast with the days of traditional advertising, when all one had to worry about was reach and impressions.

Gradually though, a new holistic approach to digital advertising has emerged, and that is of the digital marketing funnel. Brand advertising creates awareness, favorability and consideration at the top of the funnel, while search slightly overlaps with consideration and intent to purchase. Social media (in China, BBSes, QQ, Sina Weibo and other mobile texting services) provide reinforcement, acting as word-of-mouth before the final purchase decision is made, which may be made online or offline. In this decision-making process, the consumer usually visits several different sites which have different purposes in the purchasing cycle, using a different set of tools at different stages.

In this use scenario, it is easy to understand that marketers must understand what role each site or tool plays in the digital marketing funnel, and it is almost impossible for any single site, no matter how large, to manage the whole process from awareness to purchase. What the marketer needs is reliable metrics and standards to measure cross-site funnel performance while consumers are driven from one stage of the cycle to the next.

Surprisingly, most publishers and marketers in China are not that knowledgeable about the role the funnel plays, how to build funnel scenarios and how to measure. To add further confusion, different measurement tools have different definitions, which means that while quantitative information is given, it may not be as reliable as one would like.

The other challenge is that in China, each publisher tries to provide a whole funnel scenario, trying to capture all adspend, even when that is not  the most effective solution. Naturally, the smart marketer wants to build marketing funnels which provide the cheapest, most economical transition from one stage to the next, while keeping customer loss to a minimum. Because content is always changing, they need to make adjustments to their campaigns on the fly. The marketer needs to be smart, analytical, quick, market-savvy, quantitative and qualitative in execution. Not easy to find.

To further compound difficulties, there is a lack of standards and definitions among media competitors. These are challenges which have been addressed by different standards bodies in the west, but have not yet gained traction in China. If there was more education of savvy digital marketers (which are now in very short supply), then maybe China’s digital advertising industry would be able to realize its full potential.

Source: http://blogs.forbes.com/china/2010/06/21/what-is-holding-back-digital-advertising-adspend-in-china/