Chinese Are Flocking To the Internet, So Why Aren't Advertisers?

Institutional Inertia And Industry Squabbling Are Hurting the Industry, Says Youku's Victor Koo

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Advertising is the lifeblood of China's major online publishers. They live or die by their ability to attract advertisers.

Entrepreneurs in areas such as online game producers and a handful of successful e-commerce companies have shown impressive resourcefulness in tapping viable alternative revenue streams, mobile value-added services, point cards, micropayments and the like.

But most mainstream Chinese internet companies -- the internet portals, the verticals, the search engines, the video sites and many Web 2.0 companies -- still depend on advertising.

Unfortunately, ad dollars aren't flowing our direction, even though Chinese are going online in record numbers. Many web users now spend far more time on the web than they are in front of their TV set. On average, internet users are online over 19 hours per week.
Youku's founder and CEO, Victor Koo
Youku's founder and CEO, Victor Koo

TV ad budgets still dwarf online ad spend. About 4% of China's total ad spend goes to online media, compared to a far healthier 17% in the U.S. If you assume that money budgeted by advertisers to a given medium should correspond roughly to the time consumers spend with that medium, there's a substantial time-money gap. Online ad spend in China is growing impressively year-to-year, but if spending is measured on a per unit time basis, the gap is growing, not narrowing.

There are plenty of sound arguments about why advertisers should reallocate part of their ad spend from traditional media into interactive media. The internet offers access to an attractive, overwhelmingly urban demographic that can be segmented with far greater precision than a TV audience. And the results of a digital campaign often are more measurable than campaigns using outdoor or print media.

With 253m users, internet penetration is still low
But the message isn't reaching advertisers in China. What really accounts for the time-money ad gap?

One reason is the relatively low rate of internet penetration in China. With 253 million users, China is the world's largest market in absolute terms, but with internet penetration at only 19%, China is still below the world average of 21%. The penetration rate in first-tier Chinese cities like Shanghai and Beijing is comparable to overall rates of internet use in developed markets.

Unfortunately, not every advertiser is as enamored with the web-surfing urbanite as we'd like to believe, and until the internet spreads more widely into the Chinese hinterland, TV -- with its near-universal reach in China -- will still have a leg up.

This will take time. Internet adoption spread quickly in the U.S., for example, on the back of personal computer use, which was already commonplace by the mid-1990s. In China, the PC penetration rate was pitifully low when the first internet entrepreneurs set out to build online businesses. Even fixed line phone access -- the minimum requirement for dial-up access -- was still very low in the late 1990s, when the internet was taking off in China.

But internet penetration is rising with tens of millions of new users coming into the market every year, so it's tempting to believe that time will help close the gap.

Perhaps time will also diminish another factor that has delayed the growth of online ad spend in China -- the forces of institutional inertia.

The old guard ruling over marketing departments and media agencies is alive and well. It is comfortable with the status quo and happy with the prevailing commission structure that favors spending in traditional media, namely TV.

Media buying agencies are understandably concerned with volume and earning rebates. Some online publishers and ad agencies are more focused on price competition rather than increasing effectiveness and bringing more value to advertisers.

Strong TV in China has curbed internet's growth
There are more fundamental issues that time won't address so easily, however, such as the relative dominance of TV over print media in China's ad market.

In the U.S., TV only recently overtook print in total media spend. Before internet video sites started to gain ground, online advertising in the U.S. grew mainly at the expense of print media, not TV. Print has received the biggest slice of the pie in the U.S. and therefore has always been the medium most threatened by the rise of the internet.

TV is the king of China's media industry, however, with no less than 65% of total ad spend. Print took no more than 25%, giving it a much thinner slice of the pie on which China's online ad industry could nourish itself.

China's internet market is remarkably advanced when it comes to entertainment applications, but in some critical areas like e-commerce and paid search -- both important drivers of internet advertising -- it lags far behind the U.S.

China's internet players squabble among themselves, rather than uniting to prove the efficacy of the internet and to try to collectively grow the market and gain share in the overall advertising market. Fierce competition among the portals before, during, and even after the Olympics was a glaring example of this.

Traffic statistics are routinely manipulated
Equally troublesome is the fact that most major internet publishers in China still aren't selling advertising in a way that accurately reflects this growing share of audience attention. They sell ads by duration, and not by number of impressions, for example.

Forward-thinking media buyers are fed up with buying on a "cost per time" basis, but online measurement in China is also behind the times in many ways. There is very little trust in publishers' claims about metrics, and that's not surprising, given the way traffic statistics are routinely manipulated, gamed, and lied about in China.

There are strong, objective third-party providers of metrics in China, like Nielsen/NetRatings and iResearch, and their data continues to improve but no one has established real authority in the market. So publishers tend to be secretive about site audits they commission and advertisers aren't demanding verifiable metrics.

Clearly, sitting around and waiting for internet penetration to rise and for a new generation of web-savvy marketers to get their hands on the purse strings is not the answer. As an industry there's a great deal we can and must do to cooperate in addressing these issues. Only then will we be able to accelerate the process of bridging China's internet advertising time-money gap.

Victor Koo is the founder and CEO, Youku.com, one of China's leading online video sharing web sites.


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