Digital Thoughts – Far East

It’s not often that deals in our industry top nine figures, and it is even rarer when those deals involve Internet ventures outside of the United States. Such a transaction occurred this week when Yahoo announced its intent to purchase a stake in China’s largest homegrown Internet venture, Alibaba.com. Valued at, at least, $1 billion, the deal is a complicated one that involves investment into Alibaba and its two large business units – Alibaba.com and Taobao.com – as well as the consolidation of Yahoo’s existing Chinese operations into Alibaba. Net/net, Yahoo receives an estimated 40% stake in Alibaba, and the company looks well positioned in a market that has already seen its first US IPO in Baidu.com. But, this article isn’t about the Yahoo deal, nor is it about the IPO, or Google’s Chinese efforts, which include AdSense expansion and recent controversial hiring of a key Microsoft executive. It’s about opportunity, a challenge if you will. One that someone should solve.

For all that has changed in the industry in the past five years, there remains one area lagging behind the rest, international monetization. It was a problem in 2000, and it is still a problem now. International traffic, especially that from China, India and other developing nations, has few buyers. This causes problems for all sorts of players in our space, one of which are the incentive promotion advertisers. They make their money by funneling users through a co-registration path and converting users on high-dollar CPAs. All of the offers in this monetization process require users to be US or Canadian, but primarily US residents. While they can proactively filter out users based on IP, ask one of them, especially those that do email if they receive any non-US / Canadian entries.

Ad networks too have a similar issue. Most ad networks will not accept impressions from countries outside the United States, and those doing media buys on behalf of ad networks focus exclusively on traffic from the United States. Publishers in the networks must either proactively filter on their end or be prepared to have upwards of 50% of their impressions go unmonetized. While there are a handful of advertisers that regularly buy traffic from outside of the United States, it’s not enough and their combined yields not lucrative enough for networks to focus on accepting non-US impressions. Instead of the Cheaptickets and the Vonages of the world buying international traffic, the current handful tends to be the more unbranded, risk-taking, advertisers including the now famous green card lottery sites, software downloads (both free and paid), work from home, ring tones, and to a lesser degree, other lead generation areas like education.

Saying that no ad networks can monetize international traffic doesn’t take into account companies like Advertising who, thanks to their purchase of Dayrates in March 2002, earns millions monthly off international traffic. And, there are at least a handful of other non-US based ad networks doing equally well monetizing international traffic. The key difference is that almost all have sales offices in the respective countries, and this includes Google and Yahoo. Conversations with European ad networks confirm that a local presence is required, which helps explain why so many US or Canada-only based companies see few of those ad buys. This doesn’t, however, only explain, but doesn’t take away from the real opportunity.

International ad companies and international ad networks run ads on sites in their native language that target users in that particular country. Similar to the US market, competition for traffic has continued to rise making inventory scarce. Take Germany for example. It might cost an advertiser five euros to purchase pop-under traffic from a German site. That advertiser, though, could purchase German based traffic from a US site or ad network for 1/5 to 1/3 the rate. Even more, they could do this not just on a CPM or CPC basis but on a CPA basis too. Few, if any international ad companies seem to be taking advantage of this opportunity. Were it all branded CPM dollars that would make sense, but it isn’t.

In other words, the ads that run on the international sites and ad networks are not the same as those ads that run on the same country traffic originating from US based sites. The major investments, both in terms of money and personnel in countries outside the US suggest that the time might be right to be thinking about this disconnect. There is a lot of traffic available for what appears to be under market pricing. The question that has yet to be answered is the quality difference. Is local traffic originating from non-local sites performing less than 1/5 to 1/3 as well, or is there an opportunity? Flipping the situation around, if someone offered a chance to buy US traffic in volume from sites like Alibaba at 1/3 what we currently pay for equivalent traffic, would we take it? That might just be a good first test. Either way, someone will figure this out or the market will. I can’t help but think there is a lot of money in it for the company that figures it out before the market does.