The Unmonetizable
Almost ten months ago, I made some predictions for what might happen before the close of 2006. Similar to our Trends piece on the un-network ad networks, this particular prediction involves an issue that leaves many ad networks thinking there should be a better option than what exists today. As advanced as networks and sites have come at monetizing traffic, including remnant, one source of traffic seems to go unmonetized by many if not all – Asian traffic, specifically that from China. Given the large opportunity and low cost of the media from a US perspective, it seemed only reasonable that someone would crack the nut.
In the US the infamous x10 cracked a similar nut. They figured out how to buy what others couldn’t monetize. For a while, they got so good that they competed head to head for premium position. More often than not though, x10 took all the rest. With such a large population and hot economy, it seemed a similar company either based in the US or abroad might create the x10 super soaker for unmonetized Chinese traffic. Seemingly as likely was that an enterprising shop might do for China what some did for European traffic a year or two back, i.e. find a handful of offers, then buy European traffic from sites that have more than they can fill. No major technology is needed, just the willingness to take risk. It looks, though, that the x10 for Asia and/or scappy network won’t happen, at least not this year. As large of an opportunity as Asia presents, it simply won’t be ready in time and in this piece I tell why.
Despite my prediction that my earlier prediction won’t occur, it has nothing to do with a lack of sophisticated web sites or lack of traffic. The Chinese have many large and thriving portals including number one Sina.com, Sohu.com, QQ.com, and 163.com to name a few. As a note, you will find more numeric domains in China, as I understand it, because the domain name system is based on the English language. Numbers however are quite universal and thus easier to type in (no switching from Chinese to English letters) and easier to remember.
Unlike the US and many parts of Europe and even other countries in Asia, the Chinese display ad market sells space not on CPM or CPA. They, chiefly the dominant portals, sell their space using time increments. Hypothetically speaking, you could purchase several hours of time, and you would do so by picking the section of the site you wanted to be seen. Those parts of a portal that companies want their ads on most, the US equivalent being Yahoo Finance versus run of network, form a site’s hot properties. It’s advertising by association, very similar to a sponsorship, except that the Chinese media properties will boost revenues by rotating in more than one advertiser.
The sites in the Chinese ad market, similar to the US and European ones, do not sell out 100% of their inventory. In China, the branded advertisers vie for main sections of the portals, i.e. the “hot properties,” but what they do not have yet are any ad networks or advertisers that specialize in filling the unsold gaps. As we have seen in the US market, a company can create a substantial business by focusing on the gaps. Remnant spots might not have the cache of the higher value premium ones, but if you could build a multi-million dollar per month business like an Advertising.com did, wouldn’t you?
In the US and now European ad market, which advertisers came in to take advantage of the remnant space? It wasn’t the brand guys, but companies like x10 and Expedia who bought on a performance basis. The problem is, these types of companies don’t really exist in China. And for the most part it comes down to their not being an online payment infrastructure. (Caveat – this information is not based off first hand experience. Take it as directional but not gospel.) The vast majority of the online population doesn’t have credit cards. If you buy something off eBay, you pay the other seller in cash. In many cases, after a sale occurs, a messenger comes, picks up the product, takes it to the buyer, and the buyer, if happy gives the money to the messenger. Nowhere in this process is eBay guaranteed to get its money.
Those that have read “The Perfect Store” will know that when eBay launched in the United States, all transactions took place offline and listing fees were physically mailed in. The lack of online payments didn’t prevent it from growing, but the massive growth couldn’t take place until it did. And, in China, at least according to my understanding, an equivalent postal service to the US doesn’t exist, which means sales occur on a regional level where people can have them delivered and inspected by some form of messenger. They don’t send them across the country as we do here.
Travel, a huge vertical in the burgeoning US ad market, has similar issues. Here, to book a room online, you do so by leveraging two things – complex computer systems that enable the travel site to communicate and see inventory status of the airline, or in this example hotel room, and credit card processing so that hotels have a means for billing you. The billing is most important when making reservations and not showing up. In most cases, you are charged something if you reserve and do not show, with that amount increasing the closer you get to the requested date of stay. In China, travel sites exist, but when you book a room, computers do not talk to computers. A person faxes in the request to the hotel. Most important though, the travel site cannot take a piece of the transaction electronically. They must go to the hotel to collect. With nothing to lose, people do not have as great an incentive as they do here to manage cancellations.
This then brings us to areas where commerce does exist more readily, i.e., cell phones. Almost every market outside the US has a more advanced cell phone system, China included. Probably all surfers have cell phones, which means a large market exists for selling content for phones. Unlike parts of Europe though, users cannot buy other goods and services through their cell phone. It can’t act like a digital wallet. There are other areas of online that thrive, such as games, but even there, revenue generation goes through middle men and then more middle men. It’s much like search, where you deal with authorized agents and not the engines directly. Everybody is getting a piece, and the value offered is debatable.
Take it all together, and the reason why we in the US do not have a solution to our unsold Chinese ad inventory is because Chinese sites don’t have a solution, yet. Performance-based advertising is not in a position to thrive, and it is performance-based advertisers that drive the remnant economy. The US will get its solution, but it can occur only after the same solution takes place in China. There might be companies looking to buy the low cost ad space, but the overall economic infrastructure prevents them from buying a lot, and as we’ve seen, buying up a lot is what it takes to win in remnant. It won’t be long though. Payment systems are progressing rapidly, and I fully expect a firm in china, or even one here, to help put in place a Chinese remnant ad network model…just not by the end of 2006.
