China Internet: Where does online ad spend go?

We explore the changing face of online advertising in China, where both advertisers and platforms are becoming more sophisticated in the way they spend and make money. Tencent, Baidu, and Alibaba will...
Group Research24 Jan 2018
  • Advertisers are placing less importance on traditional measures such as the number of users and
  • …time spent; instead, they are opting for the AIDA model
  • Ads to gain ‘Attention’, ‘Interest & Desire’, and ‘Action’ are determining where ad dollars go
  • Tencent, Baidu, and Alibaba are well-positioned in ‘Attention’, ‘Interest & Desire’, and ‘Action’
  • E-commerce and local service online-to-offline platforms will be the main beneficiaries
Photo credit: AFP Photo

Based on traditional measures such as users and time spent, the market believes advertisers would like to allocate more budget to Tencent. It is because Tencent has the largest number of monthly active users (MAUs) of 938m (March 2017) and longest monthly time spent per MAUs of 1,869 minutes, while Alibaba and Baidu have lower MAUs of 507m and 400m and monthly time spent per MAUs of 224 and 289 minutes, respectively.

We interviewed China’s advertising agencies, advertisers in various industries (i.e. auto, consumer, financial and property), and Internet companies. Our proprietary research shows that advertising objectives (namely, ‘Attention’, ‘Interest & Desire’, and ‘Action’) influence advertisers’ budget allocation more than traditional measures such as users and time spent.

(1) ‘Attention’: Attracting potential customers’ Attention,
(2) ‘Interest & Desire’: Raising customers’ Interest by demonstrating advantages and benefits, and convincing consumers that they Desire the product or service,
(3) ‘Action’: Final purchasing Action.

Tencent, Baidu, and Alibaba, which have China’s largest social communication, search, and e-commerce platforms, are well-positioned in online ads for ‘Attention’, ‘Interest & Desire’, and ‘Action’, respectively.

We forecast ad spending for ‘Action’, as a percentage of total online ad budget, to increase from the current 30% to 50% in 2019F. We base our analysis on interviews with China’s advertising agencies and industry experts; we expect China’s online ads for ‘Action’ as a percentage of China’s online ad market to increase from 30% in 2016 to 50% in 2019F. We expect China’s online ads for ‘Action’ to deliver CAGR of 54% (FY16-19F), versus 30% for the overall online ads industry.

(1) Advertisers’ point of view: online ad budget allocation to ‘Attention’, ‘Interest & Desire’, or ‘Action’? The number of potential customers is the largest in the first stage – ‘Attention’, and decreases in the second and third stages – ‘Interest & Desire’ and ‘Action’. Online ads for ‘Attention’ are thus the most effective in chalking up in user numbers and time spent. However, online ads for ‘Action’ are the most effective in converting users into buyers. It is because the lag time between customers seeing ads and purchasing is shorter, which can reduce the chances that customers will be influenced by other ads or other categories, products or brands. Despite having the lowest number of potential customers in ‘Action’, advertisers would like to allocate more budget to online ads for ‘Action’.

(2) Internet companies’ point of view: online ad inventories in ‘Attention’, ‘Interest & Desire’, or ‘Action’? The continuous growth in user numbers and time spent will cause a chain reaction in the growth in online ad inventories for ‘Attention’, ‘Interest & Desire’ and ‘Action’. However, improving user data analytics, which will increase the click-through rate and the conversion rate, will amplify the effect of user numbers and time spent most on online ad inventories for ‘Action’.

Which online ad platforms will be beneficiaries? (1) E-commerce (selling goods online) platforms, which are able to connect users to point of sales, are the major source of online ad inventories for ‘Action’ and beneficiaries; (2) Local service online-to-offline (local service O2O, selling services online) platforms are another huge potential source of online ad inventories for ‘Action’ and beneficiaries.

(1) Alibaba operates leading e-commerce platforms including Taobao and Tmall in China, and it will be a key beneficiary of the shift in ad budget towards ‘Action’. We forecast Alibaba’s share of China’s online ad market to grow from 30% in 2016 to 35% in 2019.

(2) Tencent is well-positioned in online ads for ‘Action’ in local service O2O market. Tencent is well-positioned to provide online ads for ‘Action’ in the local service O2O market, leveraging its WeChat MAUs, Tenpay, and various partnership such as Meituan Dianping. We expect Tencent’s share of China’s online ad market to grow 9% in 2016 to 15% in 2019F.

(3) Baidu is positioned to stir users’ ‘Interest and Desire’, but not to stir them into ‘Action’. Its search business is losing share of China’s online ad market to e-commerce platforms, which can more effectively direct customers to take ‘Action’. Its search business and its ads will be in an increasingly unfavourable position, due to e-commerce platforms’ product category expansion or rising adoption of other local service O2O platforms. We expect Baidu’s market share of online ads to decline from 22% in 2016 to 18% in 2019F.

(4) Weibo is the second-largest social communication platform in China. Like Tencent, Weibo’s ads are positioned to attract users’ ‘Attention’. But it is expanding its ecosystem to e-commerce through cooperation with Alibaba (which owns 30% of Weibo), to position their ads to convert users to buyers. Weibo will be a beneficiary of the shift in ad budget towards ‘Action’ with Alibaba.

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