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China Mobile Advertising Landscape Report (Thomvest Ventures)

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This report examines China's digital advertising industry, with a specific focus on mobile. Our goal with this research is to grasp the many nuances of advertising technology in China – what role does programmatic play, who are the key vendors in the space, what challenges do these vendors face, and how do we expect the market to evolve over the next several years?

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China Mobile Advertising Landscape Report (Thomvest Ventures)

  1. 1. China Mobile Advertising Landscape Q4 2016 1
  2. 2. About Thomvest Ventures 2 Thomvest is an early-stage venture capital firm with over $250 million under management. We primarily focus on opportunities in Silicon Valley with early stage B2B startups in the fields of advertising & marketing technology, financial technology, and security. The capital we invest is our own, enabling us to be more creative, flexible and patient with our entrepreneurial partners. More than two-thirds of the companies we have funded in the last decade have either gone public, been acquired, or continue to grow as independent businesses. Don Butler Managing Director don@thomvest.com Nima Wedlake Associate nima@thomvest.com Mark Prior Entrepreneur-in-Residence mark@thomvest.com For questions or comments, please contact:
  3. 3. Use of mobile devices is extensive & sophisticated; most digital ad spend is flowing to mobile - 620M Chinese consumers have access to internet-connected mobile devices - Chinese consumers between ages 16-45 spend nearly 40 minutes more per day on their devices than consumers in other countries - The China mobile gaming market is the largest in the world – collectively, Chinese gaming apps earned $6.5B in 2015 - 84% of digital ad revenue is expected to come from mobile devices by 2020 - Baidu, Alibaba & Tencent – collectively known as “BAT” – own & operate 16 of the top 20 mobile apps in China - Time spent in mobile apps is dominated by BAT-owned properties (71% of time spent) - As a result, these companies control much of the available mobile ad inventory – advertisers work directly with BAT, leaving little room for intermediaries - Collectively, BAT will take 73% of China’s mobile internet ad market in 2016 - There is a lack of user-level targeting data available to third parties to purchase inventory on open exchanges - Many marketers have concerns over the quality of inventory in exchanges; most top tier inventory is only available through direct publisher deals - Programmatic direct buying (PDB) is growing in popularity, as it provides advertisers with more control over publisher selection & inventory quality The mobile advertising market is dominated by a small set of premium publishers Use of programmatic advertising remains nascent due to unique market dynamics Three takeaways from this report 3
  4. 4. Agenda China mobile advertising market size and growth Key mobile app publishers & adtech vendors in China The role of programmatic advertising in China China technology M&A trends 4
  5. 5. There are 620M mobile internet users in China, which represents 90 percent of all internet users 50 118 233 303 356 420 500 557 620 24% 40% 61% 66% 69% 75% 81% 86% 90% 0% 25% 50% 75% 100% 0 200 400 600 800 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mobile Internet Users (Millions) Mobile Internet users as a % of total Internet population InternetUsers(Millions) MobileInternetusersasa%oftotalInternetpopulation Mobile Internet Users in China, 2007-2015 Source: Statistical Survey on Internet Development in China 90% of internet users in China connect via mobile devices 5
  6. 6. Many Chinese internet users are mobile-first & rely primarily on apps vs. desktop services 3.2 2.4 1.9 3.9 3.0 1.5 0 1 2 3 4 5 16-30 31-45 46-65 Worldwide China Daily Time Spent with Mobile Devices in China vs. Worldwide, by Age Chinese consumers between ages 16-45 spend nearly 40 minutes more per day on their devices than consumers in other countries 6 Source: TNS, “Connected Life”, 2015
  7. 7. China is the largest and fastest growing market for mobile gaming $6.50 $6.18 $6.02 $1.85 $1.01 $0.82 $0.52 $0.52 $0.51 $0.41 $0 $2 $4 $6 $8 China Japan U.S.A. South Korea U.K. Germany France Australia Canada Taiwan Top Countries by Mobile Gaming Revenue, 2015 (Billions, USD) Revenue(Billions,USD) The China mobile gaming market grew 46.5% YoY, compared to 15.1% growth in the U.S. 7 Source: Newzoo Global games Market Report, 2015
  8. 8. In 2015, Chinese consumers spent nearly 3x on mobile commerce than consumers in the U.S. $75 $104 $135 $316 $0 $100 $200 $300 $400 2014 2015 U.S. China Mobile Commerce Sales in U.S. & China (Billions, USD) 25% 30% Mobile as a % of all e-commerce sales 34% 56% 8 Source: Internet Retailer (U.S.) & iResearch Global (China)
  9. 9. Mobile ad spend in China will grow to $70B by 2020, representing 84% of total digital ad spend $8 $17 $27 $38 $49 $60 $70 35% 55% 68% 74% 79% 82% 84% 0% 25% 50% 75% 100% $0 $25 $50 $75 $100 2014 2015 2016 2017 2018 2019 2020 Mobile advertising revenue (Billions, USD) Mobile ad spend as a % of total digital ad spend Mobileadvertisingrevenue(Billions,USD) Mobileadspendasa%oftotaldigitaladspend China Mobile Advertising Spend (Billions, USD) 43% CAGR 84% of digital ad revenue is expected to come from mobile devices by 2020 9 Source: eMarketer, March 2016
  10. 10. China is the fastest growing mobile advertising market, by both impression volume & ad spend Mobile Ad Impression Growth in Select Countries Q4 2015 vs. Q4 2014 Mobile Ad Spend Growth in Select Countries Q4 2015 vs. Q4 2014 15% 45% 46% 55% 101% 105% 127% 203% 0% 50% 100% 150% 200% 250% Australia Mexico U.S.A Japan Indonesia Philippines Canada China 31% 47% 69% 77% 110% 174% 308% 1246% 0% 250% 500% 750% 1000% 1250% Mexico Australia Russia Germany Indonesia U.S.A Canada China 10 Source: Smaato, Global Trends in Mobile Advertising, Q4 2015
  11. 11. Agenda China mobile advertising market size and growth Key mobile app publishers & adtech vendors in China The role of programmatic advertising in China China technology M&A trends 11
  12. 12. The mobile ecosystem in China is dominated by three walled gardens – Baidu, Tencent & Alibaba $7.1B mobile ad revenue $56B market cap $9.2B mobile ad revenue $240B market cap* $2.7B mobile ad revenue $250B market cap “Collectively, Baidu, Alibaba and Tencent will take 72.8% of China’s mobile internet ad market in 2016” 12 Source: eMarketer estimates & company filings; *Note: Includes market capitalization of Alibaba Group Holding Ltd (NYSE:BABA)
  13. 13. Baidu, Alibaba & Tencent (collectively known as “BAT”) have built full-stack consumer experiences “If you think of Alibaba, their apps are preinstalled on local Chinese phones. They produce content through Alibaba Pictures. They broadcast advertising on Youku [Tudou], which they’ve now bought. They sell products on Taobao and pay online through Alipay. They’re very, very connected, and they’re very close to the big Chinese phone manufacturers, Xiaomi and Huawei, and it’s a fully integrated system, much more than probably you would see in the West.” Doug Pearce CEO, Greater China Omnicom Media Group 13 Source: eMarketer
  14. 14. Mobile revenues for BAT rival the scale of large U.S. internet companies Domestic Mobile Advertising Revenue by Company, 2015-2016 (Billions, USD) Collectively make up 73% of the mobile advertising market in China Collectively make up 55% of the mobile advertising market in the U.S. $4.5 $5.9 $1.5 $10.0 $5.9 $1.2 $7.1 $9.2 $2.7 $13.3 $8.1 $1.7 $0 $5 $10 $15 Baidu Alibaba Tencent Google Facebook Twitter 2015 2016 (E) 14 Source: eMarketer estimates & company filings; Note: Google, Facebook & Twitter revenue figures are for the U.S. only
  15. 15. Of the top 20 mobile apps in China, 16 are owned by Baidu, Alibaba & Tencent 80% 74% 46% 41% 34% 33% 32% 29% 29% 29% 28% 27% 26% 25% 25% 24% 24% 22% 22% 21% 0% 25% 50% 75% 100% WeChat QQ Taobao Alipay Baidu BaiduMap iQiyi KugouMusic Weibo TencentVideo SougouPinyin WiFiMasterKey Youku MyApp(Tencent) QQBrowser UCBrowser Meituan QQMusic 360MobileAssistant TencentIMSecure Top 20 Mobile Apps in China by User Coverage, December 2015 Tencent Apps Alibaba Apps Baidu Apps Top social apps in the U.S. 49% 24% 16% Facebook Instagram Twitter 15 Source: TalkingData Mobile Data Research Center’s Android platform data
  16. 16. Similarly, time spent in mobile apps is dominated by BAT-owned properties (71% of time spent) 35% 10% 8% 11% 7% 29% WeChat (Tencent) QQ (Tencent) Other Tencent-owned apps Alibaba-owned apps Baidu-owned apps All others Collectively, Tencent-owned apps represent over half of time spent on mobile devices by Chinese users Share of Mobile Time Spent, April 2016 Alibaba & Baidu-owned properties make up nearly one-fifth of time spent in mobile apps 16 Source: QuestMobile,Trustdata & Hillhouse estimates
  17. 17. Baidu’s advertising products Ad Product Description Paid Search - For paid search, sponsored ads are purchased based on keyword bids and rank higher than organic search results (very similar to Google’s AdWords model) - Because of government regulations, marketers need to file a business license and a deposit (if a foreign company) that can be used towards the bids Baidu Union - Baidu Union is like Google’s Display Network. It shows ads across Baidu-owned-and-operated search products, music players and desktop apps as well as Baidu’s business partners - Baidu’s algorithms determine where and how ads are shown based on the target audience’s demographics, location and browsing history - Ad formats include banners, text links, videos, full-screen and rich media - The Union includes Wangmeng, a publisher network comprising 600,000+ websites Baidu Brand Zone - Baidu Brand Zone is located on the top of Baidu’s search results that features a specific brand - This mini branding section shows basic company information, new products and websites where viewers can make purchases - Brands that purchased a Brand Zone will have a better chance to direct visitors to its official site China’s dominant search engine, modeled after Google’s business - Baidu is the biggest Chinese search engine, often referred to as the “Google of China” - Each month, over 90% of China's internet users use Baidu search, with the daily query number reaching the hundreds of millions. - Earlier this year, the company’s advertising practices came under scrutiny after a user undertook an ineffective cancer treatment he found through a Baidu online ad - Shares in the company have fallen nearly 15% YTD, and Baidu lowered its revenue forecast by nearly 10% 17
  18. 18. Alibaba’s advertising products Ad Product Description Alimama - Alibaba’s online marketing technology provides merchants on its platform with marketing services on desktop and mobile. - “Alimama accesses the large Taobao Marketplace merchant base as customers for online marketing services without the need to rely on a field sales team.” Taobao Affiliate Network - Taobao Marketplace is one piece of Alibaba’s e-commerce properties with 100 million visitors a day. The affiliate network lets Taobao sellers advertise on partner properties like Weibo - “Sellers place marketing displays on our marketing affiliates’ websites and mobile apps, and sellers pay us a performance-based marketing fee primarily based on cost-per-click, or CPC, and cost-per-sale, or CPS, models.” Taobao Ad Network & Exchange (TANX) - Alibaba’s real time bidding ad exchange is powered by its cloud computing platform and handles billions of impressions a day. Data Management Platform - Alibaba’s data arm plugs into its ad exchange, providing better targeting capabilities - For example, Mercedes Benz used its own data on store visitors to influence its online ad buying through Alibaba’s Taobao Marketplace AdChina - Alibaba acquired digital ad platform AdChina in January 2015 - The company launched a marketing platform within Alimama called “Dharma Sword”, designed to serve brand advertisers and leverage Alibaba’s valuable shopper intent and transactional data Rich e-commerce data powers advertiser solutions - Alimama says it has customer profiles for 630 million consumers, representing nearly every Internet user in China, for which it’s created more than 8,000 audience segments - The account information housed within Alimama is derived from Alibaba account profiles, which include consumer details such as name, email address, home address & purchase history - The company leveraged this account information to develop a “super ID” that powers cross-screen campaigns both inside and outside of Alibaba’s properties 18
  19. 19. Tencent’s advertising products Ad Product Description Social Advertising - Tencent last year started placing brand ads in WeChat’s Moments section, where users post photos and updates. - In June, announced a partnership with WPP to create the “China Social Marketing Lab”, which develops enhanced solutions that cater to brand clients and their target audiences - Recently struck partnerships with Dentsu, Publicis, Omnicom & others to make inventory & data available to brand advertisers programmatically Tencent Ad Exchange & DSP (Tango) - Exchange allows for inventory access across social apps & gaming titles - Launched a DSP called Tango in 2013 to better leverage user data across its exchange inventory - "Tango’s revenue is still small compared to our traditional display ad and content partnership revenue. However, on the Tencent Ad Exchange, Tango accounts for a good portion of the ADX revenue.” - Exchange is also open to third-party DSPs and buying platforms Tencent Network - Mobile ad network similar to Facebook’s Audience Network; targeted towards app publishers distributing through its app store; ad formats include banner, native, interstitial & app wall Tencent Smart Data - Profiles created based on user data such as consumer demographic attributes, interests, and other online data - In March, Tencent announced a partnership with Omnicom Media Group to create target audience (TA) portraits for OMGs clients using Tencent Smart Data Mobile internet giant with many popular social & gaming apps - Tencent owns & operates many of China’s most popular mobile applications, including WeChat, QQ, and several gaming titles - About 80% of the company’s ad revenue is generated by mobile platforms - As of March 2016, WeChat had 762 million monthly active users, up from 697 million in December 2015 - Active users of QQ’s mobile app rose to 658 million in March 2016 19
  20. 20. Unlike the U.S., the app ecosystem in China is distributed across many app stores 5% 5% 6% 6% 10% 15% 16% 16% 22% 25% 0% 10% 20% 30% Pea Pods (Wandoujia) BBK-Vivo App Store HiMarket Oppo App Store Huawei App Store Xiaomi Game Center Baidu Mobile Assistant MIUI App Store (Xiaiomi) 360 Mobile Assistant MyApp (Tencent) Top 10 Android App Stores by User Coverage, December 2015 Third-party app store App store run by hardware producers App store revenue from Android devices represents 61% of Chinese mobile app revenue (with the remaining 39% coming from iOS) 20 Source: TalkingData Mobile Data Research Center
  21. 21. Chinese app stores rival the scale of Google and Apple’s app stores 20% 17% 17% 16% 11% 7% 5% 2% 2% 1% 0% 5% 10% 15% 20% 25% Google Play iOS* Baidu Tencent Qihoo 360 Wandoujia AppChina D.cn HiAPK Anzhi Global App Download Share by App Store, 2015 Chinese App Stores Non-Chinese App Stores 21 Source: Digi-Capital (2015); * Note: iOS App Store download share includes downloads made in China
  22. 22. There are many mobile ad networks active in China; most are focused on driving app installs Top 20 Mobile Advertising Networks by Number of Activations Chinese Ad Networks Non-Chinese Ad Networks Other notable mobile adtech vendors operating in China: Vungle, Unity, AdColony & TapJoy 22 Source: TalkingData Mobile Data Research Center
  23. 23. Most mobile app advertising dollars are allocated to gaming apps Gaming 60% E-commerce 12% New media 12% Travel & transport 8% Other 5% 0% 25% 50% 75% 100% 1 In-App Advertising Split by App Category, 2015 (As a percentage of total number of mobile ads served) Social 3% Chinese consumers spend more 33.8 minutes per day using gaming apps E-commerce apps are used for nearly 10 minutes per day, on average 23 Source: TalkingData Mobile Data Research Center
  24. 24. 27% 18% 7%4% 4% 4% 4% 3% 3% 3% 23% Tencent Games NetEase Games OurPalm Shanda Group Skymoons Lilithgame Zeus Interactive Duoyi Happy Elements Feiyu Technology Others The mobile gaming sector in China is large & diverse – which is beneficial to ad networks Market Share of Chinese Mobile Gaming Companies, 2015 Tencent is the market leader in mobile gaming, commanding about one-quarter of the market Unlike other app categories, there are many large, independent gaming companies operating in China 24 Source: GamesInAsia
  25. 25. Other notable Chinese internet companies Company Logo Market Cap Company Description JD.com $33.5B JD.com is a Chinese electronic commerce company headquartered in Beijing. It is the largest B2C online retailers in China by transaction volume and revenue, and a major competitor to Alibaba-run Tmall. LeEco $12.0B LeEco (Formerly Letv), is a Chinese technology company, and one of the largest online video companies in China. Qihoo 360 $10.4B Qihoo 360 is a Chinese internet security company known for its antivirus software, Web Browser, and Mobile Application Store. NetEase $27.7B NetEase provides online services centered on content, community, communications and commerce. The company has a strong focus on gaming, as well as social messaging, news, reference, email, search & e-commerce. Sina $3.8B Sina is a Chinese media company. Sina operates four major business lines: Sina Weibo, Sina Mobile, Sina Online, and Sinonline a.net. Sohu $1.5B Sohu is a Chinese Internet company that offers advertising, a search engine, on-line multiplayer gaming and other services. Cheetah $1.4B Cheetah Mobile is the second largest internet security software provider in China by monthly active users, according to iResearch. In 2015, Cheetah acquired ad tech startup MobPartner and launched its online advertising platform 25
  26. 26. Agenda China mobile advertising market size and growth Key mobile app publishers & adtech vendors in China The role of programmatic advertising in China China technology M&A trends 26
  27. 27. There are four primary models by which advertisers buy media on publisher sites Advertiser Publisher Supply-Side Platforms (SSP) Ad networks aggregate publisher inventory; advertisers work with networks to buy audiences across many sites Advertisers negotiate directly with individual publishers; inventory is sold in large blocks 1. Direct 2. Ad Network 3. Ad Exchange 4. Demand-Side Platform (DSP) Methods for Buying & Selling Digital Media Ad inventory sold via exchanges is typically considered “programmatic” In China, advertisers typically work directly with large publishers to buy media Exchanges aggregate publisher inventory, but auction individual ad impressions in real-time; targeting is at the user-level DSPs allow buyers to bid across multiple ad exchanges through one interface SSPs allow publishers to manage their relationships with multiple ad partners 27
  28. 28. The Chinese programmatic advertising is still nascent relative to western markets Publishers - Both premium & long-tail publishers have adopted programmatic for some or all available inventory - Most available inventory is controlled by three dominant publishers; only remnant inventory is available programmatically Advertisers - Large brand advertisers are increasingly allocating their digital ad spend to programmatic channels - Advertisers are hesitant to spend programmatically due to ad fraud & quality concerns - Opt instead for direct deals with large publishers Intermediaries - There are many large, independent adtech vendors serving different parts of the ecosystem – DSPs, SSPs, exchanges, etc. - A robust ecosystem of intermediaries has yet to form; there are few independent adtech companies at scale in China Standards & Regulatory Environment - The IAB establishes cross-industry standards around ad formats, sizes & communication protocols between ad buyers & sellers - The Chinese government closely controls the content of online advertisements - Cross-industry standards around ad formats are nascent United States China Comparing the programmatic advertising landscape in the U.S. & China China resembles the U.S. programmatic market 3-4 years ago 28
  29. 29. Programmatic advertising represents a small but growing portion of total mobile ad spend in China 12 58 504 1,299 2,421 3,759 3% 5% 6% 8% 0% 25% 50% 75% 100% 0 1,000 2,000 3,000 4,000 2013 2014 2015 2016 2017 2018 Mobile Programmatic Ad Spend Programmatic as a % of total mobile ad spend Adspend(Millions,USD) Programmaticasa%oftotalmobileadspend Spending on Programmatic Mobile Ad Buying in China, 2013-2018 (Millions, USD) Programmatic will make up 8% of mobile ad spend 29 Source: iResearch Global Group, July 2016
  30. 30. Most desirable ad inventory is sold directly to advertisers, as opposed to via ad exchanges If you look at Tier 1 cities—Beijing, Shanghai, Guangzhou—that type of inventory is not available through the exchanges. That inventory gets booked up every month. You have to book in advance or there won’t be enough inventory because so many advertisers target these Tier 1 cities. Most of the remnant inventory goes to their private exchange, which consists of second- and third-tier city inventory, and also more of your long-tail content inventory. Charlie Wang Chief Operating Officer ReachMax 30 Source: eMarketer
  31. 31. Several factors inhibit broader programmatic advertising adoption in China Primary Challenges to Programmatic Adoption in China 1. Large publishers control most supply - The largest internet players such as Baidu, Alibaba and Tencent have leveraged their data from search, e- commerce and social to create closed advertising ecosystems - These companies operate closed exchanges and private marketplaces focus on premium inventory 2. Inventory and data quality concerns - Because the large internet companies operate closed exchanges, there is a lack of user-level targeting data available to third parties to purchase inventory on the open web - Concerns over the quality of inventory in exchanges cause marketers to be reluctant to execute on open exchange platforms; most top tier inventory is only available through direct publisher deals 3. Lack of experience and industry standards - Although Chinese advertisers and publishers are starting to embrace programmatic, most are still accustomed to buying and selling on a cost-per-day (CPD) rather than a CPM basis - Marketers, agencies and publishers lack deep experience in programmatic and RTB advertising - Lack of unified standards create disparate buying practices across publishers & networks 31
  32. 32. We expect more brand dollars on mobile to be shifted towards “programmatic direct” Long-tail inventory on open exchanges (usually ad inventory from lesser known publishing sources & traffic outside of Tier 1 cities). This carries a higher risk of brand safety and viewability issues. Advertisers negotiate a fixed CPM and pass- back ratio with the publisher, and then use a third-party buying platform to pick out the impressions. Provides control & transparency for brands. Real-time bidding (RTB) Programmatic direct buying (PDB) 99% 88% 69% 63% 1% 12% 31% 38% 0% 25% 50% 75% 100% Q1 2015 Q2 2015 Q3 2015 Q4 2015 Real-time Bidding (RTB) Programmatic Direct Buying (PDB) Available Mobile Impressions – RTB vs. PDB, 2015 More brands are opting for PDB Most RTB spend today is from e- commerce 32 Source: iPinYou
  33. 33. Programmatic advertising intermediaries 33
  34. 34. China programmatic advertising vendor landscape Source: RTBChina34
  35. 35. $82 $229 $494 $954 $1,681 $2,578 178% 116% 93% 76% 53% 0% 50% 100% 150% 200% $0 $1,000 $2,000 $3,000 2012 2013 2014 2015 2016 2017 DSP display ad spending (millions, USD) Growth rate (%) Market Scale of DSP Display Ad Spend in China, 2012-2017 (Millions, USD) (Includes Desktop & Mobile Spend) Ad spend transacted via demand-side platforms is expected to reach $2.5B by 2017Demand-side platforms 35 Source: iResearch China DSP Market Trends (2013)
  36. 36. iPinYou has a strong presence among brand advertisers in ChinaDemand-side platforms iPinYou 60% AdChina 12% Yoyi 10% Google DBM 7% Others 9% 0% 25% 50% 75% 100% 1 Demand-Side Platform Market Share in China, 2015 (Among brand advertisers) hdtMedia 2% 36 Source: EnfoDesk, Analysys International
  37. 37. Demand-side platforms Many of the DSPs in China were originally traditional ad networks DSPANs reflect advertiser buying preferences, but lack transparency - Many DSPANs started as ad networks and later integrated demand-side platform capabilities - With DSPANs, ad network inventory is mixed with programmatic exchange inventory - Brand buyers expect to buy named inventories; vendors must provide the ability to choose publishers within programmatic buying platforms - Many advertisers are accustomed to the cost-per-day (CPD) system that allows them to clearly see where an ad is placed - However, this model lacks neutrality; typically, DSPANs prioritize the sales of their network inventory first, above that of other publishers 37
  38. 38. Exchange Company Capabilities Type Owned Inventory Third-Party Inventory Device(s) Notes TANX Alibaba ADX, DSP, SSP, DMP Private Taobao online shops Alimama alliance PC & Mobile - Aggregates inventory from its e- commerce websites Baidu Exchange Service Baidu ADX, DMP Private Owned properties & partner sites Baidu alliance; news partners PC & Mobile - Works with 600K+ partner sites (similar to Google’s Display Network) Tencent Ad Exchange Tencent ADX, DSP, DMP Private Owned properties & partner sites Mobile alliance; Discuz alliance Mobile - Also launched a DSP named Tango in May 2013 Youku Tudou ADX Alibaba ADX Private Owned video - PC & Mobile - One of China’s largest video sites, referred to as the “YouTube of China” Sina Ad Exchange (SAX) Sina ADX, DMP Private Sina properties, including Weibo - PC & Mobile - SAX is used for traffic across Sina-owned sites outside of Tier 1 cities Doubleclick Ad Exchange Google ADX, DMP Open - AdMob, AdSense PC & Mobile - Launched in 2012; considered to have access to premium inventory compared to other open exchanges Inmobi ADX Inmobi ADX Open - Network of apps Mobile - Primarily focused on driving app installs for gaming companies Private exchanges operated by Baidu, Alibaba & Tencent are the largest in ChinaAdvertising Exchanges 38
  39. 39. Advertising Agencies Role of agencies in the China advertising market 1. Large global agencies with a large and mature local presence - Digital agencies operating under the umbrella of large global agency groups like IPG, Omnicom, Publicis, and WPP have been present in China for several years and have strong experience in serving both international and local clients - All of these agencies have set up agency trading desks in China and are ramping up programmatic ad spend 2. Global agencies that still need time to develop a presence in China - Other global agencies have a much shorter history in China - For example, Possible China has only been in the market for three years; the majority of its business comes from global contracts - These agencies typically lack programmatic buying expertise & haven’t set up trading desks 3. Local agencies that are more vertically focused - Few local digital agencies provide full digital services (BlueDigital is a notable exception) - Most focus more on one or a few particular services (such as social marketing agency Social Touch and mobile marketing agency Domob) - Steadily increasing online media spends but lack deep understanding of digital technologies; mostly come from offline media buying Source: Gartner Types of Agencies Operating in China 39
  40. 40. Advertising Agencies Role of trading desks in the China advertising market As in the U.S., agency trading desks are the centralized organizations that drive programmatic spending within agencies Holding Company Trading Desk Publicis Vivaki Omnicom Group IPG The major global agency holding companies have established trading desks in China Trading desks have struggled to gain broad adoption in China - Trading desks in China remain under utilized compared to their U.S. counterparts - Less than 20% of exchange buys come from agency trading desks (Thomvest estimate) - Trading desks are being held back by the following: 1) Lack of trust in inventory sources available via exchanges, 2) Lack of third-party data for audience- level targeting, 3) Lack of local talent specializing in programmatic media buying 40
  41. 41. Measurement & verification Ad measurement & verification critical components of a viable programmatic market High rates of click and impression fraud - According to RTBAsia, between 15 to 20 percent of China’s advertising impressions that are traded in ad exchanges are non-human - This high ad fraud rate can be attributed to Chinese computers running old versions of Windows which are infected with malware and allow bots to run in the background Ad verification is difficult against closed BAT systems - Currently traditional ad verification can only measure consumer demographics based on offline panels - Companies like Miaozhen Systems and AdMaster have used this methodology to roughly calculate advertisers’ target audience percentages - Companies like Nielsen are partnering with Tencent for its digital ad rating (DAR) product, which uses Tencent’s behavioral data in conjunction with traditional panels to measure advertising effectiveness 41
  42. 42. Government Intervention In July, the Chinese government issued new regulations on online advertising, which lay out guidelines to guard against false or misleading practices Background - The regulations follow public uproar due to the death of a student who tried a cancer treatment he found advertised on Chinese internet search giant Baidu Inc.’s platform - The ensuing criticism took aim at the murky online environment for health information Major Changes - Prohibits online ads for prescription medication and tobacco - Requires prior government approval for ads for medical supplies, pesticides, veterinary medicine and other health products - All paid advertising must be clearly identified in search results - Adequate options must be provided for users to close an ad (such as a popup) Expected Impact - These are expected to impact all digital marketing channels from search, ecommerce, email, social media and some elements of programmatic buying - Search giant Baidu and e-commerce giant Alibaba will take the biggest revenue hit (IHS estimate) - In the long run, tougher regulations will help online advertising to become a more credible advertising medium The Chinese government closely controls the content & creative included in ads “The government is trying to get a hold of a fast-moving segment of the internet. This new move will create a more transparent business environment for major players and will lead to a more favorable development of the industry,” Faith Gao Programmatic Director Performics 42
  43. 43. Agenda China mobile advertising market size and growth Key mobile app publishers & adtech vendors in China The role of programmatic advertising in China China technology M&A trends 43
  44. 44. Notable advertising technology acquisitions in China Date Company Logo Acquirer Price Price / TTM Rev Company Description Q3 2016 AppLovin Orient Hontai Capital $1.4B 6x (2015 rev) - Mobile app advertising platform Q3 2016 Media.net Miteno Communication Technology $900M 3.9x (2015 rev) - Contextual advertising network Q3 2016 GameAnlaytics Mobvista - - - Free app analytics platform for game developers Q2 2016 Smaato Smaato Spearhead Integrated Marketing Comm. $148M 1.6x - Global mobile SSP & advertising exchange Q1 2016 Opera* Qihoo 360 & Kunlun $1.2B 2x - Browser & security software; mobile advertising platform Q1 2016 NativeX Mobvista $25M - - Native mobile app advertising network Q2 2015 Domob BlueFocus Communication Group $289M - - China-based mobile advertising network Q1 2015 MobPartner Cheetah Mobile $58M 3.7x - Mobile app advertising platform Q1 2015 AdChina Alibaba - - - Chinese advertising platform with a focus on brand advertisers Source: 451 Research M&A Knowledgebase * Note: In July 2016, Qihoo & Kunlun announced that its consortium would acquire only Opera’s browser and security software (Opera’s Mediaworks group will be sold in a separate process)44
  45. 45. Notable advertising technology companies listed on Chinese stock exchanges Company Logo IPO Date Market Cap Gross Revenue Company Description 2014 2015 2016 (E) Mobvista Nov. 2016; NEEQ Index $1B $100M $200M N/A - Hong Kong-based mobile advertising network with a large presence across Asia (10B daily ad impressions in more than 230 countries) - Recently acquired NativeX & GameAnalytics PapayaMobile (aka AppFlood) May 2016; NEEQ Index $335M $35M $51M $150M - Mobile ad platform focused on driving app installs; offerings include DSP & Facebook ad buying tool - Projected revenue of $150M & net profit of $15M in 2016 Spearhead Integrated Marketing Comm. Group Apr. 2010; Shenzen Stock Exchange $1.2B $234M $486M $656M - Offline marketing services provider, including terminal marketing services, event marketing services, & media communication services - Acquired Smaato in Q2 2016 for $148M BlueFocus Comm. Group Feb. 2010; Shenzen Stock Exchange $3.2B $895M $1.25B $1.96B - Large branding agency with services including ad planning, brand communications, product promotion & crisis management - Acquired Domob in Q2 2015 for ($289M) Source: Thomson One & company filings45
  46. 46. Chinese companies are increasingly active buyers of American & European digital media vendors Western digital media companies acquired by China-based buyers, 2011-2016 (Includes adtech, martech, gaming & media companies) Source: 451 Research M&A Knowledgebase * Note: ”Total Deal Value” only includes deals where acquisition price was disclosed ** Opera acquisition not included because deal has yet to close 4 0 2 3 5 12 0 5 10 15 2011 2012 2013 2014 2015 2016 YTD NumberofDeals $452M N/A N/A $79M $94M $11.7B Cloud Data Corp Cryptic Studios KAX Media Riot Games Inc. We Are Social Ltd. Longshot Interactive Digital Extremes Ltd. Semp.com GetJar Rumble Entertainment WPT Enterprises Piraeus Consulting MobPartner Miniclip SA Supercell Smaato OpenJaw Bigpoint NativeX Corbis Entertainment Blue Fountain Media GameAnalytics News Republic Media.net AppLovin Total Deal Value (USD)* ** 46
  47. 47. This uptick in cross-boarder M&A has been spurred by high valuations in Chinese stock markets “China's stock markets are running hot. Businesses trading there get relatively higher multiples, creating an arbitrage opportunity for a disciplined buyer. That provides an impetus for East-to-West deals, in addition to cost synergies, opening up new avenues of growth and other considerations that typically drive M&A." Scott Denne Analyst 451 Research 47
  48. 48. Recent mobile acquisitions by Baidu Date Company Logo Price Company Description Q4 2013 PW Literature (Zongheng.com) $31.2M - Online literature & e-reading platform Q3 2013 Nuomi Holdings $160M - Online coupon services provider Q3 2013 91 Wireless Websoft Limited $1.85B - China-based Android app store Q2 2013 PPStream $370M - Peer-to-peer streaming video network software Q4 2012 iQiyi N/A - China-based video-sharing website Q2 2011 Qunar.com $306M - Online travel search and reservations service Recent Investments: 2016: ZestFinance, Circle, Exands 2015: Womai.com, Bai An, Bolo.me, CloudFlare, Mia.com, Uber China, Edaixi, Taboola, Qianhai Mobile, VisionChina, Uxin, 2014: Pixellot, SmartStudy, IndoorAtlas, Wanda, UUCun 48
  49. 49. Date Company Logo Price Company Description Q2 2016 Wandoujia $200M - China-based Android app store Q2 2016 AGTech Holdings $307M - Lottery and gaming systems Q4 2015 Youku Todou $3.7B - China-based video-sharing website Q1 2015 AdChina N/A - Chinese advertising platform with a focus on brand advertisers Q3 2014 UCWeb >$1.9B - Mobile browser software provider Q2 2014 AutoNavi Holdings $1.58B - Mapping data and location-based services software Recent mobile acquisitions by Alibaba Recent Investments: 2016: Didi Chuxing, Yiguo, Magic Leap 2015: Jet, Meituan-Dianping, One97 Communications, Snapdeal, OpenJet, Koubei.com, Quixey, Yazuo, Lazada Group, ThetaRay 2014: Peel, Lyft, Tango, TutorGroup, Baicheng, Myfriday.cn, Huxiu.com, Kabam, MomentCam, WiTown, ByeCity, Momo 49
  50. 50. Recent mobile acquisitions by Tencent Date Company Logo Price Company Description Q3 2016 China Music Corporation $2.7B for a 60% stake - Mobile music streaming services (Kugou and Kuwo) Q2 2016 Supercell $8.6B - Mobile gaming developer (“Clash of Clans” is its most popular title) Q1 2016 Radiant Entertainment N/A - Online gaming developer Q1 2015 Miniclip SA N/A - Online & mobile gaming developer Q1 2012 ZAM Network N/A - Videogame enthusiast website operator Recent Investments: 2016: Baobao, Pinduoduo, Future Mobility, Payoff, Meta, Ningmeng Pictures, Diffbot, iCarbonX, Paradox Interactive, Yuanfudao 2015: Watsi, AltSpaceVR, Wuxi Maimaibao, QuizUp, VC Mobile Entertainment, Cyanogen, Satellogic, Lyft, Scanadu, Didi Chuxing 2014: Breadtrip, Playdots, Kamcord, WiWide, Amplitude, WhisperText, Garena, Domob, Weebly, Dianping.com 2013: Snapchat, Daum KaKao, QuizUp, Kamcord, JiaThis, Uxin 50

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