iResearch’s China Advertising market survey and prediction

On 2/21/2008, iResearch published their survey as well as their prediction on the China’s internet advertising market. See the following link:

http://www.iresearch.com.cn/html/consulting/online_advertising/DetailNews_id_76730.html

I don’t usually study their survey because I usually have some doubt about their mythology and accuracy. But I will study this one just to see I can see some patterns.

In this survey, they break it out to brand ads, search ads, classify ads, email ads, etc. For now, I just look at the brand ads.

First, I will make a table to make it more understandable:

	2004	2005	2006	2007	2008	2009	2010	2011
Total Ad	2.35	4.07	6.05	10.61	17.23	23.23	29.74	36.99
YoY	78.6%	78.9%	48.6%	75%	62%	35%	28%	24%
Brand Ad (%)	55.6%	50.1%	49.3%	45.9%	45.8%	42.3%	40.7%	39.3%
Brand Ad	1.307	2.04	2.98	4.87	7.89	9.83	12.1	14.54
YoY		56%	46%	63.4%	62%	24.6%	23%	20.2%
Portal %	51.3%	44.2%	39%	28.3%	27.2%	24.3%	22.7%	21.1%
Portal (RMB)	1.206	1.8	2.36	3.0	4.68	5.645	6.75	7.805
YoY		49%	31%	27%	56%	21%	20%	15.6%
Portal (USD)			.33	.417	.65	.784	.94	1.084

The second row is the total advertising market in China. The number is in unit of billions and it is in China’s currency, RMB. The third row is the year over year (YoY) growth rate of China’s total advertising market.

The fourth row is the brand ad as % of the total advertising market. The fifth row is the brand advertising market in China. Again, it has the unit of billions of RMB. It is just the product of the second and the third row. The sixth row is the year over year growth rate of the China’s brand advertising market.

The seventh row is the revenue from the portals (such as Sina, Sohu, etc.) as % of total advertising market. The eighth row is the revenue of the portals in unit of billions of RMB. The ninth row is the year over year growth rate for the portal’s advertising revenue. The final and tenth row is the portal’s revenue in USD. Note it is converted using today’s conversion of 1USD = 7.2 RMB.

Right away, we see something is wrong. For example, the growth rate for the brand ad market in China is 63.4% in 2007.

But how can this be? The following table has the advertising revenue from the top three portals. They are the year over year growth rate for the 4 quarters of 2007. Note that I only have the total advertising number for Sina and Ntes.

	1Q07	2Q07	3Q07	4Q07
Sina Ad	43%	40%	40%	40%
Sohu Ad	27%	24%	32%	35%
Sohu Brand Ad	41%	38%	42%	46%
Ntes Ad	-10%	-4%	2.5%	36%

There is just no way the brand advertising market grow as fast as 63.4% as indicated by iResearch data. But I think the confusion could be easily explained by iResearch doesn’t classify brand advertising, email advertising, multimedia advertising, search advertising, the same way most company does.

Some analysis on iResearch’s data.

The third row of the first table provides the YoY growth rate for China’s advertising market. There is a jump in 2007 and 2008. Then a very dramatic slow down in 2009 and beyond. The jump in 2007 and 2008 is largely because of the rise of the search engine.

But they don’t seem to capture the effect of the Olympics since they predict 2008 will have a slower growth rate than that of 2007. Their prediction of de-accelerating growth rate in 2009 and beyond is a little hard for me to believe. But that is their prediction.

From the ninth row of the first table, it has the YoY portals’ advertising growth rate. From those data, it looks bad! The 21% growth rate in 2009 is horrible!

As a matter of fact, iResearch is painting a very bleak picture of the whole China’s internet market place. That it will only growth at a meager 24% by 2011 is horrible!

I think there are four problems with iResearch’s methodology. First, as I mention before, iResearch seems to classify different advertising segment differently than most Chinese companies. It makes an apple to apple comparison difficult.

Second, their methodology is by observing one hundred thousand Chinese users and 170 Chinese companies over long term. It has its values. But how can that capture the extra-ordinary expansion of China’s internet growth (only about 15% of Chinese are netizens). By only focusing on segment of existing users, how can they capture all the new users.

Another thing is happening right now is the fundamental changes in China of changing from a text based internet to a multimedia based internet. I don’t believe iResearch capture that in its prediction.

Finally, I believe there are tremendous technology advances in China’s internet sector. Those advances will start to such revenues from China’s traditional media (TV, radios) onto internet. I don’t think iResearch accounted for that in its predictions.

But that is just my opinion. But if you believe in iResearch. China’s internet companies will enter nuclear winter stage starting 2009.

I don’t know who is right, but I will keep track of it. It will be interesting to see what iResearch's report will say this time next year.