China's New Media Blossoming as Business Models Revamp

BEIJING, Dec 08, 2008 (BUSINESS WIRE) -- In a vast market like China, where advertising spends per capital only approximate 2-3% of the level in the US, the blossoming new media sector is likely to see the fastest growth in consumer demand and wealth creation, according to a recent report by Z. H. Studio. New media leaders are outpacing the old media players as the key driver of innovation, both technology- and business-wise, as well as enhanced value chains.

Just about two years ago, Focus Media was almost a synonym of the "new media" concept in China. The company spearheaded the all-in-one-digital-signage model and operated LCD screen ads in elevator lobbies 24 hours a day. After a high-profiled IPO at NASDAQ, the company's founder Jiang Nanchun became one of the richest men in China at the age of 33. Ever since, LCD screens have been popping up in supermarkets, buses, air flights, railway cabinets, parking lots, restrooms, hairdressing salons ... just everywhere you go you will see the screens operated by Focus Media - or its copycats.

Does the Focus Media model still stand for "new media" today? No longer. In most cases, people are not looking to be entertained - merely as recipients - by those "unavoidable" ads. Consumers like to get more "active participation" with the media.

Interactive instead of unilateral

Small wonder, then, user-generated content and ads have become new fad. KFC Group was among the earliest companies to experiment with guerrilla marketing on Internet. In 2007, it ran a campaign for a new product launch on BlogBus, a Shanghai-based blogging service provider somewhat like Six Apart. Over 200 users blogged about their off-line experience associated with the campaign and created prime buzz for the product. According to Dou Yi, founder and CEO of BlogBus, the site annually generates 10-million-RMB revenue from such product placement campaigns and well-known brand advertisers include Absolut Vodka, General Motor, Lenor, Gillette, Garnier, and L'Oreal.

"Many companies are turning to the Internet users to help with their marketing messages and ads are blending in with entertainment content," says Mr. Dou. "Brands create partnerships with leading influencers on the social web ... In the end, the best advertisements are those that don't look like ads."

James Li cannot agree more. The founder and CEO of Bihu, a leading technology firm specializing in IGA (in-game ads), contends that "pure ads" will have no future due to commercial forwarding devices in the digital entertainment age. It took his company four years to develop a system that enables game publishers to embed commercial ads on a real-time basis, without changing any source code. What's particularly inspiring to Li is the base of 70 million active online gamers in China, plus another 50 million non-active users.

"The fact that China is already the world's largest Internet and mobile market, without even having reached 50 percent penetration, means that Chinese companies can - and in many cases will have to - do things that companies in other markets will never be able to do in terms of scale," argues Steven Schwankert, Desk Editor of IDG News Service in Asia. "Therefore, they can experiment, and a smaller percentage of their customer base embracing something can be counted as a success."

The new media sector has seen experiments in all areas like video-sharing sites, wireless, broadband, avatars in second life, local map, social networking (SNS), and many more. The highly interactive platforms not only enhance the stickiness of media users but also scale back customer acquisition costs.

Making a historic mark

According to iResearch, one of China's most authoritative research agencies on new media, Internet users in China has amounted to 253 million by June 2008. The company's vice president Michael Ruan remarks at the Digital Media Summit 2008 in Beijing that the marketplace has seen an evolving trend of diverse revenue models among Internet-related businesses, and degree of consolidation is expected to drop.

"China leads the world in new in many ways; and I'm not sure that either people in China or in other markets like the U.S. realize it," says Schwankert, half-jokingly.

Indeed, Kevin Wang is one of those who do realize it. When he founded ZCOM - now the largest digital publisher of magazines in China - back in 2004, Wang was determined to make a major mark, by the Chinese, on the world of innovation.

Nowadays, any of the 40 million ZCOM users may browse through over 300 different magazines anytime, which offer an interesting blend of static and interactive content. The articles look like what we'd find in a typical magazine, but what's mostly appealing is the natural embedding of the interactive elements - only possible in the digital world. Interactivity generates the very accurate demo stats, which in turn creates an enabling platform for direct marketing campaigns by brand advertisers.

Among the company's most successful campaigns were for BMW, Intel, Braun, LG, L'Oreal, iPod, Siemens, EPSON and a lot of other well-known brands.

Over 9500 magazines and 2000 newspapers are circulating in China, 50% beyond the levels in the US, according to a recent report by Morgan Stanley. Kevin Wang believes that when numerous players are jockeying for position in the sector, ZCOM's strong brand awareness and "gateway" position in the virtual world creates a competitive edge.

Funded by Carlyle Group, ZCOM has also nurtured a cohort of collaborators - such as Toshiba (chip), Lenovo (PC) and Kingsoft (game) -- in distribution of e-magazine content.

"A lot of the new media companies are asset-light but network- and/or human capital-heavy," contends Edward Yu, CEO of Analysys International, a well-renown independent research firm specializing in TMT industry. "In China, new media players are outpacing their big [old media] brothers when it comes to digitalizing the product-distribution-service chain activities," Yu adds.

While most of new media players in China are overseas VC-backed, industry executives cite the importance of "keeping the business relevant to China". BlogBus CEO Dou Yi says the models of Six Apart, MySpace, Cyworld are not necessarily well-suited for China, where local customer insight - e.g. social context, consumption patterns, opinion leadership, etc. - serves as a key success factor for new media players.

BlogBus hosts over 5 million blogs now; and bloggers are typically higher-end, urban dwellers with decent purchasing power. "These groups tend to be both powerful influencers and early adopters," says Dou Yi. In that light, his company is establishing add-on platforms - ranging from free trial harbor, print media to live performance - with the aim to further monetize the BlogBus' user base.

Caveats and challenges

Still, the new media sphere in China is never without challenges. Relative to quality editorial content, the long-tailed UGC raises the search cost and therefore is typically hard to attract paid subscription, according to Liu Xiangming, Chief Editor of CEOCIO magazine, a 10-year-old journal jointly owned by IDG Group. He believes that new media practitioners will count, to a larger extent, on the scarcity and scalability - as "content creators are always scarce assets and it's critical to have teams that are able to scale up [content creation] in a sustainable fashion."

Regulatory may be another caveat. As state-owned assets, old media companies often benefit from favorable government policies. On the other hand, the inherently swift progress in new media space makes it difficult for policy-makers to keep up. Because of such a "lag effect", new media policies may sometimes create sharp volatility. That said, as a side benefit, new media appear to have stronger "immunity" than their old brothers. Also, regulatory restrictions prevent cross-regional ownership for old media companies; but new media are not subject to such constraints.

The economic meltdown will likely make many organizations conservative towards ads spending. As Edmund Li, a former 4A agency senior executive, warns, "try and err" costs may shift media buyers back to traditional, "proven" platforms, leaving new media companies vying for a smaller slice of the cake.

Despite the fact that global financial crisis makes many lower outlook, some players in new media sector remain optimistic. James Li of Bihu recalls the SARS epidemic period in 2003, in which the business of online gaming managed to double its size. "Our [online game-related] business enjoys a 'counter-cyclic' element: we see 'obsessive' customer loyalty in an economic downturn."

(Market Watch)