Love at first Site

Alimama announced yesterday that they were doing away with the 8% commission, opening their advertising tracking tools free to users. However, contrary to a number of other commentators who suggest this is to grow market share, this is not about increasing market share at all, but growing the market overall. It is not a competitive move.

As you can see in my previous post, given Alimama’s recent earnings, estimated around $1200 USD a day, doing away with commision fees are very unlikely to affect the bottom line of the parent group, Alibaba Corp., currently valued at 77.5 Billion USD.

Rather, this is most likely a line straight from the Taobao/ Alipay playbook, Alibaba’s e-commerce and payment arm. Taobao was able to overtake Ebay/ Paypal in China by offering commision-free payment services whereas Ebay and Paypal, among other things, required users to pay commission fees. By the time Ebay had course-corrected, Taobao controlled the market.

However the nature of an advertising exchange is fundamentally different from an e-commerce site. Ecommerce sites tend to be a winner -takes all model, i.e consumers tend to go to the site with the most users, therefore making it very difficult for the market to support multiple competitors. Ebay in the United States, Yahoo Auction in Japan, and Taobao in China generally all claim roughly 90% or above of the e-auction space in their respective countries.

Ad buyers function differently. While they will use ad-exchange such as Alimama for a portion of their ad buys, they will generally supplement their ad buys with portal buys, ad-networks buys, Google adwords, and others. Adify’s company blog states this concept well:

“When an advertiser wants to maximize the return of their advertising investment, they need their agency Media Planners & Buyers to create a balanced portfolio mixing direct investment in large on-target sites + reach to engaged, targeted audiences through vertical ad networks + broad reach from low cost remnant networks. The share of voice and audience engagement is highest on the premium, topically relevant sites of Vertical Ad Networks while the reach is highest through direct investments and remnant networks. This is the appropriate balance for high return online brand advertising campaigns where audience engagement is critical. ” - Adify company blog

Recently an inside source at Alibaba talked about the progress of Alibaba group’s recently-launched advertising exchange, Alimama. While still early stage, Alimama is averaging roughly 100,000 RMB in daily turnover, and with openly acknowledged 8% margins, are pulling in roughly 8000 RMB before operating costs.

Not an impressive amount, but considering that advertising exchanges in China, let alone online advertising in general, are early-stage, expect this story to become more interesting as Alimama’s volume develops.

However, I suggest a few upgrades before that type of volume can be acheived:

1. Packaging smaller publishers together based on advertising categories:

Which advertiser will spend the time to place a 5 RMB ad buy for one site? Ultimately, having better packaging features enables them to monetize the long tail sites that currently account for the majority of their publisher base. For overseas ad networks such as Blogads, packaged buys account for up to 75% of sales.

2. Better filters for demographically and geographic targeting:

I expect that most of the larger media buys are posted manually through a sales agent, rather than the advertiser wading through the filter controls and attempting to actually find enough interesting sites to make a reasonably-sized ad buy. Ultimately, better controls will allow them to become more automated, and the profitable long-tail of advertisers to better place buys.

3. Instituting benchmarks for posting:

Should the webmasters whose sites have 1-10 visitors a day (and plenty of them!) be allowed to litter Alimama’s interface? This makes filtering results by CPM nearly irrelevant as most of the smaller websites have either gargantuan, or miniscule CPMs. Though the name of game for an advertising exchange is trudging through sludge to find advertising bargains, online advertising is still relatively new in China, and the majority of potential advertisers may need an easier and less cluttered interface to get them to spend more time, and money, online.

Though the entrance of a Chinese household name such as Alibaba entrance into the online advertising market may be construed as competitive to many other online ad players, the prevailing attitude from most of the online advertising companies I have talked to is positive. Overall, it should help spur more spend into the online advertising sector, ultimately increasing the size of the pie available for existing online ad players.