China Insight Report October 2013

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Inside mobile China An in-depth look at the rise of mobile and the opportunities for advertisers in China

Transcript of China Insight Report October 2013

Page 1: China Insight Report October 2013

Inside mobile China

An in-depth look at the rise of mobile and the opportunities

for advertisers in China

Page 2: China Insight Report October 2013

Mobile is the unifying device for Chinese consumers. There are over 1.1 billion mobile subscriptions across the country, with

420 million people accessing the Internet from their device. Smartphone penetration is healthy too: latest estimates suggest

there are 290 million such devices circulating in the Chinese mobile market.

Growth of mobile devices can only be expected to continue too. In 2012, the number of mobile Internet users grew by 18%, with

the value of China’s mobile Internet market growing at a Compound Annual Growth Rate (CAGR) of 102%. Smartphones in

particular saw sales increase by 85% in 2012, with similar forecasts expected during 2013.

The sheer size of the mobile market in China is also being complemented by consumer behaviour. Latest figures show 72% of

mobile Internet users in China go online at least once a day. Streaming music, shopping and gaming are all incredibly popular

too, showcasing the advanced behaviours of users. Consumers are also heavily accessing social networks from their mobile

phones too, with 74% of Internet users within China accessing social in this way.

It is for these reasons that we believe China is a future hotbed for mobile advertising. We would therefore like to introduce our

latest Insight Report, Inside Mobile China, which will look at five key themes:

1. The size of the opportunity

2. Digital consumer behaviour

3. The role of social

4. Technology & innovation

5. Mobile advertising

From here on in, our report will show the phenomenal mobile opportunity for marketers in the China.

Foreword by James Hilton, global CEO

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“The sheer size of the mobile market in China is also being complemented by consumer behaviour. Latest figures show 72% of mobile Internet users in China go online at least once a day. ”

James Hilton, September 2013

Inside Mobile China foreword by James Hilton

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• China is home to 1.4 billion people, with the country’s

population growing by one birth every five seconds

• There are currently 1.1 billion mobile subscriptions in

China

• In 2012, China’s mobile market increased by an additional

10 million subscriptions each month

• There are already 290 million smartphone users within

China

• Room for significant growth exists too, with smartphone

penetration currently only equivalent to 22% of the

country’s population

1. The size of the opportunity

3 Inside Mobile China 1: The size of the opportunity

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Economy spurring growth

There is no other country in the world that can quite compare to China. Home to 1.4

billion people, its growth has been quite astonishing. In 2012 alone, China’s population

grew by 6.7 million people, or one birth every five seconds. While the country’s

population is expected to contract slightly due to on-going governmental policies,

China’s growth will continue to flourish in other areas.

China will grow through both its economy and industry. Since opening up the economy in

the late 1970s, China has seen a tenfold increase in GDP since 1978. In 2012, GDP stood

at $12.4 trillion, with growth standing at 7.8%. Despite concerns regarding future

economic growth, which led to Goldman Sachs recently downgrading China’s growth

forecasts, China is expected to see industry grow off the back of economic

development; during the next four years, an additional 160 new coal-fired plants are

expected to be built.

Recent uncertainty regarding Chinese growth could actually spur on the economy. The

central bank has twice cut interest rates since June 2012 in an attempt to increase

lending and reduce borrowing costs for both businesses and consumers. The Chinese

government has further approved infrastructure projects worth more than $150 billion.

Such policies seem to be working, with latest figures suggesting industrial companies’

revenues rose 11.9% during the first four months of 2013.

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The mobile revolution

Mobile too is seeing phenomenal growth. There are currently 1.1 billion mobile subscriptions in China. In 2012, China’s mobile market increased by an

average of more than 10 million new subscriptions each month. This clearly shows the pace as to which mobile is expanding, and there are now said

to be 420 million Internet-enabled mobile devices in circulation - by 2016, this is expected to have increased to 631.7 million devices. Mobile, similarly

to other regions, is also helping get consumers online: 75% of all online consumers within China now access the web from their mobile device; 72% of

such mobile Internet users access the mobile web on a daily basis.

The growth of mobile has further translated to the smartphone market, where sales grew by 85% during 2012. Indeed, smartphone penetration is now

said to stand at 22% in China, equating to 290 million users. The quantity of consumers now means the country is fuelling the smartphone industry

globally. In Q1 2013, China saw sales rise 7.5% year on year, accounting for 25.7% of the global smartphone market. By 2017, 460 million smartphones

are expected to be shipped to China alone. Asia as a whole was the only region to record growth in handset sales, with sales rising 6.4% year on year

to 226 million smartphones. This represents a 53.1% share of the global market.

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Consumers comfortable on mobile devices

China clearly has an established mobile market. The majority of

consumers within the country already use mobile devices, and the

market is continuing to grow. What’s more, many consumers are

increasingly comfortable accessing the Internet from their mobile

device. This is further helping smartphone adoption, which already has a

broad consumer base. Uptake of such devices can be expected to

continue with the increase in industry, which will inevitably lead to more

jobs and more disposable income for consumers. All in all, this

represents an amazing opportunity for marketers.

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• Many consumers now regularly visit news sites from their

mobile web browsers; such sites now account for 62% of

mobile web traffic in China

• Over one-fifth of consumers state having a wide range of

apps is a key purchase consideration when looking for a

new mobile phone

• 67% of Chinese consumers use instant messaging apps

such as Tencent’s WeChat, which alone has over 300

million users

• Mobile gaming accounts for 32% of total time spent on

mobile devices by Chinese consumers

• Streaming online music is exceedingly popular, with nearly

three-fifths of Chinese smartphone streaming via mobile

2. Digital Consumer behaviour

7 Inside Mobile China 2: Digital Consumer Behaviour

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The importance of the mobile web

The growth of mobile in China is greatly benefitting consumers. The mobile web in China now sees consumption

habits similar to those in more western countries. Other advanced behaviours are taking place too: many

consumers now play games through their mobile, with both music streaming services and m-commerce seeing

phenomenal growth. In turn, these habits are of great benefit to advertisers.

Increases in mobile Internet activity are a direct result of Chinese telecommunications companies targeting

such regions. The urban mobile market is very competitive, and in attempting to reach more consumers, telcos

have started to broaden their horizons. China Mobile, China’s largest telco with over 735 million subscribers,

created the Agricultural Information Service, in a successful attempt to bolster rural subscribers. The service

provides advice to farmers regarding how best to raise crops. It also offers weather, news and information

updates regarding the latest market prices of various products. However, while rural areas do represent

fertile ground for telcos, the Chinese government hopes to move 250 million rural residents into newly

constructed towns and cities over the next 12 years. This increasing migration will see urban regions remain

the substratum for mobile companies.

Nevertheless, increasing mobile Internet penetration is leading to rather advanced mobile behaviours among

Chinese consumers. Many now regularly visit news sites from their mobile web browsers; such sites now

account for 62% of mobile web traffic in China. Other top websites visited via mobile include search engines,

literature pages, micro-blogs and music sites.

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increasing migration to urban areas will see urban regions remain the substratum for mobile companies.

Many now regularly visit news sites from their mobile web browsers; such sites now account for 62% of mobile web traffic in China.

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The desire for apps

Yet, away from the mobile web, there is a strong desire for apps within

China. Over one-fifth of consumers state having a wide range of apps is

a key purchase consideration when looking for a new mobile phone.

Chinese mobile behaviours are similar to those within other, more

traditionally advanced mobile markets. For example, among smartphone

owners, 67% use instant messaging apps such as Tencent’s WeChat,

which alone has over 300 million users. A further 58% of consumers use

their smartphone to access email.

Gaming apps are also incredibly popular. In Q4 2012, there were an

estimated 250 million mobile gamers within China. This will only continue

to grow: the gaming industry as a whole in China was worth RMB5.2

billion during 2012; by 2015, the industry is expected to be worth RMB14

billion. Such is the obsession with mobile gaming that it now represents

32% of total time spent on mobile devices.

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Streaming & music

Other mobile behaviours are developing too. Streaming online music is exceedingly popular, with nearly three-fifths of Chinese smartphone users

streaming via mobile. Using mobile for such purposes is however a contentious issue. Major record labels have reportedly requested online music

streaming services in China start charging for their services in a bid to tighten up piracy concerns. This has not deterred e-commerce group Alibaba,

which has recently finalised a deal to acquire Xiami, a major music-streaming service and while concerns do persist, online streaming is one of

China’s growth markets. According to the Chinese Ministry of Culture, the country’s online music industry grew by 379% in 2012 to be worth 1.82

billion yuan, or $298 million.

The growth of mobile streaming has not been constrained to the music industry either. Two-fifths of smartphone owners in China now view video/TV

through their mobile devices. The preferred method of watching such content is via the mobile web, with 74% of mobile video consumers accessing

content this way. That’s not to say watching video through apps is unpopular; over half (55%) of video consumers watch content this way. A further

39% download clips to their device.

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The m-commerce revolution

M-commerce has soared greatly too on the back of mobile adoption

within China. Traditionally, Chinese consumers have preferred paying by

cash than any other payment method. However, 43% of smartphone

owners now claim to purchase through their mobile device, with a

further 48% banking on their smartphone. This has seen local m-

commerce platforms flourish. Huango, a service targeted at workers

and students, saw sales explode during 2012 as low priced smartphone

sales grew dramatically. Total revenue generated in the first three-

quarters of 2012 alone was double the revenue the company took

throughout the whole of 2011. There do however remain issues. Due to

China’s size, consumers can often be hard to find. Another m-

commerce delivery company, Maimaibao, reports failed delivery rates

of 15-20%. Nevertheless, the latter company now sees consumers

spend on average 300 yuan per order: This is higher than many other m-

commerce brands, and shows how consumers are now increasingly

using mobile to shop.

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Mobile offering opportunities

Smartphones are drastically affecting consumer behaviour. The web is

allowing consumers access to news, gaming now accounts for one-third

of time spent on mobile, music streaming is growing at an incredible

rate and m-commerce is giving consumers the opportunity to shop

online. This is only the tip of the iceberg for China. The bulk of mobile

growth is yet to come, and this in turn will see sophisticated mobile

behaviours develop.

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• Currently, there are 597.6 million social media users in

China: This equates to 44% of China’s whole population

• In 2012 alone, Chinese consumers clocked up 19 million

years’ worth of time on social networks

• Qzone is currently the largest social media channel in

China, with an estimated 598 million active users

• Despite only accounting for 30% of China’s population, Sina

Weibo users consume 54% of total goods and services

within the country

• There is a strong consumer desire to use social networks

when on the go, with 74% of smartphone consumers

accessing social on their device

3. The role of social

13 Inside Mobile China 3: The role of social

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The social Opportunity

Social plays a vastly important role within Chinese society. Currently,

there are 597.6 million social media users in China: This equates to 44%

of China’s whole population.

For those who currently use social media, Internet access remains the

only barrier. Indeed, of all Internet users in China, 91% have a social

media presence. Such is the popularity of social media in China that six

of the top ten social networks globally currently reside within the

country.

Consumers are regular users of such social networks too. Latest

figures suggest 88% of Chinese social media profiles are active, with

the average Chinese consumer spending 46 minutes each day on such

networks. In 2012 alone, Chinese consumers clocked up 19 million

years’ worth of time on social networks. However, identity remains an

issue, with only 38% of Chinese social networkers revealing their true

names on such sites. This is changing though, with 84% of Chinese

social networkers now having an ‘open’ attitude to personal privacy.

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The competitive social landscape

Qzone is currently the largest social media channel in China, with an estimated 598 million active

users. The service, which was one of the first social networks to be brought to the Chinese

market, initially started as a blog, but has since developed into a network focussing on

customisation and personal expression. For brands, Qzone allows for the creation of innovative

profiles and even the development of microsites. Due to its size, it also has mass market appeal,

extending beyond big cities to those in remote areas.

Other popular social media services include Tencent Weibo, with an estimated 277 million active

users, Sina Weibo, 297 million active users, Pengyou, 259 million active users and RenRen, which

has 48 million active users. These sites have very different characteristics. For example, Sina

Weibo and Tencent Weibo are similar to Twitter, offering users a 140 character limit, while RenRen

is almost an exact replica of Facebook. These sites therefore accumulate different types of users:

Tencent Weibo for example is aimed at poorer cities, while RenRen’s main demographics include

students and graduates.

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Mobile key to social behaviours

Chinese social media behaviours are rather advanced. Half of Weibo users in China

access e-commerce sites after noticing relevant information on the service; 42% of

consumers state they have purchased a book, audio or video, 37% have booked a

restaurant/entertainment show, while a further 36% have purchased clothes, shows

and bags. Despite only accounting for 30% of China’s population, Sina Weibo users

consume 54% of total goods and services within the country.

The desire to be social in China has vastly been aided by mobile devices. There is a

strong consumer desire to use social networks when on the go, with 74% of

smartphone consumers accessing social on their device. These networks are visited

regularly too, with 54% of consumers stating they access social from their

smartphone on a daily basis. Consumers are happy to add content to social sites via

mobile, with 53% stating they share information on social networks from their

smartphone every day.

Sina Weibo alone now sees 72% of its users accessing the service via mobile devices.

In 2012 alone, mobile users of the service increased by 47%, with mobile Weibo users

accounting for 89% of all Chinese micro-bloggers. Instant messaging apps have also

proved popular among smartphone-owning Chinese consumers. There are currently

over 467 million users of mobile instant messaging apps such as Tencent’s WeChat.

Such services accumulate 700 million location-based actions every day.

Unsurprisingly, the majority of users are made up by younger consumers, with 74% of

WeChat’s users in their 20’s, while a further 63% are male.

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There is a strong consumer desire to use social networks when on the go, with 74% of smartphone consumers accessing social on their device.

There are currently over 467 million users of mobile instant messaging apps such as Tencent’s WeChat.

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Social positively affecting brands

Brands are benefitting from such social media behaviours. On Sina

Weibo, there are more than 230,000 companies with a presence on the

network; there are over 60,000 governmental accounts alone.

Consumers are receptive to brands too: Two-thirds of Chinese social

media users follow brands, with the average user following eight

brands. Four-fifths of Chinese Internet users claim they care about

commercial information on social networking sites, with a further 43%

interested in products shared by friends. A further 76% of Sina Weibo

users alone are open to advertising on micro-blogs, with 28% using the

site to search for brand information.

Social is therefore vast in China, and growth can only be expected to

continue as more consumers become connected to the Internet.

Mobile too is a prominent player in the rise of social, with three-

quarters of consumers accessing social media through such devices.

Importantly though, there is a great opportunity for brands on social in

China, with receptiveness to advertising relatively high. Coupled with

mobile, social media offers an array of opportunities for marketers.

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• There are effectively two brick walls in China – a physical

border and a firewall where information is controlled

entering and leaving the country

• Alternatives to western services are taking the place of

large global firms - PayPal was blocked within the country

until recently, leaving the market open to local firm Alipay

• There are now more patent applications filed by Chinese

companies than those based in the US

• Local manufacturers such as Huawei and Lenovo have

become regional powerhouses and are likely to start

challenging large global players in the future

• Chinese manufacturers have more than doubled their

share in the smartphone market within a year to 29%

4. Technology & Innovation

18 Inside Mobile China 4: Technology & Innovation

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The times they are a changing

Since economic reform began in 1978, China has become a powerhouse for

manufacturing, especially for complex electronic items. In the last decade it has

become the capital for smartphone manufacturing. However, China is no longer

the cheapest country in which to manufacture: currency movements have

disadvantaged it, wages have risen and social and environmental costs are

increasing.

With the majority of complex items manufactured in China designed in western

economies, there is a clear need for China to innovate. The country is currently

going through a period of intense innovation, which has some interesting

implications for advertisers.

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Towards native innovation

A running theme in the development of China is the restrictions placed upon it by Government. There are effectively two brick walls in China – a

physical border and a firewall where information is controlled entering and leaving the country. This artificially changes the competitive landscape in

China. Regional firms are favoured, meaning Google, Apple, Facebook and Amazon are all struggling to make the inroads seen in western economies.

Alternatives to western services are taking the place of large global firms. For instance PayPal was blocked within the country until recently, leaving

the market open to local firm Alipay. However, where Chinese alternatives to western businesses have been accused of copyright infringement, it is

now clear that China is innovating independently of tech powerhouses such as the United States.

Not immediately obvious, China has the third largest Internet company in the world behind Google and Amazon. Called Tencent, it has Internet

properties such as Ten Pay (payments), PaiPai.com (auction site) and Qzone, China’s largest social network. Renren is also a huge Internet company

dubbed ‘The Facebook of China’, boasting over 178 million activated users.

In 2012, China had a record deficit in royalties and license fees of nearly $17bn compared with an $82bn surplus for the US. However, there are

more patent applications filed by Chinese companies than those based in the US, showing the tide is slowly turning.

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The Chinese tech revolution

Beyond service provision, another area of the economy that is becoming localized is the design

of smartphones and the services surrounding them. Local manufacturers such as Huawei and

Lenovo have become regional powerhouses and are likely to start challenging large global

players such as Apple and Google in the future. For instance, Huawei recently launched the

Ascend P6 Android smartphone, billed ‘the world’s slimmest smartphone’ with competitive

features and profile not unlike the iPhone 4 and 4S. It is available in many mature western

markets such as the UK, showing Huawei’s desire to compete outside of China.

Quick innovation in the region causes many problems for consumers and advertisers. Fake

phones are a real problem in China, with recent copies of the HTC One showing how

indistinguishable the phones have become. There are reports though that as native Chinese

manufacturers are producing increasingly cheap and high quality handsets, the market for fake

devices is shrinking. Indeed, Chinese manufacturers have more than doubled their share in the

smartphone market within a year to 29%.

But the innovation does not stop at hardware. China has a rich heritage of software

development that is being applied to smartphones. For instance, Chinese e-commerce company

Alibaba has developed a novel cloud based operating system called Aliyun OS. Its ambition of

the OS is equally ambitious: The company want to become ‘The Android China’. With many

Google services (and therefore Android) limited in China, a new global OS may appear within

China in the coming years.

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Local manufacturers such as Huawei and Lenovo have become regional powerhouses and are likely to start challenging large global players such as Apple and Google in the future.

Page 22: China Insight Report October 2013

The land of future innovation?

By many measures, China is well positioned to become a hotbed of

innovation in the future. With traditional manufacturing revenues set to

decrease, this is vital for its economy and position on the world stage.

Mobile is a key area for innovation in both hardware and software, and

despite the restrictive nature of China’s economy, there are clear signs of

progress. This dynamic between East and West means China needs special

consideration, as the mobile landscape, in particular the fragmentation of

the market, is different to western countries.

22 Inside Mobile China 4: Technology & Innovation

Page 23: China Insight Report October 2013

• Mobile advertising as a percentage of online ad revenue in

China lags considerably behind advanced tech economies,

with a mere 3.3% of digital adspend going on mobile

• However, despite slowdowns in overall ad revenue in the

region, digital advertising will help Chinese ad spend rise

to over $45bn this year

• In the US, 65% of smartphone owners are equally or more

comfortable with mobile ads as those on TV or

desktop/laptop; in China this figure is 49%

• The efforts to monetize the inventory are also inconsistent

between networks with many only working on a CPA or

CPC model

• By the end of last year, in-app mobile display advertising

was said to be worth roughly $283 million

5. Mobile advertising in China

23 Inside Mobile China 5: Mobile advertising in China

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A huge market with massive growth potential

Mobile advertising in China is by most measures underdeveloped but growing quickly. Mobile

advertising as a percentage of online ad revenue in China lags considerably behind advanced tech

economies, with a mere 3.3% of digital adspend going on mobile. Compare this to South Korea and

Japan, who see over a fifth of digital ad spend on the mobile channel, and we can see the huge growth

potential in China and APAC as a whole. However, despite slowdowns in overall ad revenue in the

region, digital advertising will help Chinese ad spend rise to over $45bn this year; more than any other

country in the APAC region.

The opportunity for mobile within this is massive. China's mobile Internet user base comprises 78.5%,

or 464 million, of all Internet users in China, compared with 72.2% a year ago. In a country with over

1.3 billion people, the smallest change in consumer behaviour can represent a huge opportunity for

brands and agencies. Consumers are also relatively receptive to mobile ads, although not as much

as western consumers. In the US, 65% of smartphone owners are equally or more comfortable with

mobile ads as those on TV or desktop/laptop; in China this figure stands at 49%.

24 Inside Mobile China 5: Mobile advertising in China

Mobile advertising as a percentage of online ad revenue in China lags considerably behind advanced tech economies, with a mere 3.3% of digital adspend going on mobile.

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Gaming a channel in its own right

Much like China itself, the opportunities for advertising on mobile are different

than many other economies. For instance, gaming offers a huge number of daily

impressions for advertisers, much more so than in any other country. Mobile

makes up a small percentage of the advertising opportunities but is growing very

quickly. The China Gaming Industry Report estimates that mobile games now

account for 7.5 percent of the total Chinese games market, up from 5.1 percent

in 2012. With smartphone penetration still growing, this market will increasingly

become a mobile first business and a key channel for advertisers.

Currently, the gaming market is dominated by large companies such as Tencent,

which claimed a 20% market share during the third quarter of 2012 and is the

largest mobile gaming operator in the region. However, the long tail of games

producers means networks such as AdsYolo are important to reduce complexity

for brands and agencies.

25 Inside Mobile China 5: Mobile advertising in China

Page 26: China Insight Report October 2013

A fragmented advertising landscape

With a country as large in population as China, there is inevitable

fragmentation of the market as many advertising networks vie for control.

The efforts to monetize the inventory are also inconsistent between

networks with many only working on a CPA or CPC model. However, there

is consistency in the types of campaigns which are primarily performance

driven pushing towards applications with in-app purchasing the means of

generating revenue.

Operating systems are also fragmented. Where in western countries iOS is

a significant part of this market, Android is estimated to take 80% of

Chinese mobile game revenue. This is due to the proliferation of cheap

Android handsets in the region. However, iOS is still important for targeting

wealthy white-collar workers, as Apple smartphones in particular are a

status symbol for this demographic. In fact, looking at the mobile

advertising market as a whole outside of gaming, iOS takes a dominant

share of campaign budgets.

26 Inside Mobile China 4: Technology & Innovation

Where in western countries iOS is a significant part of this market, Android is estimated to take 80% of Chinese mobile game revenue. This is due to the proliferation of cheap Android handsets in the region.

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App usage also high

Outside of gaming, in-app advertising is an established and rapidly growing category of mobile

advertising. The growth of app usage is partly responsible for this, with app sessions growing by

around 870% in China compared to 200% in the top 100 countries worldwide. It was predicted that by

the end of last year, in-app mobile display advertising would be worth roughly $283 million. In itself

this seems relatively small, but when compared to mobile search in China which was expected to take

$189 billion last year, it is very significant. Compare this to western economies where mobile search

makes up the majority of mobile ad revenue and you can see how significant it is.

Censorship has artificially changed the landscape

With China’s highly restrictive Internet policy comes some very large implications for advertisers. For

instance many app stores that are taken for granted in many countries such as Google Play are not

available. These are often replaced by national companies such as China Mobile, who have their own

store. But the absence of one dominant player has left one consequence: over 500 different app

stores which complicates campaign setup due to the number of destinations. Couple this with the fact

that many of the app stores have advertising opportunities and very quickly an app store-focused

campaign can become complex. Google’s dominance is also restricted in other ways, with Baidu the

preferred default search engine on Android devices in China. This means mobile advertising

strategies that work in western markets are not always applicable to the Chinese market.

27 Inside Mobile China 5: Mobile advertising in China

It was predicted that by the end of last year, in-app mobile display advertising would be worth roughly $283 million in 2012. In itself this seems relatively small, but when compared to mobile search in China which was expected to take $189 billion last year, it is very significant.

Page 28: China Insight Report October 2013

A time for growth?

Mobile advertising will undoubtedly take a larger proportion of advertiser spend in the future, but there are many hurdles to overcome before ad spend

in China is inline with western economies. Growth is likely to come from gaming and applications advertising in particular, but should a western company

such as Google make inroads in the market, then search would likely be a strong contributor to growth as well. Despite the fragmentation and economic

restrictions in China, the main engine of growth still remains: the billions of people in the region.

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Page 29: China Insight Report October 2013

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CIA World Factbook

eMarketer, ‘Despite digital growth, total ad spending slows in China, APAC’, 20 June 2013

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Forbes, ‘RenRen rides China’s social networking and gaming’, 3 May 2013

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June 2013

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Page 30: China Insight Report October 2013

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Bibliography

30 Inside Mobile China Bibliography

Page 31: China Insight Report October 2013

Contact us

31 Inside Mobile China contact US

To find out more about how mobile innovation can boost your business, or to discover more about us here at M&C Saatchi Mobile, please don’t hesitate to get in touch with our team at any of our offices around the world.