Short message service (SMS) has been a savior for China's Big-Three Internet portals in helping them to achieve profitability. Now the sector needs a real revenue earner, and online advertising is its sacred cow. Zhu Shenshen explains why more and more advertisers are warming up to the huge potential that the online medium presents.

Having firmly tapped into the revenues from short message service during the past two years, Chinese Internet portals have gone back to the basics in online advertising, something they believe is a source for greater income.

Chinese internet portals, particularly the Big-Three - Sina, Sohu and Netease - were forced into survival mode just as recently as a year ago. The portals had to endure through tough times during a wave of worldwide corporate advertising freezing that occurred in the wake of the September 11, 2001, terrorist attacks in the United States.

At the time, the Big Three, all of which are traded on the technology-heavy Nasdaq market, were largely shunned by advertisers. This scenario shed light on the profitability of the portal industry's non-advertising business, such as SMS which had caught on big time especially among young consumers.

Now, the enthusiasm of chief executives for SMS has lessened as they realize the potential of online advertising.

"It seems that online advertising is a much more powerful engine for profit than those non-advertising businesses," said Sun Weijia, an analyst with Analysys Consulting Co, an information technology consulting firm. "And that's the rule of the industry."

Obviously, SMS, or a makeshift part of a Website's business, could be used to boost its revenue. But for Internet portals, the lifeline is advertising, analysts say.

Indeed, the change in attitude toward online advertising has its roots in a policy change by the country's largest mobile operator.

In early August, China Mobile told its contracted Internet service providers (SP) that it wouldn't collect SMS service fees anymore from consumers on their behalf. The fees were previously collected through cell phone bills.

China mobile reason was that it didn't want to be associated with the erotic content offered by some SPs.

Internet portals mainly provide non-advertising services, including messages, anti-software downloading, online games and fee-based e-mail accounts. Users could buy these services through their handset account.

In the second quarter of this year, non-advertising income occupied more than half of the total revenue of the Big-Three portals. In the past few years, the trio were eager to report the increasing proportions of their non-advertisement revenue among their total revenue.

Despite the fact that the soaring income from non-advertising business had helped the portals achieve profitability, the slim profits still pushed the respective companies to look for further profit avenues.

Netease.com, the first Chinese portal to generate profit by tapping into SMS and online gaming services, eked out a scant US$4,618 of earnings in the second quarter last year.

Sohu and Sina followed suits with both reporting small earnings.

Now that China Mobile has thrown a roadblock for their SMS business, the portals are gearing up for increasing advertising interest.

"Sohu will lure more small and medium-sized domestic enterprise customers to promote themselves through the portal," said Charles Zhang, Sohu chief executive. "That will help Sohu keep a high-speed growth rate in online advertising business during the second half of this year."

Advertising revenue for the portal soared 102 percent in second quarter this year to US$6.8 million from the same period in 2002.

In the same period, Netease.com earned US$2.5 million from ad sales, rocketing 159.3 percent from a year earlier.

"We achieved this result through providing more content on the Website, especially in entertainment and automotive to attract the online surfers," said Sun Dedi, Netease chief executive. "In the future, we will provide more content in new channels to boost our advertising revenue."

Sina's advertising revenue jumped 30 percent to US$9.5 million.

Overall, the online advertising spend domestically reached 490 million yuan (US$59 million), up 25.6 percent year-on-year, according to iResearch, a consulting firm specializing in tracking the online market.

The volume is expected to increase 26 percent to 620 million yuan this year, iResearch said. It forecasts that the figure will top 1.38 billion yuan in 2006.

Despite the rise, Chris Reitermann, managing director of Ogilvy & Mather China's online division, admits its online advertising business was minimal, occupying less than 5 percent of the agency's total revenue, far behind print and television ads.

Last year, the revenue of the advertising business in various mediums in China reached US$10 billion, according to Nielsen Media Research Inc.

Reitermann added Ogilvy often used the Internet to establish an online community for its customers to take advantage of its unique "interactive" capabilities which allow advertisers to receive feedback from online surfers.

Apart from the Big-Three portals which combined for 66.9 percent of the online advertising market, Tom.com Limited, a subsidiary of Hutchison Whampoa Limited operated by Hong Kong tycoon Li Ka-shing, is also vying for a share.

The company recently announced it will beef up its online advertising business.

Wang leilei, chief executive officer of Tom's online division, said the Website's advertising revenue was expected to hit 10 million yuan in the third quarter and sales would keep increasing in future.

To date, the portal's ad business has been on a fast track.

In the first quarter of this year, its online advertising revenue was valued at 1 million yuan, representing only 0.9 percent of its total sales. The sales figure, however, tripled in the second quarter accounting for 2.5 percent of the total.

Tom, however, seems far from satisfied with its rapid growth.

"Tom's advertising business should occupy more than 10 percent of its whole revenue," said Feng Jue, Tom.com vice president. She added Tom had diversified from a sheer entertainment content provider to a portal with wider coverage.

"As a healthy Internet portal, we have to create a diverse business structure to make money, from both advertising and non-advertising," she said. "It is urgent for Tom to get more income from advertising and that will guarantee us stable and fast growth."

According to an Analysys report, the average gross profit margin of advertising business is between 50 to 80 percent in China, compared with 30 to 70 percent in non-advertising areas.

Analyst sun attributed the profit margin gap to the high costs of non-advertising businesses such as SMS and online game service.

"A good online game requires a large investment and takes a long period of time to develop," Sun said. "The cost is so high that few domestic Internet portals can afford it."

SMS also requires regular maintenance and intelligent hardware.

The increasing use of broadband Internet access has also removed obstacles to online advertising.

Internet surfers used to complain that advertising banners played havoc in the dial-up era because the ads greatly ate up their computers' resources, slowing the speed to open new windows.

"Now people won't be annoyed (by the banners) as much as before with the high-speed Internet access," Sun said.

Currently, the major online advertisers come from such industries as soft drinks, sportswear and information technology amid belief that young surfers are the major purchasers of their products.

Huicong international Information, an IT consulting company, said China's fast-growing economy bodes well for online advertising.

"With better education and the increasing income of people surfing online, more companies will choose to advertise themselves on the Internet," Huicong said.

(Shanghai Daily October 13, 2003)