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Standards, Culture and the Chicken and Egg Problem will Hamper Western Ad Tech Companies in China

Vincent Flood  17 February, 2016

charlie_reachmax1Last week we saw two Chinese companies, Kunlun and Qihoo, join forces to acquire Opera. While there’s no shortage of successful tech companies, in ad tech China is usually discussed as an opportunity for outside players. However, the Opera acquisition was a reminder that the homegrown Chinese companies are now reaching the kind of scale where they’re increasingly inclined to look abroad in order to achieve growth. One of the local companies on the ground who are focusing on programmatic video in China is ReachMax, who — for reasons he discusses below — have been focusing mostly on programmatic direct. Here Charlie Wang, ReachMax’s COO, provides an overview of the Chinese video market and discusses the opportunities for Western companies in China, as well as the international ambitions of the major Chinese players.

Could you provide a brief overview of the state Chinese video market? Is it as locked down as some would have us believe?

The video sector is quiet new to opening up to programmatic comparing to display. The reason being that there are only about five core video sites in China that dominate more than ninety percent of the overall time spent, which  makes the local market very publisher-driven. That said, the publishers have very strict rules on the advertisers who are allowed to advertise programmatically. Most publishers separate advertisers into two types: brand and performance. Brand advertisers are usually large multinational and domestic companies, while the performance advertisers are mainly eCommerce and gaming companies. The inventory quality and pricing varies greatly between the two.

For brand advertisers, they care a lot about the ad environment as they don’t want their brand to be associated with potentially offensive/uncontrolled user-generated content (UGC) content, and also because most of the brand’s POS are still offline, so they tend to focus on key cities. This affects their media buying in two ways: one that they’re all more likely to buy the channels that’s considered premium and controlled such as TV series, movies, and hot variety hows. Two is that most brands will target the affluent first tier Chinese cities Beijing, Shanghai, and Guangzhou.

From a publisher’s perspective, it leads to a severe imbalance in terms of inventory fill rates. It’s way oversold in first tier, but under-filled in 3rd tier and below markets. These types of inventory is deemed remnant and mostly sold to performance advertisers. Because performance advertisers usually measure the end result of their advertising thru transactions or registration, they can care less about the ad environment. Also, because their business conducted online, they have less of a need to do geo-targeting.

The pricing policies for these two types of advertisers also negotiated differently. For brand advertisers, they negotiate an annual commitment of X amount of dollars spent on the video platform with a fixed CPM. While for performance advertisers, many of them buy remnant through third party DSPs or directly with the publisher’s private exchange. However if brand advertisers also want to buy remnant, then they’d have to jump thru some hoops. Because the video sites first and foremost need to protect their direct deals, hence they will never allow a brand advertisers that buys direct to get a lower CPM thru their exchange channel.

Last week we saw a Kunlun and Qihoo join together to acquire Opera. Do you think we’ll see more Chinese companies expanding deeper into international markets in the near future?

We’re definitely seeing more and more o fthis. It’s already happening outside of ad tech, like Huawei and Lenovo. Within the internet space Tencent is rapidly expanding into southeast asia, also Alibaba is pushing their eCommerce solutions into the U.S. Within ad tech, the growth will come from cross border advertising, right now still limited to eCommerce and gaming sectors as opposed to brick and mortar traditional industries.

How are the Western ad tech vendors faring in China?  What in your opinion are the barriers to entry?

Most of big ones are already in China or are planning to enter China in the coming months, as the market is simply too big to ignore. There are many issues for western players, and the obvious ones are things like culture, language, and becoming familiar with the local landscape.

But I see the biggest hurdle is technical integration, because the local market doesn’t have many standards. Local video publishers integration all operate under different standards, some VAST, some server to server; some have their own exchange, some do not. This can be challenging for western dev teams, especially if they’re located outside of China.

Another integration issue lies on the commercial side. Big video publishers will want third party ad tech companies to bring revenue prior to committing resources to integration. But if the foreign ad tech players aren’t integrated, how will they acquire a client base? There’s a chicken and egg problem there that will make life difficult for any new entrant.

ReachMax have chosen to focus on programmatic direct. Could you provide a bit of background on the rationale for that decision and on how the product works?

We chose to focus on programmatic direct because this model give advertisers the maximum amount of transparency in programmatic. The biggest issue with ad tech in China is that most DSPs evolved out of ad network, and they never grew out of the arbitraging business model, meaning that they buy remant video inventory at a low CPM, then sell it to the advertisers with a marked-up CPM. In our view, there isn’t a single “pure” DSP player in China right now, because a “pure” DSP is only supposed to make a transparent tech fee, not to mark-up on the inventory. But if we came into the market and said we operated purely on service fee, nobody would believe us, because all DSP’s locally mark-up on the inventory, what makes us different? Hence, we decided to only facilitate programmatic direct by focusing solely on premium inventory.

In this trading model, the advertiser negotiate a fixed CPM’s directly with the publishers, and the programmatic element comes in thru the concept of a pass-back ratio. Along with the CPM, advertisers also negotiate a fixed pass-back ratio.

For example, if the advertiser needs to buy 100 impressions, with a pass-back ratio of 50 percent, the publisher have to release a total of 200 impressions for the advertisers to select from. This gives an advertiser the right to pick from a fixed inventory pool, it’s similar to the “first look” model in which big advertisers gets to select first, prior to inventory flowing down to the smaller advertisers.

In this model, ReachMax’s algorithm is all about picking the right impressions within a fixed pool. The right impressions are defined by advertiser’s KPI’s such as target audience, and frequency caps. The programmatic direct model is not perfect, because the optimisation space is limited. But given that the video market is a very publisher dominated market, we have to give assurance to the publishers that at least 50 percent of their inventory will be sold as opposed to pure RTB which the passback ratio is variable. With our platform only facilitating programmatic direct, we give advertisers the assurance that we will never be able to make a mark-up.

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