Mar 26, 2013
By Pauline Chiou

Advertising on the internet in China is still a young industry compared to Korea, Japan and the U.S. Targeting a certain demographic is a bit of an inexact science.  

"The tools are very primitive," says Alan Hellawell, Deutsche Bank's managing director of Asian telecom, media and technology equity research. "We are still in the dark ages (in China) but I think over the next 3-5 years, advertisers are going to go from shooting a dart in the dark to really getting very robust feedback on who exactly watched your pre-roll or your social banner."

It could be worth the wait because there are 564 million internet users in China, according to the China Internet Network Information Center.
            
Part of the reason precision marketing is a challenge in China is the lack of "data integrity." Jin Yoon, head of internet research at Nomura, explains that most Chinese internet users do not use their real names or provide accurate information on social media or gaming sites. "In China, when you look at Tencent or Renren, can you really know that avatar is a person who’s a 14 year old girl or a 40-year old guy?" asks Yoon. "So if you sell Rolex watches or BMW's, you probably won't know who your audience is."

That's a problem for an advertiser who wants to develop an online strategy. Advertising models in China are very different from the models outside of China. For example, Facebook and Twitter (which are banned in China) generate 80-90 percent of their revenues from advertising. People who register for those sites are generally providing true information because they are connecting with real people – their friends. That's a gold mine for advertisers. By contrast, Yoon says Chinese social networking is based on a gaming model. Tencent generates 70-80 percent of its revenues from gaming. There's no incentive to provide true information on the gaming sites, making it a challenge for advertisers.

With the paradigm shift from PC to mobile, the competition for screen space is fierce. The China Internet Network Information Center reports 422 million people in China accessed the internet last year using mobile devices which is an increase to 74.5 percent from 69.3 percent the previous year. "You have to monetize on a much smaller screen," says Yoon. Chinese internet companies are only now starting to develop strategies around this shift. For example, Baidu recently released its mobile pricing strategy differentiating its rates from searches on a desktop.

"There's a lot of pricing distortion, but we believe that all the small moving cogs that are behind advertising to a smart phone, will start moving in locomotion over the next 12-24 months," Hellawell says. "That critical cost-per-click variable can take over that desktop cost-per-click over that two-year period."
 
Pauline Chiou is a CNN anchor/correspondent and the co-host of 'World Business Today' based in Hong Kong. Follow Pauline on Twitter @PaulineCNN. For more business coverage, go to www.cnn.com/business.