Focus Media is the darling of investors. It has been expanding its LCD screen placements throughout the country at a feverish rate, causing ad revenues to soar and setting share prices on a steady upward trend. Industry analysts say the company, which has placed LCD advertising screens in office buildings and other venues in some 50 cities around China, is filling a real need in the market for advertisers trying to reach what up until recently has been an illusive up-market consumer base.
Daniel Wu, CFO of Focus Media, says the company has succeeded in targeting what he calls “the urban consumer eyeball,” often in somewhat captive areas, such as building lobbies, supermarkets and outdoor advertising. “We identified different areas where we can deliver ads,” he says, ticking off elevators, building lobbies and outdoor locations.
“The concept of advertising in a very confined space is a very good selling point,” says Rita Chan, client services director for Nielsen Media Research in Shanghai. She says that many companies are looking for alternative outlets to reach their target consumers more effectively.
According to Daniel Wu, the average elevator waiting time in crowded office buildings in major cities in China is two minutes, compared to just 25 seconds in the United States, which means more time for idle people to soak in the message from screens hung beside elevators. He says that most advertisers in China are spending ad money inefficiently. “If you look at advertising globally, people are saying ‘I put $100 into advertising and $50 was wasted and I don’t know where it went,'” he says, adding, “It’s going to people who will never be your customer.”
Wu also says that Focus Media’s advertisements are managing to reach wealthier consumers with an average monthly income of $400. He says the majority of the company’s lobby advertisements are for banks, mobile phones and automobiles, and not inexpensive consumer products. “It’s because advertisers prefer the demographic we have identified for them and they are willing to pay more for that demographic than the producers of Coke or cookies.”
As a result, Focus Media, which has a near monopoly on flat screen advertising around China, says space has been fully booked in five cities since the last quarter of 2006 and business shows no sign of slowing down.
The company has now extended its reach to third and fourth tier cities, with a total of 300,000 screens all over China, and 38,700 screens in 4,000 hypermarkets and stores around the country, giving them a virtual monopoly on the LCD advertising market and what looks like more years of rapid growth.
Over the last year, Focus Media has raised prices three times. “There’s so much latent demand in the market,” says one analyst, adding that because the company focuses on a very target audience, it can charge high prices for its advertisements.
The company is enjoying record earnings. According to an un-audited report recently released by the company, net income for 4th quarter 2006 was $30.1 million compared to the previous year’s $9.4 million, and sales tripled to $68.3 million. The company, which was worth just $700 million when it listed on the stock market three years ago, is now a $4 billion company.
A “Dancing Elephant”
One small problem remains, however. No one is certain if many people are actually even paying attention to the screens, or if the screens are actually having much of an impact on China’s highly saturated advertising market.
So far, there has been no independent and authoritative study of the impact of LCD advertising, which leaves some people wondering what its true impact is. In an October 2006 report on Internet advertising by Lehman Brothers, analysts worried about the lack of an authoritative third party data-tracking organization that can provide independent and accurate Internet metrics to support advertising pricing. The same is true for the LCD advertising sector.
“At this moment, there is no independent study that measures this new media platform,” notes Chan, who says her company is planning a venture with the Shanghai Media Group to carry out such studies. “The industry really needs a standard to measure the effectiveness. We’re working on that.” An analyst who’s bullish on Focus Media is less concerned. “There’s no metric for this yet,” he says, but points out that advertisers don’t have many choices “and Focus Media is in the right places.”
However, David Wolf, president of the Wolf Group Asia, a media consulting company in Beijing, warns that, while advertisers have been coming back, they won’t be happy for long without any hard data to support LCD advertising. “The accountants are starting to look deeper and they’re asking, ‘When are we going to get our ROI?’”
There are also concerns that Focus Media may be growing too rapidly. “They expanded too fast and watered down their message,” says Tom Doctoroff, Greater China CEO for advertising firm JWT in Shanghai. “The farther you get away from an enclosed place where people are forced to watch, the more you’re competing with everything else, and then it’s a mess.”
It was “a pretty good idea that [worked] well for a while,” says Doctoroff. But he points out that to continue to generate growth to keep investors happy, Focus Media has focused primarily on buying up smaller competitors and putting more screens in more places. “The whole strategy is to blanket cities with screens,” he says, warning that this could turn the company into a “dancing elephant.”
Overwhelmed by Messages
Analysts say that when LCD screens first appeared in China, they had something of a novelty effect so people paid attention to them. According to Doctoroff, the Chinese are exposed to more advertising than people in any other country. With screens now popping up everywhere, and Chinese consumers being besieged with constant ads in public places, it is now “just noise” that he says is “making people tune out.”
“We have gone from a market nearly devoid of advertising messages to one where we are overwhelmed with them,” adds Wolf, noting that the Chinese are being hit with 300 messages a day. “Once you reach that point, you become good at filtering them out,” he says. “We’re almost at the point where we are reaching saturation.”
According to an unscientific survey of 45 people working in five big office complexes in Beijing, only one person could recall an advertisement that appeared earlier in the day, and that person couldn’t remember the brand name of the product. In addition, one media analyst interviewed for this story who has done work on Focus Media, and believes this form of advertising is effective, could not remember if there was a screen in her own building, and she was unable to recall the name of even one advertiser in any of the buildings where she had seen screens recently.
One reason for this may be that the advertisements, which usually run in segments of 5, 10, 15 and 30 seconds, and which appear to have been produced for TV, may not be appropriate for someone waiting for an elevator. “When you’re standing in a lobby waiting for an elevator, 15 seconds is not a long time,” says Wolf.
Too Good to Improve
Analysts agree that the company will have to become more tech-savvy to achieve continued and sustainable growth. Daniel Wu says the company is very focused on technology as a way to compete with the traditional media. The problem is that the company operates on a very low budget.
Doctoroff says Focus Media is “incredibly low tech. It’s a couple of guys on bicycles riding around putting DVDs in machines,” he notes, describing how the weekly ads are distributed to sites. He also says the lack of technology makes it difficult for the company to customize its advertising to focus on different areas of a city where the viewers can be vastly different, This is a point that becomes more important as the screens spread out across China. “Different types of buildings have different people, and unless you can segment, the [advertising] becomes less and less effective. This is a business model based on a low technology. The question is how long will the model be viable for them.”
Without improving the technology, Focus Media is left with just one strategy for continuing growth — to keep raising prices, even though the company is already approaching a price ceiling. When asked if the company has any plan to use technology to enable the company to better micro-manage its advertising, Wu is non-committal. “It’s possible, but today we have no way of doing it,” he says.
The problem is that business may be too good at present, says a doctoral student at Tsinghua University who participated in a group study of the Focus Media business model. “There is not a big incentive for them to improve their technology,” he suggests, “as long as the client believes in the effectiveness of the existing technology.”
Focus Here and Stay
Despite the obvious stumbling blocks, industry sources remain bullish on Focus Media, especially if the company can come to grips with the challenges facing it. “They are not going to run out of money,” says Doctoroff, who notes that Focus Media’s biggest advantage is the fact that it has a monopoly on LCD screen placement in a market in which “everyone is trying to get around the blandness of the mass media.” A plus is that the company’s advertising is still cheap compared to TV placements. “They [advertisers] can’t get away from it because they need to use advertising to build market share. The question is not whether the company is viable, but rather, how do they keep growing,” he says, adding, however, that he’s not sure now where the new momentum is going to come from.
“I think that once they get the mix right, they will find the right way and they will do okay,” says Wolf, noting that over the long term the company will have to do some revamping and boost investment in R&D. He believes that the company will eventually move up on the high tech ladder. “We’re looking at version 101 here.”
According to Wolf, to keep advertisers coming back, the company will have to be more creative. He suggests the company look for ways to “hit people in lobbies that are more efficient” and that it make its technology more interactive in places where people are forced to wait for longer periods, such as airports.
The company says it’s expanding into new types of advertising and is looking for diversification on top of the LCD business. The company has already expanded from an initial two advertising channels to seven today.
In October 2005, Focus Media acquired Framedia, the biggest placer of in-elevator poster advertising in China, and last year acquired Dotad Media Holding Ltd., a leading mobile handset advertiser. The biggest news, however, was the purchase in March this year of Allyes AdNetwork, an Internet advertising company, for $300 million. A report by Lehman Brothers in April said that the purchase was “only the first step of Focus Media’s Internet game plan.” However, Wu says that the company will keep its focus on the core business of LCD screens.
“It’s hard to imagine Focus media fading away,” says the analyst when asked if the business may not be being driven by misperceptions about the effectiveness of the business. “Look at the revenue growth and you can then throw the perceptions right out the window,” he says.