china mobile advertising landscape report (thomvest ventures)

China Mobile Advertising LandscapeQ4 2016

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About Thomvest Ventures

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Thomvest is an early-stage venture capital firm with over $250 million under management. We primarily focus on opportunities in Silicon Valley with early stage B2B startups in the fields of advertising & marketing technology, financial technology, and security. The capital we invest is our own, enabling us to be more creative, flexible and patient with our entrepreneurial partners. More than two-thirds of the companies we have funded in the last decade have either gone public, been acquired, or continue to grow as independent businesses.

Don ButlerManaging [email protected]

Nima [email protected]

Mark [email protected]

For questions or comments, please contact:

Use of mobile devices is extensive & sophisticated; most digital ad spend is flowing to mobile

- 620M Chinese consumers have access to internet-connected mobile devices

- Chinese consumers between ages 16-45 spend nearly 40 minutes more per day on their devices than consumers in other countries

- The China mobile gaming market is the largest in the world – collectively, Chinese gaming apps earned $6.5B in 2015

- 84% of digital ad revenue is expected to come from mobile devices by 2020

- Baidu, Alibaba & Tencent – collectively known as “BAT” – own & operate 16 of the top 20 mobile apps in China

- Time spent in mobile apps is dominated by BAT-owned properties (71% of time spent)

- As a result, these companies control much of the available mobile ad inventory –advertisers work directly with BAT, leaving little room for intermediaries

- Collectively, BAT will take 73% of China’s mobile internet ad market in 2016

- There is a lack of user-level targeting data available to third parties to purchase inventory on open exchanges

- Many marketers have concerns over the quality of inventory in exchanges; most top tier inventory is only available through direct publisher deals

- Programmatic direct buying (PDB) is growing in popularity, as it provides advertisers with more control over publisher selection & inventory quality

The mobile advertising market is dominated by a small set of premium publishers

Use of programmatic advertising remains nascent due to unique market dynamics

Three takeaways from this report

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Agenda

China mobile advertising market size and growth

Key mobile app publishers & adtech vendors in China

The role of programmatic advertising in China

China technology M&A trends

4

There are 620M mobile internet users in China, which represents 90 percent of all internet users

50

118

233

303356

420

500557

620

24%

40%

61% 66%

69% 75%

81% 86%

90%

0%

25%

50%

75%

100%

0

200

400

600

800

2007 2008 2009 2010 2011 2012 2013 2014 2015

Mobile Internet Users (Millions) Mobile Internet users as a % of total Internet population

Inte

rnet

Use

rs (M

illion

s)M

obile Internet users as a % of total Internet population

Mobile Internet Users in China, 2007-2015

Source: Statistical Survey on Internet Development in China

90% of internet users in China connect via mobile devices

5

Many Chinese internet users are mobile-first & rely primarily on apps vs. desktop services

3.2

2.4

1.9

3.9

3.0

1.5

0

1

2

3

4

5

16-30 31-45 46-65

Worldwide China

Daily Time Spent with Mobile Devices in China vs. Worldwide, by Age

Chinese consumers between ages 16-45 spend nearly 40 minutes more per day on their devices than

consumers in other countries

6 Source: TNS, “Connected Life”, 2015

China is the largest and fastest growing market for mobile gaming

$6.50$6.18 $6.02

$1.85

$1.01 $0.82$0.52 $0.52 $0.51 $0.41

$0

$2

$4

$6

$8

China Japan U.S.A. South Korea U.K. Germany France Australia Canada Taiwan

Top Countries by Mobile Gaming Revenue, 2015 (Billions, USD)

Reve

nue

(Billi

ons,

USD

)

The China mobile gaming market grew 46.5% YoY, compared to 15.1%

growth in the U.S.

7 Source: Newzoo Global games Market Report, 2015

In 2015, Chinese consumers spent nearly 3x on mobile commerce than consumers in the U.S.

$75$104

$135

$316

$0

$100

$200

$300

$400

2014 2015

U.S. China

Mobile Commerce Sales in U.S. & China (Billions, USD)

25% 30%Mobile as a % of all e-commerce sales 34% 56%

8 Source: Internet Retailer (U.S.) & iResearch Global (China)

Mobile ad spend in China will grow to $70B by 2020, representing 84% of total digital ad spend

$8

$17

$27

$38

$49

$60

$70

35%

55%

68% 74%

79% 82% 84%

0%

25%

50%

75%

100%

$0

$25

$50

$75

$100

2014 2015 2016 2017 2018 2019 2020

Mobile advertising revenue (Billions, USD) Mobile ad spend as a % of total digital ad spend

Mob

ile a

dver

tisin

g re

venu

e (B

illion

s, U

SD)

Mobile ad spend as a %

of total digital ad spend

China Mobile Advertising Spend (Billions, USD)

43%CAGR

84% of digital ad revenue is expected to come from mobile devices by 2020

9 Source: eMarketer, March 2016

China is the fastest growing mobile advertising market, by both impression volume & ad spend

Mobile Ad Impression Growth in Select CountriesQ4 2015 vs. Q4 2014

Mobile Ad Spend Growth in Select CountriesQ4 2015 vs. Q4 2014

15%

45%

46%

55%

101%

105%

127%

203%

0% 50% 100% 150% 200% 250%

Australia

Mexico

U.S.A

Japan

Indonesia

Philippines

Canada

China

31%

47%

69%

77%

110%

174%

308%

1246%

0% 250% 500% 750% 1000% 1250%

Mexico

Australia

Russia

Germany

Indonesia

U.S.A

Canada

China

10 Source: Smaato, Global Trends in Mobile Advertising, Q4 2015

Agenda





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The mobile ecosystem in China is dominated by three walled gardens – Baidu, Tencent & Alibaba

$7.1B mobile ad revenue$56B market cap

$9.2B mobile ad revenue$240B market cap*

$2.7B mobile ad revenue$250B market cap

“Collectively, Baidu, Alibaba and Tencent will take 72.8%of China’s mobile internet ad market in 2016”

12 Source: eMarketer estimates & company filings; *Note: Includes market capitalization of Alibaba Group Holding Ltd (NYSE:BABA)

Baidu, Alibaba & Tencent (collectively known as “BAT”) have built full-stack consumer experiences

“If you think of Alibaba, their apps are preinstalled on local Chinese phones. They produce content through Alibaba Pictures. They broadcast advertising on Youku [Tudou], which they’ve now bought. They sell products on Taobao and pay online through Alipay.

They’re very, very connected, and they’re very close to the big Chinese phone manufacturers, Xiaomi and Huawei, and it’s a fully integrated system, much more than probably you would see in the West.”

Doug PearceCEO, Greater China

Omnicom Media Group

13 Source: eMarketer

Mobile revenues for BAT rival the scale of large U.S. internet companies

Domestic Mobile Advertising Revenue by Company, 2015-2016 (Billions, USD)

Collectively make up 73% of the mobile advertising market in China

Collectively make up 55% of the mobile advertising market in the U.S.

$4.5$5.9

$1.5

$10.0

$5.9

$1.2

$7.1

$9.2

$2.7

$13.3

$8.1

$1.7

$0

$5

$10

$15

Baidu Alibaba Tencent Google Facebook Twitter

2015 2016 (E)

14 Source: eMarketer estimates & company filings; Note: Google, Facebook & Twitter revenue figures are for the U.S. only

Of the top 20 mobile apps in China, 16 are owned by Baidu, Alibaba & Tencent

80%74%

46%41%

34% 33% 32% 29% 29% 29% 28% 27% 26% 25% 25% 24% 24% 22% 22% 21%

0%

25%

50%

75%

100%

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Top 20 Mobile Apps in China by User Coverage, December 2015

Tencent Apps Alibaba Apps Baidu Apps

Top social appsin the U.S.

49%

24%16%

Face

book

Inst

agra

m

Twitt

er

15 Source: TalkingData Mobile Data Research Center’s Android platform data

Similarly, time spent in mobile apps is dominated by BAT-owned properties (71% of time spent)

35%

10%

8%

11%

7%

29%WeChat (Tencent)

QQ (Tencent)

Other Tencent-owned apps

Alibaba-owned apps

Baidu-owned apps

All others

Collectively, Tencent-owned apps represent over half of time spent on mobile devices

by Chinese users

Share of Mobile Time Spent, April 2016

Alibaba & Baidu-owned properties make up nearly one-fifth of time spent in

mobile apps

16 Source: QuestMobile,Trustdata & Hillhouse estimates

Baidu’s advertising products

Ad Product Description

PaidSearch

- For paid search, sponsored ads are purchased based on keyword bids and rank higher than organic search results (very similar to Google’s AdWords model)- Because of government regulations, marketers need to file a business license and a deposit (if

a foreign company) that can be used towards the bids

Baidu Union

- Baidu Union is like Google’s Display Network. It shows ads across Baidu-owned-and-operated search products, music players and desktop apps as well as Baidu’s business partners- Baidu’s algorithms determine where and how ads are shown based on the target audience’s

demographics, location and browsing history- Ad formats include banners, text links, videos, full-screen and rich media- The Union includes Wangmeng, a publisher network comprising 600,000+ websites

BaiduBrand Zone

- Baidu Brand Zone is located on the top of Baidu’s search results that features a specific brand- This mini branding section shows basic company information, new products and websites

where viewers can make purchases- Brands that purchased a Brand Zone will have a better chance to direct visitors to its official

site

China’s dominant search engine, modeled after Google’s business

- Baidu is the biggest Chinese search engine, often referred to as the “Google of China”

- Each month, over 90% of China's internet users use Baidu search, with the daily query number reaching the hundreds of millions.

- Earlier this year, the company’s advertising practices came under scrutiny after a user undertook an ineffective cancer treatment he found through a Baidu online ad

- Shares in the company have fallen nearly 15% YTD, and Baidu lowered its revenue forecast by nearly 10%

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Alibaba’s advertising products


Alimama

- Alibaba’s online marketing technology provides merchants on its platform with marketing services on desktop and mobile. - “Alimama accesses the large Taobao Marketplace merchant base as customers for online

marketing services without the need to rely on a field sales team.”

Taobao Affiliate Network

- Taobao Marketplace is one piece of Alibaba’s e-commerce properties with 100 million visitors a day. The affiliate network lets Taobao sellers advertise on partner properties like Weibo- “Sellers place marketing displays on our marketing affiliates’ websites and mobile apps, and

sellers pay us a performance-based marketing fee primarily based on cost-per-click, or CPC, and cost-per-sale, or CPS, models.”

Taobao Ad Network & Exchange (TANX)

- Alibaba’s real time bidding ad exchange is powered by its cloud computing platform and handles billions of impressions a day.

Data Management Platform

- Alibaba’s data arm plugs into its ad exchange, providing better targeting capabilities- For example, Mercedes Benz used its own data on store visitors to influence its online ad

buying through Alibaba’s Taobao Marketplace

AdChina

- Alibaba acquired digital ad platform AdChina in January 2015- The company launched a marketing platform within Alimama called “Dharma Sword”, designed

to serve brand advertisers and leverage Alibaba’s valuable shopper intent and transactional data

Rich e-commerce data powers advertiser solutions

- Alimama says it has customer profiles for 630 million consumers, representing nearly every Internet user in China, for which it’s created more than 8,000 audience segments

- The account information housed within Alimama is derived from Alibaba account profiles, which include consumer details such as name, email address, home address & purchase history

- The company leveraged this account information to develop a “super ID” that powers cross-screen campaigns both inside and outside of Alibaba’s properties

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Tencent’s advertising products


Social Advertising

- Tencent last year started placing brand ads in WeChat’s Moments section, where users post photos and updates.- In June, announced a partnership with WPP to create the “China Social Marketing Lab”, which

develops enhanced solutions that cater to brand clients and their target audiences- Recently struck partnerships with Dentsu, Publicis, Omnicom & others to make inventory &

data available to brand advertisers programmatically

Tencent Ad Exchange & DSP (Tango)

- Exchange allows for inventory access across social apps & gaming titles- Launched a DSP called Tango in 2013 to better leverage user data across its exchange

inventory- "Tango’s revenue is still small compared to our traditional display ad and content partnership

revenue. However, on the Tencent Ad Exchange, Tango accounts for a good portion of the ADX revenue.”- Exchange is also open to third-party DSPs and buying platforms

Tencent Network - Mobile ad network similar to Facebook’s Audience Network; targeted towards app publishers distributing through its app store; ad formats include banner, native, interstitial & app wall

Tencent Smart Data

- Profiles created based on user data such as consumer demographic attributes, interests, and other online data- In March, Tencent announced a partnership with Omnicom Media Group to create target

audience (TA) portraits for OMGs clients using Tencent Smart Data

Mobile internet giant with many popular social & gaming apps

- Tencent owns & operates many of China’s most popular mobile applications, including WeChat, QQ, and several gaming titles

- About 80% of the company’s ad revenue is generated by mobile platforms

- As of March 2016, WeChat had 762 million monthly active users, up from 697 million in December 2015

- Active users of QQ’s mobile app rose to 658 million in March 2016

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Unlike the U.S., the app ecosystem in China is distributed across many app stores

5%

5%

6%

6%

10%

15%

16%

16%

22%

25%

0% 10% 20% 30%

Pea Pods (Wandoujia)

BBK-Vivo App Store

HiMarket

Oppo App Store

Huawei App Store

Xiaomi Game Center

Baidu Mobile Assistant

MIUI App Store (Xiaiomi)

360 Mobile Assistant

MyApp (Tencent)

Top 10 Android App Stores by User Coverage, December 2015

Third-party app store App store run by hardware producers

App store revenue from Android devices represents 61% of Chinese mobile app revenue (with the remaining

39% coming from iOS)

20 Source: TalkingData Mobile Data Research Center

Chinese app stores rival the scale of Google and Apple’s app stores

20%

17% 17%16%

11%

7%

5%

2% 2%1%

0%

5%

10%

15%

20%

25%

Google Play iOS* Baidu Tencent Qihoo 360 Wandoujia AppChina D.cn HiAPK Anzhi

Global App Download Share by App Store, 2015

Chinese App Stores Non-Chinese App Stores

21 Source: Digi-Capital (2015); * Note: iOS App Store download share includes downloads made in China

There are many mobile ad networks active in China; most are focused on driving app installs

Top 20 Mobile Advertising Networks by Number of Activations

Chinese Ad Networks Non-Chinese Ad Networks

Other notable mobile adtech vendors operating in China: Vungle, Unity, AdColony & TapJoy


Most mobile app advertising dollars are allocated to gaming apps

Gaming60%

E-commerce12%

New media12%

Travel & transport

8%

Other5%

0% 25% 50% 75% 100%

1

In-App Advertising Split by App Category, 2015(As a percentage of total number of mobile ads served)

Social3%

Chinese consumers spend more 33.8 minutes per day using

gaming apps

E-commerce apps are used for nearly 10 minutes per day, on

average


27%

18%

7%4%4%

4%

4%

3%

3%

3%

23%Tencent GamesNetEase GamesOurPalmShanda GroupSkymoonsLilithgameZeus InteractiveDuoyiHappy ElementsFeiyu TechnologyOthers

The mobile gaming sector in China is large & diverse – which is beneficial to ad networks

Market Share of Chinese Mobile Gaming Companies, 2015

Tencent is the market leader in mobile gaming, commanding

about one-quarter of the market

Unlike other app categories, there are many large, independent gaming

companies operating in China

24 Source: GamesInAsia

Other notable Chinese internet companies

Company Logo Market Cap Company Description

JD.com $33.5BJD.com is a Chinese electronic commerce company headquartered in Beijing. It is the largest B2C online retailers in China by transaction volume and revenue, and a major competitor to Alibaba-run Tmall.

LeEco $12.0B LeEco (Formerly Letv), is a Chinese technology company, and one of the largest online video companies in China.

Qihoo 360 $10.4B Qihoo 360 is a Chinese internet security company known for its antivirus software, Web Browser, and Mobile Application Store.

NetEase $27.7BNetEase provides online services centered on content, community, communications and commerce. The company has a strong focus on gaming, as well as social messaging, news, reference, email, search & e-commerce.

Sina $3.8B Sina is a Chinese media company. Sina operates four major business lines: Sina Weibo, Sina Mobile, Sina Online, and Sinonline a.net.

Sohu $1.5B Sohu is a Chinese Internet company that offers advertising, a search engine, on-line multiplayer gaming and other services.

Cheetah $1.4BCheetah Mobile is the second largest internet security software provider in China by monthly active users, according to iResearch. In 2015, Cheetah acquired ad tech startup MobPartner and launched itsonline advertising platform

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Agenda





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There are four primary models by which advertisers buy media on publisher sites

Advertiser Publisher

Supply-SidePlatforms (SSP)

Ad networks aggregate publisher inventory; advertisers

work with networks to buy audiences across many sites

Advertisers negotiate directly with individual publishers; inventory is sold in large blocks

1. Direct

2. Ad Network

3. Ad Exchange

4. Demand-Side Platform (DSP)

Methods for Buying & Selling Digital Media

Ad inventory sold via exchanges is

typically considered “programmatic”

In China, advertisers typically work directly with large publishers

to buy media

Exchanges aggregate publisher inventory, but auction individual

ad impressions in real-time; targeting is at the user-level

DSPs allow buyers to bid across multiple ad exchanges through

one interface

SSPs allow publishers to manage their

relationships with multiple ad partners

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The Chinese programmatic advertising is still nascent relative to western markets

Publishers- Both premium & long-tail publishers have

adopted programmatic for some or all available inventory

- Most available inventory is controlled by three dominant publishers; only remnant inventory is available programmatically

Advertisers - Large brand advertisers are increasingly allocating their digital ad spend to programmatic channels

- Advertisers are hesitant to spend programmatically due to ad fraud & quality concerns- Opt instead for direct deals with large publishers

Intermediaries- There are many large, independent adtech

vendors serving different parts of the ecosystem –DSPs, SSPs, exchanges, etc.

- A robust ecosystem of intermediaries has yet to form; there are few independent adtech companies at scale in China

Standards & Regulatory

Environment

- The IAB establishes cross-industry standards around ad formats, sizes & communication protocols between ad buyers & sellers

- The Chinese government closely controls the content of online advertisements- Cross-industry standards around ad formats are

nascent

United States China

Comparing the programmatic advertising landscape in the U.S. & China

China resembles the U.S. programmatic

market 3-4 years ago

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Programmatic advertising represents a small but growing portion of total mobile ad spend in China

12 58

504

1,299

2,421

3,759

3% 5% 6% 8%

0%

25%

50%

75%

100%

0

1,000

2,000

3,000

4,000

2013 2014 2015 2016 2017 2018

Mobile Programmatic Ad Spend Programmatic as a % of total mobile ad spend

Ad s

pend

(Milli

ons,

USD

)Program

matic as a %

of total mobile ad spend

Spending on Programmatic Mobile Ad Buying in China, 2013-2018 (Millions, USD)

Programmatic will make up 8% of mobile ad spend

29 Source: iResearch Global Group, July 2016

Most desirable ad inventory is sold directly to advertisers, as opposed to via ad exchanges

If you look at Tier 1 cities—Beijing, Shanghai, Guangzhou—that type of inventory is not available through the exchanges. That inventory gets booked up every month. You have to book in advance or there won’t be enough inventory because so many advertisers target these Tier 1 cities.

Most of the remnant inventory goes to their private exchange, which consists of second- and third-tier city inventory, and also more of your long-tail content inventory.

Charlie WangChief Operating Officer

ReachMax

30 Source: eMarketer

Several factors inhibit broader programmatic advertising adoption in China

Primary Challenges to Programmatic Adoption in China

1. Large publishers control most supply

- The largest internet players such as Baidu, Alibaba and Tencent have leveraged their data from search, e-commerce and social to create closed advertising ecosystems

- These companies operate closed exchanges and private marketplaces focus on premium inventory

2. Inventory and data quality concerns

- Because the large internet companies operate closed exchanges, there is a lack of user-level targeting data available to third parties to purchase inventory on the open web

- Concerns over the quality of inventory in exchanges cause marketers to be reluctant to execute on open exchange platforms; most top tier inventory is only available through direct publisher deals

3. Lack of experience and industry standards

- Although Chinese advertisers and publishers are starting to embrace programmatic, most are still accustomed to buying and selling on a cost-per-day (CPD) rather than a CPM basis

- Marketers, agencies and publishers lack deep experience in programmatic and RTB advertising

- Lack of unified standards create disparate buying practices across publishers & networks

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We expect more brand dollars on mobile to be shifted towards “programmatic direct”

Long-tail inventory on open exchanges (usually ad inventory from lesser known publishing sources & traffic outside of Tier 1 cities). This carries a higher risk of brand safety and viewability issues.

Advertisers negotiate a fixed CPM and pass-back ratio with the publisher, and then use a third-party buying platform to pick out the impressions. Provides control & transparency for brands.

Real-time bidding (RTB)

Programmatic direct buying (PDB)

99%88%

69% 63%

1%12%

31% 38%

0%

25%

50%

75%

100%

Q1 2015 Q2 2015 Q3 2015 Q4 2015

Real-time Bidding (RTB) Programmatic Direct Buying (PDB)

Available Mobile Impressions – RTB vs. PDB, 2015

More brands are opting for

PDB

Most RTB spend today is from e-

commerce

32 Source: iPinYou

Programmatic advertising intermediaries

33

China programmatic advertising vendor landscape

Source: RTBChina34

$82$229

$494

$954

$1,681

$2,578178%

116%

93%

76%

53%

0%

50%

100%

150%

200%

$0

$1,000

$2,000

$3,000

2012 2013 2014 2015 2016 2017

DSP display ad spending (millions, USD) Growth rate (%)

Market Scale of DSP Display Ad Spend in China, 2012-2017 (Millions, USD)(Includes Desktop & Mobile Spend)

Ad spend transacted via demand-side platforms is expected to reach $2.5B by 2017Demand-sideplatforms

35 Source: iResearch China DSP Market Trends (2013)

iPinYou has a strong presence among brand advertisers in ChinaDemand-sideplatforms

iPinYou60%

AdChina12%

Yoyi10%

GoogleDBM7%

Others9%

0% 25% 50% 75% 100%

1

Demand-Side Platform Market Share in China, 2015(Among brand advertisers)

hdtMedia2%

36 Source: EnfoDesk, Analysys International

Demand-sideplatforms Many of the DSPs in China were originally traditional ad networks

DSPANs reflect advertiser buying preferences, but lack transparency

- Many DSPANs started as ad networks and later integrated demand-side platform capabilities

- With DSPANs, ad network inventory is mixed with programmatic exchange inventory

- Brand buyers expect to buy named inventories; vendors must provide the ability to choose publishers within programmatic buying platforms

- Many advertisers are accustomed to the cost-per-day (CPD) system that allows them to clearly see where an ad is placed

- However, this model lacks neutrality; typically, DSPANs prioritize the sales of their network inventory first, above that of other publishers

37

Exchange Company Capabilities Type Owned Inventory

Third-PartyInventory Device(s) Notes

TANX Alibaba ADX, DSP, SSP, DMP Private Taobao online

shops Alimama alliance PC & Mobile - Aggregates inventory from its e-commerce websites

Baidu Exchange Service Baidu ADX,DMP Private

Owned properties & partner sites

Baidu alliance; news partners PC & Mobile

- Works with 600K+ partner sites (similar to Google’s Display Network)

Tencent Ad Exchange Tencent ADX, DSP, DMP Private

Owned properties & partner sites

Mobile alliance; Discuz alliance Mobile - Also launched a DSP named

Tango in May 2013

Youku Tudou ADX Alibaba ADX Private Owned video - PC & Mobile- One of China’s largest video

sites, referred to as the “YouTube of China”

Sina Ad Exchange (SAX) Sina ADX,DMP Private Sina properties,

including Weibo - PC & Mobile- SAX is used for traffic across

Sina-owned sites outside of Tier 1 cities

Doubleclick Ad Exchange Google ADX,

DMP Open - AdMob, AdSense PC & Mobile

- Launched in 2012; considered to have access to premium inventory compared to other open exchanges

Inmobi ADX Inmobi ADX Open - Network of apps Mobile - Primarily focused on driving app installs for gaming companies

Private exchanges operated by Baidu, Alibaba & Tencent are the largest in ChinaAdvertisingExchanges

38

AdvertisingAgencies Role of agencies in the China advertising market

1. Large global agencies with a large and mature local presence

- Digital agencies operating under the umbrella of large global agency groups like IPG, Omnicom, Publicis, and WPP have been present in China for several years and have strong experience in serving both international and local clients

- All of these agencies have set up agency trading desks in China and are ramping up programmatic ad spend

2. Global agencies that still need time to develop a presence in China

- Other global agencies have a much shorter history in China

- For example, Possible China has only been in the market for three years; the majority of its business comes from global contracts

- These agencies typically lack programmatic buying expertise & haven’t set up trading desks

3. Local agencies that are more vertically focused

- Few local digital agencies provide full digital services (BlueDigital is a notable exception)

- Most focus more on one or a few particular services (such as social marketing agency Social Touch and mobile marketing agency Domob)

- Steadily increasing online media spends but lack deep understanding of digital technologies; mostly come from offline media buying

Source: Gartner

Types of Agencies Operating in China

39

AdvertisingAgencies Role of trading desks in the China advertising market

As in the U.S., agency trading desks are the centralized organizations that drive

programmatic spending within agencies

Holding Company Trading Desk

Publicis Vivaki

Omnicom Group

IPG

The major global agency holding companies have

established trading desks in China

Trading desks have struggled to gain broad adoption in China

- Trading desks in China remain under utilized compared to their U.S. counterparts

- Less than 20% of exchange buys come from agency trading desks (Thomvest estimate)

- Trading desks are being held back by the following:

1) Lack of trust in inventory sources available via exchanges,

2) Lack of third-party data for audience-level targeting,

3) Lack of local talent specializing in programmatic media buying

40

Measurement & verification Ad measurement & verification critical components of a viable programmatic market

High rates of click and impression fraud

- According to RTBAsia, between 15 to 20 percent of China’s advertising impressions that are traded in ad exchanges are non-human

- This high ad fraud rate can be attributed to Chinese computers running old versions of Windows which are infected with malware and allow bots to run in the background

Ad verification is difficult against closed BAT systems

- Currently traditional ad verification can only measure consumer demographics based on offline panels

- Companies like Miaozhen Systems and AdMaster have used this methodology to roughly calculate advertisers’ target audience percentages

- Companies like Nielsen are partnering with Tencent for its digital ad rating (DAR) product, which uses Tencent’s behavioral data in conjunction with traditional panels to measure advertising effectiveness

41

Government Intervention

In July, the Chinese government issued new regulations on online advertising, which lay out guidelines to guard against false or misleading practices

Background

- The regulations follow public uproar due to the death of a student who tried a cancer treatment he found advertised on Chinese internet search giant Baidu Inc.’s platform- The ensuing criticism took aim at the murky online environment for health

information

Major Changes

- Prohibits online ads for prescription medication and tobacco- Requires prior government approval for ads for medical supplies, pesticides,

veterinary medicine and other health products- All paid advertising must be clearly identified in search results- Adequate options must be provided for users to close an ad (such as a popup)

Expected Impact

- These are expected to impact all digital marketing channels from search, ecommerce, email, social media and some elements of programmatic buying- Search giant Baidu and e-commerce giant Alibaba will take the biggest revenue hit

(IHS estimate)- In the long run, tougher regulations will help online advertising to become a more

credible advertising medium

The Chinese government closely controls the content & creative included in ads

“The government is trying to get a hold of a fast-moving segment

of the internet. This new move will create a more transparent

business environment for major players and will lead to a more favorable development of the

industry,”

Faith GaoProgrammatic Director

Performics

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Agenda





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Notable advertising technology acquisitions in China

Date Company Logo Acquirer Price Price / TTM Rev Company Description

Q3 2016 AppLovin Orient Hontai Capital $1.4B 6x(2015 rev) - Mobile app advertising platform

Q3 2016 Media.net Miteno Communication Technology $900M 3.9x

(2015 rev) - Contextual advertising network

Q3 2016 GameAnlaytics Mobvista - - - Free app analytics platform for game developers

Q2 2016 Smaato Smaato Spearhead Integrated Marketing Comm. $148M 1.6x - Global mobile SSP & advertising exchange

Q1 2016 Opera* Qihoo 360 & Kunlun $1.2B 2x - Browser & security software; mobile advertising platform

Q1 2016 NativeX Mobvista $25M - - Native mobile app advertising network

Q2 2015 Domob BlueFocus Communication Group $289M - - China-based mobile advertising network

Q1 2015 MobPartner Cheetah Mobile $58M 3.7x - Mobile app advertising platform

Q1 2015 AdChina Alibaba - - - Chinese advertising platform with a focus on brand advertisers

Source: 451 Research M&A Knowledgebase* Note: In July 2016, Qihoo & Kunlun announced that its consortium would acquire only Opera’s browser and security software (Opera’s Mediaworks group will be sold in a separate process) 44

Notable advertising technology companies listed on Chinese stock exchanges

Company Logo IPO Date Market Cap

Gross RevenueCompany Description

2014 2015 2016 (E)

Mobvista Nov. 2016; NEEQ Index $1B $100M $200M N/A

- Hong Kong-based mobile advertising network with a large presence across Asia (10B daily ad impressions in more than 230 countries)- Recently acquired NativeX & GameAnalytics

PapayaMobile(aka AppFlood)

May 2016; NEEQ Index $335M $35M $51M $150M

- Mobile ad platform focused on driving app installs; offerings include DSP & Facebook ad buying tool- Projected revenue of $150M & net profit of $15M

in 2016

Spearhead Integrated Marketing

Comm. Group

Apr. 2010;Shenzen

Stock Exchange

$1.2B $234M $486M $656M

- Offline marketing services provider, including terminal marketing services, event marketing services, & media communication services- Acquired Smaato in Q2 2016 for $148M

BlueFocus Comm. Group

Feb. 2010; Shenzen

Stock Exchange

$3.2B $895M $1.25B $1.96B

- Large branding agency with services including ad planning, brand communications, product promotion & crisis management- Acquired Domob in Q2 2015 for ($289M)

Source: Thomson One & company filings45

Chinese companies are increasingly active buyers of American & European digital media vendors

Western digital media companies acquired by China-based buyers, 2011-2016(Includes adtech, martech, gaming & media companies)

Source: 451 Research M&A Knowledgebase* Note: ”Total Deal Value” only includes deals where acquisition price was disclosed** Opera acquisition not included because deal has yet to close

4

0

23

5

12

0

5

10

15

2011 2012 2013 2014 2015 2016 YTD

Num

ber o

f Dea

ls

$452M N/A N/A $79M $94M $11.7B

Cloud Data CorpCryptic Studios

KAX MediaRiot Games Inc.

We Are Social Ltd.Longshot Interactive

Digital Extremes Ltd.Semp.com

GetJar

Rumble EntertainmentWPT Enterprises

Piraeus ConsultingMobPartnerMiniclip SA

SupercellSmaato

OpenJawBigpointNativeX

Corbis EntertainmentBlue Fountain Media

GameAnalyticsNews Republic

Media.netAppLovin

Total DealValue (USD)*

**

46

This uptick in cross-boarder M&A has been spurred by high valuations in Chinese stock markets

“China's stock markets are running hot. Businesses trading there get relatively higher multiples, creating an arbitrage opportunity for a disciplined buyer. That provides an impetus for East-to-West deals, in

addition to cost synergies, opening up new avenues of growth and other considerations that typically drive M&A."

Scott DenneAnalyst

451 Research

47

Recent mobile acquisitions by Baidu

Date Company Logo Price Company Description

Q4 2013 PW Literature(Zongheng.com) $31.2M - Online literature & e-reading platform

Q3 2013 Nuomi Holdings $160M - Online coupon services provider

Q3 2013 91 Wireless Websoft Limited $1.85B - China-based Android app store

Q2 2013 PPStream $370M - Peer-to-peer streaming video network software

Q4 2012 iQiyi N/A - China-based video-sharing website

Q2 2011 Qunar.com $306M - Online travel search and reservations service

Recent Investments: 2016: ZestFinance, Circle, Exands2015: Womai.com, Bai An, Bolo.me, CloudFlare, Mia.com, Uber China, Edaixi, Taboola, Qianhai Mobile, VisionChina, Uxin, 2014: Pixellot, SmartStudy, IndoorAtlas, Wanda, UUCun

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Q2 2016 Wandoujia $200M - China-based Android app store

Q2 2016 AGTech Holdings $307M - Lottery and gaming systems

Q4 2015 Youku Todou $3.7B - China-based video-sharing website

Q1 2015 AdChina N/A - Chinese advertising platform with a focus on brand advertisers

Q3 2014 UCWeb >$1.9B - Mobile browser software provider

Q2 2014 AutoNavi Holdings $1.58B - Mapping data and location-based services software

Recent mobile acquisitions by Alibaba

Recent Investments:2016: Didi Chuxing, Yiguo, Magic Leap2015: Jet, Meituan-Dianping, One97 Communications, Snapdeal, OpenJet, Koubei.com, Quixey, Yazuo, Lazada Group, ThetaRay2014: Peel, Lyft, Tango, TutorGroup, Baicheng, Myfriday.cn, Huxiu.com, Kabam, MomentCam, WiTown, ByeCity, Momo

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Recent mobile acquisitions by Tencent


Q3 2016 China Music Corporation

$2.7B for a 60% stake

- Mobile music streaming services (Kugou and Kuwo)

Q2 2016 Supercell $8.6B - Mobile gaming developer (“Clash of Clans” is its most popular title)

Q1 2016 Radiant Entertainment N/A - Online gaming developer

Q1 2015 Miniclip SA N/A - Online & mobile gaming developer

Q1 2012 ZAM Network N/A - Videogame enthusiast website operator

Recent Investments:2016: Baobao, Pinduoduo, Future Mobility, Payoff, Meta, Ningmeng Pictures, Diffbot, iCarbonX, Paradox Interactive, Yuanfudao2015: Watsi, AltSpaceVR, Wuxi Maimaibao, QuizUp, VC Mobile Entertainment, Cyanogen, Satellogic, Lyft, Scanadu, Didi Chuxing2014: Breadtrip, Playdots, Kamcord, WiWide, Amplitude, WhisperText, Garena, Domob, Weebly, Dianping.com2013: Snapchat, Daum KaKao, QuizUp, Kamcord, JiaThis, Uxin

50