Baidu, Alibaba and Tencent to expand their revenue from paid digital content and targeted ad campaigns

‘Traffic engagement paves the way for long-term growth opportunities in performance-based advertising,’ analyst says

PUBLISHED : Thursday, 17 November, 2016, 9:22pm
UPDATED : Thursday, 17 November, 2016, 10:53pm

Chinese internet titans Baidu, Alibaba Group and Tencent Holdings are expected to see paid digital content and targeted advertising become their next big growth engines over the next few years, according to industry analysts.

Those include paid subscription to digital entertainment like online video and music, as well as so-called performance-based advertising campaigns which are personalised and targeted at consumers.

Tsang Chi, the head of Asia internet research at HSBC, said the number of paying digital content subscribers is on the rise in mainland China, providing a huge commercial opportunity for the country’s top three internet players.

Both Tencent and Nasdaq-listed Baidu, for example, each have more than 20 million paid subscribers on their video-streaming and other digital entertainment content services, Tsang said.

“Compared to these companies’ 200 to 300 million monthly active users [with their content services], paid subscribers are really just a fraction of their potential market ... You can see how the economics of their [content] business could improve a lot,” he said.

Shenzhen-based Tencent in July merged its QQ Music service with China Music Corp, operator of the popular KuGou platform, to create the country’s biggest digital music services provider.

On Thursday, Tencent reported spending 6.58 billion yuan (HK$7.43 billion) on content costs and agency fees in the third quarter, up 43 per cent from 4.60 billion yuan in the same period last year.

Tencent said its digital content services “sustained healthy growth” as users became “increasingly willing” to pay for them.

In Baidu’s third quarter results, it reported spending 2.21 billion yuan on content, up 141 per cent 914.5 million yuan a year earlier.

Alibaba has also been making a big push into the entertainment sector, with revenue from its digital media and entertainment division quadrupling to 3.6 billion yuan from a year ago.

Even as the three companies’ paying subscribers rapidly grow, Tsang pointed out that their spending on digital content will continue to be “really elevated for the foreseeable future” and likely remain a drag on earnings.

Alex Yao, head of JP Morgan’s internet and new media research, said performance-based advertising -- in which companies pay for audience results, such as cost per click -- will expand on the mainland.

“Traffic engagement paves the way for long-term growth opportunities in performance-based advertising,” said Yao, who pointed out that the trend will also take off in much the same way that Facebook found success advertising in newsfeeds.

Yao said that Tencent’s advertising model for WeChat Moments, a social newsfeed akin to Facebook’s Timeline, is currently “undermonetised”.

Very few advertisements are currently being pushed to consumers, as Tencent works to improve on its technology and distribution of advertisements, he said.

HSBC’s Tsang echoed Yao’s sentiments, noting that Tencent was “not yet getting more aggressive on ad loads because they’re still working on targeting, to understand their users better and increase the likelihood of people clicking their ads”.

In contrast, Alibaba’s Taobao Marketplace advertising is already “completely personalised” to each user, he added.

Marie Sun, senior equity analyst at equities research firm Morningstar, estimated that Baidu may see slower growth as search engine advertising slows because of the tightened regulation.

“There will be some recovery from the next year, but there is still uncertainty on how [much impact] regulations will have on search advertising,” Sun said.

Alibaba is the owner of the South China Morning Post.