Targeting China’s Consumers: Focus Media and the Advertising Game

Many Wall Street analysts have touted Focus Media (FMCN) as a great buy for investors. Targeting China’s burgeoning middle class has been a notoriously difficult venture for marketers as TV, radio, and print campaigns on state-run shows and papers have been the main channels for advertising. Because of regulatory issues, China does not have long-running dramas and comedy shows like NBC’s Friends or Cheers. Instead, shows are filmed and episodes are shown every day for a month or so. Thus, it is difficult to determine in advance which shows will be the most successful to advertise on.

Only in the past year have marketers been able to leverage the popularity of the internet in China to conduct advertising through Chinese search engine Baidu (BIDU). Bolstered by nationalistic consumers and backed by a war chest after last year’s IPO, Baidu has been able to extend its lead in China over Google, which has floundered in the past year.

But then came Focus Media to the delight of marketers. The company provides companies a new advertising medium in China by deploying thousands of LCD monitors to office buildings, retail stores, and apartment complexes. While people queue for elevators or wait on appointments they are inundated by advertising content provided via the screens.

The tantalizing part for marketers is that they believe more affluent Chinese consumers are in the targeted buildings where the display screens are set. Supporters of Focus Media argue that the screens capture the attention of people wracked with boredom, waiting for elevators.

So far Focus Media’s performance in 2006 has been impressive as marketers have bought into the theory and allocated larger portions of their budgets away from TV ads towards Focus Media. 2006 Q2 earnings highlights include total revenue of $50.6 million USD a year-on-year increase of 246.8%. In the second quarter, net income reached $16.7 million USD, a year-on-year increase of 283.4%. Nevertheless share prices have declined slightly as Focus Media has forecasted Q3 revenues of between $58-60 million USD, which is at the lower end of analysts’ estimates.

Positive financial data suggests a bright future for Focus Media. However, upon closer inspection, Focus Media’s business model has some shortcomings that will hamper the company’s long term growth prospects and make me wonder how long marketers will continue to buy time with them. Investors should accordingly pay close attention to the potential volatile rises and falls that might befall Focus Media in the coming quarters.

Focus Media’s immediate problem is that their mechanism for updating commercials is limited. At present, the company has to physically upload commercials weekly to each monitor using a USB drive. This method requires a lot of manpower and is extremely time consuming. Content constantly goes on short-track. Thus, even if consumers actually look at the commercials, they get tired of seeing the same images over and over for one week. They stop looking for updated images and forget the service altogether.

For Focus Media’s type of advertising to work, monitors need to supply a steady supply of fresh advertising to maintain viewer interest. To update efficiently Focus Media would have to be able to change content to monitors remotely. The company needs to acquire a network license, which would turn the company into a broadcasting station. This is a difficult proposition.

Unfortunately for Focus Media, competitors are gearing up to tear into its market share. Beijing All Media and Culture Group [BAMC] is hoping to trump Focus Media by leveraging its mobile license. The mobile license is critical for expanding broadcasting services and quickly updating advertisements. BAMC is partly owned by the Beijing Broadcasting Authority giving the company a leg up when faced with the task of obtaining licenses.

Secondly, I would be very interested in seeing the actual utilization rate of the screens themselves. In my apartment complex, a significant portion of the screens are damaged or simply turned off. The same was true in a study I made when I walked around Shanghai and visited a dozen or so buildings in key sites along Huai Hai Rd. I would be interested in knowing the exact number of screens that are actively running commercials – and I am sure marketers would too when they buy time. Pollution problems that plague China will necessitate the screens being replaced more often that I think analysts have predicted, most have said every 5 years.

Another problem my firm the China Market Research Group CMR has found is that people’s eyes are more drawn to the Focus Media logo than they are to the actual commercials on the display screens. We have run eye-checking tests and one-on-one interviews to see what consumers absorb. Our findings suggest that would be consumers see the Focus Media name and remember that more than the actual content of the commercials. Areas around and in elevators are too loud and bustling for consumers to focus their attention on the commercials. They are not the captive audience that many think they are.

It is very hard to tell who is actually viewing commercials. In fact, during the day, white-collar workers are not the ones going up and down elevators and seeing the commercials – it is the legions of couriers that are going up and down, not the plum target market for most marketers.

Mobile phone ad technology will emerge soon will have a much better barometer to determine retention numbers. Marketers can also leverage Web 2.0 to target specific segments better.

What Focus Media has done very well is market the company to advertisers and investors. If they can use their cash pile and brand name to enter more sustainable businesses like more billboard and mobile phone advertising, then Focus Media has a good chance to grow. Before they do that, I would bet on the prospects of France’s JC Decaux, which has been putting its tentacles throughout China.

Shaun Rein is the Managing Director of the China Market Research Group CMR, a Shanghai based firm that helps foreign firms entering or expanding in China get the market intelligence they need to make smarter decisions in China.

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[RONALD FLYNN:]

Many Wall Street analysts have touted Focus Media (FMCN) as a great buy for investors. But when you look up the name focusmediachina.com a startling realization of the truth sends riveting questions down investors spines. Over the past year stock brokers and marketers have convinced investors through the media that FMCN invented the SMS technology for digital signage. However what you will find out is quite the contraire. Global Satellite Broadcasting Corporation web site: gsbc.tv owns the technology and will list as a public company in January 2007. The question is did the major institutions who have been selling (FMCN) stock do there due diligence or did the due diligence kings of the stock market keep it a secret. Maybe the revenue model was so awesome they just did not care because making money had never been so easy. Business week published an article By Frederic Balfour in Shanghai. The article makes us believe that boredom is how Jason Jiang invented this new technology.


By Frederic Balfour in Shanghai
Wrote on November 14, 2005 sometimes, boredom is the mother of invention. Back in 2002, Jason Jiang was cooling his heels, waiting for an elevator in Shanghai. The ad exec had been looking for new advertising opportunities in China when inspiration suddenly hit him square in the eye. He was standing in front of a poster of sultry actress Shu Qi plastered on the elevator door. He quickly realized that if he could replace such simple posters with a video screen in elevator lobbies, he could grab lots of bored eyeballs -- and make good money giving them something to focus on.
Then in Forbes magazine it reads the following: 07.14.2005,
AFX News Limited
China's Focus Media gains bullish response in US debut
07.14.2005, 01:24 AM

NEW YORK (AFX) - Focus Media Holdings rang up a double-digit percentage gain over its already lofty price as the operator of a network of flat-panel display screens used for advertising in China drew strong interest from Wall Street.
Focus Media's IPO opened at 19 usd a share, up from its 17 usd a share offer price. The stock climbed to 19.96 usd for a gain of 17 pct over its IPO price.
In a sign of strength, the IPO was priced above its 14-16 usd range, as investors lined up behind the first Chinese firm to list shares in the US since China Tec faith Wireless made its debut on May 5. Focus Media raised about 170 mln usd by offering 10.1 mln shares with underwriters Goldman Sachs and CSFB. The Shanghai-based firm's American depositary receipts will trade on NASDAQ. 'Focus Media is leading the charge for a new advertising model in China and so far the results look promising,' Renaissance Capital said in its IPO of the week column. With China already on Wall Street's radar screen over CNOOC Ltd's Unocal bid, currency issues and the nation's overall impact on the US economy, IPO’s are starting to re-emerge as well. Along these lines, China-language search engine Baidu.com filed an 80 mln usd IPO with underwriters Goldman Sachs (Asia) LLC, CS First Boston and Piper Jaffray & Co. The company plans to trade on the NASDAQ under the 'BIDU.' Meanwhile Focus Media's chief rival, Target Media, is planning a US IPO, perhaps as early as later this year, according to reports. Earlier this week, the Shanghai-based company said it received a 20 mln usd investment from Carlyle Group, the high-powered private equity firm.

THE REALITY IS
When Wall Street hears that Goldman Sachs, First Boston and Piper Jaffray & Co. and a high powered private equity firm like the Carlyle group are involved and are bullish for (FMCN) all the due diligence just goes out the window. Investors have lined up buying into a company that now must pay a licensing fee or close down there business.
GSBC founder was quoted “GSBC will demand that anyone using their technology must pay a licensing fee starting on January 1st, 2007. You can read the entire article at:
www.emediawire.com/rel...
Obviously the 70 dollar stock that focus media is trading at is no bargain when GSBC will be listing at a much lower price. The only other company that has the right to use this technology is NETNETNET.TV who is currently trading at 6.00 under the symbol (nnnv.pk) and will soon be listed on the Dax in Germany.
What will the due diligence kings do now? How will they adjust there portfolios? If you are in the stock market world and want to make money, you must move fast! And this story is rocking the world of digital signage!

2007 Jan 03 03:27 PM