In the Mobile Ad Era, How Did BlueFocus Get Its Shot at the 4A Agencies? | What's Happening to the Ad Market, Part 2

The advertising business is going through a “structural” change, and “mobile” is the force driving it. In three articles we explain what that change is, and how the roles and the balance of power along the industry's supply chain are shifting. Part two looks at the contest between Chinese companies and the 4A agencies.

The advertising pie has barely grown in nearly 10 years.

According to a forecast from the research firm MAGNA, global spending by brand advertisers rose only 5.7% in 2016, to $493 billion. This year the growth rate will drop back to where it stood during the 2008 financial crisis — a meager 3.6%.

But the churn people in the business have felt over the past two years is greater than anything in the previous decade.

Digital's share has jumped. The research firm eMarketer expects the global digital ad market to grow from $140 billion now to $230 billion by 2018, lifting digital's share of all ad spending from a quarter to a third. Global mobile ad spending hit $101.3 billion last year, 16.5% of the total. In the United States, mobile already took more than half of all digital ad spending last year.

What has changed, under this trend, is how the pie gets cut.

“It's still a $500 billion pie, but the service fee used to be $100 billion, with $400 billion going to the media. Now that service fee is becoming $200 billion,” Xiong Jian, COO of BlueFocus, told QDaily.

An extra $100 billion in service fees is no small market, and most of it has gone to the upstart digital and internet companies.

Tech giants sitting on huge stores of data — Google, Facebook, Amazon, and China's BAT (Baidu, Alibaba, Tencent) — have seized more and more of the bargaining power. Even consulting firms such as Deloitte and Accenture have started buying downstream creative and marketing shops in bulk. A report by the consultancy R3 counted 398 digital-marketing acquisitions worldwide in 2016, 78% of them done by consulting firms like IBM, Accenture, and Salesforce.

BlueFocus is one of the main winners of this shift. The Chinese marketing group — you may still think of it as a PR firm — grew its revenue from 496 million yuan when it went public in 2010 to 12.3 billion yuan in 2016, a 25-fold increase. In the past year its revenue passed 10 billion yuan for the first time, up nearly 50% from the year before, while net profit attributable to shareholders rose eightfold. Digital marketing now brings in 82.05% of its revenue.

Without this wave of mobile, BlueFocus would have had almost no way of getting here — or at least not this fast. Now it is already talking about $10 billion in revenue by 2020, with an eye on the title of the world's fifth-largest marketing and communications group.

Standing in front of that goal are WPP, Publicis, Omnicom, and Dentsu Aegis Network — the companies the industry calls the international “4A” agencies. Their 2016 revenues were $18.6 billion, $10.6 billion, $15.4 billion, and $7.4 billion. BlueFocus's revenue is still less than a quarter of Dentsu Aegis's.

But their growth has slowed to a crawl in recent years. And what really makes BlueFocus optimistic is a different pair of numbers.

WPP, the world's largest communications group, reports not only its actual revenue each year but also its total billings across all clients. Over the past six years, revenue as a share of billings has risen from 22.3% to 26%.

Those extra 3.7 percentage points WPP keeps are the new “$100 billion” in service fees Xiong Jian is talking about. “Say WPP had $50 billion in billings last year and $10 billion in revenue — that means $40 billion is money passed through, and the agency and the media usually split it 20/80. But today, in programmatic advertising, when a client spends a dollar, 40 cents actually goes to the agency and only 60 cents reaches the media,” Xiong said.

WPP's gross margin also fell from 92% in 2012 to 86% in 2016. That means more of the 4A agencies' work is being subcontracted — and BlueFocus is one of the companies taking those subcontracts.

Which points to finer-grained agency service. And fine-grained is precisely the defining feature of mobile advertising, and the main reason this new $100 billion market exists.

Mobile has split audiences into ever smaller slices. In the smartphone era everyone owns a 4-inch or 8-inch screen and decides for themselves what appears on it. According to CCTV Market Research (CTR), 79.1% of users had at least 30 apps on their phones in 2016. Worldwide, Apple's App Store alone now carries more than 2 million apps, and will pass 5 million by 2020.

But attention is also scattering. The days of putting one ad on one outlet and reaching everybody are gone. What people discuss now is programmatic buying — how to get content to different consumers fast — and native advertising, which tries to slot ads into the feed so they do as little damage as possible to the user's experience.

The definition of “media” has changed with it. Toutiao, Moji Weather, Momo, livestreaming platforms — any phone app that can gather a particular group of users now has something to sell advertisers, and has started appearing on agencies' media-buying lists. The long tail matters more in advertising than it ever has.

So buying an ad has naturally turned from “buying media” into “buying people.”

Facebook is confident it can challenge Google in mobile advertising because it can read your social life off your ID: not just the home city, gender, occupation, and marital status you typed in at signup, but every “like” you have clicked and every exchange you have had with a friend. Facebook believes no one can match that kind of targeting — that even the smallest impression is worth something. As Ben Winkler, chief digital officer of OMD, the media agency owned by Omnicom Group, put it: “Facebook believes that the most important thing for making sure an ad works is user identity. That's the key to performance … they know who you are, and they know a lot about you.”

But fine-grained targeting has hit the centralized buying that the 4A agencies are good at — think of it as buying media inventory wholesale. For a long stretch of time the lineup of the world's five biggest advertising and marketing groups did not change, not even the order, largely because the scale that comes with centralized buying had fixed the balance of power among them.

“We spend $73 billion a year buying media, while our biggest client spends only $6.5 billion a year — so we're 11 times bigger than our biggest client, and we benefit from that economy of scale,” WPP's CEO, Martin Sorrell, told Strategy+Business.

BlueFocus, in fact, grew by copying the 4A method: acquisitions, to reach scale. Over the past six years it has bought seven companies abroad and 10 at home, and invested in more than 50 others.

What it caught was the opening the 4A agencies left when they took the new market lightly. They actually moved into digital advertising early. Ogilvy set up Ogilvy Century for digital media buying back in 2006. Publicis founded VivaKi, a new-media advertising and marketing arm, in 2008. GroupM created mJoule, a mobile-marketing execution unit, in 2012.

But at first none of them put much real money into mobile. As one executive at Madhouse remembers it: “In the beginning mobile was just a branch of digital, so the 4A agencies never made a proper plan — no dedicated department, no head count. Not knowing where it was going or how big it would get, they wanted to take the easy route, so they let media agencies like Madhouse go and study it. Now, in three or four years, new media including mobile has passed PC in commercial value across the whole market. The internet took eight to 15 years to grow and still didn't displace traditional media that fast. It caught a lot of the 4A agencies off guard.”

That is how new companies break into a market, in any industry. “The biggest change in advertising is the turn toward service,” Xiong Jian said. The “content-ification” of marketing that everyone has been discussing these past two years is the clearest case of it. All of it is a challenge to standardization.

CTR data show that spending on traditional media advertising, measured at list rate-card prices, fell another 6% in 2016. Take cosmetics, a mainstay of television advertising and one of the three big FMCG categories: of the 20 brands that make up 70% of the category, 17 cut their TV spending. Most are big international brands, and nearly all of them are 4A clients — which means the media budgets the 4A agencies manage have shrunk.

Even where the budgets have not shrunk, the fees the 4A agencies must pass down to agencies below them are rising. That is how this $100 billion market has been divided up among the new digital, technology-driven agencies.

Madhouse, founded in 2006, started out doing nothing more than the outbound links in mobile MMS messages, and nearly every order it got came from a 4A agency. Last year the domestic mobile ad budget it placed reached 1.2 billion yuan, up almost 100% year on year.

“In the minds of traditional advertisers and the 4A agencies, digital was the big line item, hard advertising was the big line item, and social PR used to count as a very small expense. But companies like ours are taking ad budget out of exactly that pocket, and for the past two years the bright spots in marketing have all been in social,” Madhouse told QDaily.

In 2015 BlueFocus bought a 51% stake in Madhouse. Look into the companies BlueFocus invested in or acquired around that year and you will find almost all of them tied to mobile ad services. In DSP (demand-side platform) and DMP (data management platform) technology, the hottest corners of programmatic buying, BlueFocus first took 25% of Bihe Technology in 2014, then acquired Domob outright in 2015.

In 2014 BlueFocus also picked up stakes in three e-commerce operations firms — Beijing Beilian Weiye, Hangzhou Wangying Technology, and Shanghai Kaijie — and set up BlueFocus E-commerce.

BlueFocus's Major Investments and Acquisitions Since Its IPO

*(Percentages are ownership stakes.)

2010.03

Dentsu BlueFocus (new media), 51%

2010.04

Boce Hengyang (marketing training), 17%

2010.12

Baihe Media (FMCG advertising), 3%

2011.03

Boce Hengyang (marketing training), 16%

2011.03

Shanghai Litang (exhibitions), 16%

2011.03

Huayi Baichuang (internet marketing), 24.5%

2011.05

Sienke (game advertising), 51%

2011.06

BlueFocus Entertainment Media (entertainment marketing), 51%

2011.06

A Singapore financial PR firm, 40%

2011.07

Jingzhun Yangguang (outdoor light-box advertising), 51%

2011.07

Meiguang Interactive (website design), 51%

2012.01

Jinjiu Advertising (real estate advertising), 100%

2012.01

Shanghai Zhizhen (internet technology), 20%

2012.03

Beijing Shidai (entertainment marketing), 19%

2012.04

Sienke (game advertising), 49%

2012.04

Boce Hengyang (marketing training), 16%

2013.01

Tibet Bojie (media agency), 11%

2013.04

Tibet Bojie (media agency), 89%

2013.04

Huntsworth (UK advertising and PR firm), 19.8%

2013.12

WAVS (US social media company), 82.84%

2014.04

Meiguang Interactive (website design), 49%

2014.04

Biaoyang Technology (CRM data), 15%

2014.05

Lakala (internet finance), 12%

2014.06

Metta (Hong Kong advertising creative and media buying company), 100%

2014.06

Tian Yu Kong (integrated marketing), 20%

2014.07

Yishi Interactive (outdoor media), 20%

2014.07

Fuse Project (US industrial design and UI design), 75%

2014.08

Bilin Hongke (big data), 10%

2014.09

Beilian Weiye (e-commerce), 51%

2014.09

Shanghai Kaijie (e-commerce), 19.9%

2014.09

Jianfei Kelian (wireless internet technology), 23.04%

2014.09

Lakala Credit (internet finance), 15%

2014.10

Wangying Technology (e-commerce), 22.67%

2014.10

Jiebao Data (media monitoring), 51%

2014.10

Shidai Yunchou (data mining), 21%

2014.11

Blab (US big data analytics), 9.48%

2014.11

Wanleyun (entertainment marketing), 25%

2014.11

Taihe Entertainment, 10%

2014.12

Bishuiyuan (e-commerce), 25%

2014.12

Yuntu Weidong (mobile app development and operations), 10%

2014.12

Youche Yihou (auto data marketing), 10%

2014.12

Chehui Network (internet automotive), 15%

2014.12

Vision7 (US integrated communications), 85%

2014.12

Xuanniao (TMT new-media marketing), 30%

2014.12

iClick (programmatic marketing), 14.59%

2014.12

Shenyang Xinwei (real estate new-media marketing), 51%

2014.12

Bihe Technology (real-time bidding, DSP technology), 25%

2014.12

Weilan Xingkong (integrated marketing), 30%

2014.12

Leyue Information (mobile healthcare), 27%

2014.12

Zhangshang Yunjing (programmatic buying), 54%

2014.12

AdMaster (internet monitoring), 11.69%

2014.12

Zamplus (data management platform), 14.29%

2015.06

Domob (mobile ad serving), 100%

2015.06

Madhouse (mobile ad serving), 51%

The 4A agencies have not been idle either. From 2010 on, they too started buying Chinese digital advertising companies at a fast clip. Publicis Groupe, one of the more aggressive, bought Gumei and Wangfan in 2011 and folded them into Publicis Maida, took Longtuo in 2012, and netalk in 2013.

They had seen the value of “service” as well, but while the market was still small their usual strategy was to watch and wait. The agencies taking orders from the 4A companies were the ones doing that watching — and on what they learned, those companies were building something valuable: a grip on how consumers behave.

“When the profits aren't big enough, the 4A agencies won't move into a space. Later they find that the money and the model there can't be ignored or they'll fall behind, and they see there's margin in it, so they go in. What matters most is delivering value to the client,” Fu Zhenghong, mobile media planning director at GroupM China, told QDaily.

That value — or that client demand — points toward performance marketing, the second important feature of mobile advertising, and the place where an agency's “service” shows most.

As we noted in the first article in this series, advertising billed on performance grew 65% last year. And the number “performance marketing” circles most closely is the conversion rate.

Whether it is Procter & Gamble or an international FMCG brand like Mondelez, the cases they are eager to talk about now all come back to this. P&G's Rejoice recently launched a silicone-free shampoo. It brought its endorser, the singer Xue Zhiqian, to the launch event, and also had a hundred internet celebrities livestream themselves washing their hair. On launch day, sales on Tmall hit what Rejoice had set as its target for a whole month.

Dong Xin, head of marketing at Mondelez China's e-commerce department, once described to QDaily a custom-packaging coloring campaign Oreo ran on Tmall: “The conversion rate was much higher than a normal promotion — sales that day grew nearly tenfold.”

It is e-commerce, in fact, that has pushed the hunt for performance to its peak. It does not merely drive conversion; it closes the purchase.

Last year Alibaba became the world's third-largest seller of mobile advertising, its mobile ad revenue equal to 40.3% of all mobile ad spending in China, or $11 billion.

“We work with Mead Johnson, which serves the maternal and infant market. In China only 40 million mothers a year actually buy formula — mothers of children aged one to three. Why would it need to run an ad on CCTV for 400 million people? It can hand 80 cents to CCTV, but only 10% of those people are affected by it. If today you tell the brand: I've chosen the media for you, you only need to show the ad to 100 million people and you'll still reach those 40 million mothers, and you're spending 60 cents — it looks like a bargain, because the gain in conversion rate is several times over,” Xiong Jian said.

This is why BlueFocus began building a digital platform.

Wang Lian, 49 this year, now runs BlueFocus's core Big Data department with a team of more than 100. The department supports performance marketing in three directions: analyzing data from the advertising side, analyzing data from social marketing channels such as Weibo and WeChat, and helping clients build their own CRM (customer relationship management) systems. It does not make money, but BlueFocus has poured enormous sums into it for three and a half years. In the vision of BlueFocus chairman Zhao Wenquan, it is the core strategic investment behind the company's performance-marketing model.

Wang Lian thinks people make two main mistakes when they talk about data. One is always wanting to monetize the data itself, instead of asking what data can concretely do for a specific marketing goal. The other is putting too much weight on big data and ignoring first-party data. He splits data into first, second, and third party. First-party is the advertiser's own: CRM data, e-commerce sales, offline retail. Second-party comes from platforms like Madhouse and Domob, which pool user data from both the ad-serving end and the media end. Third-party is BAT, the telecom carriers, and the like.

“Third-party data is bound to get more and more standardized — eventually you just pay for it, because it's an open market, as long as you can afford it. But do you have your client's first-hand data? Do you have second-hand data on where you're placing the ads? If you have none of that and you tell me you went and bought data back from China Mobile, that really is useless.”

Holding first-hand data, as Wang Lian sees it, is how you set yourself apart from the standardized products of big players like Google and Facebook, and how you win more advertisers with customized service.

This is not, of course, the first time digital, performance, or technology has hit the advertising business. The 4A agencies have been losing market share to digital internet companies like Google and Facebook for some time. After Google put click-through rates into its billing in 2005, “relevance” became a measure of precision marketing. The app ads Facebook later put into its news feed do that job even better.

And if you look into who is buying mobile advertising, you find that industry clients have contributed the most.

Rob Norman, GroupM's chief marketing officer, puts it this way in his latest book, Interaction 2017 (《互动 2017》): “The advertisers who generate 90% of TV ad revenue account for only 30%-40% of Google's and Facebook's ad revenue. The other 70% is small and local businesses, businesses that sell only digital goods and services, direct-to-consumer e-commerce companies, and companies whose core marketing goal is app installs. These companies have generally found enormous success on Google and Facebook, and at the boundary where the value of the two overlaps.

“Perhaps more important, using Google and Facebook alone or together, plus varied platforms such as Amazon, eBay, and Etsy, has already allowed new businesses to compete with major brands and retailers with the least possible infrastructure. With the least possible friction, they connect commerce of every size to a vast, widely distributed pool of demand. The same pattern exists in China, operating through Baidu, Alibaba, and Tencent (BAT).”

Most of BlueFocus's clients are industry clients, and the logic of its acquisitions runs the same way. Sienke and Jinjiu Advertising, which BlueFocus bought between 2010 and 2011, were then China's largest agencies for game advertising and real estate advertising respectively; buying them amounted to buying the biggest clients in those industries — Tencent, NetEase, Greenland Group.

But now the FMCG giants that used to concentrate on brand marketing — P&G, Coca-Cola, L'Oréal — are paying more attention to performance marketing too, especially since they realized that e-commerce should not be treated as a mere add-on to their sales channels. According to iiMedia Research, brand clients' share of the mobile ad market rose from 15.7% in 2011 to 40.4% in 2015.

This turn among clients has alarmed the 4A agencies. In an interview with Business Insider early this year, WPP's CEO, Martin Sorrell, admitted that what keeps him awake at night most is Amazon, because “Amazon could use its conversion advantage to overtake Google in search marketing.”

Last October, Xaxis, WPP's digital arm, bought the US e-commerce service provider Triad Retail Media. On May 9 this year, Possible, WPP's digital advertising company, acquired Marketing Ignition, which specializes in helping brands make money on Amazon.

Half of the 648.9 billion yuan marketing budget in China's advertising industry still comes from these multinationals, and they are the clients BlueFocus wants. Madhouse's reading: “What BlueFocus itself is really stuck on is how to get brands that haven't yet put money into new-media buying to put money in, and use that to take their media buying away from the 4A agencies.”

In Xiong Jian's telling, BlueFocus will increasingly concentrate on “serving big clients,” because “products are going to get more and more productized and intelligent. If you spend a small ad budget in a year, you don't need to hire an ad agency; a company like Baidu can already hand you a standardized product. But if you have to spend 100 million yuan on a search-engine budget, you'll certainly need an intermediary to build you a customized plan.”

Bryce Whitwam, China director of Wunderman, the WPP-owned agency, thinks neither the 4A agencies nor BlueFocus has actually figured this market out.

He told QDaily: “In the Chinese market, a huge amount of core user data is still held by BAT, and on that point BlueFocus is as powerless as we are. More important, in global markets data flows between different platforms — Instagram, Facebook, Snapchat and so on — but in China the platforms under BAT shut each other out, which makes the problem far more complicated. It's hard for anyone to build a mobile marketing system that keeps feeding itself.”

Even as mobile fuels this rush toward precision and performance, the past two years have also brought second thoughts inside the industry. P&G cut its budget for precision targeting on Facebook last year. Xaxis, WPP's digital advertising arm, cut part of its investment in DSP platforms. And Facebook halted its own multi-platform DSP plan, moving Atlas — bought from Microsoft in 2013 to strengthen multi-channel DSP buying — out of its Ad Tech department and into Marketing Science, turning it into a tool for advertisers to match and tag users across platforms.

Brian Boland, head of Facebook's Ad Tech department, explains it this way: “When people talk about ad tech, they always think of that programmatic-buying industry chain chart LUMAscape put out in 2009, and they treat it as the same thing as cookies and the internet. I prefer to avoid that assumption … What we want to do is solve real problems for advertisers: how to do marketing centered on people, not just place ads.”

“But without this wave of mobile internet, we would have no way to challenge the 4A agencies,” Xiong Jian said. He also knows they have left him very little time. Once WPP finishes laying out its global footprint, it will put more energy into China.

And the big-client plan Xiong Jian describes for BlueFocus's future is really another form of scaling up. With international brand clients in particular, it will put BlueFocus in more direct conflict with the 4A agencies.

The 4A agencies still hold the advantage in clients. The consistency international brands have built into their marketing strategies over many years will not come apart that quickly — but mobile advertising demands localization above all. In the next article we will look at another Chinese company that rode the same mobile wave to become the app that attracts the most advertisers.

Charts by: Feng Xiuxia

Cover image from CKGSB Knowledge