Whose Business Is Toutiao Taking — Baidu's, or CCTV's? | What's Happening in the Advertising Market, Part 3

Advertising is going through a "structural" change: more and more brands want a better channel for showing ads on phones, and mobile advertising is shifting from sales-driven ads toward brand ads. This is the third piece in the series, and it takes up that question.

Everyone has piled onto the same prediction: Toutiao is turning into another Baidu — obsessed with algorithms, data-driven, cold, with ad revenue exploding.

The numbers say as much. 300 million yuan in 2014, 1.5 billion yuan in 2015; for 2016, the industry consensus was that Toutiao pulled in at least 6 billion yuan in annual revenue. This year CEO Zhang Yiming has set the target at 15 billion yuan.

That growth rate and that revenue put Toutiao roughly where Baidu stood in 2011, the year it locked in its dominance of the PC era. Baidu earned 14.5 billion yuan that year.

But last year Baidu earned 64.5 billion yuan in advertising, only 0.8% more than the year before. In the third quarter of 2016 its advertising business fell for the first time since the company went public — down 6.7%.

In a Chinese mobile advertising market worth 175 billion yuan and growing 75.4% a year, Baidu and Toutiao do look like a seesaw, one rising as the other falls. But look one step further into the advertising itself and the picture may be different.

What Kind of Advertisers Do Toutiao and Baidu Each Attract?

It is still digital advertising, but the advertisers willing to pay for it have changed enormously in six years.

"We think mobile internet advertising has come in roughly three waves," says Wang Wenqi, vice president of marketing for Greater China at InMobi, the mobile ad network and exchange. "The first wave drove downloads for mobile games and apps; the second wave's clients were e-commerce companies; the third wave is brands." In other words, a move from performance advertising to brand advertising.

In the kind of advertiser they serve, Toutiao and Baidu are exact opposites.

Toutiao began selling ads in 2014, and from the start it worked with the large media buying agencies; its earliest clients were mostly car brands. A source inside Toutiao told QDaily that revenue splits 8:2 between key accounts (KA) and small and midsize accounts (LA), with the big brand clients concentrated in autos, e-commerce, consumer electronics and fast-moving consumer goods.

Brand advertising has always been Baidu's weak spot. Since it started selling ads in 2003, Baidu's main source of revenue has been medical advertising; in the earliest years more than 60% of its clients were medical providers, the Putian network of private hospitals being the archetype. Its sales method was basic door-knocking and cold calling — "what you get from knocking on doors is small and midsize clients."

But as brand advertisers like Procter & Gamble, Coca-Cola, L'Oréal and LVMH keep raising their mobile budgets, mobile advertising is turning more and more toward brands.

TalkingData's 2015 report on China's mobile advertising industry shows that as brand advertisers spent more on mobile, the share of mobile brand advertising rose from 25.8% in 2015 to 36.5%. Xu Weichong, head of digital foresight at the media agency Carat China, said in an interview that the fast-moving consumer goods clients he works with now put roughly 70% to 80% of their spending on mobile.

The shift is reaching the whole industry. At the end of last year WPP, the world's largest advertising group, lost two big clients: AT&T and Volkswagen.

Volkswagen is probably more familiar to us than AT&T. The group — which includes Volkswagen, Audi, Porsche and Škoda — spends more than $3 billion a year on media, sixth-largest advertiser in the world by Ad Age's ranking.

That loss is what left WPP's growth last year at 2%, short of Wall Street's 3% expectation. On an earnings call, CEO Martin Sorrell said, "I think that's right — AT&T and Volkswagen account for roughly that 1%."

Volkswagen handed the business to Hearts & Science, a digital media agency set up last April under the ad group PHD, hoping that "digital possibilities and new ways of finding target audiences" could play a larger part in media planning. Besides Volkswagen, Hearts & Science also won Procter & Gamble's business for its group. What WPP lost was, in effect, big-company brand advertising.

Search Is "People Looking for Information"; Brand Advertising Needs "Information Looking for People"

Search advertising used to take most of the digital ad budget because people's intent to buy was thought to be highest at the moment they searched for a product.

Search runs on purpose — people are actively looking for information — so setting the right keywords matters enormously. That same trait makes search a natural fit for sales-driven product advertising.

What brand advertising has to do, above all, is make you interested first: use the information to go find the consumer. The feed ads in your WeChat Moments, on Weibo, or in Toutiao are all built to catch your attention first.

People's paths on a phone are far more tangled than in the PC era, but one feature is obvious: they follow information out of interest. That is also a key reason search lost its place as the gateway to traffic on mobile.

So when people pick up their phones, the decisive moment merchants care about most — the point at which someone decides "I want to buy this product (or download this app)" — arrives earlier. Someone scrolling through a social app who sees an ad recommending a gift may well buy it on the spot.

"Traditional search used to be people looking for information; now it is gradually evolving into information looking for people," Robin Li wrote in an internal open letter at Baidu this February. "We now attach enormous importance to feed products."

At the end of 2016 Baidu gathered the feed ad inventory from its homepage, Mobile Baidu, Baidu Tieba and its other platforms and launched a feed advertising product of its own. This April it held its first briefing in Beijing to explain to companies what its feed inventory could do.

For news and social media, a feed of countless separate items gives users the smallest possible unit of information consumption: every item is read on its own. Zhu Shiyu, a senior strategy analyst in charge of investment management at Sina, called the design of a feed "a measure of time" that "sketches out its commercial potential — more precisely, its advertising potential. Sometimes 2x5 is greater than 1x10."

A feed vastly widens the number of ad slots a publisher can hold while keeping the interruption to a minimum. That is why feeds are also a large part of another industry buzzword, "native advertising."

So even an ad like "Matcha Soap — hot mom Yang Mi's skincare secret, the very same one" becomes bearable. Apart from a "promoted" or "ad" label, it slips easily into the feed you are reading, and some people even find it appealing.

That particular ad had an average cost per click (ACP) of 0.23 yuan and a click-through rate (CTR) of 3.44% — a case others in the business study and copy.

Feed advertising already takes nearly two-thirds of the digital display ad market in the United States, and in China it has become the growth every internet giant wants. According to iResearch, China's mobile feed ad revenue grew 89.5% year on year in 2016 and reached an 11.2% share of all advertising, while search advertising's share fell from 31.2% to 26.4% over the same period.

Feed advertising is Toutiao's main source of revenue.

How Did Toutiao Become a Publisher Advertisers "Can't Ignore and Can't Give Up"?

In our interviews for this piece, a number of media buyers said that Toutiao, with 74 million daily active users, is "a top-tier publisher you can't ignore and can't give up."

That "can't give up" has more to do with the place Toutiao occupies in advertisers' minds. How popular a platform is, what its technology can do, the creative work, how well the buying strategy is optimized — all of it shapes the final result.

But the metric that matters most is being a "traffic center."

Advertisers know they are there to promote a brand, and what they need is a big channel that reaches everyone. In the television era, that usually meant a strongly centralized medium like CCTV. In China, in fact, only CCTV has ever reached that position. It is the medium that speaks to everybody.

Baidu is by nature a decentralized medium. It can reach the most people, but it has no good place to display brand advertising: it is a gateway to traffic, not a center of it. When Robin Li said Baidu would strengthen its feed products, what he was really strengthening was Baidu's ability to be a "center."

Why, then, have video sites — the closest thing to television — not produced a big centralized channel like CCTV either?

The crucial point is that the video platforms' core ad format, the pre-roll, is organized around whichever drama or variety show happens to be a hit, and hits are uncertain and impossible to predict. This month's hit may be on Youku Tudou; next month it could just as easily be on iQiyi.

Mario, a planner at one of Coca-Cola's media agencies, says mass-market brands like Coca-Cola now prefer to use content as a coarse filter for their audience — picking a show that is popular at the moment, such as Ode to Joy. "Its audience is already precise enough for Coke."

So although video takes a large share of the mobile ad market overall, no company with a real traffic center has come out of it.

YouTube, for its part, has long worked to attract brand advertisers, and yet, as Rob Norman, chief marketing officer of GroupM, writes in his report Interaction 2017: "The advertisers who contribute 90% of TV ad revenue account for only 30% to 40% of Google's and Facebook's ad revenue."

Why was Toutiao able to attract brand advertising from the start? That too has to do with the path it took. As a startup, Toutiao could not afford the labor cost of building a sales force, so it had no choice but to sign agreements with the large media agencies — and the clients those agencies hold are mostly brands.

Zhang Yiming once told QDaily that Toutiao is not a media company but a technology company with the characteristics of media. What it cares about is not the content itself but the distribution of it. So Toutiao ended up as a company with the properties of "mass media" — and its other label, "algorithm," is one advertisers like as well.

"Toutiao's feed ads give our clients the widest possible exposure among their target users, and that is hard to do with search," Yang Yin, deputy director of the search department at HYLink, told QDaily. "Feed advertising today is still traffic first."

There are not many publishers with this quality of being a traffic center.

WeChat reaches the most people, but users are most active inside the chat window, and the ad space it has so far opened up in Moments still falls short of Toutiao's.

Toutiao's Playbook Looks More Like Baidu's, But the Market It Is Taking Is CCTV's

In the words of Yang Yin, deputy director of search advertising at HYLink, "Toutiao must be fighting alone — it doesn't have a huge sales department."

But last November Toutiao set up a separate company called Ocean Engine, whose legal representative is Zhang Lidong, a Toutiao partner. It manages the direct sales team for Toutiao's small clients, known internally as "SMB."

"Toutiao is learning from Baidu," a person close to the company told QDaily. Toutiao poached Chen Qi from Baidu, and he brought a sales team with him — "there are dedicated companies at fixed locations in Fujian, Hainan and East China." If you opened the Toutiao app recently you could see their recruitment ads too. Zhang Yiming has said he plans to grow the ad sales team to somewhere around 5,000 to 6,000 people.

At the same time, Toutiao is doubling down on short video. After putting 1 billion yuan into short video and acquiring Flipagram, the American mobile short-video creator community, outright, Huoshan Video — the 15-second video community Toutiao incubated — also received a 1 billion yuan subsidy from Toutiao.

Toutiao is doing video for two reasons: first, it found that video keeps users around longer; second, and more directly, video brings new "ad inventory."

The third reason is that video advertising is still what brand advertisers are most willing to pay for.

"We now treat Toutiao more as a supplement to the TVC — the television commercial — and use it to carry video," Mario says. The consumer goods giants, he notes, still revolve around video advertising.

"Jeep is a very typical case. Last year it went from imported to domestically built and needed to raise awareness fast, to go from a niche car to a mass-market one." Yang Yin uses the media plan for Jeep, one of HYLink's auto clients, to explain brands' preference for video. "For Jeep, traditional advertising is still the bulk of the budget, more than 50%. Of what's left, in digital, more than 60% goes to mobile, and most of that is mobile video."

Xiaomi paid 140 million yuan to put its name on U Can U Bibi for no other reason than that its marketers believe video is worth more for "raising awareness." At bottom that is no different from Xiaomi sponsoring CCTV's Spring Festival Gala.

Seen from the angle of brand exposure, what Toutiao is competing for is the budget that traditionally belonged to CCTV and the video media — and that is the largest share of all ad spending.

Toutiao Covets Baidu's Market Too, and Baidu Will Not Sit Still

Toutiao's plan to grow its ad sales force to 5,000 or 6,000 people is said to be aimed mainly at pulling in Baidu's mid- and long-tail clients later on. The number of salespeople assigned to small clients is quickly passing the numbers working KA (listed key accounts) and LA (midsize accounts).

At the same time, the agency system that used to orbit Baidu search is showing signs of reorganizing itself around "feed advertising" and Toutiao.

In the PC era, every agency with a digital business bought around Baidu, the reigning ruler of traffic; SEO (search engine optimization) and SEM (search engine marketing) were among the hottest words a media buyer could say. Baidu even created an "Internet Marketing Professional Qualification Certification" exam for it, with four levels from "basic" to "advanced," and the best optimization specialists were "closely guarded" by their agencies.

In the words of Chen Yifan, general manager of direct clients and integrated marketing in Baidu's key accounts department, Baidu is asking media agencies to "transform along with Baidu."

Tina, who runs search engine marketing at the media agency Amplifi, says that late last year Baidu sent people to her company to run a fresh round of training on its feed advertising product.

New performance pressure came with it. "Basically all of Baidu's policies this year are built on feed advertising," says Yang Yin. "In 2016, say, I only had to hit an overall volume target to get every bit of the profit share and rebate Baidu offered. This year I have to hit the feed target first."

"Having taken on a target that size, we in the search department also have to adjust where Baidu sits in the client's mind."

Yang Yin sat Baidu's intermediate certification (BCSMC, the Baidu Certified Senior Marketing Consultant) once in 2011; it later expired and he sat it again in 2015. That experience with real-time bidding carries over to the brand-new business of buying feed ads. And not only for Baidu — his team also works with Toutiao and other publishers, which has left their remit overlapping with HYLink's own media team.

To meet the growth in demand for feed advertising, Chen Yifan argues: "Agencies need dedicated creative departments and matching optimization departments. Feed advertising has very tight timing requirements, so agencies also need to respond faster."

Just as with Baidu's marketing certification years ago, the industry has already produced training and certification bodies built around programmatic buying for feeds.

In 2013 iPinYou and several other companies held China's first certification training and exam for DSP (demand-side platform, for programmatic buying) optimization specialists. AiQi SEM, a platform originally aimed at search advertising professionals, now gives DSP material a prominent place as well. One of its reports says about 12% of search advertising professionals are now well versed in buying feed ads, and that Toutiao is the publisher they choose most often for feed advertising, with Tencent Social Ads second.

The joke, though, is this: take auto clients, where the distance between an ad placement and an eventual sale is enormous (which is typical of brand advertising). "In that case, what does an auto client use to grade internet advertising? They use the Baidu Index."

Toutiao Does Not Look Like It Took a Wrong Turn, But It Faces the Same Problems of Fake Traffic and Missing Standards

Traffic still matters, and all of it is moving toward brand advertising.

"Total traffic is certainly not the problem — users look at Toutiao every day," says Chen Chuanqia, CCO of Ad Master, a third-party firm that monitors mobile internet advertising. "The problem shows up when you start slicing the audience. A lot of the clients are car companies — BMW, say — and you want to reach high-income people, but how many can you actually produce? Or a maternal-and-baby platform has only 200,000 mothers on it and the KPI calls for 300,000. What do you do?"

While everyone scrambles for traffic, more and more fake traffic is coming to light.

Bot Baseline's latest report puts the economic loss to American advertisers from fraudulent traffic at an estimated $6.5 billion in 2017, about 10% below the $7.2 billion estimated for 2016. China has no comparable figures, but the real situation may be worse.

Another practitioner, who asked not to be named, put it this way: "By this year you can count China's sellable 'click conversions' on your fingers. If I take one more order, two companies collide — both with the same phone number."

Sun Ningchao is channel director for user growth at Enjoy, a gourmet food e-commerce platform. "June 18 is almost here, and all the big e-commerce sites will be fighting for traffic — there's no way we can match them on price," he said in an interview. If they chose to buy on Toutiao at that moment, the most they could get is "inventory after the fourth refresh." In other words, you would have to refresh Toutiao four times before their ad might appear.

At times like that you have to dodge the peak: "Say I've loaded 50,000 yuan into a [DSP] account — I can set a ceiling on what I spend today. If a publisher is performing poorly, what would have been 5,000 yuan of spending today becomes 500."

The fight for traffic has grown fiercer, and in the end none of the buying prices are set by the publishers any more; they are set by "the players above them" — the brands.

By Yang Yin's account, Baidu's favorable terms on feed advertising have brought in competitors that had nothing to do with search advertising before. "Right now it's chaos. Every agency and every publisher is grabbing for volume."

And as hot as feed advertising is, next to video advertising it still lacks an effective, agreed way to measure results.

Traditional brand advertising has a theory called "3+ Reach" — an ad has to be seen at least three times to count. "Without that number, the client asks why you're spending 2 million yuan in Shanghai and not 3 million," Xu Weichong of Carat explains. "Mobile has the same problem today: if I spend 3 million yuan on Toutiao, why not 4 million? The market still doesn't have that standard."

Across the mobile advertising market, most apps will not open their data to monitoring. Chen Chuanqia likes to call these apps "naked," because the risk of fakery is extremely high.

Standards are still being built. On May 23, the Mobile Marketing Association China (MMA China) issued three standards for mobile internet advertising, covering ad viewability, brand safety verification and invalid ad traffic.

They draw on the standards used by the Interactive Advertising Bureau (IAB) in the United States, under which an ad counts as valid if at least 50% of an image ad's pixels are on screen for more than one second, or at least 50% of a video player is on screen and playing for more than two seconds.

This February Marc Pritchard, chief brand officer of Procter & Gamble, the world's largest advertiser, announced that the company's own buying would follow that standard, and pressed the whole industry to move with P&G. "The days of giving digital media a pass are over. It's time to grow up," he said.

The arrival of standards in the Chinese market begins to settle the "standards" piece of the three challenges Chen Chuanqia lists for mobile advertising; the other two are opening up the industry's data, and working out how to attribute value to different publishers in a single campaign. On this, Chen Chuanqia says, the Chinese market is roughly three to five years behind the United States.

Feed advertising is also moving past text and images into video. Not long ago InMobi released a six-second feed video ad format built for the Chinese market, and in the United States YouTube introduced a six-second pre-roll format last year.

"The future of feed advertising may lie in an entirely new category of creative, one that understands the constraints of the feed — time and attention — and its strengths — scale and shareability. Perhaps the emphasis in future will be on something like static-animation print advertising, rather than a compressed version of 'traditional' video," Rob Norman, global chief digital officer of the media agency group GroupM, writes in his latest report, Interaction.

What is worth watching, though, is that as more fake traffic is exposed, advertisers trust new ad slots less and less. A person close to Toutiao also told us that brand clients have lately been complaining a good deal about the environment on Toutiao.

Brand advertisers have arrived on the mobile internet and face an endless supply of new publishers, and yet their range of choices does not seem to have widened.

Precision is not new. What has precision actually solved? Perhaps it is like viewability, the most basic yardstick in mobile advertising: not a way to judge whether an ad's message worked, only a way to measure whether the message arrived at all.

The admen of the mobile era have taken only their first step, and the gunpowder is already thick in the air.

(Mario and Tina are pseudonyms, used at the interviewees' request.)

Cover image from Wikipedia