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With Facebook and Google Walled Off, China's Digital Ad 'Triopoly' Thrives

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06/19/2017 | 11:45am CET
By Jack Marshall 

China is home to some of the world's largest digital-ad players, mostly because they have a stranglehold on the world's second-biggest market, where their Western rivals are pretty much absent.

Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are forecast to attract a healthy 15% of the global market this year, according to eMarketer, even as their digital ad revenue comes almost exclusively from within China.

Only the industry's two behemoths, Alphabet Inc.'s Google and Facebook Inc., do better world-wide: eMarketer expects them to capture 49% of global digital ad spending this year, despite their lack of presence in China.

China represents an attractive ad market that foreign companies can't easily access, largely because of restrictions placed on them by the Chinese government. Regulators blocked access to Facebook in 2009, and Google all but abandoned its China operations in 2010 over hacking and censorship concerns, although it has since attempted to slowly work its way back in.

Alibaba, Tencent and Baidu are expected to attract over 62% of the $50 billion digital ad market in China this year, eMarketer said, and command a predicted 70% of a $76 billion market by 2019.

Each of the three Chinese ad giants has a different focus.

Alibaba operates the nation's largest e-commerce platforms Tmall and Taobao, where it collects vast amounts of data and makes most of its money by charging shops for advertising.

Tencent owns WeChat, the messaging app with more than 900 million users that has evolved to also offer mobile games, mobile payments and a social-media-style timeline.

Baidu runs the dominant search engine, accounting for nearly 80% of mobile searches in China in the first quarter.

"These three guys are pretty much dominant in the subsectors they operate in," said Michael Levine, a global technology and media investor and analyst.

The Chinese digital ad market is growing rapidly, as mobile-device usage proliferates and ad formats and data-driven targeting capabilities continue to evolve. As that market expands, the dominance of the three is only expected to increase.

"Ad spending in China continues to shift rapidly toward digital formats, fueled by rising time spent online and greater advertiser spending on mobile formats," said eMarketer forecasting analyst Cindy Liu.

While Alibaba and Tencent's presence is projected to quickly expand in China, Baidu's roughly one-fifth share of the digital ad market there is expected to erode, with e-commerce ad revenue growth outpacing search-engine ads.

Still, a lack of significant product overlap and competition between the three companies has made it difficult for other Chinese companies to wrestle away market share, Mr. Levine said.

That could also help explain why other Chinese companies and bankers are choosing to invest in online ad firms outside of China, including in the U.S.

A group of Chinese investors led by the chairman of tech conglomerate Miteno Communication Technology Co. last year paid $900 million to acquire Media.net, a Dubai-based online ad broker that gets 90% of its revenue from the U.S.

Investment bankers such as Luma Partners' Terry Kawaja have predicted an influx of Chinese money into the international online advertising sector over the next few years.

Write to Jack Marshall at Jack.Marshall@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING 1.50% 197.415 Delayed Quote.12.82%
ALPHABET -0.61% 1091.475 Delayed Quote.4.43%
BAIDU 0.97% 255.28 Delayed Quote.7.95%
TENCENT HOLDINGS LTD -0.73% 465.2 End-of-day quote.14.08%
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