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SinoTech Aims to be One-Stop Digital Marketing Shop
 SinoTech Group is a China-based digital marketing company that shares product similarities with Focus Media's (Nasdaq:FMCN) Allyes. Company Chairman and CEO Dr. Mathew McDougall established SinoTech Group in April 2007, after taking his previous digital marketing firm public on the Australian Stock Exchange. JLM Pacific Epoch recently caught up with Dr. McDougall, who is in his seventh year in China, to discuss his company and the future of China's digital advertising industry. Dr McDougall's blog, "The Digital Marketing Inner Circle," can be found at http://www.sinotechblog.com.cn
Can you talk about the development of SinoTech Group's products since the company's inception?
SinoTech Group has evolved from being basically a pure tech-software company developing ad serving and web analytics technologies to a full service digital marketing company. However, we are not an agency; our business model is to provide the best in-market solutions to our 4A agency partners, PR firms and some select clients.
For example, in the early days, we were developing analytics and bid management algorithms for optimizing search marketing on Baidu (Nasdaq:BIDU). We started when search marketing in China was a very manual process, and the advertisers had very little in the way of assistance. SinoTech Group was the first Chinese company to work with Baidu on its search API so we could automate the bid management and buying of bulk keywords through our SinoMaximizer platform. Now many companies are leveraging automated buying with Baidu and a small part of an eco-system has developed.
Since we developed SinoMaximizer, we have moved strongly into the area of social media marketing, which I think has much promise in China. We are also investing in the area of online reputation management and ad network optimization technologies.
How has your company been performing recently?
SinoTech Group revenues grew more than 200% in the past year and we're growing substantially month-on-month. We are profitable and that was a key goal for us in 2009. Our technology has provided a catalyst for us as advertisers want more effective media buying, analytics information and general ROI on their ad spend.
Who are your customers?
Our customers are predominately large 4A international advertising agencies and PR firms. The economic downturn resulted in agencies cost cutting, and, in China, we saw a large number of 4A companies cut staff. As the firms reduced staff, SinoTech Group was leveraged as their outsource digital marketing provider. We have developed very quickly in the last couple of years because the market is maturing and brands are recognizing the value in more integrated digital solutions.
How does SinoTech Group differ from other digital marketing companies?
The first difference is our business model. When we entered the internet advertising industry in China, there was one dominant local player, Focus Media’s (Nasdaq:FMCN) Allyes, and a handful of international digital marketing providers like Double Click and Omniture. We saw that Allyes really had only ad serving technology at the time, yet no web analytics, reputation management or social media marketing. So we set out to develop a more complete Chinese focused digital marketing suite of products.
Secondly, China is a unique market. A company like U.S. vendor Omniture can develop a large successful business by offering only products in a very niche vertical, but, in China, brands accept the value of a single vendor offering an integrated solution. SinoTech Group is the only company in China that can offer this.
Thirdly, our pricing model is very competitive. We are priced at domestic market rates which provide a barrier to entry should international vendors choose to enter China. Their pricing is often done on a global basis.
Finally, our products and services are all developed here by Chinese engineers and in consultation with our partners. If someone in China wants a new interface or a new feature, it's very easy to work with us, whereas with North American or European vendors there are difficulties with time, language and location.
In terms of China's online marketing industry, portal advertising takes about 30-35% of the market, while paid search takes about 40%. Do you think there will be a shift in the market during the next two years?
There's certainly going to be a readjustment. The pie is getting bigger. The consumer base in China is changing, and discretionary income is just enormous compared to what it was five years ago. WPP just came out and said they expect 10% going into digital this year, next year they reckon about 15%.
Because we work with 4A agencies and a lot of digital services, we get a fairly complete picture of what's hot and what's not. One thing that's hot is search, which has really come of age in the last six months or so.
Right now, search accounts for around 50% of the market in the U.S., and, in China, it will grow from 40% to 45% in the next few years. Within that search pie, I think there will be quite a dynamic shift. Currently, we've got 60% going to Baidu and 20% to Google (Nasdaq:GOOG), but, in the future, more of the pie will go to other search engines like Tencent (700.HK), NetEase's (Nasdaq:NTES) Youdao, Microsoft's (Nasdaq:MSFT) Bing and a couple of other smaller verticals. So in the next few years, search is going to grow overall, but there will be more fragmentation, which will stimulate a lot of innovation.
What other market trends are you anticipating?
There's also a trend toward SEO (search engine optimization), and slightly less focus on SEM (search engine marketing). Because of the way Baidu works and the market penetration of Google, SEO was almost non-existent in China just six months ago. But as SEO becomes more understood we will see more companies leverage this. Fundamentally, search marketing is set to grow.
Social media marketing is a relatively misunderstood concept by marketers and there is not one universally accepted definition. That said, I believe we will see more agencies in China moving budget into developing SNS and BBS communities. Some will explore widgets and web apps but generally there is a 'feeling-in-the-dark syndrome' here as they try and find something that sticks. SinoTech Group is working with some agencies on more integrated solutions, combining search and social together with online reputation management and brand sentiment measures. This is also an area I am excited about but this is embryonic and will certainly evolve in the next year.
For now, social media marketing will be more campaign-oriented rather than long-term. A few brands have created fan pages on Xiaonei.com, 51.com and other SNS sites, but, in general, there's not much activity because brands still don't know how to measure success. I anticipate that some brands will choose to set up an SNS within their own property rather than go to Facebook and create a fan page.
We'll also see a little more in-game advertising. This is a potentially exciting area, but, again, we are looking at brands taking budget and testing this medium, something that is a hard sell in a downturn.
In terms of what's cooling down, I think advertisers and their 4A proxies will still buy banners on large portals and in top verticals, but they're going to put more thought into why they're buying in certain positions. Next year, we're going to see a lot more targeted campaigns based on geography, context or behavior, rather than network- or site-based campaigns.
Do you expect the portals to change their cost-per-day (CPD) charging models?
I think we are stuck with CPD for awhile because it's simple. Agencies are getting a lot more noise from their brands because they want to do performance marketing, but CPD will probably dominate for the next year or so. However, we may see more ad units supporting performance-based or targeted campaigns. We may sell a lot of CPD, but it might be geo-targeted, or, down the line, we may add on our shoulder page or a footer with CPA [cost per action] advertising.
Do you think Chinese social networking sites have a clear revenue model?
I don't think any of them do. In North America, Facebook and MySpace are mature SNS businesses, and they are still looking at ways to make effective commercial business. In China, the game is to get as much traffic as possible, as much audience as possible, and go from there. Selling ads hasn't worked for Facebook yet and it probably won't work for anyone else either. What's interesting though is Tencent's entrance into the social-commerce space. So that's probably going to be the best bet, combining e-commerce and social networking.
So what is next for SinoTech Group?
We have made great progress to date, but our board wants to accelerate growth. I anticipate doing Series A funding this year to facilitate acquisitions. We have significant VC interest in our business and choosing the right funding partner is crucial.
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