China's advertisers are beginning to see the benefits of using search engines to boost sales

----By Daniel Inman

Companies in China are beginning to adopt increasingly sophisticated marketing strategies involving the internet, and as they do so, they're turning more and more to the search engine. Advertising on a search engine consists of paying to have an advert associated with certain keywords, so that when someone makes a search which uses that word, the advert appears alongside the search results.

The advocates of search engine advertising tout it as one of the most effective forms of advertising there is: it's extremely targeted, because the advert is only seen by people who are looking for information on that topic; and it's highly cost-effective, since the advertiser only pays for their advert when they get a result, for example, if someone follows the link to their website.

In a short period of time, search engine advertising in China has grown to a significant size. Analysys International, a China-based business information company, reported that at the end of the second quarter of 2006, the market for search engine advertising in China had reached RMB376 million, and it predicts that the market will double by 2008 to an estimated size of RMB687 million.

The Chinese market leader for search engine advertising is Baidu, which currently has about 50 percent of the market. Foreign contenders, such as Google and Yahoo, are very much in second place, with both handling about 20 percent of the market. Although Google and Yahoo are way behind now, no one is sure how things will pan out over the next few years. Baidu's advantage is that it is China's homegrown search engine, and therefore more sensitive to the needs of its Chinese users; but Yahoo's acquisition of Chinese search engine 3721 could help close that gap, and Google's seemingly bottomless resources have helped them enjoy success across the rest of the world. Canny spending on their part could have drastic effects. The market is still young, and the right innovation could turn everything upside down.

On the advertiser's side, there are a lot of small to medium-size Chinese companies taking out advertising with the search engines. "It's mostly small to medium enterprises, because of the way that the reseller network is set up," says Eugene Chew, Head of the Interactive department at ad agency TEQUILA\ China. "Baidu and Yahoo are just starting to purchase their resellers, so they can go directly to their customers. Before that, they would partner with little shops in all the cities. These shops would go to small to medium enterprises that had no website and offer to build them a website and manage their search marketing as a package. What attracted these small to medium enterprises was the website, and search engine marketing was just an additional part of that package."

Dishonest clicking

Anyone who advertises on a search engine in China is going to have to put up with click-fraud. This is when an advert is clicked on by someone pretending to be a legitimate user, with the intention of generating a charge for that click, which the advertiser will have to pay to the search engine. China isn't the only country where click-fraud exists, but it is a country where the rate is particularly high. It's an activity that is difficult to measure, but click-fraud is generally considered to account for 10-30 percent of clicks in China.

Advocates of search engine advertising say that click-fraud isn't enough of a problem to act as a disincentive to taking out adverts on a search engine. T.R. Harrington is managing director of Shanghai based Darwin Marketing, a company whose main activity is optimising the value companies get out of the money that they spend on online advertising. He says, "You've got to look at the next best alternative as an advertiser. How much does it close the gap between what its providing you now on a return on investment basis, as opposed to the next best alternative? Right now, the gap is huge. Even with 30 or 20 percent, whatever it is, of click-fraud factored in, there's still a tremendous gap between that and the next most cost-effective form of advertising."

Who are the click fraudsters? No one

knows, but there are a number of theories. It's the search engine itself that gets the most immediate benefit from click-fraud, since the revenue from the click goes to them. It's highly implausible that the search-engines would actually engage in click-fraud to boost their revenue, since their profits are already very healthy and being caught would undermine their entire business. At most, the fact that the search engines gain revenue from click-fraud could mean that there is less of an incentive to stamp it out.

It could be an advertiser's competitor, trying to damage their rival's marketing strategy. This could be true to some extent, but engaging in click-fraud requires more than just sitting at the desk clicking repeatedly on an advert's link, because for multiple clicks to count, they must come from different IP addresses, requiring people to use different internet connections. Setting up an effective click-fraud operation would require an amount of effort that would be disproportionately high compared to the effects it would have on any rival.

The people most likely to be engaged in click-fraud are disreputable marketing agents. If an advertiser is paying an agency based on how much revenue is being used of their search budget, there could be an incentive for an agency to boost how much they get paid by clicking on their client's links.

Baidu's barriers to natural search

Search engine advertising is just one arm of search engine marketing. Instead of paying for an advert on a search engine, a company can try to alter how high its website appears when someone searches for it. The advantage of this strategy, which is known as search engine optimisation, is that people are more trusting of a link to a company's website that appears as a result of their search, rather than an advert that appears as a result of their search.

Compared to search engine advertising, this is a long-term strategy. "With paid search results, you can have a result within a day or within a week at most; and you can measure everything very easily. Natural search results take a minimum of three to six months, and sometimes they can take up to 12-18 months," says T.R Harrington. "Our understanding of the market is that many companies in China aren't willing to invest for 12-18 months before they see results. Marketing directors within a company, their bosses are telling them that they need to get results faster, so the likelihood that they're going to have the budget to invest in this is smaller. But for the companies that do have the budget to invest in it, there's no question that they're investing in something that becomes an asset."

The problem for search engine optimisation in China is that Baidu, the market leader, allows for companies to simply pay for their website to appear at the top of the search results. These sponsored links are not clearly marked as such, and it is often the case that there are no natural results on the first page. The result of this is that for many keywords, natural search optimisation is pointless because too many sponsored links appear before the natural results.

The combination of Baidu having the lion's share of the market and its willingness to profit from sponsored links will slow down the growth of natural search engine optimisation. It doesn't stop companies from trying to get their site higher on other search engines like Google and Yahoo, but while natural search optimisation is not worthwhile on the market leader's site, the growth of natural search engine optimisation is going to be impeded. When the average Baidu user becomes sophisticated enough to realise that the results that they see aren't necessarily the most relevant, then Baidu might start to rethink its sponsored link strategy. Until then, natural search engine optimisation is going to see slow growth.

The future search

Despite the setbacks of click-fraud and sponsored links, those in the advertising industry are confident that search engine marketing has a strong future in China. Chew believes that a greater proportion of online advertising budgets will go on search engine advertising. He predicts that in the next few years, the companies will go from currently using 25 percent of their budget on search engine advertising, to about 45 percent.

Chew also stresses that the future growth of search engine advertising is tied into the growth of e-commerce. People often advertise on search engines because they want people to visit their website and subsequently purchase something from it. E-commerce in China has been slowed down by both the scarcity of credit cards, and the failure of anyone to come up with an alternative method of payment. When e-commerce finally takes off in China - which it inevitably will - there will be more e-commerce sites inclined to advertise on a search engine. It is then, that search engine advertising will explode in China.