Shares of several Chinese Internet companies rose on January 1, 2008. Sina Inc. went up 7.9 percent following predictions from analysts on Wall Street that the Web portal operator would likely raise its ad rates this year by a margin of 30 percent.

Ad rate increases are important for Sina's growth, the analysts noted, because they are the source of half the company's branded revenue growth. Analysts also anticipate that the rate hike would bring these sites more income.

Analyst Gene Munster at Piper Jaffray, a U.S.-based Investment Bank, upgraded Sina shares to "Buy" from "Neutral," and expected the Beijing 2008 Olympic Games will bring the Web portal operator additional income.

However, Wall Street only saw the surface, not the cause, said a Chinese analyst in this industry, who wished to remain anonymous. In his opinion, the fundamental reason of the ad price hike was inflicted by mergers and acquisitions among new media advertising businesses.

Focus Media Holding, China's largest life-style media service company, and WPP, advertising and marketing service worldwide, now controlled approximately 70 percent of the total amount of advertisement of new media companies, after purchasing new media advertising service companies,

Focus Media acquired 40 percent of the ad service market in 2007, after purchasing several ad service companies in China, including Allyes Information Technology Co. Ltd., Wonder Ad, and iResearch, which help Focus Media to have more say in the Internet advertising sector.

London-based WPP, the world's second largest media group, bought Beijing Hua Yang Lian Zhong Advertising Co. in 2005, and Shiji Huamei Advertising Co. (www.a.com ) in 2006. The two purchases mean WPP own over 30 percent of ad service rights in China's Internet new media ad market.

The analyst said that Focus Media was now in talks with Japan's Dentsu, considering a merger of Focus' six subsidiary online ad agencies with Dentsu's business in China. The new company is to be named Focus Wang Jing Online Advertising Co. Identically, WPP was planning to reshuffle Huayang Lianzhong Co. and Century Harmony Co., thus to set up a new Internet company to be named as Huayang Qunyi Internet Co.

The two newly set up companies under the two ad service giants are designed to serve both media operators and advertisers.

Controlling 70 percent of the total amount of advertising media, Focus Media and WPP are strong enough to demand new media firms like Sina to cut their advertising discounts. To maintain their earning scale and profit margin, these new media companies have no choice but raise their ad price, said the analyst.

The analyst also disclosed that in the fourth quarter last year when Sina and Sohu were setting ad rates for 2008, ad resellers under Focus Media and WPP requested Sina improve the 30 percent discount it normally provided them to 50 percent. To continue meeting revenue and profit expectation, Sina and Sohu therefore had to increase ad rates.

The analyst believes the bulk of the increase will have to be passed on to Focus Media and WPP. He said what is emerging is advertisement service agencies are designed to eventually monopolize new media advertisements, and then re-establish the game rules.

However, Ji Hairong, Focus Media Vice President, denied the ad price rise had any connection with his company. He said that new media companies raise ad rates every year, so it's normal to do so in 2008. The Beijing 2008 Olympic Games is another cause for the increase, he added.

The analyst warned that Internet portal operators like Sina and Sohu, should not allow themselves to be taken advantage of. They should first, set up subsidiary companies to form their own direct sales teams nationwide, and then ally themselves with the other two Internet portal companies -- QQ.com and 163.com -- to establish operating rules together, since the combined advertising income of the four Websites totals 2.77 billion yuan, or 82 percent of the whole advertising income of the market. They need to consider how to balance interests among them, thus to compete with advertising service companies, the analyst said, adding that failure to do this would result in exploitation.

However, Vice President of Sina Corp. Du Hong, explained that Sina raises its rates at every fourth quarter, therefore, it has nothing to do with WPP and Focus Media. Du unveiled that online revenues from the two ad services are less than 40 percent of Sina's revenue, which means little influence on its share price setting.

The analyst, however, insisted that 40 percent is not a small number.

Wang Xin, Vice President of Sohu Inc. argued that Focus Media and WPP were not directly against new media, but that advertisers were. "There were several dozens of ad service agencies before, with each did things in their own way, resulting in fierce competition among similar companies." To get additional clients, they reduced service charges, or even exempted service fees, making profits low for ad service agencies, he said.

Usually, service fees accounted for 10-15 percent of advertisement expenditure. For instance, the 3.4 billion yuan of ad revenue in 2007 should mean about 350-500 million yuan in service fees. WPP and Focus Media, with 70 percent of ad service rights for new media, would definitely have earned service fees from advertisers.

The analyst noted that Focus Media and WPP will eventually establish new rules. Traditional media like TV had formed a set pattern encompassing content providers, advertising service agencies and advertisers. Small advertising services have little say in their own future however since the buyouts by the two ad service giants, things had changed.

Having the power to call the shots, Focus Media and WPP, will first, request media companies to lower discounts, and then, request higher service fees from advertisers. The combination of 10 percent decrease in discounts and 10 percent increase in service charges will contribute 300-500 million yuan in revenue.

Profits from Internet ad trade are expected to increase further with the sector's rapid development. The analyst said that Focus Media plans to reorganize its online ad businesses and then go public.

Both Focus Media and WPP planned to cooperate with media companies through buying fixed ad periods and then selling them to advertisers in return.

Focus media plans to reorganize online ad companies so they have a say in their affairs, then purchase and streamline some Internet portals; and finally, set up a strong media group to consolidate its advantage in ad service trade.

Wang Xin said that the plan of Focus Media will not pose a threat for Sohu. Sticking to long-term development strategy, the company will attach great importance on its content and service quality, aiming to lure more users, who in turn view the ads. Wang said ultimately it is hoped to form a harmonious balance between WPP and Focus Media, and new media companies.

Currently, the new media advertising market has witnessed a rapid development. According to statistics from the Data Center of the China Internet on January 8, trade volume of China's Web portal operators amounted to 123.5 million yuan in 2007, including 3.4 billion yuan from advertisement, accounting for 27.2 percent of the total. Of the 3.4 billion yuan in online ad revenue, over 70 percent came from ad agencies under Focus Media and WPP, larger than that of Gome and Suning -- two giant electrical appliances suppliers in China.

Therefore, the analyst suggested that WPP and Focus Media should not be encouraged to expand further. New media companies should learn from handset manufactures who have all the power in this industry, while retailers have no way to control their own destiny.

(Source: The 21st Central Business Herald)