China's internet lack of innovative advertising remains the main source of revenue

Is there a bubble in the share price of Chinese internet companies? I think if the future is not innovative in the business model, or rely on advertising, then the market value of Chinese Internet companies have been overdrawn for many years of growth, the bubble has formed.

China's internet companies are many, overseas listing is also many, but the business model of making money is not much, mainly advertising and games. From advertising revenue, 2010, Sina's advertising revenue accounted for 70% of the total income, and Baidu's income is almost 100% from advertising. The recent listing of Youku and everyone relies mainly on advertising as a major source of income. No matter how wonderful the future of the Internet is, if the business model remains unchanged, advertising will be an important source of revenue for Chinese internet companies.

According to the survey, 2010 China's internet advertising market reached 32.1 billion yuan, according to the Research institute CTR data show that China's 2010 overall advertising spending reached 621.2 billion yuan. As a result, internet advertising accounts for about 5.17% of China's overall advertising spending. Over the past six years, the proportion of Chinese internet advertising spending has been rising, from around 1.33% in 2005 to 2010 years of 5.17%.

At the same time, China's overall advertising spending has grown at a rate of 10% per cent each year as GDP has grown rapidly. As a result of the rapid growth of the overall advertising costs, internet advertising accounted for the proportion of the entire advertising costs increased rapidly, the Internet advertising market to achieve a burst of growth, composite growth rate of up to 50%. Such a high composite growth rate has benefited from the dual benefits of overall ad spending growth and increased internet advertising.

Advertising, for advertising companies, including Internet companies, is revenue, and for companies that spend money on advertising, it is spending. The amount of corporate advertising spending is closely related to the economy. Over the past six years, although the economy has experienced ups and downs, China's overall advertising spending as a proportion of GDP is fairly fixed, about 1.56%. U.S. advertising spending as a share of GDP has remained at around 2.25% per cent, according to data from 1900 to 2007. The advertising expenditure budget of an enterprise has a certain limit. Therefore, the advertising enterprise's income growth also must be subject to the advertisement owner budget expense limit.

Assuming that China's advertising market is growing at an average annual rate of 10%, 2011, by 2016, China's advertising market will be more than 1.1 trillion yuan. Assuming that by 2016, China's internet advertising spending reached the current level of the United States, accounting for about 8.5% of the overall advertising costs, the next five years, China's internet advertising market will be about 18% of the compound growth. This is a rapid growth, but it is not enough to meet the high growth expectations implied by the higher valuations of internet companies today. At present, Chinese Internet companies are more than 50 times times the price-earnings ratio, in fact, at least 30%-50% growth expectations. This is typical for looking at the future with a rearview mirror.

In the advertising-oriented business model, individual Internet companies may be able to expand market share and achieve more than market growth. However, as a whole, the advertising revenue of Chinese Internet companies will not continue to grow by 50% in the future.

The gap between anticipation and reality is the space in which bubbles exist. If Chinese internet companies cannot get rid of their reliance on advertising and find new growth points, current valuations are unsustainable.