Chinese tech majors Alibaba and Tencent are discussing the joint acquisition of a minority (20 per cent) stake in the Chinese unit of the world’s largest advertising media firm despite rivalries in their domestic markets.
Together with China Media Capital Holdings (CMC), the negotiations for this deal are in their infancy. In closing, it could value the business between $2 billion to $2.5 billion. While it could take several months to conclude, the London-based WPP is likely to spin off its Chinese agency operations into a new holding company to retain its majority ownership if the deal were to go through.
This could be a good time to take to revolutionize the traditional advertising communication model even more, especially with a poorly performing WPP that is in the midst of a leadership change.
WPP reported of its worst performance since the 2009 economic recession, with revenue declining by 0.9 per cent to only 15.2b pounds (close to $20b). It has also been plagued by management losses; company founder Martin Sorrell left the company earlier this year in April following complaints of personal misconduct.
After all, the value of the internet-based data analysis model, as opposed to the aged old traditional advertising communication model is very clear to these Chinese giants. According to details in an SCMP report, Alibaba and Tencent along with Baidu have dominated the country’s digital advertising market, accounting for a combined total of 72 per cent of China’s mobile revenue.
This is similar to the trend amongst the American tech giants. The combined advertising revenue of Facebook and Google accounted for a whopping 46.4 per cent of total global digital advertising expenditure in 2017 alone.
Specifically, Facebook raked in $33.7 billion in advertising revenue, while Google’s advertising revenue hit $79.4 billion. Given the fact that Google’s parent company Alphabet had to reassure investors that it is still fundamentally an advertising company in its recent earnings announcement, it is evident that digital advertising is the core driver of these internet giants’ revenue.
More importantly, this Chinese deal that sees a collaboration of archrivals Alibaba & Tencent highlights the belief amongst tech giants that a tech firm ultimately draws a bulk of its revenue from digital advertising and puts further pressure on the traditional advertising market, as evidenced by the dismal performance of WPP, an advertising giant.