Felicis Ventures Blog

Top Global Internet Ad Markets in 2008

Myspace CEO Chris DeWolfe was quoted in TechCrunch 50 as saying that "95% of their ad revenues come from 9 countries". Based on online ad market estimates* between mid 2007 to mid 2008, the following chart depicts the top global internet ad markets as follows:

* all estimates based on eMarketer [2007-2008], except:

- South Korea (estimate from Asia Media News Daily, Feb 2007)

- Australia (IAB Australia 2007 estimate on Feb 2008)
- Brazil (Projecto Inter-Meios Mar 2008)
- Italy & Spain (BIPE Sep 2007)
- Russia (Group M July 2007)

 
Please note that these estimates were derived on different dates, and sometimes across different sources, so this is not exactly a perfect comparison. But it nevertheless paints a clear picture that might help with prioritizing international ad markets:

• US is by far the largest online ad market with an estimated size of nearly $25 billion
• US online ad market is larger than all the other international online ad markets combined ($24.9 billion versus $24.2 billion)
• UK and Japan are the next biggest markets with $6.4  and 4.5 billion respectively
• The main European online ad markets are about 80% bigger than the leaders of the Asian market
• China, Canada, France, Germany, South Korea and Australia each have online ad markets which exceed $1 billion
• Russia and Brazil online ad markets are now estimated to be large enough to compare with Italy and Spain respectively

In terms of aggregate size, the European markets throw their weight right behind the US. Japan is a clear leader in Asia with the Australian, Korean and the faster growing Chinese market trailing it. After these global leaders, the other ad markets are expected to be much smaller in comparison. So outside of the US, the above 12 countries are the most significant when it comes to actual monetization potential. As for prioritization, the numbers are clearly telling the story.

Asian Internet Users Poised for Strong Growth

With 530 million users, Asia has the world's largest internet user population according to Internet World Stats. The penetration of internet users compared to the total population however is lowest in the world with 14%, except for Africa. Given internet penetration rates in North America and Europe of 73% and 48% respectively, that bodes well for strong growth in the number of internet users in Asia for years to come, making the region important to watch in the coming years.

While China has more than double the internet users of Japan with 210 million, it has less than one fourth of Japan's internet penetration at 16%. India has third largest internet user base in Asia, almost twice as much as in South Korea, but its internet penetration is 1/13th the rate of South Korea. More details of the specific Asian countries and their internet user statistics can be found here.

Vkontakte.ru - Russian Facebook Clone Growing By Leaps & Bounds

If you've never heard of Vkontakte.ru before - you're not alone. It was shocking to discover that it rose all the way to Alexa #34 in very short order. The site is growing so fast and is so popular in Russia that the country's secret service FSB got concerned that it might become a security risk because the Russian soldiers are signing up in droves. Social networking keeps demonstrating phenomal international growth. This shouldn't be a surprise: according to comScore's "State of the Internet" report from March of this year, Social Networks are the fastest growing vertical on the internet globally (60% annual growth) with under 40% penetration rate (versus 90% for portals).

What's even more amazing is that as far as I can tell, the site seems to be a carbon copy of Facebook - but localized in Russian and cyrillic alphabet. According to third party sources, the company has a team of only 20 people. It ranks among the top ten sites (based on Alexa stats) in Russia, Ukraine, Belarus, Kazakhstan and Tajikistan.

Russia is the country in Europe with the lowest market share for Google at 32% (versus Portugal's 94%) and its top 3 sites are all homegrown: Yandex, Mail.ru and Rambler. Facebook might find itself fighting an equally uphill battle in this important BRIC internet market.

BRICs Make an Increasingly Large Impact on the Internet

BRICs (Brazil, Russia, India, and China), the group of 4 countries, first coined by Goldman Sachs, are exerting a much greater influence on the global state of the internet: While in 2004 only China and India were in the top 10 countries for TMT (Tehcnology / Media / Telecom), in 2006 Brazil and Russia replaced South Korea and Canada on that list (source: Morgan Stanley Research, 2008). China has recently become the global leader in the following key TMT categories: population (1.3B), credit cards (1.1M), mobile subs (446M), telephone lines (368M), cable / satellite subs (155M) - [source: Morgan Stanley Research, 2008]. Only less than 1% of world's internet users were in China in 1995, but in 2007, 16% of the Internet users originated in China (~210M).

The importance of the BRIC countries like China have an ever growing consequence for the top US sites as well. The top 5 global properties, consisting of Google, Microsoft, Yahoo, YouTube and eBay derived virtually three quarters of their traffic from non-US users (source: comScore 2008). The ratio is as high as 78% for Microsoft and Google.

While the BRIC countries already established themselves among the top 10 countries in the world with the highest number of internet users, the penetration rate of internet usage is still incredibly low in these countries. In my opinion, it is exactly this contrast that makes these 4 countries highly interesting to watch.

Highlights from 2007 China Venture Capital Annual Forum

This time last year, I was just returning from my first LeWeb 3 Conference in Paris, having enjoyed impromptu appearances by Shimon Peres and Nicholas Sarkozy, which made the event really memorable for me. This year however, I spent the same week in Shanghai, China attending the China Venture Capital Annual Forum. While this Conference was short on celebrity appearances by former or current Presidents, it was rich in terms of news from an impressive year in Chinese venture capital based on the first 11 months so far: 98 IPOs, $5.4B raised (55 new funds started this year), $3.2B invested in 428 deals according to the keynote address of Gavin Ni, CEO of Zero2Ipo Group. $3.2B invested reflects a six-fold growth in six years.

To get an idea of scale, I wanted to compare the numbers from China with US, India and Europe. Estimated annualized figures are as follows (based on first 3 quarters from Europe & India, first 2 quarters in the US):

These numbers of course only tell part of the story. Following the conference, I visited Chinese cities like Xi’an in the middle of the country whose population exceeded 7.5M, one of 100 cities in China with a population of more than 1M. The massive scale of growth is not without its cost however. In cities with a large industrial base like Xi’an, even on a sunny day, the weather looked foggy due to an intense haze. It’s not unusual for people to wait over an hour in lines at local banks.

The most eye opening experience for me was shopping at Gome, one of China’s most popular retail chain stores, focusing mostly on electronics. I could buy an iPod clone called She for less than $40 and was shocked to find a ski jacket in an attractive color with synthetic fur for a whopping $23. It wasn’t unusual to encounter restaurants with multiple floors with rows of private rooms (people dine out and entertain quite frequently here in China). Not surprisingly, at least one third of the total VC investment in China in 2007 was directed at the Traditional / Service industries. This is one of the few places in the world, Sequoia Capital invested in a fast food retail chain according to Fan Zhang, Founding Managing Partner of Sequoia Capital China.

All in all, it has been an amazing experience to meet first hand with great entrepreneurs, bloggers, investors, VCs and angels in China. More on that to follow in the next few blogposts…

South Korea - Harbinger of Internet Trends

For the future of Internet trends, look no further than South Korea. According to statistics released by OECD and ITIF on April 2007, Korea ranks #1 in broadband penetration [90%], #2 in average internet access  speed [45 mbs], and #2 lowest in internet access cost [$0.45 per 1mbs per month], among 30 OECD countries surveyed. Given its roster of Internet companies, one would guess that the US wouldn't be far behind. However, it merely ranked 12th on the list with 51% broadband penetration, 4.8 mbs average internet access speed and average internet access cost of $3.33.

Other interesting comparison points were in the following areas:

• Popularity of Virtual Worlds: Korea's CyWorld had 14.8 million subscribers versus Second Life's 3.1 million as of June 2007 based on comScore Media Metrix data [Source: eMarketer] - Contrast this with South Korea's population of 49 million versus US population of 301 million
• Popularity of Social Networking: 55% of Active Internet Users in South Korea visited a Social Networking site in the last 30 days versus 24% for the US [Source: eMarketer / Ipsos Insight, 2007]
• Newspaper Penetration in South Korea fell 17% between 2004 and 2006 from 48% to 40% [Source: eMarketer / Korea Press Foundation, 2006]
• South Korea's $ 14 billion B2C E-commerce sales represented more than 25% of all e-commerce activity in the Asia Pacific Region in 2006 (Japan and China were at  $33.5 billion and $2.5 billion respectively, for comparison) [Source: eMarketer, 2007]
• Internet retail sales grew fastest among all retail channels at 23.5% per year, twice as fast as second most popular channel: convenience stores [Source: eMarketer / Korea Times, 2006]
• Clothing, shoes and sporting goods were purchased by 62% of all active internet users in South Korea, ranking number one among all products and services. Music was a close second at 49.1% [Source: eMarketer / MIC, 2006]
• While Music was #1 content purchased online, with 75% of active internet users, Education was not far behind at #4 with 27%
• Mobile TV is a huge growth area with expected subscriber growth of more than 8X in 6 years - from 2.5 million subs in 2006 to 21 million subs in 2012 [Source: eMarketer / TU Media Group, 2006]

Personal Conclusions:

• Keep watching the social networking space for interesting vertical implementations (examples: Maya's Mom, Dogster)
• E-commerce volume will keep going up and personalized recommendations will keep playing an important role in that growth
• Online Education is an overlooked segment and should become much more visible in the next few years
• Mobile TV space should get a lot more exciting if the wireless carriers could improve their user experience and abysmal bandwidth faster