HONG KONG - AirMedia, whose products are viewed, like it or not, by the more
than 55 million passengers now going through Beijing International Airport
annually, has tightened its remarkable grip on China's airport advertising
business by adding Shanghai's two main airports to its portfolio.
The Nasdaq-listed company operates a network of LCD and plasma televisions in
40 airports in China, including 29 out of the 30 largest. It also runs the
in-flight TV program for nine airlines in the country, including the three
largest.
Now AirMedia, founded in 2005 by chief executive Herman Man Guo, has secured
from French advertising firm JCDecaux, the only major competitor in its
particular sector, the contract to operate
digital TV and digital frames in Shanghai's two main airports, Pudong and
Hongqiao, from September this year to February 2012. Digital frames are
high-definition LCD screens that show poster-type advertisements rather than
video
Real estate developers, car manufacturers and luxury goods vendors have been
using AirMedia's network to reach hundreds of thousand travelers coming to and
going from the country's airports every day. "We are one of the best media for
reaching high-end consumers in China," AirMedia chief financial officer Conor
Yang told Asia Times Online.
The company has gone against the grain over the past year, expanding as many
sectors of the economy are struggling amid the global financial crisis. At the
end of June, it had digital frames at 28 airports, compared with only 16
airports 12 months earlier, after starting to put them up only in December
2007. Total inventory, as measured by the number of time slots available for
sales through digital frames, increase 150% in one year. The addition of
Shanghai's airports will help to maintain that powerful growth.
"Beijing airport currently contributes 59% of our revenues of digital frames
and Shanghai airports are as busy as Beijing's," said Yang. About 55.9 million
people used Beijing International Airport last year, according to Airports
Council International, a Geneva-based industry body. The two Shanghai airports
hosted more than 51 million passengers in 2008, according to the Civil Aviation
Administration of China.
The deal with JCDecaux, announced on August 26, was long in the making. "We
have been talking with JCDecaux for three to fours years about it," Yang
said.
JCDecaux originally won the contract from the airport authorities of Shanghai,
but weak advertisement sales due to the economic slump made the French company
think twice about whether it should operate the digital media itself. By
subcontracting to AirMedia, it can earn a stable, and possibly high, contract
fee - the exact amount was not disclosed.
Investors greeted the announcement of the deal with enthusiasm, driving the
stock price up 13% in the following two weeks. By the $7.82 close on Tuesday
this week, the stock had gained more than 100% since its 52-week low of $3.80
on March 2.
The Shanghai deal means AirMedia has all the major airports in China under its
control and the company is now a monopoly in the particular sector. For
advertisers who wish to use the new media to reach consumers at airports,
AirMedia might be their only choice, while AirMedia, with the country's
second-largest city now in its portfolio, can finally give its advertisers
complete national coverage.
Yang estimated the contribution from digital frames at Shanghai's airports
would account for 8% of its total revenue a year from now, that is, in the
second quarter of 2010.
AirMedia's rapid expansion, however, is also swiftly increasing its fixed
costs. Its airport contracts are usually for between three to five years, and
the concession fees are not on a shared-revenue basis but are fixed with an
annual rise.
The company ran a $1.25 million loss in the first quarter, jumping to $7
million in the three months through June, partly due to increased concession
fees. These reached 77.3% of its net revenues in the second quarter, compared
with only 40% a year earlier.
The addition of Shanghai airports and other media resources will drive total
fees even higher, to $35.5 million in the fourth quarter from $28.1 million in
the second quarter, when net revenue was only $36.3 million. Yang did not think
the company would turn profitable until the first half next year, with the
financial crisis still squeezing corporate spending.
"Domestic advertisers have started to recover. However, the multinationals are
still holding back," said Yang.
With airports firmly secured, AirMedia is developing a new media channel,
advertisements in gas stations, targeting China's ever-increasing number of
drivers. It has signed an exclusive deal with Sinopec, the country largest gas
station operator, to place advertisements in its premises, and the first 1,000
gas stations are expected to be covered by the end of this year, involving $15
million in capital investment.
The expansion - and its costs - have both attracted the attention of investors.
"The good thing about AirMedia is that it has a very good media resource
targeting mid- to high-end consumers in China and it is almost a monopoly in
its particular sector," said a hedge fund manager who has invested in the
sector, "The bad thing about it is that it spent too much to obtain those
resources."
If the advertising industry does recover in the next two years, AirMedia might
win in a big way, said the fund manager. He expected that if everything went
well, the company could have $65 million to $70 million in revenue per quarter,
a 77% to 90% increase from the present level, and a net profit of $10 million
to $15 million.
"However, if the advertising industry recovers late or the recovery is only
mild, AirMedia will be running a loss for a very long time, as its fixed cost
[concession fee for airports] is really high," the fund manager said.
During an economic slump, companies cut their advertising budget from areas
they perceive as less important first. "TV is a must in China, and its
effectiveness is proven," said JP Gan, managing director of Qiming Ventures, a
venture capital firm based in Shanghai. "The Internet is a new area and the
cost is low. Both suffer less in a budget cut. Outdoor media suffer more, as
they are seen as something only good to have - and LCD advertising networks are
classified as outdoor media. They usually are first to suffer and last to
recover."
Other companies operating LCD advertising displays in China are already
discovering this hard fact. First-quarter total revenue at Focus Media, whose
core business is to play advertisements through LCD screens installed in the
lift lobbies of office towers, dropped 18.9% in the first quarter compared with
a year earlier, driving a quarterly loss of $5.7 million.
Focus Media has also paid the price of aggressive expansion in its earlier
days. Last year, it closed its mobile advertising division after the
government-backed China Central Television accused the company of creating
mobile spam and using unauthorized methods to obtain people's mobile numbers in
its news program.
After merging with CGen, an LCD advertiser in supermarkets, Focus discovered
that many of CGen's contracts with supermarkets were signed at too high a price
and it had to close down many of CGen's locations. By the end of 2008, Focus
Media lost $768.5 million, compared with a 2007 profit of $144.4 million.
Last December, Focus Media tried to sell its core business, LCD screens in
office towers, to Sina, China's top online portal. Most analysts believed the
deal would fall apart under government scrutiny. There is fear that the
combined entity could be a threat to China's largest media firms, China Central
Television and Shanghai Media Group, both government-backed. Sina chief
executive Charles Chao said at the end of last month that the deal was unlikely
to secure government approval by September 30, the deal's closing deadline.
Another LCD player, VisionChina Media, which uses LCD screens to play
advertisements on buses, is also struggling in the present environment,
reporting a 16.7% fall in second-quarter profit from a year earlier, even as
sales jumped 51.8%.
With a full economic recovery possibly some way off, AirMedia is doing what it
can to improve its bottom line. "We are re-negotiating the concession fees with
the airports," said Yang. "Some smaller players have been able to cut their
contract fees by 20%."
The company's confidence that it can get a better deal may be justified.
"The airport authorities know if they do not lower the price, operators such as
AirMedia might walk out of the contracts," said the hedge fund manager. "If so,
they would have to auction the new contract again and probably get a much lower
price, as no one is bidding under the current circumstances."
AirMedia's Yang, for the time being, sees little danger of the company's
position being challenged. "I don't think there will be another strong player
in our field," he said. Focus Media, which once tried entering the airport LCD
advertising space, only to retreat, "is no longer in mood for expansion."
Sherman So is a Hong Kong-based correspondent and co-author of the soon
to-be-published book, Red Wired: China's Internet Revolution.
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