Piper Internet Research - The User Revolution

Piper Jaffray research analysts led by Safa Rashtchy published a voluminous report Thursday--we're talking 425 pages--called "The User Revolution: The New Advertising Ecosystem and The Rise of the Internet as a Mass Medium." Among its key findings, released in an industry note:

• We expect global online advertising revenue to reach $81.1 billion by 2011, representing a 21% CAGR (2006-2011).
• The User Revolution. The advertising world is going through a revolution, one that we call the "User Revolution" as it is happening primarily with the consumers, who are taking control of content consumption and branding. We believe this trend will cause a significant rise in prominence of the Internet as a major content consumption and marketing medium.
• "Communitainment." The Internet has increasingly become a principal medium for community, communication, and entertainment--three areas that have collided together and are impacting each other's growth--generating a new type of activity that we call communitainment.
• The Internet Is Mainstream. The Internet has become a mainstream media outlet that now rivals traditional media for reach and advertising dollars.
• Media Fragmentation. The proliferation of online and offline media outlets has resulted in shrinking television audiences and an increasingly fragmented media landscape.
• The Golden Search. We believe search continues to gain ground, driven by the rise of search as the New Portal, the increasing use of search in branding campaigns, and the local search opportunity.
• We believe Google's wide variety of non-search-related products creates a virtuous cycle of brand affinity that drives incremental search volume.
• Video Ads Could Drive The Next Wave. We believe Internet video ads could become a game changer for large brand advertisers, who are used to the 15- or 30-second TV commercial
• Internet Usage Patterns Are Changing. Portals maintain the highest reach, but the fastest growing category of destinations is communitainment sites such as MySpace and Facebook.
• Ad networks are experiencing increased demand due to increasing Internet fragmentation, desire for more targeted inventory, increasing usage of networks for branding, and increased site visibility.
• Agencies are rapidly evolving into more sophisticated, technology-savvy entities that combine best of breed offerings.
• Watch These Companies. We expect companies such as Google (and YouTube), Yahoo!, Disney, News Corp, Time Warner, Microsoft, InterActive, Facebook, Craigslist, Brightcove, Yelp, SINA Corp., Baidu, aQuantive, ValueClick, 24/7 Media, Netflix, Wikipedia, MobiTV, Digg, and Hakia to be the most important players to watch.
• Conference Call. We will be hosting a conference call on Tuesday, February 27 to discuss the main findings from our report. Please contact your Piper Jaffray Account Executive for a copy of the full "User Revolution" industry report and for information about the conference call.

None of this, so succintly put, is going to come as a surprise to anyone who's been watching development on the Internet in recent years. But the report itself is chock-full of eye-opening (and, from where I sit, frankly encouraging) findings regarding the decline of television viewing, changing viewing behavior--more ad-skipping, multitasking while TV viewing, and so forth--and on the decline of broadcast TV ad as percentage of total ad spend.

Safa spends a lot of time in China, and watches Chinese Internet companies quite carefully. I ran into him just before CNY in the lobby of the St. Regis Hotel in Beijing on one of his many annual trips out here. There's a section on International Search Markets, with a nod to Baidu's rope-a-doping of Google and Yahoo in this market; and the report gives quick summaries of some Chinese companies to keep an eye on, including the ad network Allyes, the ubiquitous Focus Media, Oak Pacific Interactive (the consortium which operates Mop.com. DoNews.com,DuDu.com, UUme.com, Renren.com and a couple of others), Sina, and Sohu. But if you're looking for the answers as to how all this will shake out in China, you may be disappointed.

China's a different animal in some regards: Internet penetration is still just north of 10%, and though Internet ad spend's growing at a healthy clip--twice the CAGR that Piper Jaffray forecasts for global online ad revs, according to some reports--it's growing still from a very small base. Meanwhile Web 2.0 Fever has definitely caught on in China, and the Internet has gone mainstream--at least with the most desireable segment of the demographic, from advertisers' perspectives. Media is certainly fragmented, and that's been helped along by the paucity of great programming on television. Search looks like it's on track to dethrone the portals as the primary point of entry for most Chinese Internet users, but the portals--particularly Sina and Tencent (don't know why Safa & Co don't mention Tencent)--have quite a hold still. TiVo or TiVo-like DVR products haven't made serious inroads yet (though you might keep your eyes on AaaHaa Media out of Guangzhou);

When it comes to digital media advertising in China, lots of things are still very much up in the air: Will Internet video ads be a major driver? I've met with one company that's got an amazing network of video sites--YouTube clones, P2P streaming companies, IPTV providers--and some very nifty technology. I'm confident that advertisers will be convinced of this; I just wonder how ready people are for pre-roll commercials tacked onto the stuff they're want to watch on UUSee, or 6Rooms, or Yoqoo, or PPLive.

Two things in Piper's key findings especially resonate in China: The critical importance of ad networks (like Allyes) and the rapid evolution of agencies into tech-savvy entities with expanded offerings. Watch this space and you'll find out how one agency, at least, is evolving very rapidly, God willing.

A tip-of-the-hat to Craig Watts for pointing this report out to me!

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