The Elevator Pitch, China-Style

Ads on LCD screens in office and apartment towers are becoming ubiquitous, thanks to a booming startup called Focus Media

Shanghai's Focus Media seems to get more ambitious all the time. Founded a bit more than two years ago by 32-year-old Shanghai ad veteran Jason Jiang, Focus operates liquid-crystal-display screens that shows ads in elevator lobbies of office towers and upscale apartment blocks. Today, it has grown to some 35,000 screens in 52 Chinese cities -- and has spawned a host of rivals that have blanketed China with video ads aimed at bored eyeballs.

Now, Focus is buying up its biggest competitor. On Jan. 7, it said it would acquire Target, a crosstown rival that operates 25,000 displays. With a combined 60,000 screens and a presence in about 75 Chinese cities, Focus will now be far and away the largest player in this fast-growing market.

Investors cheered the deal. On Jan. 9, the first trading day after Focus announced it was paying $325 million in cash and stock for Target, trading volume of its Nasdaq-listed shares was 7.5 times higher than usual. By Wednesday, they had jumped by 23%, to $45.50, and now trade 165% above Focus' July initial public offering.

AD CACHET. LCD advertising displays have become ubiquitous in China's big cities. They light up subways, buses, mini marts, and even taxis. Western consumers might be turned off by this type of bombardment. But in China, where advertising has been around for only a couple of decades, the screens have considerable novelty value. Indeed, Focus says it has been able to install some for free in buildings because landlords say it gives their properties additional cachet.

For advertisers, a big part of the panels' appeal is that they provide an alternative to stodgy, state-owned media. A 30-second slot on nationwide CCTV, reaching 500 million households, may appeal to companies selling soaps and toothpaste, but others would rather pitch their message to wealthier city residents cornered waiting for an elevator or a supermarket checkout clerk. "I think it's a really big deal," says Tom Doctoroff, CEO for Greater China at ad agency JWT. "It's really the only truly targeted television medium out there."

Competition in the segment has intensified quickly. Like Focus and Target, many of these startups have attracted big-name backers. Shanghai-based Digital Media Group, which operates screens on subway trains and platforms, counts Japan's NTT DoCoMo among its investors. And CGEN, which operates screens in 255 hypermarkets including those owned by French retail giant Carrefour, has raised money from Sumitomo Equity Partners.

"GROSSLY OVERVALUEED"? Once the Target acquisition is completed in February, Focus will wield increasing clout with both advertising clients and landlords. Before, the two companies had been locked in a tough battle to expand in Shanghai, Guangzhou, and Beijing. "They can consolidate and work together instead of competing," says Wayne Tsou, head of Carlyle Asia Venture & Growth Capital, which had invested $19.5 million in Target.

Tsou notes that instead of cashing out, Carlyle took full payment for its portion in Focus stock. "This isn't an exit for Carlyle, it's a continuation of our investment first in Target and now in this bigger platform."

Not everyone is so bullish. "By any measure, Focus is grossly overvalued," says one Shanghai-based entrepreneur who's also in the LCD screen media industry. "But the market loves this story. It has all the elements: China, a young aggressive entrepreneur, and a company that was rated the No.1 venture-capital investment in 2004."

The question is, can Jiang keep delivering? Focus reported 146% growth in third-quarter revenues year-over-year, to $19.5 million. Profits for the quarter hit $7.1 million, compared with a loss of $1 million for the same period in 2004. Fourth-quarter results won't be out until the end of February.

PEDAL POWER. Despite its high-tech look, in some ways Focus remains very old world. Each week, for instance, employees pedal their bikes out to buildings to manually change the flash memory cards containing ad videos. While linking the screens via a network would be more efficient, doing so would be tantamount to Internet broadcasting -- a no-no in China. Chief Financial Officer Daniel Wu says Focus has experimented with uploading information such as weather reports as cell-phone text messages.

At the same time, Focus continues to expand aggressively. Supermarkets are one growth area -- Focus screens are now in more than 1,000 stores. And it's also moving into venues such as karaoke bars and airports. It might just be time for Jiang to invest in some more bikes.

READER COMMENTS

Frederik Balfour is BusinessWeek's Asia correspondent in Hong Kong
Edited by Cristina Lindblad

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