This is a guest post from my colleague Chris Reitermann, who heads OgilvyOne China. Chris is a veteran digital marketer in China, and I’m sure readers will appreciate his insights. The article was written initially for Global Entrepreneur magazine, and published in Chinese.

1. A broad look at the industry – globally and in China

I wrote this same article exactly one year ago, trying to look back at that past year and predicting key trends of 2007. Just reading this article again I must give myself a pat on the back. I wasn’t too far off, and most what we predicted to be key trends did indeed come true. Actually a lot more happened, both in China and on a global stage. The stars of this year were certainly Facebook, the iPhone and the shopping spree of major companies like Google, Microsoft, WPP and Yahoo to acquire advertising technology companies like aQuantive, 24/7 and Doubleclick. All these companies have realized that technology platforms will be key to deliver more effective advertising to consumers, and make a very nice margin by the way. Facebook has been the darling of 2007, literally everyone I know now has a Facebook page, and people we haven’t connected with in years suddenly reappear. Facebook is growing at an amazing rate of 200,000 new users per day. Facebook has led the industry with opening up its API for developers to develop applications and thus making it more sticky to users, and Facebook has had an interesting run at opening its site to advertising. Even though initially rejected by most users, Facebook will figure out how to use its extremely powerful platform to offer amazingly targeted advertising. I predicted last year that Rupert Murdoch would find his investment in MySpace an absolute bargain, and given that Microsoft spent more money on a 1.5% stake in Facebook I am sure he is even more assured to have made the right decision.

The iPhone certainly was the other major hit of 2007. It had to take Apple to show the world that the mobile device can indeed be a gateway into the internet, and that a mobile internet experience can indeed be a pleasant and simple one. The iPhone will be remembered as a game changer. Other important developments were that content became more accessible and the web easier to navigate, widgets, Ajax made this all possible and put the content in the place where users want it to be. No more surfing, but come look and leave. The last key development worth highlighting is that the world starts to look at the effectiveness of online advertising in a different light, we seem to have finally figured out how to measure effectiveness, it is not about page views and clicks anymore, but about conversion rates, sales and increase in brand measures.

Let’s have a look at China, and again lots has happened as expected. The four companies that have made their mark to me were Focus Media, Tencent, Baidu and Alibaba. Obviously the good old big players like Sina, Sohu and Netease continue to strive and grow, but I would say that they’re growing on rather traditional models as content players. It has to be seen how successful they will be in the future, I would predict pressures on their models and margins.

Focus Media has acquired an entire array of digital media agencies growing into a massive media conglomerate and controlling a large stake of the online advertising market. We will have to see if a size matters approach will work out. If Focus Media will be able to successfully integrate and leverage its acquisitions it will certainly be a force in China. Tencent has been extremely visible in 2007, and certainly has a massive treasure trove in its 200m odd QQ user base. Tencent has successfully built and ecosystem around QQ, and to me is the next best thing to a social network in a Chinese context. Baidu continues to impress and build market share in Search while launching innovative new products. It will be key for Baidu to monetize these new assets like Baidu TV.

The big China IPO certainly was Alibaba. Maybe slightly overhyped, but it was certainly justified to make a big splash given the fact that Alibaba has built an extremely solid business in China over the past years. Alibaba dominates the space for market places and has successfully moved from b2b to c2c with Taobao. Alibaba has also wonderful assets in Alipay its payment platform and has recently launched Alimama and online ad exchange. Its partnership with Yahoo in China also seems to bear fruits with Yahoo slowly rebounding.

Beyond these big plays there has been lots of activities and developments in the web 2.0 and mobile area. Thousands of entrepreneurs have set up innovative ventures and certainly the internet space in China still attracts a large amount of both domestic and foreign venture capital. I would however say that the big ideas and models are getting rarer. Many VC’s we’re talking to seem to have a hard time in either finding innovative new companies or companies that are not highly overvalued. I am sure this is a temporary issue while the market is waiting for the next big thing, and I am sure that several of the companies that got funded in the last 24 months will eventually rise to fame. I do hope so that we can see more innovation and more business models that don’t entirely rely on ads.

Ecommerce has also been a key word in 2007, and we have seen a Chinese ecommerce developing. Still challenging but in general logistic and payment issues seems to have been largely overcome and consumers actually turn to the internet more and more for shopping. Several of the ecommerce players have seen phenomenal growth rates in 2007 and go extremely strong into 2008.

We also have seen a massive second wave of overseas web companies entering China or at least realizing the massive potential. There has been quite a hiatus in major internet companies entering China after many high profile failures and struggles like eBay, Yahoo, Google, etc. We now see companies like About.com, Friendster, MySpace, all entering China trying to make it work this time around. Certainly these companies have learned from the struggles of their predecessors but I would still predict a hard time for all of these companies. Making a business work in China takes time, patience and commitment which many internet companies do not have. 2008 will tell how successful these companies can grow in China.

Worrying are the thousands of companies in China that bank their entire fortune on making revenues of advertising. Many of these newer companies grow their user base at all costs in hope of eventually being able to turn on the advertising switch and monetize their traffic. My fear is that there will be a massive oversupply of advertising inventory in the online space once all of these new companies turn on their ads. Yes the online advertising market is growing and more and more budgets go digital, but a major portion of this money still goes to the major portals and increasingly search, while more and more smaller sites fight for a relatively small remaining pool of advertising money.

An other thing that I am waiting to happen is a general sophistication of the digital space in China. Obviously things are they way they are for good reasons, but the time has come for the web and online marketing space to grow up. We need to move on from a very traditional display advertising driven market. We need third party measurement, we need accountability and transparency. Only this will give marketers the confidence to increase their still often tiny online advertising budgets. Marketers often seem to be more ready than the industry in general. We do see however very encouraging developments, and I am sure that 2008 will be the year where we will see many interesting initiatives that will accelerate the sophistication of the online space.

Read in the next issue how consumers, marketers and brands go into the digital Olympic year. How will marketing change in a digital China?