The price of internet traffic

This paper delves into the pricing of Internet traffic, analyzes the characteristics of public and private domain traffic, platform competition and algorithm influence, and reveals the business logic and development trend of Internet platforms.

Author’s note:

This article was first published in October 2021 and is a summary of the exchange between the Phantom Thieves and friends from the Center for Law and Economics of Peking University. In the blink of an eye, more than three years have passed, but the competitive pattern of mobile Internet platforms has been solidified, and most of the arguments discussed at the beginning have not been outdated so far. So we might as well revisit it today.

In the process of studying the Internet industry, “traffic price” is an unavoidable problem. Game manufacturers pay attention to the cost of buying volume, e-commerce brands pay attention to the cost of customer acquisition, and self-media also pay attention to the cost of increasing fans. Internet platforms are both the supplier and the demand side of traffic, and the rise in traffic prices is not conducive to selling advertisements and exchanging traffic for strategic interests, but it is also not conducive to their own new recruitment.

Over the past few years, internet traffic has increased in price as a whole as mobile dividends have been exhausted. The recent promotion of platform interconnection is also largely aimed at promoting transparency in Internet traffic pricing and fair and orderly traffic transactions. However, how exactly is internet traffic priced? When we say “traffic prices rise/fall”, what exactly do we mean technically? How will connectivity specifically affect traffic transactions and pricing? These issues seem to be rarely explored outside of professional technicians.

On October 17, 2021, in response to the traffic pricing issues involved in the platform interconnection dispute, Pei Pei, head of the Internet Phantom Thieves Group, was invited to carry out an industry knowledge sharing session for the Center for Law and Economics of Peking University. Mr. Deng Feng, professor of Peking University Law School and director of the Center for Legal Economics of Peking University, attended the meeting with teachers and students and exchanged views from the perspective of legal economics. This article is the exchange minutes at that time, and after obtaining the consent of the participants, it was published on the official account of the Internet Phantom Thieves.

In a broad sense, Internet traffic can be divided into “public domain traffic” and “private domain traffic”. Due to time constraints, at the sharing meeting on October 17, we focused on the transaction and pricing of public domain traffic; The discussion of private domain traffic will wait for future discussions. However, since the “Internet traffic price” referred to by the vast majority of people is the price of public domain traffic, this article still has great reference significance. Whether you are an Internet professional, investor, or academic researcher, I believe this article will have some inspiration. Questions and comments are also welcome.

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The following is the table of contents:

1. [Theoretical significance of traffic problems]
2. [Classification of Internet traffic: public domain traffic and private domain traffic]
3. [Core issues of Internet antitrust and interconnection]
4. 【Pricing process for public domain traffic】
5. [Competition between platforms and price equilibrium in competition]
6. 【Algorithm Problem】
7. 【Q&A Session】

[Theoretical significance of traffic problems]

Deng Feng: Traffic competition is a real problem encountered by Internet platform enterprises in the theory of industrial organization. The platform problem is a new problem and an upgrade for enterprise research in academia, because our analytical framework is still relatively traditional.

At present, antitrust scholars have many views on the platform economy:

• The first point of view: Internet platforms are often cross-industry, there is cross-subsidy, there is no way to measure the traffic price alone, we can only measure the overall value of platform traffic, which is actually a black box. This research method cannot meet our understanding of enterprises.
• The second point of view is that econometrics measure the price of flow by whether products are complementary or substitute. In the framework of traditional industry research, we also measure the complementary and substitution relationships between products in this way. This idea can certainly solve cross-industry and cross-product problems, but it does not solve the core problem.

The advertising business of Internet platforms is an important feature. In fact, the study of advertising business is a problem in traditional economics, and Marshall, the founder of the Cambridge School, was troubled in his later years:How can advertising problems be well analyzed in the economic framework?The law also does not have a good analysis of this issue.

The traffic problem of the Internet is an upgraded version of the advertising problem, which is more accurate, concrete, and more measurable. If we can study the traffic well, we can promote our understanding of the essence of enterprises under the theory of industrial organization. To put it bluntly, the problem of traffic price is solved, and the problem of the platform can be solved. That’s why we’re holding this seminar today, and it’s a theoretical significance.

From the perspective of the content side, see what the trend of each platform is to obtain traffic, this foothold is different from my previous work as a brokerage analyst. When we do self-media, we will actively judge which place has better traffic and which place is more cost-effective to obtain traffic. Therefore, today I will not only discuss with you as an industry analyst, but also as a traffic buyer/consumer, to share some personal experience.

[Classification of Internet traffic: public domain traffic and private domain traffic]

Head:

From a macro perspective, Internet traffic can be divided into public domain traffic and private domain traffic, of which public domain traffic accounts for a large proportion, and its proportion in the Internet advertising plate is also an absolute advantage.

The so-called public domain traffic is the information square, similar to offline hypermarkets, outdoor advertisements on the street, public TV broadcasts, etc., which can be accessed by anyone. Everyone is free to join and leave a public domain.

Public domain traffic is highly dependent on algorithm recommendations, for example, when I open Weibo or Douyin, there are millions of new content every day, how does the platform recommend content to individuals? This depends on algorithms. In the distribution of public domain content, algorithms have the characteristics of centralization and centralization, which is why regulatory authorities in various countries are more vigilant about algorithm recommendations.

In China, mainstream Internet platforms such as ByteDance (Douyin, Toutiao), Alibaba, Baidu, and Sina (including Weibo) are dominated by public domain traffic, although they also have some private domain scenarios within them. Private domain traffic is basically Tencent; We can even say that in China, the vast majority of private domain traffic is WeChat traffic.

The essence of private domain traffic is like I opened a party at home and did not let strangers join, which is absolutely private; Or set up a stall in front of the house, which is semi-private and semi-public. We can roughly think that WeChat personal conversations and WeChat groups are absolute private domains, and circles of friends are semi-private domains; The push of WeChat public account is semi-public and can also be regarded as a semi-private domain.

Compared with public domain traffic, the biggest feature of private domain traffic is “decentralization”. For example, in most cases, you must follow my official account to receive my content push; You have to follow each other with me to watch my circle of friends. Although WeChat is now integrating algorithmic recommendation mechanisms, the decentralized attention chain is still important. Therefore, people who can play in the centralized public domain scene may not necessarily play the decentralized private domain scene (mainly the WeChat scene).

[Core issues of Internet antitrust and interconnection]

Head:

Now the core issues of Internet interconnection and anti-monopoly are related to both public and private domain traffic:

• How much control does Tencent have over its private domain traffic, and is it obligated to accept third-party content?If it believes that the Toutiao-based items placed in WeChat’s private domain do not comply with the regulations, does it have the right to manage them?
• Private domain traffic pricing is difficult.For public domain traffic, we can set prices, such as Douyin and Weibo’s advertising prices are more transparent. However, private domains are difficult to price, and many platforms cannot buy WeChat group forwarding even if they spend money; The rise of Pinduoduo largely depends on the forwarding mechanism of WeChat groups. If WeChat allows content from Douyin and Taobao to be forwarded to WeChat, can it be charged? How do I charge?

Also, in terms of public domain traffic, the price of purchasing traffic is theoretically more transparent. The problem is that some platforms have bad relationships with each other and are unwilling to sell to competitors, is this normal business behavior?

• Is there a right not to sell the platform’s public domain traffic to some competitors?ByteDance and Tencent do not sell advertisements to each other, how do you understand this situation? Although my traffic has a fair market price, I am not willing to sell it to you at the market price, is this a normal competition?
• Can the platform restrict the dissemination of private domain scenarios?For example, reposting product links in WeChat scenarios may seriously affect the user experience, can Tencent take care of it? Also, WeChat’s official ban on “induced sharing” means that it is not allowed to disturb users excessively, is this prohibition a reasonable business practice?

(Note: The situation mentioned above has been basically resolved after 2021, and now Tencent will often purchase ByteDance’s advertisements and sell ads to ByteDance when appropriate.) ）

The platform interconnection that is currently being promoted is actually WeChat’s unilateral opening to third parties such as Alibaba and ByteDance. This brings us to the first question above: How much control should WeChat have over its own private domain traffic?

You know, WeChat traffic is very attractive, and because it is private domain traffic, there is no transparent pricing, which is the last depression for many Internet platforms to seek growth:

• If it can arouse the voluntary forwarding of WeChat users, it can produce social fissionThe resulting viral traffic is what many platforms dream of. This is how Pinduoduo rose, and many of Tencent’s games also rose in this way.
• WeChat is irreplaceable.For example, if you don’t want to use Douyin, you can also use Kuaishou; If you don’t want to use Weibo, you can also use Toutiao. But there is no alternative to WeChat. For example: Alibaba’s community group buying business, because it cannot enter the WeChat ecosystem, is far less good than Pinduoduo and Meituan.

With the exhaustion of mobile Internet dividends, user traffic has peaked, and traffic will only become more and more expensive in the future. In this case, all platforms will rush to tap the potential of WeChat’s private domain scene, which is the fundamental reason why non-Tencent platforms such as ByteDance and Alibaba are so concerned about interconnection issues.

Then the question arises again:How should we price private domain traffic?

The most typical example: Pinduoduo and Tencent are strategic cooperative relations, and Pinduoduo’s product links can be forwarded to the WeChat group at will, but Taobao can only send Taobao passwords. How much commercial benefit has Pinduoduo gained from this differential treatment? This is unfathomable, after all, we can’t see the details of the cooperation agreement between Tencent and Pinduoduo, let alone Pinduoduo’s background operation data.

In 2019, the strategic cooperation agreement between JD.com and Tencent expired, and the capital market was once rumored that it would not be renewed, causing JD.com’s stock price to fall; Later, it was renewed, and the stock price rose back. It can be seen that the capital market is highly concerned about the value of private domain traffic and is willing to give a price. But what exactly is this pricing? It’s hard to know unless it’s the person involved.The opaque price of private domain traffic poses a significant obstacle to research.

【Pricing process for public domain traffic】

Head:The procurement behavior of public domain traffic is similar to the free market, and it is more transparent to study. At present, Internet advertising is generally divided into brand advertising, that is, advertising with the goal of display; and performance advertising, that is, advertising aimed at facilitating transactions, downloads, etc.

On the backend, the final pricing of brand advertising and performance advertising is actually based on CPM (cost price per thousand), that is, the price of 1,000 impressions to a specific group of people. However, on the front end, the prices offered by advertisers can be said to be strange, and there are many pricing methods, which we will discuss in depth below.

Deng Feng:What factors make up the price of public domain traffic? For example, basic services, algorithms, and engineer input? Also, Does competitor pricing affect me? Does the nature of downstream consumers have an impact? Can you discuss it?

Team leader: Some strategic cooperation agreements are not market-oriented pricing (such as the agreement between Tencent and JD.com mentioned above); There are also some long orders and annual frames signed annually, which are not strictly on the market, especially in the advertisements of high-end brands. However, in the current Internet advertising market, most of the advertisements are real-time pricing and automated pricing, and the entire delivery process is highly automated.

In fact, many advertisers now sign a year frame with the platform, which only agrees on an approximate delivery amount and requirements for advertising materials, but does not agree on the price. We can think that under the algorithm-led matching mechanism, the placement of Internet advertising reflects the spirit of the “free market” to a certain extent.

Deng Feng: Can it be understood that advertisers actually buy a channel, which is equivalent to buying a page in a newspaper, and the content is up to me?

Team leader: It can be understood this way, but your advertising content and advertising materials need to be reviewed by the platform, and the specific delivery method also needs to comply with the platform’s policies.

Deng Feng: So, where will the advertisement be placed? For example, if I run a large number of ads on Douyin, will it cause my advertising creatives to appear in a concentrated manner in a period of time, for example, 2 out of every 20 pieces of content?

Team leader: Each platform has different types of advertising space (commonly known as advertising inventory). For example, the most important advertising space on Douyin is a single-page information flow (that is, the short ad video you swipe); The Douyin opening page is also very important (in fact, the opening of all head apps is very important); There are also fragmented ones, such as the bottom banner of the discovery page.

Advertisers will have specific needs about what type of ad space to buy, as different ad placements not only have different performances, but also different creative requirements. For example, Douyin feed ads must be dominated by video materials, but Douyin may need pictures to open the screen; The interstitial advertising material of WeChat Moments can be a picture or a video.

As an advertiser, your bidding behavior for platform advertising resources is actually a bidding behavior for advertising spaces of different nature and different time periods, and this process is highly transparent, and a large number of people bid for each advertising space at all times.

Deng Feng: So, how is the price determined?

Team leader: Advertisers are bidding on advertising space all the time. Large platforms like Tencent and ByteDance may have millions of advertisers. For ad placements for a certain time period and a certain target group, the automated pricing system will rank all bidders, and the highest price wins. Of course, the specific implementation method is very complicated, and it can be explained in detail below.

Deng Feng: So, how to determine the cost of Internet platforms?

Team leader: For a super app like Douyin, high-quality advertising space is a seller’s market, and it is impossible for the platform quotation to cover operating costs – it is hard for me to imagine that Douyin advertising will not be able to sell operating costs!

The pricing of advertising resources is generally less related to the cost of the platform and more related to the target user profile. Because now we pay attention to thousands of people, everyone often sees different advertisements. The platform will detect each user’s behavior and label it with data, and advertisers are actually bidding on these labels; The final transaction price is determined by the ad space + user tag.

For example, I’m a “legendary” game company, and my best target audience is male users over 35 years old (because they are the core players of “legendary”). However, there are too many game companies competing for this user label, and I may not be able to buy it. Then I might settle for a second place and accept female users aged 30-50, or male users under 30, because the transaction price may be a little lower.

By the way, when Internet platforms decide to place advertisements, it is not strictly “the one with the highest price”. For example, “legendary” games like middle-aged male users, and “new domestic” beauty brands like young female users, but I can’t push only one type of advertisement to the same type of users, so they will soon get aesthetically fatigued. In addition, although the proportion of female users who play “legends” is small, there are always people who play, and if I can pinpoint these people, I may get users at a lower price. All in all, advertisers’ placement is carried out under a variety of resource constraints, and price is the most important, but not the only constraint.

Deng Feng: What are the main factors that advertisers consider when advertising on two or more Internet platforms? How do I decide which platform to put a little more?

Team leader: There are many measurement criteria for advertising effectiveness, and the more common ones are nothing more than the following two categories:

The first is ROI (Return on Investment), which is the return on advertising investment. If I invest 1 yuan in ByteDance, it will bring a 5 yuan income increase; Investing 1 yuan in Tencent can only bring 3 yuan in revenue increment, and the ROI provided by ByteDance is significantly higher, and I will allocate more budget to it until a dynamic balance is achieved.

The second is that advertisers choose the most important one (KPI) among all business indicators. For example, a gaming company can choose CPD (cost per download), CPR (cost per new user sign-up), or even CPPU (cost per paying user). Assuming that I am most concerned about new user registration, Tencent can let me spend 50 yuan to have a new user, but ByteDance can lower it to 30 yuan, I will invest more money in the latter, and vice versa.

However, whether it is ROI or business KPIs, they are dynamically balanced, and each advertiser’s standards are different. Therefore, there is no transparent set of statistics for these important indicators, and it can only be controlled by advertisers and advertising agencies.

Deng Feng: From the above discussion, I understand that the platform’s advertising inventory is limited, which is a constraint; The operating costs of the platform and the supply of traffic are cost constraints; These factors will ultimately be reflected in the bidding results of the ad space. However, my understanding is that the display price of brand advertising may be easier to determine, but the final effect of performance advertising is difficult to accurately measure. How to accurately price performance advertising?

Team leader: In practice, the pricing of brand advertising and performance advertising (no matter which effect) is actually the same! No matter what requirements advertisers put forward and what metrics they bid on, they will be translated into the same language by the platform in the background, that is, CPM.

Just like if you want to renovate your home and hire a contractor, you may put forward various requirements for him, such as contracting labor and materials, such as how many days the construction period cannot exceed 10 days, etc.; You may have a complex settlement mechanism. However, the contractor only conveys to his workers the indicator of “how much is the daily/hourly wage”. Eventually, a dynamic balance is achieved between you, the contractor, and the worker.

I will also give the example of a game company. You have a new “legendary” game online, and you can accept an offer of 200 yuan for each new user (subject to registration), so buy it on the Douyin platform at this price. You tell the system: “Any traffic that meets my target user tags (such as male users in 35-50 years old, second- and third-tier cities) will be open to purchase under a budget constraint of less than or equal to 200 yuan until it is spent on 100 million yuan.” ”

The platform will translate your above requirements into CPM pricing. If your product is good and your advertising material is good, you can generate a new user registration for every 1,000 impressions, and the CPM obtained by the platform is 200 yuan – this price is very high! Therefore, you are a high-quality advertiser on the Douyin platform and can get a large number of impressions. However, your competitors aren’t doing very well and may generate new user sign-ups for every 3,000 impressions, so the platform gets a third of your CPM from it. Of course, you can buy a lot of traffic from Douyin, but your competitors can’t!

This leads to two crucial conclusions:

1. The better your product quality and advertising materials, the lower the actual delivery cost, the greater the traffic you can get, and the advertising platform will welcome customers like you.
2. As long as your budget is large enough, you can also ignore the above constraints and set a price that others cannot afford, thereby disrupting the platform’s price system and getting the traffic you want. This will cost you a lot, but you can at least pull up the user numbers.

Ideally, after an infinite number of repeated games, any advertiser who advertises on the same resource and the same user tag on the same advertising platform will receive the same CPM pricing. At this moment, the Internet advertising market is “cleared”. Unfortunately, due to the rapidly changing reality, this kind of “clearing” is impossible.

Deng Feng: If I want to advertise on platforms like Douyin or WeChat, is there a price list?

Head of the group: As mentioned above, the actual transaction price is on the market, and there is no detailed price list. However, you can find out about it from an advertising agency, or you can directly find out about the platform’s advertising sales. Good ad sales understand its needs and budget constraints even better than advertisers.Just like we don’t know what the housing prices in Beijing are today, we know what range the housing prices in Beijing are roughly fluctuating.

【Competition between platforms and price equilibrium in competition】

Deng Feng: If this is the case, is there real competition between Internet advertising platforms?

Commander: Of course there are, for two reasons:

1. Advertisers’ total budget is limited, and more on one platform and less on other platforms.
2. If a platform’s advertising performance is poor, it will affect the advertiser’s customer acquisition costs, and advertisers are certainly motivated to move their budgets to other platforms.

However, domestic Internet platforms may have greater advantages over advertisers and ordinary users. Unlike Europe and the United States, they still have a large number of users accessing the Internet through browsers, but China has long been the world of mobile apps. Mobile apps not only have high customer acquisition costs, but also high conversion costs, which gives large platforms a high first-mover advantage.

Deng Feng: Can I understand it this way: advertising agencies are the main advertising channels, but I can also directly find platforms to advertise. Assuming I have a good understanding of my needs, I can directly find a platform to advertise?

Commander: That’s right. In recent years, the trend of direct advertising on mainstream Internet platforms is more obvious, everyone wants to catch customers in their own hands, and the status of agents is not as important as before.

In addition, for advertisers, there is a concept called “advertising budget consumption”. For example, I am a beauty brand, and I have a budget of 100 million yuan this year’s Double Eleven. In reality, Tencent, Alibaba, and ByteDance are dynamically competing for these budgets, and which platform I consume more is more important to me. Therefore, Internet platforms compete not only for macro market share, but also for the consumption share of each advertiser and every budget. Because the advertising budget is limited, if my efficiency is particularly high, the client’s budget is exhausted, and the competitor has no income.

Deng Feng: According to different advertising spaces and time periods, the number of impressions is the so-called consumption, right? If the platform’s algorithm is superior, wouldn’t the consumption be better?

Leader: As mentioned earlier, advertisers ultimately look at the effect. If your algorithm level is high and your delivery is accurate, you can increase the advertiser’s ROI or key business indicators within a certain number of impressions, which will of course encourage advertisers to spend more of their budget on you. Therefore, the algorithm level of the platform is very important.

Deng Feng: In the process of clearing the Internet advertising market, is there a universal traffic price index that can be cross-platform? That is, a standardized unit of measurement?

Team leader: CPM (cost price per thousand) is one such indicator, but it is not easy to compare with different platforms. For example, we can compare the headline opening screen with the Weibo opening screen, and compare the Douyin information flow advertisement with the Kuaishou information flow advertisement.

In the e-commerce industry, there is another metric: ad monetization rate. That is, what proportion of the GMV generated by all transactions on the e-commerce platform is consumed as advertising. The advertising monetization rate of Tao e-commerce is 3-4%, while Pinduoduo is slightly more than 2%, so we say that the traffic cost of merchants in Pinduoduo will be slightly lower than that of Taobao.

(Note: The above is the situation in 2021, and the current situation has changed, please refer to the financial reports of relevant listed companies.) ）

Deng Feng: Can the above traffic price indicators be compared between countries? What is the situation in other countries?

Team leader: Taking e-commerce as an example, Taobao and Pinduoduo in China will announce the monetization rate, but Amazon in the United States will not. About one-third of Amazon’s GMV is self-operated, and the concept of advertising monetization rate is meaningless; Moreover, now mainstream e-commerce platforms in the United States such as Amazon do not even disclose GMV, and it is difficult to calculate the above indicators.

There is also an intriguing difference: many foreign e-commerce transactions occur on the brand’s official website or independent website. In Europe and the United States, it is the norm in the e-commerce industry to directly visit the official website through search, pull back through email, and finally settle on independent websites outside large platforms. But in China, large platforms such as Taobao, JD.com, and Pinduoduo cover the sky with one hand, even if they are loyal users of a certain brand, they will eventually settle in its Tmall or JD.com flagship store, rather than on the official website or official APP.

Deng Feng: What is the reason for this difference?

Leader: That’s what I’m working on! China’s mobile Internet has been too drastic, for example, the proportion of Americans using computer browsers to access the Internet has increased significantly during the epidemic; But Chinese people play with mobile phones even if they stay at home. As mentioned above, the cost of customer acquisition of mobile apps is too high and the Matthew effect is too serious, which may lead to the lack of a stage for decentralized e-commerce in China, where large platforms control everything. However, this is just my rough idea and may not be correct.

Deng Feng: I would also like to ask a basic number: what proportion of China’s major Internet platforms generally account for the total revenue?

Leader: The vast majority of ByteDance’s revenue comes from advertising. Alibaba’s advertising revenue ratio looks decreasing (because self-operated e-commerce and Alibaba Cloud are growing rapidly), but most of its profits come from advertising. Tencent’s advertising is less developed, and it is not as good as games on both the revenue side and the profit side; Many of Tencent’s internal traffic resources are exported to partners in exchange for strategic investment.

Why does everyone want to go to Tencent wool now? Because the advertising of the WeChat ecosystem is not developed,Zhang Xiaolong is already conservative, and Tencent’s advertising sales ability is relatively weak. In addition, Tencent has made a lot of money through games and strategic investments, and is not in a hurry to improve its advertising monetization capabilities. We can think that WeChat’s internal transactions of game products and partners such as Pinduoduo are a kind of invisible advertising, and its value is difficult to calculate.

Deng Feng: So the question is, if I output my own traffic to partners, how to measure the value? For example, WeChat is not in a hurry to monetize advertising, but uses traffic to support strategic investment targets, how to calculate the value of traffic support?

Leader: It’s really hard to say how to quantify, but there is a rough way, which is to calculate the appreciation of equity investment. Tencent has invested in many listed companies, including Meituan, JD.com, Pinduoduo, and Shell, either giving WeChat a first-level entrance, or giving Jiugongge, or giving some convenience in other aspects. Tencent’s shareholding ratio is transparent, can the value of traffic support be calculated based on the appreciation of Tencent’s equity? This is a way of thinking, although it is not precise enough.

【Algorithm Problem】

Deng Feng: I would like to ask, what is the connotation of algorithmic competition between platforms? What determines the difference between the advantages and disadvantages of a platform’s algorithm?

Leader: I think algorithms are seriously mythized. The algorithm of the Internet platform is important, but it depends on the following factors:

1. What is the mastery of user data? More than 80% of domestic users use Android phones, and the protection of user privacy in the domestic Android ecosystem is better than nothing. Apple phones are exemplary in this regard, so many Internet platforms hate Apple phones. Many Android apps regularly take screenshots of users’ screens, read phone albums, read input method data, and even manipulate cameras without the user’s knowledge. Because the platform can collect user data unscrupulously, of course, it can accurately label users. This is not so much the credit of the algorithm as the “credit” of the invasion of user privacy.
2. Is the data at all ends of the platform connected? Why ByteDance’s algorithm recommends accurately is because the data of various products and businesses within it is highly shared. ByteDance’s advertising salespeople can quickly understand a certain trend and a certain traffic depression on Douyin, and then immediately recommend advertisers, so that advertisers are of course motivated to advertise. Rather than relying on algorithms to rise, it is better to rely on technology and sales to rise, and Baidu was the same in the past.

Deng Feng: From the perspective of microeconomics, algorithms are a function of production technology. I also agree with the idea that “algorithms are mythical”, but the actual competition still depends on how much user information the platform occupies. There is also a saying that I want to verify – some people say that as long as a user interacts with the APP 17 times, the APP can completely portray the user’s portrait, is that so?

Head: It’s hard to describe the correlation between “number of interactions” and “getting a complete user profile”. However, every interaction reflects the user’s behavior labels and feature tags, which are the organizational units of the user portrait. Now, the regulatory authorities have strengthened restrictions on platform merchants obtaining user data, but this has led to the strengthening of the platform’s control over data.

For example, for Taobao merchants, it was previously possible to obtain the phone, address, and identity information of a specific buyer, so that internal analysis could be carried out, and they could also actively pull back through text messages. Now the data seen by merchants is encrypted, and only the courier still knows the real contact information of the user. Although this does protect user privacy, it also causes merchants to be completely subject to the platform, and it is difficult to bypass the platform to operate private domain traffic.

Deng Feng: Are there rules on Internet platforms that prohibit traffic from third-party websites? For example, third-party links are not allowed to be forwarded?

Leader: To be honest, because it is very rare for Chinese users to use browsers to view “websites”, and the vast majority of people use apps, I don’t think opening third-party links will have a great substantial effect. The change of user habits is not transferred by human will. Now, the so-called “third-party drainage” is mainly to guide the download of third-party apps. It is conceivable that if this kind of drainage is released, the most beneficial are still head APPs such as Taobao and Douyin, and only they are attractive enough to keep users on the APP. Real small and medium-sized content parties and small and medium-sized merchants may not even have the financial resources to maintain an APP, and this kind of openness is better than nothing.

Deng Feng: There is another problem: brand flagship stores on Tmall, such as LV, can analyze users; And can the Tmall platform analyze the user information held by LV?

Team leader: I’m not sure how far Taobao/Tmall can grasp user data. However, at least the platform is clear whether you have browsed the product or added it to the shopping cart. The biggest problem for brands like LV is that it is not possible to browse the real contact details of buyers from August 2021. Therefore, the data they hold is only valuable for internal analysis, and they can no longer actively reach users; In this way, the meaning of internal analysis is better than nothing.

Deng Feng: So, do Taobao/Tmall merchants have the motivation to convert public domain traffic into private domain traffic?

Team leader: All brands have the urge to operate private domain traffic, because only private domain traffic can be controlled. However, platforms like Taobao can also take advantage of this impulse, forming a symbiotic relationship to some extent. For example, Taobao has always had a rule, that is, “traffic ratio”: how much traffic merchants import from the outside, Taobao will allocate as much traffic as possible from the inside for free; Transactions achieved by importing traffic from outside account for a higher weight in Taobao searches. This encourages merchants to contribute part of their private domain traffic to Taobao. All in all, private and public traffic are not strictly adversarial or vicarious relationships.

【Q&A Session】

Question: Are there any regulations on the automated algorithm system of Internet advertising platforms?

Leader: Authorities at all levels are promoting the control of algorithmic recommendations, including normal recommendations and advertising recommendations. The regulations on the control of advertising recommendations are not particularly specific.

Although the Press and Publication Department stipulates that users under the age of 18 can only play games for three hours a week (and for a specific time period), it does not impose a hard and fast rule on the placement of game advertisements. Now the platform mainly restricts through internal regulations: it does not run game advertisements to people under the age of 18 or suspected to be under the age of 18, users who cannot identify user portraits, and users who cannot verify their identities. This hits game companies and advertising platforms hard.

Another example is the simplified interface and anti-fraud requirements for the elderly, which has dealt a blow to the promotion method of traditional Internet advertising, and a large number of advertisements cannot be pushed out for elderly users, and mainstream apps need to launch an elderly model (the same as the previous youth model). Because many users will not log in or verify their identities, in practice, the platform has to fulfill the responsibilities of youth protection and elderly protection for these users at the same time, because you don’t know their specific age.

Question: What is the specific impact of the restrictions you mentioned above on the advertising industry?

Leader: Some of the advertisements have disappeared permanently. For example, in education and training, due to the introduction of the double reduction policy, many educational institutions have closed their doors or changed careers, and their advertising budgets cannot come back. The delivery of game advertisements will also be restricted, version number approvals will slow down, and the delivery demand of game companies may also be permanently reduced.

For the game company itself, it was originally possible to advertise to users on the whole network, but now it cannot be placed to minors, nor to users who have not logged in/verified their identities (because it may be minors), and the scope of advertising has suddenly narrowed, which may lead to an increase in traffic costs. On the one hand, revenue is declining, and on the other hand, costs are rising, and life in the game industry is very difficult.

Question: You mentioned the automated pricing mechanism of advertising platforms above, which is indeed very similar to the free market competition described in classical economics. So, can advertisers influence this mechanism? If they think this mechanism is not fair enough, can they ask the platform to improve?

Team Leader: Frankly speaking, although the pricing of advertising platforms is already automated, the entire process of advertising is still highly dependent on people. For example, mainstream advertising platforms such as ByteDance, Baidu, and Tencent issue military orders to salespeople every year and also put forward requirements for agency companies. ByteDance’s advertising business is doing so well, largely because its sales team is large and active. For example, for game companies, Byte’s advertising salespeople may know how to buy better than their own distribution directors.

Why is TikTok not doing as well in the overseas advertising market as Douyin in the domestic advertising market? Because ByteDance has not yet been able to promote this domestic advertising sales system overseas, and the national conditions of each country are different, it cannot be simply copied. Advertising sales is still a labor-intensive business, although the final pricing process is automated, but why should users open an account with you? Why invest in a certain type of resource for you? These all depend on people-to-people communication.

Question: Just talking about advertising, you mainly described Alibaba, Tencent and ByteDance. However, Meituan and Didi are also platforms with a large number of users, why haven’t they developed a large advertising business?

Head of the Association: There are two issues involved: advertising inventory and advertising scenarios.

First of all, there is advertising inventory, after opening Meituan, there are very few places where advertisements can be inserted. Of course, Dianping is better, and Meituan’s main advertising revenue comes from Dianping. The same is true for Didi, after opening it is a taxi page, where is the right advertising space? I’m afraid only open-screen advertisements can be sold at a more affordable price.

The second is the advertising scene, and catering merchants have placed a lot in Meituan (including Dianping), which constitutes an important source of Meituan’s in-store business income. However, it would be strange to run beauty ads on Meituan (unless it is offline medical aesthetics), and it would be even stranger to run game ads. As for Didi, there are even fewer applicable advertising scenarios.

Previously, China’s most successful Internet advertising platforms were Baidu and Alibaba. Needless to say, Baidu is the most important traffic portal in the PC era; Alibaba provides a large number of brand advertisers with Taobao landing pages, which can directly facilitate transactions. In recent years, the focus of Internet advertising growth has shifted to ByteDance, and the core of ByteDance is Douyin. Douyin’s single-page information flow product form is particularly suitable for inserting advertisements, you don’t need to click on it, in the process of swiping up/down, the advertisement will naturally open. Coupled with the advantages of ByteDance’s algorithm and sales, the advertising business is certainly doing well.

Although other platforms are not so large, they also have specific user groups, such as Xiaohongshu is a “little fairy” user, and the little fairy who is rich and loves to sun is used more. Bilibili is a “Generation Z” user (it used to be two-dimensional, but the two-dimensional color has been diluted a lot in recent years). If advertisers have an urgent need to target these users, they must allocate a portion of their budget to these platforms. In any case, they are vertical platforms, and the gap with Alibaba, Baidu, ByteDance, and Tencent mentioned above is still very huge.

(Note: The Xiaohongshu platform has changed significantly in recent years, but the above conclusions are basically true.) ）