Digital signage in buses: VisionChina's model for growth

Author: Bill Gerba on 2007-12-01 17:37:52

With 1.3 billion people, an economy that's growing at a blistering pace, and super high-tech wired and wireless infrastructure blanketing every major city, China seems like the ideal place to build large out-of-home advertising networks. And judging by the number of major investments or IPOs coming from digital signage firms in the country (like Focus Media, AirMedia and most recently, Network CN), it looks like the secret is out. Still, hardly a few weeks have passed since we talked about AirMedia's IPO, and there's already another big network getting ready to go public. This time, VisionChina Media (which deploys networks in mass transit vehicles) is heading for the NASDAQ, and as usual, that means we have some numbers to pick apart. I wish a few more US networks would get up to speed and go public so we could see what they're doing, but for the time being it looks like China's going to be the major source of financial data for digital signage networks. So how's this firm doing, you ask? To answer that, let's run the numbers.

You probably haven't heard of VisionChina Media before. I wasn't familiar with them until I saw their SEC registration statements. Apparently, the company has 33,000 screens in mass transit systems in 14 "economically prosperous" cities. In all, the screens reach about 26 million consumers every day and broadcast a combination of news, financial information and, of course, targeted advertisements. When they say "mass transit," the company is mainly referring to buses, noting that traffic is becoming quite a problem and more people are turning to public transportation. I think "economically prosperous cities" means "cities where capitalism is allowed." Here's their year-to-date synopsis:

Through September 30, 2007, more than 230 advertisers had purchased advertising time on our network either directly or through an advertising agent. We have the ability to place advertisements in one or more cities, both within and beyond our network, according to their demands. As of September 30, 2007, we have placed advertisements in 26 cities across China. Our top two international brand name advertisers, Yum! Brands, Inc. (whose brand portfolio includes KFC, Pizza Hut and Taco Bell) and Spalding Group, in aggregate accounted for approximately 7% of our advertising service revenues for the nine months ended September 30, 2007. Our top five domestic brand name advertisers, China Citic Bank, Guangxi Wuzhou Pharmaceutical Group Co., Ltd., Hangzhou Minsheng Pharmaceutical Group Co., Ltd., Nice Group Co., Ltd. and Jilin Wutaigankang Pharmaceutical Industry Co. in aggregate accounted for approximately 31% of our advertising service revenues for the nine months ended September 30, 2007. We have grown significantly since our inception in April 2005. We generated total revenues of US$3.9 million in 2006 and US$17.4 million for the nine months ended September 30, 2007. We achieved net income of US$3.7 million in the nine months ended September 30, 2007, but we incurred a net loss of US$4.1 million for the year ended December 31, 2006.

So the name of the game for VisionChina is growth. Going from $3.9 million in 2006 to probably over $20 million in 2007 (they did more than $17M as of September 30) represents growth in excess of 400%. Their net income of $3.7M on revenues of $17.3M translates to over 20% margins. Given their type of operation, they should be able to achieve even higher margins over time, since I suspect that a number of these big networks will exceed 30% net margins once they get the hang of balancing growth with maximizing profitability of their existing screens. From the looks of things, though, VisionChina is off to a good start. In 2006, the company sold a total of 20,126 hours of broadcasting across about 17,000 screens, with average revenues of about $34/hour. In 2007, they've not only nearly doubled the number of screens to over 33,000, but their revenues per hour of broadcasting have skyrocketed to $282/hour. They're either selling a greater percentage of their ad slots, raising the rates on the slots, or both. They claim to be filling about 31% of the slots on screens in their "exclusive agency cities," a collection of seven cities where the firm has the exclusive right to sell all of the advertising time on the city�s existing mobile digital television network. This network consists of screens on buses and enjoys contracts ranging from four to twelve years, and probably has the highest fill-rate of VisionChina's holdings. While it's unlikely they'll ever fill 100% of their slots, with improved sales approaches and more established marketing data, it seems likely that they could take that number to 45% or above. This would be extremely lucrative, since any additional sales are virtually 100% margin (i.e. no more network buildout required to achieve them).

While VisionChina's SEC filings don't have the fantastic revenue breakdowns that AirMedia's did, we have enough data available to make some basic observations about the monetization of their screens. Let's start with the facts about their 2007 performance through September 30:

Advertising service revenues: $15.8 million
Percentage of revenues from mass transit digital signage: 91%
Number of screens in operation in January 2007: 16,809
Number of screens in operation in September 2007: 33,584
Number of hours of broadcasting in 2007: 54,017
Greatest percentage of advertising slots sold: 31%
Average content loop length: 12.5 min

From this data, we can estimate some of the more interesting metrics:

Amount of revenue derived from mass transit digital signage: $14.378 million
Average number of screens in operation from January-September 2007: 25,196*
(*assuming a steady installation and monetization of new screens throughout the year)
Total revenue per screen over the nine month period: $570.65
Average monthly revenue per screen: $63.40
Loops per month (assuming a 12.5 minute average loop length, with content running 24 hours/day): 3,456

Unfortunately, here's where it gets messy. The company doesn't say how much of the content in their loops is revenue generating, and how much is not. So I made up a quick table that might tell us what they can sell an average slot for, based on different ad-to-content ratios and the assumption that they sell 15-second slots. Email subscribers, if the table below doesn't look right to you, click the link at the top of this message to see it on the web.

% ads	# of 15-second slots available in each loop	# of 15-second slots sold based on 31% booking rate	Revenue per slot sold (per screen, per month)
15%	7.5	2.33	$27.21
30%	15	4.65	$13.63
45%	22.5	6.98	$9.08
60%	30	9.3	$6.82

Assuming that 60% of the airtime is dedicated to ads, advertisers would be paying around $6.82 per screen per month for placement on the network. While that sounds like next to nothing, if advertisers have to buy space on 1,000 screens at a time, the revenue per media buy climbs to a much more respectable $6,820. Regardless, this pricing is much lower than other networks we've seen, which indicates that perhaps advertising on buses and other mass transit systems isn't as valuable as advertising at the point of purchase. Or it might reflect the possibility that mass transit riders are less affluent or have less expendable income than the viewers of some of China's other major digital out-of-home networks that focus on office buildings and airports, where more wealthy viewers might watch. However, one thing is certain: while we've seen the finances of many companies that sell each ad for $150/month per screen, VisionChina proves that there's more than one model that makes money in this industry. And here's the most encouraging part for other network owners who are seeking fast growth: VisionChina is growing rapidly and profitably despite selling less than one-third of their ad slots, which suggests a lot of room for achieving even higher margins in the future.

Comments (8)

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2007-12-11Jeremy writes:

I wonder how similar their screens are to the ones in some of the US mass transit systems. I think Atlanta's MARTA has something like this. It would also be interesting to see where they're placing the displays in the buses, since you typically have some people sitting and some standing, and people can be facing any of several directions while riding.

2007-12-11Linda writes:

Wonder if they eventually plan on adding credit card transactions too given how resistant the culture seems to credit cards

2007-12-11Jeremy writes:

Contactless payment is pretty big in Asia, so they probably have something like that in place for paying fares. Those transactions may be linked to prepaid accounts, credit cards, etc. As for showing direct-response ads on the digital signs where you can buy a product or request more info via your mobile phone, that's a whole other interesting application :)

2007-12-11Bill Gerba writes:

You know, I spoke to Bruce Rasa at IBM about contactless payment a couple of months ago, as I still don't see what the big deal is about it. His feeling was that, in the US at least, its success is a function of speed, not necessarily convenience. In other words, in transactions where it's too time consuming to go and find your credit card, contactless payments will take hold.

2007-12-13Shawn Verzilli writes:

Another aspect you may consider is that many Americans do not like confrontation or talking to "strangers" and as the trends are going, the general population tends to lean towards depersonalization. This depersonalization is kind of sad in my eyes, but would and most likely will become the fuel to jettison the demand for contactless payment options and advanced kiosks. Perhaps even retail stores outfitting themselves with advanced kiosks that would allow a consumer to view, pay and have a product delivered directly to their home. If that became the trend then stores would only need to stock perishable groceries as everything else would be available on screen... Just a thought.

2007-12-14Bill Gerba writes:

Hi Shawn,

You make an interesting point: there are certainly a good number of people who would prefer to do things anonymously, and nearly everyone would like to take care of low-thrill activities like filling up at the gas station as quickly and efficiently as possible, so the market for these kinds of services may already exist.

Lots of people have suggested that the Internet is fostering this trend. While I know I do lots of shopping online, whenever I go to our local mall it seems as busy as ever, so I don't know how true this "common knowledge" really is.

2007-12-14Shawn Verzilli writes:

I think the internet is fostering the idea and as for the traffic at the malls, a good chunk of people like to see the product before they buy it, others just don't want to wait on the shipping time.

I'm not sure how many people do this, but I have known a few people who only go to the malls and retail locations to see the price [difference] and to handle the product before they purchase it. A lot of it can be accredited to the internet being cheaper while the remaining part is "I don't want the checkout hassle." Oh, and those people LOVE the self checkouts at Walmarts and other locations.

2008-05-23Babajide Quadry writes:

Dear Sir,
I would like to know what it will take to use your platform for Digital Signage in Buses for Africa and i would like to know we can work togther or prefer to sell the platform and other equipments for my company.We are eager in starting as soon as possible.

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