Taobao banner ad in HandyGames' Clouds & Sheep in China

This story was contributed by Henry Fong of Chinese game platform Yodo1.

The Chinese mobile game market is massive. By the end of this year, Niko Partners forecasts there will be nearly 200 million Chinese owners of iOS and Android phones. So it’s no surprise that mobile advertising is also a major business in China. There are lots of opportunities – and challenges — for Western game developers and advertisers to break into this market. Here are five points to introduce the basic playing field.

China’s ad market is segmented and still evolving

China has over a dozen mobile ad networks, and the industry is very much in its infancy, with advertisers still experimenting with the best ways to monetize. If you’re an indie game developer and you sign up on one of the major networks, revenue is not going to be consistent. One day you’ll monetize well; the next day, poorly, and with very little control or visibility as to why.

Banner ad in Townsmen promoting another Chinese online strategy gameBanner ads & CPA/CPC rule: Everything else is experimental or ineffective

Unlike the West, there’s very little market for cost-per-thousand (CPM) impression campaigns. About nine months ago, CPM advertising did enjoy some popularity, but since then, the market has moved almost entirely to performance-based cost-per-action (CPA) and cost-per-click (CPC) campaigns. Banner ads still remain the highest valued units, so a major challenge for game developers is optimizing ad design to attract click-throughs without disrupting gameplay.

Top monetizing mobile ads: Consumer brands, not other games

Generally speaking, consumer brands drive the highest value to game developers in Chinese mobile advertising: By contrast, ads for other mobile games don’t do as well. Since most of these ads in China are CPA, their revenue is totally dependent on install conversion, and most game developers and ad networks have not learned how to drive effective conversion. That’s very different from the West, where game ads have a wide variety of formats ranging from standard banner ads to higher conversion interstitial formats, which tend to attract both higher conversion rates as well as pricing.

Average Chinese eCPM: From .05 up to .80, depending on optimization

Due to the fragmentation of the market, advertising revenue in China can vary widely, often ranging from 5 cents to 80 cents effective cost per thousand (eCPM). This wide variance has much to do with the fragmentation of the market and the fact that most Chinese mobile advertising networks have wildly fluctuating ad fill rates and inventory. Getting the best eCPM rates starts with optimizing supply and demand across networks and choosing between them to get the best price-per-impression on a particular given day.

Optimization also means matching advertising to content. People playing a random smartphone game aren’t generally in the mood to think about car insurance, but put this ad in a more appropriate context – like a realistic car racing game – and the response rate would be much higher.

Cross-media promotion for pop singer Wanting in Clouds & SheepWhile China’s mobile ad market makes monetization difficult, there are solutions

What’s the best strategy for dealing with China’s wild market fluctuations? One solution would be to wait until the mobile ad market consolidates so that it can provide an AdMob-like experience in terms of efficiency. If they’re willing to work directly with China’s major ad networks, Western mobile game developers can learn how to optimize their monetization by allocating inventory over several networks and adjusting it dynamically over days or weeks. Another solution is to work with a local partner who is capable of federating inventory across networks. Currently, we are finding the federation approach for mobile games to have a lot of promise. We’re able to negotiate the highest revenue share levels with the ad networks (up to 80 percent) as well as get priority allocation of high value-branded ads from the networks.

Federation, however, is just an enabler. In order to get the optimal eCPM for your ad inventory, developers and publishers need to regularly tune inventory allocations, maintain relationships with the major Chinese ad networks, and ensure that the right ad campaigns are matched with the most appropriate games and consumer demographics to optimize performance.

Henry FongWhile all this advice applies to the Chinese mobile market today, expect to see dramatic changes soon. Within the next few years, half a billion Chinese will own a smartphone or tablet, and it’s a safe bet that the advertising market will grow and evolve with them.

Henry Fong is the chief executive officer and cofounder of Yodo1, a full-service publishing platform and marketing entry specialist for Western game developers who want to monetize in China.