The China Vortex

A while ago, a friend of mine who works in a 4A ad agency in Beijing said to me: “You think we’re all dinosaurs, don’t you, and that Google is going to own the whole advertising scene?”

I’m glad he challenged me, because he forced me to think things through on a deeper level as to what my prognosis on the ad industry is going to look like. I’ll try to outline those thoughts here.

First of all, advertising has been divided into roughly two camps; the “Google is going to own the industry” camp, and a more traditional advertising camp, which says that traditional advertising (TV, radio, print) are going to survive and prosper, albeit in a very different form. I must confess that for a long time I have leaned in favor of the former, or Google camp.

But having thought things through on a deeper level, I think that it might not be so simple. Here’s why.

Ad agencies were born in the 19th century; they did a simple job, they bought media inventory at wholesale rates from newspapers, and then sold them at retail prices to advertisers. Later on, as they developed, they also sold creative services to their clients as an extra value-added, generating more income. This is how the “mass market” arose; manufacturing had risen, and products needed to be sold to the masses.

The business model is simple: buy media inventory at wholesale rates, integrate them into media plans to sell to advertisers at retail rates, and charge them extra for creative services. Since media is controlled by a publishing group, or television or radio group, and is published at regular intervals, the media business is a lot like the airlines business. Airlines fly according to set schedules, and the more butts in the seats, the more profitable that flight is going to be. Media is a lot like that; media inventory are the seats, and advertisers are the butts (no pun intended).

The advertising industry is based on a version of information arbitrage; it knows better than publishers who the advertisers are and what they are willing to pay, and it knows better than advertisers the best ways to reach their audiences. Over time, a whole business ecosystem has formed, including media research and marketing, with their own businesses and terminology. This business ecosystem is deeply entrenched in larger company’s marketing departments, providing them with market information.

Where online media is different is that Google’s Adwords/Adsense model disrupted the whole model. When it comes to search advertising (ads placed on search results pages), Google owns the page (media) where ads are placed. But when it comes to overlaying ads on third-party websites, Google (and the other ad publishing networks) do not own the page. Instead, they pay a portion of the money generated by each ad click to the content publisher. So who determines the targeting of the ad campaign? What is the definition of media inventory? Sometimes it is a large 4A ad agency working for its advertising client, but it could just as easily be a man sitting in his living room in Shanghai targeting his customers with a Google Adwords campaign.

Google has empowered advertisers with the tools to reach their advertisers directly online, without any need for a third-party advertising agency, if that is indeed what the advertiser chooses to do. Furthermore, he/she can set the budget and tweak the campaign according to his needs.

Even more interesting: Google does not have to buy media inventory. It just charges a commission per click.

This has worked very well in an online world, where Google does not have to own the media inventory it runs its ads on. But does it work in traditional media (TV, radio and print) where reach and frequency are the main metrics? Not as well. This is because these are all backed by large media organizations owned by corporations, or in China’s case, by the government through large state-owned media organizations.

No pay-per-click model would work for them. And I’m sure that they would not go for a model where a third-party paid them a commission determined according to how many sales were made. Their problem: their audiences are eroding as more means of delivery become available (webcasting for television, podcasting for radio and more print content moving to the web). It will be interesting to find out if electronic paper will support overlaid ads. This will be a major factor in determining whether the future of print will be more like the Internet or paper.

A common criticism of advertising is that it is unaccountable; there is no way to know which ads directly lead to sales. The only media where it is possible to establish a direct connection between advertising and sales are direct mail advertising and its online younger brother, email advertising (spam). Now Google is trying to establish a direct relationship with scripts which monitor user behavior directly through the checkout process online.

A common marketing rule of thumb is that a person has to hear about a product seven times before he/she makes a purchase. What’s changing now is where they are hearing it from; now the referrals come more from Google Reader and Facebook than television. Social networks are taking more and more of my time. There is no way to establish to establish a direct connection all the time; any advertiser who claimed that they could determine which impression resulted in a sale would be a liar. The promise of Google and online advertising is that eventually it will become possible to trace a direct cause and effect relationship between ads and sales; this forms a threat to the business ecosystem of online advertising.

So far, advertising can measure reach and frequency, but it cannot measure purchasing intent. To reach a higher level of personalization, advertisers (especially of big-ticket items) need to know where each potential customer is in the sales cycle.

More and more, for niche products/services especially advertising is about balancing quantity (reach and frequency) with quality (clicks and other metrics which lead to sales).

If Google goes into traditional advertising, it will have to buy media inventory to sell to its clients for offline campaigns. If it does this, its cost of doing business will go up considerably, cutting into its earnings.

This is why I see Google’s possible foray into the traditional ad agency business as a defensive move, not an offensive move. Online advertising revenues are reaching saturation, and Google has to show its investors that it’s doing something. The real challenge to Google’s ad revenue model will come from Facebook, which has probably already eroded search engine advertising revenue. This is why the real battle will be between Google and Facebook for ad revenue.The age of the “mass market” is over; now we are well on the way to making sales the old-fashioned way:one-by-one.

Both traditional advertising and online advertising are playing out a classic game of “crossing the chasm”. For traditional advertisers, the challenge is how to build a new business ecosystem for online advertising; for online advertisers, led by Google and Facebook, it is how to learn the terminology and and be accepted by the traditional advertising business ecosystem.

Then of course, media publishers might decide to sell their advertising space in online exchanges or auctions, instead of just selling wholesale. CCTV (China Central TV) already does this; it will be interesting to see if others follow suit. If they think that they can get more revenue by adopting a more efficient buy/sell mechanism, then they will do it.

This raises the question of why Google and the 4A agencies are trying to build their own exchange networks? Instead, why don’t they build a new business ecosystem which media inventory owners and ad buyers could simply plug into using standard APIs? Wouldn’t that make things so much more efficient? Why doesn’t WPP or Publicis buy Facebook? Buy the network. Then why not charge both buyers and seller a service fee plus commission for the wider exposure and ad targeting the network brings? It could be argued that this is already what Google Adwords/Adsense already provide, but it does not yet provide a wholesale backend solution for plugging in large amounts of inventory.

For all its strengths, Google is not a user-generated network; Facebook is. It is already selling advertising space, and it is in a better position than Google to create a whole new online metrics for advertising because it owns the network.

At the end of the day, advertising is largely a numbers game, except for the creative part. And then the creative is just to support reaching the right target audience and increasingly now, getting them to convert to buyers.While Facebook now has only 50M profiles, it is growing exponentially.

So, to my friend, I would say that we’re all dinosaurs basking in the glory of our late Cretaceous period just before the asteroid strike, and the world is changing faster and faster. The main question is how human and computer work will be allocated; this is a question which meets in a very intriguing way in the advertising industry.

If this period in advertising was Chinese history, we would call this the Warring States period. The question is whether the ad agency will still be recognizable in 10-20 years’ time? I would say that it is; as long as there are people who spend a portion of their lives reading and absorbing content both online and offline, and if agencies remodel themselves into generalist marketing organizations equally comfortable with both online and offline, there is room for agencies, both large and small.

And what will ads look like? I don’t know, but if more look like Fight for Kisses, I’ll be pleased.

I found out about this very entertaining video commercial from a blog I read on Google Reader. Enjoy.

In the course of my work, I’m often asked, based on my experience living and working in China, “What’s wrong with China’s Internet developers?” Unfortunately, I have never attacked the problem in a systematic way and organized my thoughts, even though I should.

Today, I was visiting the Signals vs. Noise website which is maintained by 37 Signals, who are Ruby developers. David Heinemeer Hansson, who extracted the Ruby on Rails framework works there. He also publishes his own blog, Loud Thinking.

If you have an interest in technology from a technology and/or business viewpoint, you really should read the 37 Signals blog; it’s really excellent.

When I read this posting on “Secrets to Amazon’s Success” , I said to myself “That’s it; that’s exactly what’s wrong with China’s internet developers!”

If Chinese developers just followed what Amazon has done, they would be in a much better place.

Read it and tell me what you think in the comments below.

On Sept. 18, Christine Lu of the China Business Network interviewed me about “Getting Past the China Marketing Hype”.

If you would like to listen to the podcast, you can download it here.

Last night I had dinner with five individuals in Beijing. Except for me, all of them had real hands-on experience in the gaming industry in China. (My experience in gaming is limited to the business side; not programming and production.) All of them were Americans, or had extensive experience in the US.

Long story short: China has become a boomtown for gaming companies doing development. There are several reasons for this:

• A large Chinese gaming population
• Smart programmers and artists
• A large cheap labor pool which is eager to work, and more importantly, learn

Significantly, most of the group had started, or were starting, their own companies in China. The president of one company, Gage Galinger, had been working in stealth mode for three years, quietly hiring and developing its own title for his company, Possibility Space.

Most of them were former Microsoft employees.

Gage was from Texas, and had come to Beijing to start his own game development studio. He is not Chinese, or Chinese-American, but Caucasian. I always admire someone who is not of Chinese extraction, and is willing just to jump on a plane to Beijing or Shanghai, learn, and start a company. More than anything else, that is what starting a business is all about in this age of globalization. This is the mark of a true entrepreneur.

After arriving in Beijing, he started hiring for his own studio where he is lead programmer and president.

I’m sure many of my readers may be wondering how someone who does not know Chinese could possibly function in an environment where many people do not speak a common language. How could he add value?

This is where his background at Microsoft came in handy, and the American style of collaboration for game development really shines. In Chinese gaming companies, the artists and programmers are just worker bees, performing repetitive tasks. They are not asked, and do not offer their opinions about the games they are developing; they are told what to do, and just do it. In his company, employees are required to show their day’s work to everyone else in the company, and others are encouraged to critique the work. Of course, most Chinese are reluctant to say bad things about other peoples’ work, afraid that it will hurt their colleagues’ feelings. For Americans, it is more natural to critique other peoples’ work because Americans are able to separate the work from the person.

Most of the time anyway.

Gage said that the path was not entirely smooth; he had to fire people who did not fit. But all in all, he was encouraged by the experience, and he had a very clear idea about how he added value to his company. He was very optimistic about his experience, and said that for him, living in China was about realizing the American dream of having his own company and making his own title, and launching it worldwide.

The economics of the gaming industry in the US is broken; developments costs are high, and game developers are always in debt and losing their IP to investors. But development costs in China are low, and Gage claims that his developers in China are better than any team he has worked with in the US by an exponential factor, or anywhere else.

He said that he has tried to get other game developers to come to China to partner with him, but while they have expressed interest, none have made the move. He has just opened an office in Austin, Texas.

If America had more entrepreneurs like Gage, who don’t overthink, overplan, have a solid core skill, and just get on a plane to China and start their company, and are humble and willing to learn, the US would be in a much better place.

America used to be a much more entrepreneurial country, now it is overly regulated, overly expensive, overly specialized, overly structured and overly corporate. In order to be competitive again, the entire society and culture will have to make major adjustments. The road will not be a smooth one.

That is why the smart entrepreneurs, like Gage, start their businesses in China.

In this new globalized world, China has become what America used to be.

Cory Doctorow, open-source advocate and publisher of the Boingboing blog, spoke in Beijing yesterday on Sept. 12. The Boingboing blog was one of the first blogs on the Internet, and now reportedly has more than 600K subscribers. The venue for the event was the Beijing Bookworm bookclub/bookstore in Sanlitun. Many members of Beijing’s English-blogging digerati were there including Jeremy Goldkorn of danwei.org who served as host, William Moss of ImageThief and Kaiser Kuo of Ogilvy China Digital Watch.

Cory opened his talk by reading a short story he had written. The story was set in 2027, where a VC was trying to talk a woman into letting him invest 600K in her company, which created customized mobile devices from junk, which she would then sell to customers. It was a perfect case of mass customization; this time, the VC had become commoditized, he was now part of a venture capital franchise and was looking for places to put his money. Trouble was, he had more cash to invest than what he knew to do with. The woman complained saying that she had tried to get money from Sand Hill Road in 1999, but she was blown off because her business did not, as the VCs put it then, scale. Now the tables were turned, and the woman was able to buy her raw materials for very cheap prices, and taking advantage of new technology design software and equipment, was able to design unique devices very quickly. At the end of the story, the poor VC was reduced to asking if he could work a shift on her assembly line so that he could have one of the devices.

After the reading of the story, Cory proceeded to talk about the issue of DRM (digital rights management) and copyright. He related the story of how Google had recently stopped selling videos from Google Video, disabling the ability of people who had paid for downloads to watch videos they had already paid money to buy. For this reason, many had turned to the Google search engine to find unauthorized downloads of those same videos which they did not have to pay money to buy, and which they could play anytime they wanted. This was a perfect example of how screwed up the whole copyright issue had become; it encouraged unlawful behavior by punishing those who acted lawfully, but now changes forced people to adopt and use products which were not “lawful”.

He then proceeded to talk about the DMCA (Digital Millenium Copyright Act) takedown request, which was used to remove content from Internet websites. He recounted the experience of one publisher, the Science Fiction Writers Society, of which Cory is a member, which asked that all references to Isaac Asimov be removed from a document publishing website. As a result, even high school reading lists had to be removed.

All this was done without any need for proof of ownership to be submitted to a court, or seeking of an injunction. His point was that the copyright laws are much more strict on the Internet, and do not need “proof”. In a twisted way, this has encouraged the proliferation of online piracy because the laws are unreasonable and unenforceable.

He then talked about how changes in technology had helped the publishing industry as a whole. Whereas before, major book hits needed to sell 50,000 copies, now many books became profitable by selling only 3,000 books. Technology has lowered the threshold of costs and profitability for small niche publishers, which are now able to reach a wider audience through the Internet, and later through mobile search and applications.

When the US was founded, for the first hundred years of its history, the US pirated all books written by English authors, and refused to honor British copyright laws. Cory added that the American founding fathers knew what they were doing; they were not prepared to have US dollars go into the pockets of the English treasury. It was only Mark Twain, an American author, became famous, did Americans become interested in copyright laws.

Now, Cory noted, China wants to become an accepted member of WTO and the international business community, and is seeking to honor international copyright laws. He warned that it is important for China to think through what its own interests are so that the country’s own best interests are not sacrificed to globalization.

Cory made it very clear that he believes that the current copyright laws are formulated to favor current copyright owners, at the expense of consumers. He noted that the current US copyright law, introduced some thirty years ago, has gone through eleven revisions, and that literally no one, including judges, lawyers and politicians understands it completely.

If there was a theme to his discussion, it is that the Internet has opened up a whole new world for those who are savvy enough to use it intelligently, and use it to reach niche audiences and interest groups all over the world, without being restricted by geography and language.

It’s great to know that we are all tied into our own interest groups through the power of the Internet. If we are willing to reach out, we can find people with similiar interests without any restrictions at all.

It’s all in our hands now.

Andrew Lih has posted a photo of the event on his blog and Frank Yu has posted photos of the event on Flickr. Search for “cory doctorow beijing”

Updated 9/15/07: Danwei has posted a video of Cory’s talk.

Rebecca McKinnon has a very interesting post at her blog “Thomas Friedman gets the middle finger in the Middle Kingdom”, which was part of her coverage of the World Economic Forum at Dalian.

During a panel, Thomas Friedman, author of The World is Flat, accused China of being a “free-loader” while the US carried the heavy load of being a “global guardian”. I really love the term “global guardian”; what does it mean? Does it mean that the US is protecting the globe
from an attack by Mars? Or Jupiter? Or is it some unknown Deathstar which we don’t know about? Does it mean that Beijing is keeping this a secret from the rest of the world so that it won’t have to publicly acknowledge this enormous debt to Washington DC?

Who defines the role of “global guardian” and the role it involves? It takes a lot of hubris even to bring the phrase up. How would you react if your spouse calmly announced that he was the “global guardian of our world against evildoers who want to destroy our way of life”? I think you get the drift…

Then in the post,

Friedman also argued that it’s in China’s interest to work more directly with the U.S. on geopolitical issues because if the U.S. fails, then China will have to pick up the pieces. “If there is too little American power China will be forced to respond to that,” he said.

Now I get it, Beijing is supposed to change Washington DC’s diapers when it makes a mess! So now Beijing is going to be the “global diaper changer” when the “global guardian” has… well, nevermind.

Unfortunately for Friedman, Sha Zukang, told the audience that the Chinese government is not anxious to assume this new role.

Sha rejected the whole idea of “soft power,” calling it a “condescending approach” and “notion created by Western developed countries.” When it comes to world leadership, he said the world’s leaders should not be “self-proclaimed” – he said they should be elected. China, he said, would not self-proclaim itself a world leader, because China’s policy is always to treat other countries as “equals.”

Translation: “Let’s take responsibility for changing our own diapers, instead of expecting someone else to do it for us.”

Another very interesting viewpoint put forward by Clay Chandler of Fortune magazine is that now that China is a world power (I really love the way the words “world” and “global” are thrown around), Chinese politicians are still giving boring speeches. Of course, American politicians never give boring speeches; I’m sure that any intelligent reader of this article can recite all the speeches of George W. Bush and the Senate and House heads by heart. Yes, I too, am deeply disheartened that Beijing has not announced plans to stage a pre-emptive attack against Mars so that the “global guardian” can at least take a small rest and enjoy a cup at Starbucks.

Seriously though, Friedman’s criticism of Chinese policy is, at its very least, an acknowledgement that the US has not been able to carry all its burden by itself and needs help. In this light, it should be interpreted more as a plea for help and assistance for the global guardian than as a rebuke of current Chinese policy.

In the article, Rebecca recalls:

A couple years ago a Chinese academic who advises the Chinese government on foreign policy issues told me that the best way for China to build global power, good will, and international credibility over the long run is to mind its own business, avoid criticizing the U.S. whenever possible, sit back and let the U.S. destroy its own power and credibility by itself.

There is a strong argument to be made that it isn’t so much that China has risen quickly out of seemingly nowhere, but that China’s growth appears accelerated because of rapid American decline. Put it this way, if China is riding an up escalator, and the US is riding a down escalator, at some point they will pass each other at an intersection point.

The only question is “When?”

Now the question becomes whether it is a good thing to accelerate decline. Wall Street routinely rewards companies which make dramatic management changes when they are in decline. The thinking is that it is better to make dramatic, even wild, changes in the face of falling sales and market share. Share prices go up even before the results of those changes become apparent, based on the hope that the new management can make the changes necessary. Wall Street is hoping for a happy ending, even though most of the time it doesn’t work. Doing something, even if it is madly wrong, is better than doing nothing when confronted with a bad situation, according to Wall Street. Then, when the company has hit bottom, it can either be acquired or claw its way back to recovery.

My question is whether this same rule should be applied to countries and governments? If the US is in a state of systemic decline, is it better to accelerate the decline, so that the country can eventually climb out of the mess it is in? The problem with this approach is that when a company screws up, a few hundred thousand people lose their jobs.

The problem with a country, especially one as big and powerful as the US, is that no one knows what the bottom looks like.

For this reason, the slow erosion and decline of American power will continue.

An article in today’s Telegraph suggests that foreign central banks have sold US48B in US treasuries, with US32B in the past two weeks alone, according to figures released by the New York Federal Reserve. China currently holds US1,340B in reserves into other higher-yielding investments. Foremost among these newer investment vehicles is a sovereign-wealth fund.

China has bought US treasuries in order to secure its largest single export market. Effectively, China is lending money to its largest single buyer, since the American people have maxed out their credit. China is buying US treasuries so that Americans continue to have the capability to buy Chinese imports. Since the US dollar has been steadily falling in international markets, especially against the euro, this option is becoming less attractive.

In addition, China bought a large amount of US agency and corporate debt, some of which was backed by, you guessed it, subprime mortgages. For a detailed guesstimate (because it is not public information), take a look at this article by Brad Setser.

There is a good chance that there are some very senior people in Beijing taking a deep gulp as they look at their portfolio of dollar-denominated securities.

If so, that would explain the recent sell-off of US treasuries. And if they start selling, people in Washington are going to start worrying about how to handle US debt. Ultimately, Americans will have to recognize that they have lived beyond their means, and the US standard of living will have to make a downward adjustment, as is beginning to happen now.

So who wants to be president of the US in 2008?

What do you call it when people pay nearly double current sales price to buy a product which is basically crippled of its most important function, and the maker has spent zero marketing dollars to sell the product?

I’d call that pretty powerful buzz marketing.

According to this USA Today story, some Chinese are willing to part with 8800 yuan to own an iPhone which doesn’t have working phone capabilities in China, because Apple has not yet signed a partnership agreement with a carrier. (Presumably, Apple would part with China’s leading mobile service provider, China Mobile, to launch iPhone service in China.)

Any way you look at it, Apple’s iPhone has had a successful launch in the US. Apple has taken its legendary experience in hardware/software design and integration and applied it to a whole new product, the mobile phone, bringing good design sense and functionality to a product which has confounded most users for years. On the marketing side, Steve Jobs has put the reality distortion field into overdrive, convincing many Americans who have never used smartphones before to part with their money. A few analysts have gone so far as to predict that Apple will replace Microsoft in the mobile space, becoming the leading player for a new category combining hardware and software design and integration in mobile computing. A report which came out on Sept. 4 has claimed that iPhone sales in the US in July have already beaten smartphone sales.

In China, mobile phones are very popular and are more than just communications devices. Often, with the Chinese concern for social rank, they are indicators of social status. On the business side, this translates into frequent replacements of handsets among China’s rising urban middle class as users want to have the latest devices. Mainly for this reason, handset makers have placed most of their research and development in China, to lower costs and to be close to trends for their single largest market.

But could Nokia, Motorola, Samsung and LG have missed something Steve Jobs and Apple saw, an opportunity which Jobs’ gang could not pass up? And could the high rate of handset sales belie not only a desire to have the latest mobile device, but be an indicator that Chinese users were not satisfied with any of the handsets made by any of the major hardware makers?

Moreover, could this represent an opportunity for Apple, which has never had major market presence in China for its computer business, but has made limited inroads with its iPod business? And is this a major opportunity for iPhone in a major emerging market?

First of all, let’s take a look at what Apple has done differently. In typical Steve Jobs style, Apple has played God, giving buyers a complete final sealed package and solution, including software (a version of OS X) by Apple, and a hardware design by Jonathan Ive, Apple’s superdesigner who has been largely responsible for the elegance factor in Apple’s products. To the consternation of a new generation of software developers, Apple has provided only very limited support and documentation for designers of third-party applications for the iPhone. But even with this very limited support, something interesting has happened: the developers have organized themselves to develop new apps for the iPhone.

When was the last time you heard of a large group of developers organizing themselves to develop and extend apps for new Nokia, Motorola, Samsung and LG phones? And for nothing?

While Apple and Steve Jobs try to create consumer reverence somewhere along the lines of Moses coming down from Mount Sinai with the Ten Commandments, the fact is that the first iteration of Apple’s products still are far from perfect. But the products always gets better. This reveals something about Steve Jobs which he strives to keep from the market: he listens and acts on intelligent customer input.

Uniquely among major hardware/software companies, Apple does not use focus groups. Designers design for Steve Jobs: designs and features Steve Jobs likes are kept; designs and features he dislikes are tossed away. There are no focus groups by marketing groups for senior management to use as crutches for their decisions.

If you look at it closely, what is happening with all the buzz for the iPhone is a mirror copy of what happened when the iPhone was announced on Jan. 7 at Macworld in San Francisco. The six month waiting period created a huge amount of pent-up demand and free buzz for the iPhone in the US, which translated into record sales for the product when it was launched on June 29.

Now, it’s happening even in China.

Genius. Pure genius.

Last night (Sept. 3) I attended the Mobile Users Panel held by Mobile Monday in Beijing. This event was held at the Radisson Hotel. This event was the evening part of the Wireless Developer Forum sponsored by Sony Ericsson and Nokia.

I always like to listen to how users use new technology products and services. There are a lot of very smart technology and business people who, at the beginning of a project, have all kinds of ideas of what they are going to build into the next killer app. Then, when they test the product on a focus group, they are always humbled by the experience. I call this phenomena “the revenge of the user”.

Mobile Monday assembled a four-person panel: one 25 year-old research student (technology) from Chongqing and who had lived in Beijing for the past seven years; one 18-year old high-school student who called himself Rico, and appeared anxious to test his fairly good English on the audience; one 25 year-old female math teacher in high school and one 30+ tech startup guy. Because the 25 year-old researcher and the startup founder knew more about technology, I tended to discount their views, and was much more interested in how the 18 year-old high school student (Rico) and the 25 year-old female math teacher used their mobile phones.

Benjamin Joffe, CEO and founder of Plus8star, presented the questions, and a female co-host did the English-Chinese translation work.

The 25 year-old researcher spent about 150 yuan on service charges per month, and was a subscriber to China Mobile’s M-Zone service package, which is targeted at youth. He made about 10 calls daily, and received 20-30 SMS messages daily.

Rico also subscribed to the M-Zone package, which offered 800 SMS messages monthly. He would send about 40 SMS messages daily, which would suggest that even 800 SMS messages a month is not enough for him. He used a Samsung phone; previously he had used Nokia phones. Although he was only 18, this was already his 10th phone, which seemed to cause a gasp in the audience, and Benjamin Joffe did a double-take when he heard this.

The 25 year-old female teacher also used the China Mobile M-Zone service, but also used PHS service at home because of the low monthly charges. Her use was much lighter than Rico.

When it came to services used, Rico said that he had once used China Unicom, but the monthly charges had gone up to 300 yuan a month, and he had cancelled. The rate he seemed most comfortable was in the region of 150 yuan monthly.

Aside from the 25 year-old researcher, all had more than one phone and one SIM card.

Benjamin Joffe asked all of them if they knew about 3G. Rico said that he didn’t know the details, but that he thought that it meant there would be higher quality services at lower prices. All said that they occasionally played casual mobile games and never expected to pay for them. This would suggest that entertainment on the mobile platform is headed for an advertising model.

It became most interesting when Benjamin asked what single feature they would like their next phones to have. The answer from both the female teacher and Rico were maps. Rico suggested that he would also like GPS so that he could find his way around. The female teacher recounted how she got lost meeting her class one day on a day trip, and how helpful it would have been to her to have a mapping service; she said that it would have prevented her from being some 10 minutes late to meet her class.

Maps and mapping are still sensitive government-regulated issues in China, and it will be interesting to see how the different regulatory ministries will reach consensus on how to offer these services.

My conclusions are:

• It will be very difficult to monetize mobile content in the next 2-3 years because of government regulatory hurdles and a generally challenging environment.
• While China is a very big market in the mobile and Internet space, users are still very price-sensitive. Most teenage urban users would cap their monthly subscriptions at 150 yuan, and 300 yuan would be a ceiling for most salaried people. (Rico was spending his parent’s money; and I assumed that working people would be willing to spend up to 300 yuan of their own income on monthly mobile services.)
• Just because someone likes a service a lot does not mean that they are willing to pay for it, so please remove those rose-tinted glasses and stop fantasizing about the “China market” is my advice to those entering the Chinese market.
• Mapping and GPS on mobile phones are the killer app, but are currently regulated by different Chinese government ministries. Currently, there are still no standard published APIs for accessing an online mapping service. A lot of horse trading will happen before everything gets sorted out on the government level. When that is done, advertisers will have to figure out how to monetize maps and GPS services, which involves yet another round of horse trading.
• The times when telcos and their partners were fantasizing about people spending kajillions of dollars, yuan and yen on mobile services will be hit hard by the expanding credit crisis. I expect users worldwide to put fairly solid ceilings on their discretionary spending, at least in the US. In China, the government may further slow down credit expansion since they have already seen what fast credit expansion has done in the markets of Japan, South Korea and Taiwan, where there are swathes of the local populations which have become victims of their monthly credit card payments.
• The ultimate measure of how much users spend on mobile services is ARPU (average revenue per user). While China is much larger than Japan in population and market size, the amount of revenue generated by the telcos in the two countries are about the same. It’s going to be a long long time before the average Chinese user spends nearly the same amount on mobile services as the current Japanese user does.

Yesterday I participated in Barcamp Beijing 2007, which was held at the France Telecom Research and Development Building in Haidian district in Beijing. There were more than 100 participants with some 24 sessions held in three different languages.

It is hard to describe the firehose of information from Barcamp, but I will try to offer some of the highlights.

Michael Sikorsky, CEO of Cambrian House, first spoke about how to raise financing for startups. Based in Calgary Canada, Cambrian House offers a business platform for service providers, and Michael has successfully transitioned from being a tech person to a business person. I was immediately impressed by his praise of Paul Graham, founder of the Y Combinator seed-funding group. Paul Graham is the smartest tech guy who has transitioned to business, and Michael showed how Y Combinator has introduced a new VC business model of seeding startups by mentoring them through the startup process.

I have spoken frequently with Frank Yu about the need to bring something similiar to the Y Combinator seed capital model to Beijing. Chinese startups badly need mentoring, especially in their early phases because most of the founders do not know how to build teams. This is something Paul Graham’s Y Combinator organization has been able to address very well, teaching business smarts to founders from tech backgrounds.

The other main takeaway from Michael’s talk was that it was important for new companies to be “investor-centric” as opposed to “founder-centric”. If a company is set up to be friendly to investors up-front, then it is much easier for it to scale.

Andrew Lih, who is now living in Beijing, spoke about the Wikipedia movement. Andrew is a researcher in new media, and is now working on a book on Wikipedia due for publication sometime next year.

In the afternoon sessions, Karl Mattson, president of Medium Cool based in San Francisco, talked about what kinds of people were needed to build a good company. He put special emphasis on need for background diversity. When most Americans hear the word “diversity”, then tend to think in terms of racial, religious and sexual diversity. What Karl was talking about was the need to get people from different parts of the world, social and educational backgrounds so that they can exchange views by looking at a business proposition from different angles. Failure to do so meant that companies would often have “blind spots” and result in “group-think”, where the same group of people have a narrower and narrower vision.

I have noticed this tendency even in very large and successful US companies such as Microsoft and Google, where the definition of a smart person fits very closely with the founders’ definition of smart. This has resulted in a form of inbreeding, where the companies’ blind spots get bigger and bigger, creating opportunities for new challengers and startups.

Following his talk, Robert Scales, founder and CEO of Raincity Studios, talked about his company’s experience working with Drupal, the open-source community web framework. Robert talked about how Drupal has matured into an excellent solution for all kinds of businesses, with new modules being added on a regular basis. Previously, companies had been wary of using open-source as a solution because of security cares, but now he found that they had gone past those issues and had come to embrace it as a development platform. The best part for his 12-person team based in Vancouver was that because the software is regularly updated, his company only has to concentrate on basic functionality, design and configuration issues for his clients. And if his company cannot perform the work, design and feature requests can just as easily be addressed by another team which is familiar with Drupal. Now, his company is so busy that he has come to China to look for designers and coders to augment his Vancouver team; he mentioned that he is so busy that he has had to turn away business.

In reply to a question from me, Robert mentioned that the average billing amount and timeframe for a project is 3-6 months and 50-100k (Canadian dollars) per project.

My session was on the topic of “Building Management Teams” for startups. I focused on some of the problems which I found most Chinese startups to have:

• Founders fall in love with their own ideas too much, take criticism personally. This makes companies too slow to ditch old bad ideas.
• Chinese companies tend to be “founder-centric” instead of “investor-centric”, which means it is very difficult for a company to grow past US5B market cap in size (with the exceptions being Chinese state-owned enterprises or SOEs).
• Healthy startups have a technology founder, product founder and a bizdev founder, forming a tripod. Most startups in China do not have this setup; instead relying on one person to drive growth and vision. This model does not scale well, and feeds the founder’s ego too much. This puts a cap on future growth.
• There are too few original ideas; companies tend to copy each other.
• China has a high-competition, low-trust society. This also puts a cap on Chinese companies’ growth. If someone can successfully address the issue of how to build trust in the online/offline world, they will have something very interesting.

Many photos were taken, including many by Kris Krug, president of Bryght, one of the event sponsors. You can find the list of sponsors from my previous pre-event posting. If you would like to see photos from the event, you can find them on Flickr.

Many participants will be going to Shanghai where Barcamp Shanghai 2007 will be held at the offices of Tudou on Sept 8.

Barcamp Beijing 2007 was a very interesting and exciting event for those interested in technology. It provided an excellent opportunity to meet some of the participants and drivers in open-source and Web 2.0, and gave those from outside China a chance to learn about the Chinese market, and a chance for Chinese to mix with outsiders.

All in all, an excellent experience.