Does China Fit Into the Long Tail Scenario?

Bill Bishop, who is based in Beijing, recently published a very good article and checklist focused on western Internet companies which want to enter the China market on his blog, which is titled Do You Have What It Takes to Do Business in China? In the article, he lists three factors as being most important:

  • Invest in Experience
  • Prepare for Regulatory Complexity
  • Expect Copycats

His three factors, in my opinion, hit the nail on the head. So how does this affect the average US Internet company which wants to make it in the world’s largest single Internet market (listed by number of users)?

When it comes to investing in experience, most US companies choose someone of Chinese extraction who has worked in the US, not knowing that for the most part, the average ABC (American-born Chinese) knows as little about the Chinese market as any man off the street in the US. Even someone from the PRC who has lived in the US for more than 5 years may not know much about the Chinese market, even though they speak the language, because the market has changed so much so quickly. In the meantime, local Chinese companies have prospered, making mistakes, but the smart ones have learned from their mistakes, getting tougher, stronger and more competitive along the way.

Advantage: local Chinese companies

China is going through a period of regulatory change, and in most cases, Beijing is demanding that the provinces hand back many regulatory decision-making powers that were given to them over the past 30 years of reforms. If you are interested in the macro discussion about this in China, I’d suggest that you read more on GE Anderson’s blog; he goes into considerable discussion about this under-reported discussion.

What this means for the western company coming into China is that you might get caught by regulatory decisions and changes from Beijing, even though you hire expensive consultants to help you navigate your way through this maze. This is not to say that the system is biased against westerners; even leading Chinese companies such as Netease have made major mis-steps in dealing with a changing and opaque regulatory environment.

Advantge: Nobody

When it comes to copycats; they are all over the place in China when it comes to the Internet. US lawyers who specialize in IP love to paint vivid pictures of how awful this situation is in China in order to scare their clients into paying large legal fees to get IP rights protection. Any company would be unwise not to make a certain investment, but they would also be wrong to go overboard.

This is because success in China it is all about executing and learning quickly. To give an example which most Americans are familiar with, it would be like the browser war between Microsoft and Netscape in the late nineties. Netscape came out with the first browser, Mosaic (which soon became Communicator), then some time later, Microsoft introduced Internet Explorer. Netscape sued Microsoft, at which point the legal gears started turning. But by the time the legal system had run its course, Netscape was no longer around as a company, having been bought and absorbed by AOL, which had merged into Time Warner. From a legal standpoint, Microsoft lost the battle, but it didn’t matter, because Netscape was no longer there to collect on its winnings.

Now, China is like that, except the market is changing much faster. And when it comes to execution, the Chinese companies can make the changes faster because they don’t have to explain their changes to someone in Mountain View or New York who has never worked outside the US in their whole careers.

Advantage: Chinese companies

At this point, you may be thinking that it would be wrong, even insane, for a western company to enter the China market. That is not my point. Instead, I would argue that most western management teams get overly enamored of the huge promise of the Chinese market, and in the process, overlook what it takes to succeed in ANY market. And, I would like to point out that because of changes in the technology and business ecosystem, there are more opportunities than ever everywhere, not just in China, and the initial investment costs required to test the waters are much lower.

The platform I have found most engaging is the iPhone business ecosystem, which I have been enthusiastic about since the very beginning in March 2008. Since I wrote that article more than two years ago, the iPhone and AppStore have turned into a thriving market all over the world. A few individual developers and software companies have become successful, even wealthy, over this market, which now includes 50 million iPhone users worldwide, and if you include iPod touch owners who also buy apps, now total 85 million.

When I look at this market, I see the long tail which Chris Anderson first talked about. When Anderson spoke about the long tail, he was talking about companies getting more and more of their revenue from small customers, and moving away from the 20/80 rule, which dictated that 80% of business comes from 20% of customers. When western marketers look at China, they see $ signs in their eyes, and think of money flowing into their bank accounts on a daily, even hourly, basis. To a large extent, the Chinese government wants to perpetuate this view; it serves to attract foreign investment into China. But in reality, there has been no western Internet company which has made it big in China. In this respect, the reality of China has never lived up to its promise.

However, I believe that there is a change and opportunity underway for the long tail to finally come to China, in the form of the iPhone platform. (The Android platform is in a state of flux because of Google’s recent troubles with the Chinese government; the three government-owned carriers don’t seem to be know what to do.) In China, the iPhone is sold and distributed through the China Unicom network.

So let’s say you are in the software business, and you want to build your presence in China. You have two choices:

  • You can go the traditional route which Bill Bishop outlined and which many other companies have taken, including Google.
  • You can build games and apps in Chinese, which are distributed through the AppStore, relying on Apple as your channel. But along the way, you can learn about each individual market at very little cost. And you can do this ANYWHERE.

If you go the first route, you may or may not succeed, and you will have spent millions in the process. If we look at what has already happened, the odds are against you.

If you go the second route, you may or may not succeed, but your costs are much lower, and you will learn a lot about what Chinese like, and maybe even make a little money in the process. Then you can decide how much you want to commit to the China market.

Maybe it’s time to look at things a new way.

You decide.