Advertising, Real-Name and Other Opportunities in China

July 14th, 2010

Several weeks ago, I wrote an article on China’s digital advertising industry for Forbes.com The China Tracker. Now that China’s online advertising expenditure is growing, I’d like to talk more about challenges, and what I see as good opportunities in the field.

The past few years in China have seen some investment in China in combined lead-gen/traffic websites in China. I won’t name any names, but if you know this space, then I’m sure you know a few players. Basically, combined lead-gen/traffic is not viable on the long-term because there is an inherent conflict in combining lead-gen and traffic together. Either you are in lead-gen, in which you sell your leads to other sites which then try to monetize them, or you are in the traffic business, and you sell your traffic to firms which try to segment that traffic for their campaigns.

You don’t do both under one roof.

I see advertisers and publishers getting smart about this very soon, and figuring out the inherent conflict, which will cause problems for the companies which are doing this, and I expect them to change to either traffic only or lead-gen only very soon.

This will lead to healthier market development, and will help digital advertising expenditure to grow as a whole, as the industry will then grow more healthily.

Many of the advertising plays in China have been laggards, as games have always generated more revenue. Growth is now slowing among game publishers, and the number of new game players is also slowing; this is a reflection of China’s aging demographics. The growth has moved from MMORPG games to casual games, which don’t eat up time and attention the same way MMORPG games do. With the growth of mobile phones, especially the Android and iPhone platforms, you can expect more mobile casual game popularity. Some of the MMORPG game publishers will move to these platforms; others will not. I expect their success to be mixed.

Blizzard and the Chinese government have all been trying to push real-name registration, for their own set of reasons. I predict that this year more people will begin using their real names on the Internet, not out of government registration threats and rules, but because they are building a following, and are becoming well-known, and even generating income from Internet referrals. This already happens for some people, but as the society becomes more digital, it is being pushed down further into society.

This will create a bifurcation of those who use multiple identities and remain anonymous, and those who use real names. Some people will become famous as leaders in their fields and will use their real names; in this respect, they will become like experts on South Korea’s leading search engine Naver.com. In this respect, I expect the Internet in China to develop along and follow South Korean lines. On the one hand, this will make the Chinese government more comfortable with its development, and it will also increase the accountability of the information.

I see the next five years in China as a kind of cleaning-up period, where content quality and reputation need to be re-examined. Let’s be honest, there is an awful lot of content on the Chinese Internet, and a lot of it is crap. Much of the content is just copied from other sites with no value added. Brands are going to advertise in China because of the importance of the market, but it would be much friendlier if it was cleaned up. This needs to be done.

As for advertising sites in China, too many of the startup ideas are content- and front-end related. This is because most of the westerners and westernized Chinese in China are content people. But content is not enough; the Internet is really about data and sorting and filtering very large amounts of data to capture insights for advertisers.

This is where the next generation of online advertising startups in China will add value. This will require REAL technology, and will be filled with terms like Hadoop, MapReduce, etc. This will replace terms like branding, China strategy, market entry, etc. In other words, the emphasis will move from the front-end to the back-end, where the real technology always is.

Google is the world’s most successful advertising company, and it is a backend data-driven business. Its front-end services are just there to drive traffic to the backend, where it is processed into useful data which generate profits.

That is something most people just don’t get.

It’s about time they did.

I wonder who will be the new VCs in this space?

I welcome your comments.

White God Syndrome Meets China’s Internet Sovereignty

July 8th, 2010

Virtually all westerners, and most western companies, embrace the belief that information should be free. This means that it should freely cross national borders and be accessible by anyone with a browser. In short, as long as it sits on a web server, it should be accessible from anywhere.

Some individuals, such as Mark Zuckerberg, Facebook’s CEO, and Google’s CEO, Eric Schmidt, have gone so far as to embrace the concept that people should have almost no secrets at all, and that if you do have secrets, you are either backward, or have something bad to hide. Basically, they put forward the view that if you want to hide something, you are old, out-of-date and out-of-fashion, and that you SHOULD embrace openness as the way of the future. Mark Zuckerberg has gone so far as to say that if he had the chance to re-architect Facebook all over again, he would make it completely open, with no privacy controls.

Many in the west, especially libertarians, have embraced this idea without even debating the merits of this argument. People in the IT sector especially are sympathetic to this POV, so much so that it has become a white god. The white god syndrome is the widespread belief is that those in the west have always known what is best for the rest of the world, and that it upholds the precious values of personal liberty and individualism. After all, hasn’t the west been the leader in the struggle for human liberty and progress, fighting two world wars and numerous small wars so that others could be free? Many in the west adhere to this point of view, forgetting to question why accountability in the west is often applied selectively, in spite of all the claims made by its proponents.

If you accept this historical narrative, then anyone, or any government, which dares to object are either ignorant or evil.

Throughout the argument for free flow of information, there is no room left for defining the role of what a government does. There is only 1) information and 2) the rights of the individual to access that information anytime and anywhere.

Because the argument is framed this way, the Chinese government’s claims for Internet sovereignty have been met with derision and even contempt by the western press. The Chinese government’s claim is simple enough: IT companies in China must adhere to PRC laws. Looking at it from the surface, there is nothing revolutionary or different about the PRC claim; other governments, including those in the west, require IT companies to follow the laws of the country they do business in. If there is a difference in China, it has to do with due process, and what the government needs to do in order to obtain data from the IT companies. This is where things get blurry.

The infrastructure for the Internet was built in a way which did not clearly follow national borders. A US IT company may have web servers in Iceland, which now has the most stringent laws protecting data privacy. The data may or may not sit on the company’s own web servers; it could just as easily sit in the cloud, on servers provided by Amazon, Microsoft, Google or Apple, adding yet another layer of abstraction. Just thinking about the legal aspect of this is likely to throw lawyers into a tizzy of billable hours.

In contrast to this, the Chinese government has been very protective of Chinese consumer data. In China, consumer market research is a restricted industry, meaning that non-Chinese market research companies are not allowed to enter the field. In order to enter the industry, most western market research firms need to form joint ventures or partner with multiple Chinese market research firms. While the western market research firms do the analysis, the data is usually kept in the hands of the Chinese market research firms. This way, the data about Chinese consumers is always kept in the hands of the Chinese market research firms, and never leaves China’s borders.

The only exception to this rule comes with regard to personnel files in western multinational corporations. Most US and European firms have centralized HR departments at company headquarters; these include detailed personnel files for all staff and management, regardless of country and location.

Throughout this discussion, it has become very clear that the Chinese government does not adhere to the currently dominant western notion that information should flow freely across borders. This position has been made crystal clear in the showdown between Google and the Chinese government over censorship. I see the Internet sovereignty assertion as the first step in a systematic pushback against the free flow of information argument.

How could the Chinese government push back further? The simplest and most logical argument would be to claim that all personnel and data files on PRC citizens must not leave the PRC’s borders, and giving the security services the right to go to western MNCs’ HR departments to perform data audits to make sure that they are in compliance. Such a move would throw their HR departments into chaos, as it would mean that headquarters would no longer have the personnel files of PRC employees.

If the PRC government were to make this claim, it would effectively claim that it has control over all data about its citizens.

To sum up:

  • There should be a healthy debate about the free flow of information across borders. For too long, this is a position which has been supported without question in the west, and those who have challenged it have been routinely tarred and feathered by the press. This lack of an open debate about this aspect of the white god is not a good thing.
  • The PRC government should clearly state its position on data, and express how far it intends to go. If the government stakes a claim to all PRC citizen’s personnel data, will they extend that to their medical information and later, genetic data, too? Will the individual have any control or recourse over their own data, or will the government always be the final arbiter and decision-maker? The Chinese government should makes its position clear, without resorting to slogans and nationalism.

This would be best for everyone, especially the Chinese people.

Google China Adds ICP License At Bottom of Search Page, But No One Knows What It Means

July 6th, 2010

In a widely misinterpreted move, Google added an ICP license registration notice at the bottom of the search page in China. Many early followers of the Google China saga interpreted this to mean that Google’s application for a new ICP license had been approved by the Beijing authorities, but later Google confirmed that they had not received new information from the Chinese regulatory authorities, which in Google China’s case is the Ministry of Industry and Information Technology.

In a late-day move, Google’s PR department has denied that there has been any update from the Chinese authorities. That raises the question: “If there was no update on status from the Chinese authorities, then why did Google China add the ICP license, even though it did not have it before? And why did they do it without winning renewal from the Chinese authorities? Did they consult with the Chinese authorities before added the ICP license to the page?”

The Google China story is rapidly escalating into one of the great mysteries of the universe right up there with the age of the universe, what are the rules of physics if there were no space and no time, what caused the dinosaurs to become extinct, spontaneous human combustion, who was Jack the Ripper, and can the hole in the Gulf of Mexico be plugged?

GE’s Jeff Immelt Surprised That Chinese Interests Are Different

July 5th, 2010

In a recent statement, GE’s CEO Jeff Immelt expressed surprise and dismay that the Chinese government and business interests are pursuing moves that will seemingly make the Chinese market less friendly and accessible to western companies. Then, he went one step further, accusing the Chinese of the attempted “colonization” of other countries.

Shortly after making the statement, GE seemed to take a step back from his statement, saying that his remarks were made out of context.

China’s opening up the west and western investment has been predicated on access to the Chinese domestic market in return for the west’s sharing of technology and access to western export markets. Since 1979, this has worked to a large extent: Chinese joint ventures and startups got technology, and Chinese consumers got access to western consumer brands such as Coca-Cola, McDonald’s and KFC. In late 2008 though, the financial crisis forced western consumers to tighten up their spending, and the Chinese government had to quickly motivate Chinese consumers to spend, making up for the excess production capacity opened up by the collapse of western consumer spending. At the same time, Chinese government stimulus packages have driven development in green- and clean-tech technologies, which will be major technology and manufacturing growth areas over this century. China is a leader in the production of the rare earths which are crucial in the development of these new energy sources and has signaled to the west that they should seek alternative sources for materials besides China. Unfortunately, most of this information has not been properly covered in the western media.

To recap, the key technologies of the future are technologies which most western companies did not heavily invest in, and is one which Chinese companies are now leaders, and following 2008, the export markets’ collapse, western imports of Chinese goods have fallen off the cliff. As Europe tightens its belt further to wean itself off excess debt, it’s natural to expect Chinese exports to the EU to be largely anemic. As for the US, one of the few things which all sides seem to agree on is that the country has excess debt, and the problem needs to be addressed somehow.

In light of this situation, the west really has very little room for leverage in pushing China for anything. Why would Jeff Immelt, or anyone else, expect China to do anything else except pursue its own interests in light of this situation? And why should he expect those interests to be the same as the west’s? It’s not as if the west has been a shining example of responsibility, success and accountability for the whole world.

Where Jeff Immelt veered off into politics was his use of the sensitive word “colonization”. For most westerners who do not follow the Glenn Beck school of racial harmony, equality and justice, colonization is associated with a largely shameful period in western history, which left a scar on its relations with Africa and India. Saying that Chinese intentions are the same as the west in the 19th century is an over-simplification, and it is too early to say how China and Chinese corporations will behave. For the most part, Chinese government policy and Chinese companies have had a laser-focus on mineral extraction and business, to the exclusion of everything else. They have shown no interest in getting Africans to adopt Chinese language, textbooks and beliefs, as did most of the European colonial powers in the 19th century. For this reason, Jeff Immelt’s choice of the word “colonization” was unfortunate. In most cases, projecting past injustices onto the future don’t help us to gain further insights; instead, they appeal to the worst sides of our character and create further misunderstanding.

Countries like India have shown that they are very good at defending their own business interests and squeezing business concessions from China; they do not need help from the west.

If only the American taxpayer had been so well-protected!

China Internet Plays Winding Up to Hit NASDAQ

July 2nd, 2010

Chinese e-commerce companies have done especially well in the past year, and many are putting their finishing touches on to get ready to hit the NASDAQ and other markets.
Will bring you more information and in-depth coverage on these companies soon.
The greatest weakness of these companies is not their operations and marketing in China, but the HR firms they hire in China are generally stupid, and are unable to help them bring in the level of experienced management to talk authoritatively to analysts and institutional investors.

Google China’s Issues and the Party’s Anniversary

July 1st, 2010

Google’s deadline for getting approval for its ICP license in China has passed, and aside from Google Suggest being blocked, there don’t seem to be major changes.

Aside from the cat-and-mouse being played out, the one thing which has irked my curiosity is that there doesn’t seem to be anyone on either side (Google or Chinese side) who wants to be openly identified with the issue. Aside from David Drummond, who blogs about China, there is no one on the Google side who has stepped up and said “This is our position and this is what we stand for”. Earlier on, it was Sergey Brin who claimed to speak for Google, taking a hard line against censorship. Would be nice if someone stopped him and asked him if he still speaks for Google on China, and what is his and/or Google’s position?

July 1 is a holiday in China, today marks the 89th anniversary of the founding of the Chinese Communist party. It is kind of curious, even ironic, how a party which was founded on supporting the workers and the proletariat against capitalism and exploitation is now sitting on the biggest pile of cash in the world. But, on reflection, it is no more strange than how a country which was founded on principles of equality, freedom and justice started out accepting slavery as an institution, and continues to struggle internally with the issue of race. Internal contradictions are normal.

Under the current Chinese administration, it seems that the government and party are trying to reconnect with their roots among the workers. This is seen through the quiet tolerance shown for Foxconn workers and for striking Honda workers. This was balanced off against not allowing these worker actions to spread.

On the surface, it seems that there is a shortage of blue-collar factory workers in China, and an excess of white-collar urban workers. Now, it is easier to get a job if you are a blue-collar worker looking for a job in a factory than for a recent university graduate looking for an office job. I expect this trend to pick up pace in coming years.

One of the biggest challenges for the party in coming years is how to rebalance the expectations of China’s new workers entering the workforce. For the vast majority of Chinese, it is logical to move from the farm to the factory, then to the city. But what happens when finding work in the city becomes very hard and highly competitive? Will China become a nation of well-paid factory workers and poorly paid white-collar workers? If that is the case, then what is the point of all that education?

These are all things the Chinese government needs to think about as Chinese society continues to change.

Rebecca MacKinnon Raises Interesting Issues

June 30th, 2010

Rebecca MacKinnon has raised some very interesting questions which need wider discussion; this has to do with US companies investing in Chinese companies which support censorship. While her testimony has to do with China and Baidu, the issue of what to do when US commercial interests are in direct conflict with values which the US government claims to support is something which should be opened up to intelligent debate and discussion, instead of being swept under the rug.
She is very specific in her criticisms, and does not hold back from naming names, including the two US directors of Baidu. I urge you to download and read her PDF. She goes into some detail about how the Chinese government has adapted in a very smart way to support the Internet in a way which she calls networked authoritarianism, and has set the terms for how it will operate in China. Companies which want to operate in China must help to obey and enforce these terms and conditions. In some cases, such as Baidu’s, these companies have attracted US investors’ money.

The Clock Ticks On Google China

June 30th, 2010

Today is the day Google China needs to get government approval on its ICP (Internet Content Provider) license. The news from yesterday shows that Google China is trying to finesse its Chinese operations, and find a middle ground on its commitment against censorship and complying with Chinese regulations.

My guess is that the Chinese government will think that Google is trying too hard to be sly and tricky, and will punish them accordingly. Killing the monkey to scare the chickens, as the old Chinese saying goes.

Link to Forbes.com The China Tracker Articles

June 29th, 2010

I have been spending more time writing for Forbes.com The China Tracker. They have put together an excellent group of writers to write about China, and I’m lucky to be among them. When you have time, they are definitely worth the time to read.

You can access my articles on Forbes.com The China Tracker from this page.