Another Look At iPhone versus Android

October 20th, 2010

Lately there has been much discussion about how Apple’s iPhone is not open, as opposed to Google’s Android which claims to be open. Throughout the conversation, one thing has gone missing, and that is what’s good for users and their data privacy.

Which would you prefer, an app which charges you a small amount of money, say $5 or $10, for a one-time download, and keeps your data securely only on your iPhone, and then alerts you when it shares it with another app or website? Or do you prefer an app which is free, but then freely shares your personal data with other apps and websites in order so that the publisher can make his initial investment back?

I would prefer the app which charges me money upfront and keeps my data private.

But most people have chosen the free apps which don’t charge money, then sell data to other 3rd party websites and companies without their knowledge. Then they act upset when they find out that their data has been sold, and that their privacy is not private at all.

My reaction is “What did you expect?”

When you pay for an app, there is an implicit agreement that it will work, and the publisher feels the need to protect the interests of the user who paid him/her. If the app was given away for free, there is no such implicit agreement and obligation. Because Google’s Marketplace is largely offering free apps in order to gain marketshare, there is little desire to vet the applications to check if they have backdoors which will violate user privacy.

Caveat emptor.

But the Android camp doesn’t tell you this, since the vast majority of Android apps are given away for free. It’s like promiscuous unprotected sex for users. In contrast, iPhone apps are usually sold.

So yes, Android is open, but not exactly the way I’d like it to be. I would rather live with the rules Steve Jobs and Apple set.

New Goldman Chart Shows How Apple Seizes Mobile Phone Profits

July 14th, 2010

In my recent article for Forbes.com The China Tracker, “Apple, Google To Battle In China”, I predicted how Apple’s iPhone would be much more profitable than the Android platform even though unit sales would be lower.

This view is corroborated by this chart (second on the page) posted on Business Insider, which is now capturing close to twice the profit of the rest of the industry combined, even though unit sales numbers are only 3% of the total market sales worldwide.

I expect these numbers to be similar for the China market, and they show why Apple will be in a virtuous cycle in the China market, since iPhone and iPad sales will drive increased marketing expenditure in China, putting extreme pressure on Apple’s competitors in China.

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.

Does China Fit Into the Long Tail Scenario?

April 14th, 2010

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 Digicha.com, 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.

Why China Mobile Should Buy Baidu

April 26th, 2008

A few days ago I read an interview with Steve Jobs published in Fortune in March. One of the ideas which Steve Jobs put forth is that you really need to understand the technology issues, then follow how they will roll out in order to be successful. Apple has a certain advantage because it owns the operating system and the hardware. This means that the hardware and technology can be integrated much more tightly together.

This makes me think that one of the issues with the current media and advertising space in China is that there is not enough understanding of the integration of the hardware and software. Basically, DoubleClick came up with the idea of the banner ad, then Google came up with the idea which came from came up with the idea of PPC advertising on the search results page, and the algorithms which would optimize the system to become a money machine for Google. For too long, players in this space have come from the media space, offering a “me too” solution full of buzzwords but with little real content to differentiate.

What did Google do which was so different from Yahoo!, the leading Web 1.0 portal? They got very close to the technology, to the point where they built the servers and disks, and created MapReduce, Google’s search technology which could run on huge clusters.

Now, I hear a lot of talk about all the startups in China, but most of the time, I don’t see how any new technology is used to take a whole new look at how advertising should be delivered over a complex network. Most are consumer plays which do not deliver anything spectacular. That would not be an issue if they had a good feel for the marketing process, but more often than not, they do not. As a result, most advertising buys gravitate to the big online media companies, which include Sina, Sohu, Netease and QQ, as Kaiser Kuo frequently talks about in his blog at Ogilvy China Digital Watch.

In fact, we are just at the beginning of a whole new wave for technology and advertising: this is the mobile wave. Handset makers now only pay US$15 per handset for software, and with the upcoming development and launch of Google’s Android, per handset payouts are going to go down even more. This means only one thing: there will have to be a steady advertising revenue stream to finance all the content. The mobile network though is not one network, it will have to be two:

  • The search and search results network including GPS location-based detection
  • The network delivery system

In software development, there is the MVC or model/view/controller system for software design. The rules are defined at the model level, there is the presentation end for how the viewer sees the content (Apple is now taking a grab at this with the Apple iPhone) for view and the controller, which connects the rules at the model level with the view, and handles delivery.

Basically, Apple is trying to leverage its control of the iPhone audience at the view level to get leverage with the carriers, who act at the model level. In some markets it has been successful, but not with China Mobile so far. The handset makers such as Nokia, Samsung, and LG have solutions, but since their product lines are spread across so many products, they have little leverage unless they came up with their own operating system and hardware as Apple has. What are the chances of that happening? Microsoft has a solution with Microsoft Windows Mobile, but it is just one among many players and does not have a dominating position on any of the model, view and controller levels of the mobile network.

China Mobile has made no secret of its plans to control the platform as much as possible by virtue of its near-monopoly role in this space. Ultimately, it will have to make marketing choices about what audience it wants to serve: the casual youth market or the productivity worker, and how to maximize revenue from the market they choose. The only way for them to avoid having to make this choice is to offer contextual advertising on the mobile network. It would make a lot of sense for China Mobile to buy Baidu to protect its mobile advertising revenue stream from Google, and then make a serious technology effort to combine improved search algorithms with location services. Search technology involves a great deal of non-trivial technology which cannot be easily replicated, even by a company as huge as China Mobile.

As for smaller players, they will have to come up with ways to get revenue from a market which has been bombarded with a huge amount of free content.

Google has a tremendous advantage with the Google Android operating system, which will have hooks built into it for search and location services. If you think that they are giving a mobile phone OS away for free just because they are nice people, you are delusional. They are offering a new mobile ad platform with other services to attract developers.

I expect that the mobile network will very soon become the “smart network” compared to the PC-based network, which will become the “dumb network” because it does not have location sensitivity. (Of course, newer computers will have location sensitivity. This will then combine with Google’s current services to deliver ads which will make the current ad networks look like something from the Stone Age.) The PC network will continue to be good for banner and brand advertising, but if you really want smart contextual advertising which operates on a PPC basis, mobile will be the leader.

The smaller mobile players will have to pay “toll fees” to the model (China Mobile, China Unicom, etc,.) and view (Apple) players. It will be much harder to get onto the technology ramp for mobile than it is for the PC, at least in the beginning.