The China Vortex

In Sept. 2007 I wrote an article about how Apple’s global marketing for the iPhone was attracting and creating a new user base in China. Now, we know that there are more than 400,000 unlocked iPhones in regular use in China.

Since Apple gets recurring revenue for the iPhone through its contracts with the operators, many analysts have said that these unlocked iPhones represent lost revenue for the company. In China, China Mobile gets all the revenue spent by users for moving data up and down from the cracked iPhones, and does not have to share any of the income with Apple. And the statistics show that iPhone users consume much larger amounts of data than competing mobile phone platforms.

Obviously this is a serious loss for Apple.

I say “Not so fast!”

Today, Apple just announced its new iPhone SDK. Now, the Apple iPhone will talk with Exchange servers, morphing the Apple iPhone from something corporate IT departments viewed as a consumer toy, to a full-fledged platform on a par with Blackberry, Windows Mobile, Symbian and Linux.

As in most Apple presentations, the most important stuff always get buried close to the end of the presentation. That was the announcement of the Apple App Store, which will allow developers from all over the world to build and sell their iPhone applications. Developers will be able to charge any price they want, and Apple will keep 30% to cover hosting, distribution and credit card fees. The App Store will be available as a new button on the iPhone beginning in June. Presumably, this download will work on all iPhones, including cracked and jailbreaked iPhones.

Make no mistake about it, this is truly revolutionary news. The iPhone platform has taken over the role which the carriers once took for themselves. Today is as important a day as when Apple announced the Macintosh platform in 1984, singlehandedly launching the desktop computing industry.

Today Apple launched the mobile applications industry. When the Macintosh platform was launched in 1984, it led to the growth of Microsoft with the Office applications suite, which was developed for the Macintosh before the PC platform.

Now, do you think that Microsoft will have enough sense to develop apps for the Apple App Store, or will they continue to stick to developing for the Windows Mobile platform only? My feeling is that if Microsoft developed for the Apple App Store, they would get traction very quickly, if only they would let their developers develop.

Make no mistake about it, today, Apple launched the mobile computing industry with the iPhone computer SDK which user statistics show, is the favorite platform among consumers, and is gaining headway in the corporate space.

Even in China, where it is not officially sold and supported yet.

With the iPhone computer SDK and App Store, along with Apple’s excellent development tools, any developer with any sense will start building apps for the iPhone computer.

Including in China.

So where does this leave China Mobile? Much press has been devoted to Apple’s unsuccessful negotiations with China Mobile to distribute the iPhone in China.

In reality, the interests of the companies are aligned.

• Both China Mobile and Apple want the mobile computing industry to succeed.
• Both stand to make MUCH more revenue when the platform takes off.

Right now, they are just jockeying for position in this new business ecosystem. Where they rub against each other is on the applications platform level, which China Mobile wants to control as much as possible, and on the revenue share level, which China Mobile wants to control, and does not want to share with anyone.

Today, Apple just won on the application platform level round on the rapidly growing iPhone computing platform.

But I predict that China Mobile is quietly pleased with all the extra revenue data consumers on the iPhone computer platform have been generating, and which it does have full control over. Have you noticed that China Mobile has not broken out those revenue numbers yet? When the Apple App Store launches in June, those numbers will shoot up even higher.

You see, there is nothing wrong with being a commodity data mover when you run into the ideal data platform for users.

Round two will be about who will define ad standards and specifications for the iPhone platform (Apple), and how advertising revenue will be shared in different markets on this platform.

Scott Karp had an excellent article about how Facebook’s Beacon messed up and created such a reaction from Facebook users.

My explanation for Facebook’s policy re Beacon is that all the press, plus a 15B valuation on a company which does not have significant cash flow will get management to adopt all kinds of dumb user-privacy violating tactics to justify the valuation in the hope that the company can garner significant ad revenue.

In short, Facebook’s Beacon policy of spying on users’ activity across the Internet was a panic move…

Some hokey marketers get so wrapped up in the data that they can garner that they forget a lof the information is, frankly, useless.

“Look! We can target albino 16-year old Chinese boys who play more than 20 hours on the PS3 in Nome, Alaska during the winter and who had the Nintendo Wii recommended to them on Overstock by a friend in Wichita, Kansas!”

Now, many have put forward basically a Bill of Rights for users, and user control of their own data. Dave Winer has said that the user should be able to control how his/her data is used, right down to being able to to keep a copy for him/herself.

Giving the user control over his data? What a revolutionary idea! (There I go again…)

I think that there is a simple and elegant solution which will take some hard work and years to perfect.

Here it is: Why do consumers have to give their data for free to advertisers and be only consumers? Why can’t consumers be advertisers too? And why can’t they be credited or paid for advertising products/services they like? In return for being paid/tracked, they would give up their anonymity. Should they want to become anonymous again, they can do so, and they would not be tracked. But they would not be paid. If they wanted to become tracked/paid again, they could do so. Anytime. Anywhere.

In this scenario, the user would control what ads he wanted to receive in his user profile in real-time; this could be done with a system of checks or tags or something else. To opt out of “auto ads”, just to use an example, all he would have to do is uncheck it.

Basically, the user is selling his attention information to the advertisers. I look at it another way; the user is selling his time to advertisers to get data; relevant advertising data will be deemed useful and passed on, while irrelevant data will not be used and will not be passed on, and will be treated by the user as spam. In return for passing meaningful data to another prospect or customer, the first consumer should be reimbursed with money for exposing his data, and making a meaningful referral which eventually results in a sale.

And so on and so forth. Here is the trade: Give us your name, identity and user info, and let us follow your activities, and we will pay you. You can opt out anytime, and you will not be paid.

Simple.

I have always wondered why consumers are always treated by advertisers as consumers, when in real life, people have multiple roles such as father, husband, son and manager, or mother, wife, daughter and VP, just to use a few examples. So why should people only be consumers? Ask people for their data, then pay them for it.

That’s what I call a fair trade.

Now, if Facebook did that, that would be really something. And if Facebook doesn’t, then I hope that someone else does.

If they do, they’ll have my business.

Whatever Facebook does, let’s cut the spyware bullshit. That’s a real business killer. Those guys just dug themselves a big one with Beacon, and I’m wondering how they’ll get out.

This morning I was watching a TV program on China’s CCTV-4 which talked about the history of gold, historically and in China. The program, all in Mandarin, had a fascinating format. It started off with history and the Bretton Woods agreement of 1945 and when the US controlled about 80% of the world’s gold reserves. At the time, the US Federal Reserve had a standing policy of letting non-US citizens redeem their gold at a price of US$35 per troy ounce, while not allowing Americans to own gold. Then, as the value of the dollar fell, Nixon basically opted out of Bretton Woods and the US government would no longer redeem gold. This started the period of different currencies floating against each other in floating exchange rates.

Before and during Bretton Woods, because of the tie to gold, the US dollar was often referred to as “meijin” 美金 instead of the now popular term “meiyuan” 美元 or US dollar. The implication is that in earlier times, the US dollar was as good as gold.

Not now.

In 1979 with 17% inflation in the US and the Soviet invasion of Afghanistan, gold shot up to US$850 an ounce. Then when things settled down, so did gold prices.

Now, because of all the trouble with the US dollar and the subprime mortgage crisis, gold is back between US$700-800 per troy ounce.

Then the program took a curious turn and started interviewing Chinese who were investing their savings in gold. The best way to describe it was as if it had suddenly become the Home Shopping Channel program for gold. China opened up the gold market to trading for Chinese retail investors in Oct. 2002. Then it proceeded to interview housewives and ordinary Chinese urban consumers about their investments in different gold markets, all in China, and how much money they had made. Then there were interviews with gold analysts for gold exchange websites, all of whom were gold bulls.

And this program went on and on for an hour. The interesting thing is that this program was broadcast on CCTV-4, which is the news channel. And of course, nothing gets on this channel without official approval. The underlying message of the program was that gold is a good investment for Chinese investors in turbulent times. Not euros, not yen, and certainly not the dollar.

Gold. So go forth and buy gold, and rest assured that you will not lose your investment money. I could not escape the impression that the Chinese government was trying to talk its citizens out of putting their savings in dollars, and wanted them to save their money in gold.

Fascinating!

Ever since the subprime mortgage crisis began, the US dollar has become the currency nobody wants. Private equity and venture capital firms from the US have been actively investing in Chinese companies, just because they want to get out of US dollars. This pace is picking up as even the top-tier VCs from the US are relocating to China. Sometimes I think that if you breathe and can count to 10 in English you can get seed funding for your China startup. (Follow-up rounds are not as easy; they depend on company fundamentals, at least for now.)

It seems like the Chinese are getting tired of buying economic activity in the form of exports to the US, and getting paid in depreciating dollars. Add to that some other recent tensions, and you get the picture that things are going to start getting more rocky on the economic, military and political fronts.

There was a time when the US financial markets were looked up to and trusted by the Chinese and the rest of the world as a model. That trust has been shattered. At the end of the day, that is what capital markets depend on to work: trust. Already we are seeing a trend away from going public in the US and to other capital markets.

All of this adds up to my view that globalization is one of those ideas which makes good sense when viewed from 30,000 feet, but simply will not work in the real world of economic, political and military power.

The US dollar’s fall, in a way, is a direct result of globalization. When the US had the world’s leading economy and was the home of the world’s most voracious consumers (consumers who continued to consume even after they had no savings), the rest of the world had almost no choice except to use the dollar as the main currency for international transactions. With the rise of Japan, then the European Union, and now China and the African nations, that has all changed. Economic strength and activity are now highly diversified; there is no single center of power.

China is investing heavily in the development of Africa. The world-famous China-Europe International Business School (CEIBS) based in Pudong, Shanghai will soon announce plans for an African campus. Other parts of the world, including India and oil-rich countries of the world continue to grow. And they have less need for dollars which continue to depreciate in value. Add on to this the general unpopularity of US foreign policy in the rest of the world. They are looking for more stable investments which more or less keep their value.

All this adds up to a picture of a world which has less demand for dollars. If the US did not rely on depreciating the dollar as a policy to lessen the debt burden, the falloff would not have been as precipitous as it has become. Sometime soon, American consumers will have to learn about living within their means, and saving money. I’m of the opinion that the sooner they learn, the better. In order for it be worthwhile for Americans to save, the dollar must be stable.

If there is one thing impressive about China, it’s all the investment in infrastructure. Sure, a lot of it is tacky and even poorly constructed, and sometimes there are bridge collapses, but it is getting better in quality. Most importantly, the government is building for the future.

It’s time the US started investing more in its own future, instead of just consuming for today.

But now, the world is looking for other choices besides the US and the US dollar. And globalization is giving the rest of the world more choices to pick from.