The China Vortex

Several months ago I wrote about how Apple’s opening of the iPhone SDK and its App Store would create a whole new business ecosystem for application developers for that platform. Apple offers globally accessible hosting and payment clearance in return for a 30% cut of the app’s sales price.

Now, there are early signs that the strategy is paying off for some early application developers who have developed popular apps for the iPhone and iPod touch (which uses the same SDK as the iPhone) users. Eliza Block, who developed 2 Across, a word game for the iPhone platform, has reportedly cleared in the area of $2,000 a day according to this article.

The App Store is a new updated version of the shareware movement which took hold in the early 80s with the launch of the Apple Macintosh 128K. In those days, homebrew developers would develop games, apps and productivity tools which were distributed on floppy disks. (Remember those? If you do, you’re showing your age.) More often than not, these came with a message which went something like “If you liked this app, please show your appreciation by sending a contribution to this address.” More often than not, people just used the apps without sending money, although there were a few kind and generous souls who did.

Now, Apple has become the doorkeeper for these independent developers. There is no more reliance on the kindness of strangers; Apple takes care of global distribution and payment for new apps in return for 30% of the app’s sales price. For devs, the App Store is the perfect barometer for what’s hot and what’s not.

In contrast, Facebook and others have not been able to find the magic balance point between independent developers and their own corporate needs for revenue. When Facebook opened its platform to developers, it ended up enabling app developers to spam the FB audience, driving many away from Facebook. Now, with Facebook Connect, FB is trying to find that balance point.

Chinese social media companies are no better at finding the right balance between independent devs and their own need for revenue. While there has been talk about open systems in China, all of the competing business models in fact, are not open. Apple’s system is certainly not open. it’s just that Apple is willing to share in order to grow the pie.

Apple and Steve Jobs have successfully put themselves at the juncture of technology, business and hardware, and are willing to share a larger cut in order to drive up sales of a very attractive new hardware platform. With growing earnings from hardware sales, Apple can afford to be generous with devs, and is effectively subsidizing a new business ecosystem. By making some independent developers financially successful with App Store and getting that word out, they do something none of their competition have been able to do yet.

The question for Chinese companies such as Tencent is whether they are willing to use their high corporate earnings to subsidize their own independent developers’ business ecosystem as Apple has, and share some of the revenue in order to grow the pie for everyone? Or do they still think that they can own the whole pie? Tangos Chan says that they still believe that they can own the whole pie.

But Tangos believes that this will change in the future. In the meantime, more independent devs will gravitate to developing for the iPhone platform. It’s better to open up sooner while there is still interest in their platform because opening up later means that they will have to be that much more generous in order to attract developers away from Apple’s platform.

After all, that’s where the money is. And I’m sure that Steve loves how his competitors’ moves help his platform.

What more could he ask for?

Technorati Tags: Apple, applications, apps, appstore, business, corporations, developers, distribution, ecosystem, facebook, gaming, iPhone, iPod, Macintosh, productivity, sdk, stevejobs, tencent, tools

One of the frequent questions I run into in China is how western Internet companies coming into China should position themselves for growth in China.

Should they try to be western, or should they try in the shortest possible time, try to become Chinese, hiring Chinese for their local staff and management? Under what circumstances is it best to be western, and under what circumstances is it best to be Chinese? And what if a company has been in Taiwan, Hong Kong and/or the US; how should they position themselves for future growth in the Chinese market?

Their positions are made more complicated because it is now hard to find good management people they can trust locally in China; as an organization becomes larger the camaraderie and culture which forms in the management team becomes increasingly important. Over time, this builds into trust, especially if they need to deal with problems and challenges which need to be overcome on a daily basis. This comes face to face with another China reality: it simply is not easy to find people you can trust in China. Backgrounds can be fudged, headhunters want to push their candidates; the list goes on and on.

Internet businesses are especially complicated; most founders come from technology backgrounds, even today, and they have very little understanding of marketing, company positioning, and yes, national and corporate culture. Many still have dreams of serving the world from one virtual data center in Redmond, Mountain View, Beijing, Hong Kong or elsewhere, and letting more junior management deal with the soft and fuzzy stuff like “culture” and “marketing”. Even relying on ethnic Chinese management from Taiwan or Hong Kong has not really worked, as China is littered with Internet startup failures led by Taiwan and Hong Kong management teams who really did not understand the dynamics of the market in China. There have been many western executives who have said “How was I supposed to know that they didn’t understand China; they told me that they were from Hong Kong/Taiwan?”

For anyone from established business service sectors, such as banking, these ideas seem silly, even foolish. And they are. A simple reality of the Internet is that it is going to come under more national jurisdictions and regulations as it becomes a more important part of peoples’ lives. Just as it is inconceivable that banking would not be government regulated (unless you count the ongoing subprime mortgage crisis as a failure of the government’s regulatory system), it is becoming inconceivable that the Chinese, US or other governments would not want to have a say in how the Internet is run.

These established sectors know only too well how important it is to somehow find a way to live with government regulatory bodies. In China, successful new startups have almost always come from new areas which the Chinese government has not figured out regulations about and does not yet know how to regulate.

The perfect example is the online gaming industry. This industry was basically an import from South Korea, and took root in China because gaming consoles are technically illegal. (Sony PS2 and 3, Nintendo Wii and xBox360 are all freely sold; that law is seldom enforced, and all of the games sold are cracked versions.) The Chinese government’s rationale for that law was because way back in the nineties, the Chinese government saw PCs as a valuable educational tool, but considered gaming consoles to be expensive frivolous tools for kids to waste their time. At a time when the Chinese had much less buying power than they do today, it seemed like a good idea to ban gaming consoles.

This created an opportunity for Shanda, which was the first company to launch online games (almost all from South Korea) in the Chinese market. This idea caught fire with many younger Chinese and spawned the Internet cafe industry, where many younger Chinese choose to spend/waste their time and has also popularized QQ, the ultimate social networking application if there ever was one, and which for many Chinese, is the Internet.

This industry has swiftly matured, and with success has come regulation. Online gaming companies have tried to adapt, some have adapted (or tried to adapt) by moving into the online game publishing business from online game distribution. The transition from online game distribution to online game publishing has been a rocky road for companies like Shanda. The company has in the past acquired studios and titles, but many of the creative pros have left post-acquisition. A new wave of game publishers with strong titles have come up, led by Perfect World and the highly-contentious Giant Interactive.

On the regulatory and marketing fronts, the online game publishing company has become a victim of its own success: the huge amount of revenue it generates has created something the government and other regulators call a “social problem”, and it has fallen into a rut on the creative side, adding more titles in what are basically the same genre with very little to differentiate each other. The result: titles with diminishing shelf lives and ROI. People who are not addicted to games (i.e. people who have lives) have an increasingly bad view of the industry and game titles.

Unless you have some way to break out of your core audience, which is exactly what Nintendo did with the Wii. The greatest contribution of the Wii is that it has forced people to take a second look at gaming, as something other than just frivolous entertainment which wastes a lot of time and is anti-social for people who do not play games. (Heavy game players would argue that game players are social; they are just online.)

So the Nintendo Wii is halfway there; it has offered a new paradigm for games and gaming.

Now, if gaming is going to really succeed, it will have to get non-gamers to think that they are not playing a game. Then we are talking breakout.

And the game publishers (creative people) will have to learn how to get along and work with the marketing pros, and will have to understand that there is much more to marketing than press releases, press conferences, paying off the media to pick up their stories, planting stories and fake planted conversations on Chinese BBSes, etc.

To really go big, they will rely on a new class of professional and and a new kind of strike force.

We’re not there yet, and we’re not moving fast enough. But there is a way.

I believe in the value of history, but I also believe that there are times when we have to stop referencing the past for what we do in the future.

This is one of those times.

Technorati Tags: , banking, BBS, cafe, China, Chinese, culture, distribution, gaming, government, Hongkong, internet, management, marketing, microsoft, online, publishing, regulation, service, Shanda, sony, taiwan, western, xbox

With all the talk about globalization, as well as what is working and what isn’t about it, it’s time to drill down and find out what businesses are global by nature, and what businesses are local by nature.

For companies who are entering China, or are planning to go from China into international markets, this is a very important issue. There are some businesses which by their nature are global and others which are more local.

There are several businesses which by their nature are global. They are:

• Raw materials and commodities
• Transport, logisitics and distribution
• Manufacturing
• Commoditized services such as back-office operations and software outsourcing
• Finance, especially wholesale banking
• New technology development and research

Then there are other businesses which are more local/national in nature:

• Retail and brand marketing
• Most legal services
• Internet services
• Accounting services
• Foods and food-related services

My experience is that the businesses which are more wholesale in nature tend to cross national borders and become more global in nature, while those which are closer to end consumers tend to be more local and national.

If there is an irony, it is that the least sexy businesses are the most global in nature, while the more sexy brands and Internet businesses are in fact, local. I believe that there are several reasons for this:

Some of you may be surprised to note that I include Internet services in local businesses. If fact, they are. The struggle between Baidu and Google is largely a struggle over who has the larger local language search advertising market, Google, which gets most of its revenue from its home US market in English, or Baidu, whose services are almost entirely in Chinese. Even though China has four times the population of the US, the time when Baidu will overtake Google in terms of advertising revenue is still far far away.

One of my pet peeves is the amount of hype first-time visitors to China swallow, thinking that they can plan their retirement on a “China strategy” without in fact coming and living in China and making an effort to understand the people and culture and building relationships on the ground. More often than not, the people who have dollar (or yuan) signs in their eyes come from the services sectors, which are in fact, more local in nature. The ones who are making the money in China are the big wholesalers, but they have enough presence of mind to keep their mouths shut.

Lately, Dan Harris of China Law Blog has been talking about the opportunities opening up in the Chinese services sector because of policy changes. Most likely these changes will be led by another wave of service entrepreneurs coming into the country, or as is more likely, a new batch of local Chinese entrepreneurs offering services to China’s urban middle class. After all, they know the language, have the opportunities and can make the fast move.

For businesses which are local by nature, and are mostly in retail, the challenges come in several forms. The costs of crossing national boundaries to establish a name presence are always huge. This is an area global ad agencies are designed to address, even though their market has undergone huge changes.

The other huge challenge is human talent. How do you find the human talent who understand the needs of the parent company, and at the same time, can build relationships in a new market and understand what consumers want?

This is the real challenge of globalization.

Technorati Tags: accounting, baidu, commodities, distribution, finance, global, globalization, google, internet, local, logistics, manufacturing, marketing, retail, services, talent, technology