The China Vortex

Yesterday, Twitterdom in China was on fire with the news, first published on TechCrunch, that Facebook clone Xiaonei had raised US$430M from Softbank, which is huge, even by current Web 2.0 bubble standards. Immediately on Twitter, there was almost an uproar, especially from users in Taiwan, who said that it was ridiculous that a Facebook clone would have such a high valuation. Does Oak Pacific Interactive and Softbank know something which we don’t? (My answer to that is a simple “Obviously yes”.)

But before delving into that, let’s talk about the pluses and minuses of C2C, or “copy to China”, a term which I believe was first used by Tangos Chan, publisher of China Web 2.0 review. I believe that when an entrepreneur does not have a clear idea about what he is going to do, starting with a copy of a currently popular application is a good way to go. After all, if it got funded by VCs in the US, it is highly likely that given the team’s experience, they will also be able to get funded in China.

What is important is what happens after it gets initial funding. Where many startups lose direction is that they look too closely at their competitors, and don’t look at the challenges for many users whom they want to reach. Most ask the wrong questions: They are too focused on their platform and applications, and don’t study the problems their users have in their daily lives.

There are a few simple questions startup founders need to find answers to:

• What are the most important tasks for a person in any given day? (These are always changing according to age, situation, etc.)
• Where do they encounter the most frustration?
• Can you offer a solution to this?

I have a simple way of looking at this: If the need is urgent, then you can charge a fee or subscription for it. If you can help people make more money, you can charge a fee or subscription for it. If it is a hardware solution which simplifies and clarifies life and makes the user more efficient, you can sell it (as is the case with the iPhone).

If it does not do any of the above things, but still offers some informative or entertainment value, then your most likely source of revenue is advertising.

Back to C2C. When OICQ was launched in early 1999, it was nothing except a Chinese-language clone of ICQ. It had an advantage in that there was tremendous need among Chinese for easy convenient communications across the computer and the then-new mobile phone platforms. The management saw this need, offered the services, collected fees all along the way, evolving into QQ along the way, and the company is now worth more than US$11B.

Tencent, the parent company for QQ, saw a social wave in China, copied something which worked overseas, fulfilled the need, and evolved it into something tremendously popular and successful in China. Instead of looking iinwards and worrying about their technology and UI, they looked out, and saw the opportunity in users’ needs and frustrations.

Now the company has more than 500M registered user accounts. It has achieved brand lock-in among most younger Chinese users.

That is why I say that when anyone only compares UI features, they are not thinking deep enough.

Now, the question is whether Xiaonei or any of the Chinese Facebook clones can evolve into something successful. The China of 2008 is vastly different from the China of 1999, and there are all kinds of communications solutions competing for users. The dynamics has changed to favor the user, who now has almost too may choices.

Add to that my feeling that SNS (social networking solutions) are a solution to a problem which is not that urgent for most people (hence the reliance on advertising as a revenue source instead of fee or subscription).

Of course, if depending on income was the only way to make money in this business, then I’m sure that Xiaonei would not have received such a high investment. An article in Plus8star talks about possible strategy scenarios in the move (h/t to Kaiser Kuo).

Technorati Tags: advertising, c2c, China, copy2china, encent, entertainment, facebook, fees, ICQ, income, information, iPhone, oakpacific, oakpacificinteractive, plus8star, qq, softbank, subscriptions, taiwan, techcrunch, twitter, ui, US, VC, venturecapital, web2, xiaonei

Is there any way at all that 2008 will not be the year of the Chinese Olympics, and by extension, China? Will we be stuck between the rise of China narrative and the sourness to the point of completely puckering up of the US media and to a lesser extent European media re China?

I say yes.

The coverage of China by the major media has been completely unsatisfactory; it has not been informative and has instead driven their own editorial agenda. That old editorial agenda no longer works because it does not reflect the ground reality of China. It does make sense though to take a closer look at China’s development outside of just the tier one cities. Let’s hope that this begins to happen.

In the big picture though, the Chinese Olympics are not the biggest story. There are so many interesting things and opportunities happening on the Internet. I’m surprised that so many people miss them, such as the fall of Facebook even though their numbers continue to increase, and the failure of social networks to monetize their traffic because they have chosen to side with advertisers against their own user base.

Facebook is like a rocket which continues to coast upwards even though its engine has cut off; momentum is carrying it upward. But eventually gravity will win…

We are in the early stages of growth for the Internet, I believe that increasingly new Internet startups will be founded by business people, not technology people. On the PC platform, the technology is mature; it is the business models which aren’t working. Now, the smart technology people are switching their focus to the mobile Internet.

For smart business people who want to disrupt the current business models, 2008 will be a banner year. For more predictions, take a close look at the predictions of Mark Anderson and Fred Wilson. Part of the reason new and viable business models have grown relatively slowly on the Internet is because the business side has been driven by technology people who don’t understand business and how to make deals, and the business people have been thinking too much in terms of the large corporate businesses which are now being disrupted by the Internet.

It is time for a new breed of entrepreneurs who understand technology, and are not behoven to traditional businesses. In China, this has already happened in gaming with Timothy Chen Tianqiao of Shanda and Shi Yuzhu of Giant Interactive. Ironically, it has not happened as quickly in the west.

It’s time to expand the base.

On the web application side, it is getting easier and easier to develop robust applications. Twitter, a very successful social application was developed with Ruby on Rails, a full stack web application framework which was released by 37 Signals, a Chicago-based design firm.

The significance of this is that web applications can now be designed by designers who are more focused on user experience than software engineers who are focused on features (many of which are of dubious value). One thing I have noticed among many Ruby on Rails deployments: narrower focus. Instead of trying to do everything, these applications focus on doing a few tasks very well. Good examples are the online project management tools put out by 37 Signals and which I use to manage my business.

Wouldn’t it be great if these web applications were made available to a Chinese audience?

As for myself, I’m sharing my feeds on Google Reader. You can find them through Google Talk and Gmail by contacting me. You can reach me at paul dot denlinger [at] gmail dot com.

I’d like to see yours too; let’s start sharing in 2008!

Technorati Tags: 37signals, applications, China, facebook, gaming, giantinteractive, google, reader, ruby, rubyonrails, Shanda, social, twitter, web

There has been a lot of talk lately about valuing social networks and Facebook's management knows that, which is why they try to track everyones' activities across the Internet with Facebook Beacon.

There has been a lot of discussion
if/how/when/who Facebook will acquire a social network company in China. As usual, I will jump out to offer my often contrarian views on social networking.

Let me put it this way, I don’t think that there is a way to value social networks, even though this is what advertisers would very much like to see happen. And the reason that social networks cannot be valued in a top-down/corporate/advertising way is because they are entirely subjective and dynamic according to each individual at any given moment in time.

That’s why it makes much more sense for each individual to assign a value for _access_ to his network, and anyone who wants to access it has to pay an access fee. If you don’t like the access fee, then don’t pay. If you like the fee, pay, and you will get access.

It’s that simple. Nobody owns the network except me. Not Facebook, LinkedIn, Google or anyone else. I own my relationships, just as you own your relationships. They only exist on Facebook insomuch as I’m active on Facebook now, but that is no guarantee that I will be there tomorrow.

That is why it doesn’t matter if Facebook owns all my data; if I no longer go there, it’s dead, out-of-date data. My data is only valuable as long as I’m active there.

I talked about the idea before, let me fill it out some more.

Here is my problem with Facebook’s Beacon:

1. If Facebook wants to track my activities across the Internet, they should explicity ask me first, and give me an opt-out option.
2. If I say “Yes”, they should ask me how much I want to be paid for access to my network activities on a 24-hour basis
3. I go in and set my fee for 24 hour access beginning immediately and click submit.
4. Facebook’s servers churn and return “yes” or “no”. If “yes”, they will be directed to my payment gateway. After confirmation, Facebook will say something like “Thank you for giving Facebook access to your network activities for 24 hours. After 24 hours, the cookie installed in your browser will automatically expire. (More blahblahblah from corporate and legal departments.)

In this model, each user has control over his/her activities, and is paid for access to their data by each social network.

Now wouldn’t this be a much better world than the current free-for-all where everybody is playing “Let’s screw the users and see how much we can get for free?” The current valuations on social networks are based on not paying users for access to their data.

How would you value social networks if they had to pay users for access to their data?

And since the Internet is all about pushing power to the edge, then why shouldn’t users have the power to earn money from having their activities and relationships tracked?

It would be great to hear what Seth Godin, Dare Obasanjo, Dave Winer and Robert Scoble have to say about the idea.

UPDATE: It’s been three hours since I posted this article, and I wanted to see if Facebook had imported this article into Facebook Notes so that I could tell my Facebook friends about it. (I have set Facebook to automatically import my posts here.)

Guess what? Facebook has not imported this article. Now what have I done to get that kind of treatment? I seem to have some recollection about “empowering users” and all that stuff.

Charming. Did their PR and marketing people go to the “Khmer Rouge Charm School of How to Win Friends and Influence People”. I guess I should be so grateful to Facebook and their management where they can watch all our moves and try to monetize it without passing anything down to us dumb users who haven’t figured out the shill yet.

I’m a great believer that if you fail, you should fail fast. In this respect, Mark Zuckerberg and his flaks have done a great job in record time. Mark, what are your chances now that you will hit that 15B valuation?

Scott Karp has written a great piece “Facebook’s Crisis Demonstrates That People Matter More Than Technology”. Be sure to read it.

Technorati Tags: , advertising, beacon, China, corporate, dareobasanjo, davewiner, facebook, management, robertscoble

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.

Technorati Tags: , advertising, attention, beacon, consumer, davewiner, facebook, profile, user