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.

Podcast Interview About US, China with Eric Garland of Competitive Futures

August 13th, 2010

I recently did a podcast interview with Eric Garland of Competitive Futures. Eric was until recently based in Washington DC, and recently moved to St. Louis, Missouri. His company is a strategic analysis firm which advises companies on global strategy related issues.

Our conversation was about how China sees the US, especially in the period following the Wall St. meltdown of September 2008. I’m pleased to say that the podcast has been very well received, and Eric and I have started talking about doing more podcasts about China in the near future. Please tell us if you like it, and we’ll do our best to make things happen.

This podcast can be listened to on the Internet, or as part of Competitive Future’s new iPhone app.

New Goldman Report: iPad to Take Significant Netbook Market Share And More About iPhone Antenna Issues

July 15th, 2010

In a new report, Goldman Sachs says that the iPad is poised to take significant netbook market share because of the five Cs: consumption, content, connected, constant operation and commerce. You can read all the details at this report on the Financial Times.

If you have been a reader of the China Vortex, this would come as no surprise, since we predicted all this about the iPad way back on January 5, before even the iPad name was announced. When AAPL was trading around $215 per share, compared to today’s $252.73.

Or you could have listened to us in March 2008, when Apple announced the iPhone SDK and China Vortex predicted that it would be a game changer. Back then, Apple shares were trading around $130 per share.

Today, the Microsoft CTO Kevin Turner predicted that the iPhone 4 may turn into Apple’s Microsoft Vista because of the antenna issues. Aside from pointing out that Kevin obviously does not come from a PR background, I have been asking myself a question about the antenna issue.

The question is this: “Why isn’t the antenna issue bigger than it is now?” While some have called for a recall, the demand for the iPhone 4 continues. Why?

My answer: “People aren’t using it for voice calls much anymore.”

The main function of the iPhone 4 is as a data device or computer, not as voice phone. The heavy data usage stats for the iPhone and iPad show that these are devices for asynchronous data consumption, not voice communications. If the primary function of the iPhone 4 was as a voice phone, then yes, the problem would have been much more serious, on a level with Toyota’s recent brake problems.

It’s called an iPhone, but the voice phone function really isn’t that important.

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.

Let the Mapping Wars Begin!

June 25th, 2010

As location-aware applications become more core for mobile services, especially with the launch of the new iPhone 4, location and mapping services become ever more important.

The Chinese government has made clear that non-Chinese owned mapping companies will not be able to provide basic mapping services and AutoNavi is filing for an IPO. Will be interesting to see if AutoNavi tries to get its products/services into mobile phones.

In the meantime, Apple is getting more aggressive about protecting and using the data it collects on iOS 4, and this has caught the attention of US legislators.

In the short term, this will give Hong Kong an advantage for developing these applications, because it is relatively restriction-free, as I mentioned in this article for Forbes.com The China Tracker.

The issues are complicated, and will converge in a way most people are not yet aware of. Will write more about this subject later.

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.

China Telecom Shapes Up As Leading China Mobile Competitor

August 31st, 2008

In an earlier article, I talked about my take on the telecom shakeup in China in May. Three months after, it looks more like China Mobile is being slapped down by the State Council for growing too big too fast and being overly aggressive and dominant in the growing Chinese mobile market, which is now the single largest national mobile market in the world.

For this transgression, China Mobile is:

  • Saddled with China’s own 3G mobile standard, TD-SCDMA, which by China Mobile’s own admission is behind the competing western-developed standards;
  • Facing new marketing rulings which stand to help China Mobile’s competitors, especially the newly resurgent China Telecom;
  • Even considering partnering with Apple to distribute the iPhone in China. The only way this would make sense for both parties is if Apple agrees to build China iPhone3Gs with the TD-SCDMA chipset, since TD-SCDMA is not currently supported by the iPhone3G.

The greatest beneficiary of the great China Mobile slapdown is China Telecom, which has shrewdly positioned itself as an underdog to the China Mobile bully. With its recent rulings, the State Council is cheering on the underdog.

China Telecom, for a long time, was the odd man out, until the May telecom ruling allowed it to introduce 3G mobile services in direct competition with China Mobile and China Unicom.

Obviously, the Chinese government feels that there is a lot of room for pruning back on China Mobile’s dominant position in the mobile market.

Apple’s App Store Shows Early Financial Success for Devs

August 3rd, 2008

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?

Apple and China: The American Media Ignorance Continues

July 26th, 2008

Over the past year, the tone of coverage of many China-related topics in the US has improved. For the most part, writers covering China have tried to look past the generally-accepted stereotypes, and have tried to get a deeper understanding of what is going on in China.

But occasionally something finds its way through the cracks.

This article is really exemplary; it seems like the writer has taken all the stereotypes about Apple and China, and thrown them all together in one basket. Judging from the tone of the article, and what he professes to be truth, it seems like he has never set foot in China. Otherwise, how could be believe some of the things he writes?

Let’s take a look at some of the choice statements:

Apple has less than 8 percent market share in China for media players, and far less than 1 percent of either PC or cell phone market share.

Yes, so? I wonder if the writer has walked into any cafe in Shanghai, Beijing and Shenzhen, and looked around? Or has he taken any of the subways in any of those three cities and looked around for the signature white earbuds? The question should not be the percentage market share. It should be the trend, and whether it is tracking up or down.

Apple’s second biggest hit in China, the iPhone, isn’t authorized. One Chinese analyst estimates that some 1 million Apple iPhones are currently operating on just one Chinese carrier — China Mobile — with a smaller number on other carriers. Most Apple “Authorized Resellers” in China sell black-market iPhones, and many even offer illegal cracking services — a process that reportedly takes less time than activating an iPhone 3G in California.

Apple makes money off of every iPhone sold, whether it is through authorized or unauthorized channels. Sure, Apple would like to have a carrier agreement in China, but having a group of fans, even though it is relatively small percentage-wise, which is very enthusiastic about Apple products, is a good thing. Besides, there are a lot of people in China who pay even more for more expensive feature-packed mobile phones in China. In fact, the iPhone is not the most expensive phone in the market. Ask Nokia.

Apple succeeds because customers love the products and the brand. But in China, brands mean little to most potential customers, and hardware even less. Chinese consumers prize value above all.

This quote is a true gem and qualifies as one of the most ignorant sweeping statements about China for 2008, even though we are only halfway through the year. Obviously the writer has not been to China and walked in the downtown of any major city. Here is an article about the runup to the recent opening of the Sanlitun store in Beijing and another story about Chinese youth camping out in front of the Beijing Apple store, where they were behaving just like American Apple fans.
I guess that’s why there are no Mercedes Benzes, BMWs, and Chinese women don’t care about the labels they wear? Maybe he thinks that they still wear Mao suits?

The rest of the world’s love of the Apple brand has enabled Apple to get favorable terms with carriers around the world. But this hasn’t helped much in China. Apple initially demanded a big two-digit percentage of carriers’ wireless revenue as a condition for granting its coveted exclusivity deal, according to reports (one company says Apple demanded 30%). The Chinese carriers were apparently unimpressed by the value of Apple’s brand compared with the value to Apple of access to Chinese consumers. They appear to have forced Apple to drop its demand for any share of wireless revenues.

The reason Apple has not been able to get an agreement with China Mobile is because they are both big companies with very big egos who want to control everything. I would say that Apple and the carriers have trouble reaching an agreement because they are so much alike, and don’t believe in compromise.

One-party rule in China actually affects product quality. One example is that Apple will probably be required to disable the iPhone’s Wi-Fi feature in order to comply with the Communist Party’s strict Internet control and censorship rules.

The relationship between one-party rule and product quality is an arguable point. But if it is that simple, then why are ALL of Apple’s products made in China? As for the disabling of Wi-Fi on phones sold in China, that is a China Mobile requirement, not a State Council requirement. (If you think that the rulers of China don’t have better things to worry about than whether mobile phones in China have Wi-Fi functionality, you don’t know anything about the country and how it’s ruled.) Besides, with the recent re-arrangement of the Chinese telcos, it’s not as if China Mobile is able to control Wi-Fi as much as it would like.

China is number one in intellectual property theft

Apple’s whole business model is based on creating value through exquisite design, superior branding and the sale of creative intellectual property (IP) — then defending its rights against the IP thieves, pirates and counterfeiters.

How will this formula succeed if China doesn’t enforce intellectual property laws?

The music piracy rate in China is between 90 and 99 percent, depending on whom you ask. China is the global epicenter of intellectual property theft in general, and of Apple IP theft in particular — especially iPhones and iPods.

Fake iPhones, and phones that steal Apple branding; illegal iPhone unlocking services; trade in illegal movie and music files; all appear to be tolerated and even government-protected activities in China.

Oh yes, how can we talk about China without IP violations? Seriously though, this is an issue. The best way to fight IP though, is for a country to get more prosperous. As people become wealthier, they are more willing to spend money on software, music, etc. In China, it is also very important to explain the importance of IP to various government ministries, and even be flexible about how much you charge Chinese consumers. Many Chinese think that they should not have to pay as much for music as US consumers because they have a lower income and standard of living. Does that fit into any American companies’ equations? Up until four years ago, Microsoft had a very high level of illegally installed Windows licenses in China, and constantly lobbied with the US Congress to “punish” China. When Microsoft China changed tactics and chose to engage Chinese ministries, educate them, and lower the license fees (as China’s standard of living increased), first the ministries, then the schools, then the people started buying original software from Microsoft. Now Microsoft gets more revenue from China, and the relationship with the government is much less confrontational. Piracy of Microsoft software still exists, but again it’s about the trend, which is improving.

Steve Jobs is an exemplary business and marketing genius. But when it comes to learning about other markets, he is lazy. He would like nothing better than to set prices for all media products sold through iTunes himself, and he would like it to be the same all over the world. China is a major kink in his vision.

How many times has Bill Gates been to China? How many times has Steve Jobs been to China?

I rest my case.