The China Vortex

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.

In a final closeout post on his blog, MSFTExtremeMakeover takes a hard look at MSFT’s performance over the past eight years.

The picture which emerges is not pretty, but it’s true.

Just as with a master go player, whose moves seemingly look random in the beginning, Apple’s moves in the mobile and desktop space are beginning to come together.

While the iPhone3G was expected, the real aggressive play came with MobileMe, Apple’s completely revamped version of it’s .Mac subscription service.

With Apple’s announcement of the new iPhone3G and MobileMe web-based push-sync solution, Apple further closed the loop on the competition with a complete soup-to-nuts offering for consumers, and now has a strong entry into the corporate market. By licensing Microsoft Exchange to Apple, the Redmond giant gave Apple an entry path into corporations for the iPhone3G at the expense of Blackberry, and the future of its own Windows Mobile platform.

How will future versions of Windows Mobile differentiate themselves in the corporate marketplace, traditionally Microsoft’s stronghold?

Alvin Foo has excellent coverage of the iPhone3G on his blog, and now also provides a robust development environment for mobile developers.

The feature comparison chart above gives some feel for how things are shaping up for Apple, Microsoft, Blackberry, Nokia and Adobe. The immediate pressure is on Blackberry, then pressure will shift to Nokia which has a very wide product line, and is the largest seller of mobile handsets in the world.

Apple and Nokia have two different visions of the future: Apple wants to sync multiple devices including computers and mobile phones. Nokia needs to offer single computing platforms in multiple markets which provide excellent computing capabilities with voice capability as their only computer of choice, making it unnecessary to have multiple computers.

Can Nokia pull it off? Unfortunately Nokia is still too married to the voice phone capabilities of its phones, and has not been able to come up with a single data-centric vision of the future for the OS and applications.

Microsoft’s vision of the future is the same as Apple’s: multiple devices with push-sync across platforms. The trouble is that Microsoft cannot have solutions as elegant as Apple’s. The company is reliant on its strong corporate presence to continue to get revenue, but now Apple has a backdoor entry into that marketplace with its licensing of Microsoft Exchange for the iPhone3G. The next step is for developers to come up with iPhone versions of corporate apps for the iPhone. This will give IT departments an opportunity to evaluate the stability and security of OS X.

Microsoft’s matrix management and multiple business units and product lines make it difficult, if not impossible, to come up with single elegant solutions for both corporate and consumer markets. If Microsoft continues to launch operating systems like Vista on a much slower launch schedule than Apple, their position in the marketplace will continue to erode.

In order to pull off a plan as aggressive as Apple’s, you need a strong division management with limited product lines, reporting directly to The Man, Steve Jobs, who has the vision, and gets everybody in line to execute.

Apple’s loop continues to close…

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.

If you are interested in the kinds of social networking applications Chinese are now using today, David Feng offers some ground-level observations in this article. I’m a great fan of first hand research and observations and David offers some excellent observations.

Maybe it’s been a reaction to some of media coverage of everything which has been going on with the coverage of China and Tibet, but I have been diving into technology lately. Specifically, I have been digging deeper into Apple’s frameworks for development on the Macintosh and iPhone platforms.

Here are some of my observations:

– Everything’s an object, and everything’s object-oriented. Think of actors on a stage, and passing data to objects, which act on them. All the time.
– The MVC (model, view, controller) analogy is used throughout, which makes it natural for Macintosh developers to make the leap over to Ruby on Rails development and other non-Ruby frameworks such as Django;
– While Microsoft has worked on developing new languages such as ASP.net and C#, Apple has stuck with one: Objective-C, which has roots in NeXT and OpenStep. (For instance, all classes begin with NS. What does NS stand for? NextStep.)
– Apple’s efforts, in contrast with Microsoft’s, has been on developing frameworks;
– Think of the frameworks as sandboxes which Apple provides for you to play in, which you can gradually grow and develop with, and then later contribute to;
– Cocoa and Cocoa Touch are frameworks of classes, all based on Objective-C. You use these classes to instantiate your objects;
– Instead of thinking about writing code, you spend more time thinking what you want your objects to do, and objects messaging each other;
– Apple provides many sample applications and their code. You learn by making minor changes to the code and seeing what happens;
– There is a small and very dedicated community made of Apple developers. Very smart people.
– The documentation is REALLY good, and includes videos which you can download into iTunes, online documentation, and documentation in Xcode, the development tool. It is clear, sharp, concise and jargon-free.
– Every Macintosh ships with all the development tools you need, including Xcode, Interface Builder and Dashboard so that you can develop native apps or web apps right out of the box.

After some play with it, I’ve come to the conclusion that part of the reason there are relatively few developers working on the Objective-C/Macintosh/iPhone platform is because it completely rejects procedural programming as a development model. In fact, procedural programming would most likely be a handicap in shifting to the Macintosh programming model because it basically requires programmers to relearn a new programming model.

If you embrace object-oriented programming and agile development as a model though, it’s the best.

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.

For many westerners and western companies, it’s hard to figure out why some Chinese have gone to the US for their graduate degrees, worked at name technology companies such as Intel and Microsoft, then come back to China, their homeland, start their own businesses, and fall flat on their faces.

How is this possible? They had everything going for them; they had the best education the US had to offer, worked in a great company, were smart and entrepreneurial, know the language, have connections, and they failed.

More often than not, these people have been away from China for a long time. Over time, they have become used to the American way of life, and while they keep up with what is going on in China, their knowledge and understanding of the country has gone stale. Gradually, they are more at home in America than in China. They jump on the China bandwagon because it is in the media all the time, and they hope to strike it rich.

Then they return to China and discover a country which is not the China which they grew up in. Compared to when they left, the role of the government is much smaller, the country has become more market-oriented in most sectors, and they may have lost many of their former connections. Worst of all, they look at the country through American-tinted glasses and use American society as a point of reference, something which does not work in China at all.

For any business or individual to succeed in China, you must understand China on Chinese terms.

This failure to understand China on Chinese terms is, in my opinion, why so many western Internet companies have failed in China. Moreover, the constant need of local management to report to headquarters outside of China, and to report every purchase they make, and more often, to explain what they are doing, puts a fatal hindrance on the decision-making process because the management is constantly tied up in knots educating someone in headquarters about China.

This makes for another very important point: No successful company in China can be successfully run from outside China; the key decisions and decision-makers must live, breathe, work and sweat in China every single day to make it work.

The single most important bad decision western companies make in China is to force the local China management to consult with headquarters about every matter; this makes the local management look weak in the eyes of their own staff. After all, what is the point in staying with a company if they do not have the power to make decisions even if they are sitting in the corner office?

It all comes down to how empowered people are to make their own decisions, and to be held responsible and accountable for them.

It makes much more sense for them to break out and start their own company, often taking the idea the western company had, but was not able to implement in China because they were constrained by headquarters’ indecision. In the Internet sector, where change is happening so fast, it makes no sense to sue and countersue; that would only make the lawyers happy and not solve the basic issues.

This just scratches the surface of why being Chinese is no guarantee of success in today’s China. Put simply, the society has changed too much too fast, and unless outsiders live here and deal with local Chinese who have never been outside China and speak only Chinese on a daily basis, they will fail.

In business, success cannot be guaranteed, but failure can…

Mark Anderson of Strategic News Service has written an open letter to Steve Ballmer on Microsoft strategy which is posted at the new online version of The Industry Standard.

FYI, Mark Anderson is the owner of Strategic News Service, which publishes a newsletter aimed at technology executives. It’s full of insights and he pulls no punches.

If you read this blog, you should read SNS.

Information Arbitrage has an excellent article on how the different cultures at Microsoft and Yahoo! would have trouble coming together; he compares it to the difference between football players and baseball players.

This is one of those soft things which the number crunchers and bean counters usually miss, but invariably hits the outcome of a merger.

The quality and amount of discourse on the proposed takeover of Yahoo! by Microsoft has had my bullshit meter jumping off the charts, and I felt I just had to chime in.

Paul Kedrosky summed it up best when he said that it would benefit Google the most. Anyone with half a brain and who has worked in corporate management more than one week knows that the most painful thing to do in business is to grow by acquisition. Acquisitions are especially hard to do in a market which has matured relatively quickly in the US, such as search advertising. But analysts and senior management sometimes like to do acquisitions because it creates a lot of buzz. And in the lousy US market nowadays, any buzz which does not include the keyword “subprime” is welcome buzz.

Organic growth is the much better way, and in the long run, yields better results. A lot of early Google talent has been cashing in their chips and leaving the company; shouldn’t Microsoft focus on hiring some of those very smart people to beef up their search offerings? Wouldn’t that be a better way to catch up to Google’s search technology? Yes, and I’m sure that Microsoft is doing that right now, but it doesn’t capture the imagination of the old media folks the way Microsoft! would.

“Let’s toss a big fat red herring to the dumb masses!”

In spite of its management problems, Microsoft still has a formidable technology pool of talent. The fact that it cannot create an operating system as reliable as Apple’s Leopard even though it has more than three times the number of employees is more a testament to bad management of talent and resources than to anything else. It could even be argued that Ubuntu Linux has a friendlier and more stable operating system, and it has almost no revenue, and almost everyone working on it is a volunteer!

So why does Microsoft’s Steve Ballmer want to do this deal? I see it as hail-Mary desperation pass to show that he is “doing something”. If you are saying that it is useless and dumb, then you have a problem. You see, you have committed the unforgiveable sin of looking too closely and thinking too much.

Shame on you!

To add to the entertainment value of this show, Google has jumped in with claims that it is seeking to protect the “openness of the Internet from a closed company like Microsoft”. Now, I have had many images of the Internet, but I have never quite had the image of the Internet as this beautiful bride about to be horribly ravished by some mean thug in the northwest. As a matter of fact, I think that the Internet has been ravished many times before, continues to be ravished, and somehow manages to live with it and get along with life.

Now, if Google has suddenly discovered that Microsoft is closed, why should it limit itself to complaining about Microsoft? Why not go after nation-states which are not famous for openness, and frequently tinker with the “openness” of the Internet. If they have any trouble thinking of any, they are welcome to call me.

I could easily come up with more than 190 names.

So Google can now also score points with your senile old grandfather, the one who criticized Microsoft for being a monopoly way back in the 90s, but still makes sure to keep his copies of Microsoft Office current.

YEAH, GOOGLE STANDS FOR OPENNESS!

Now, to add to Uncle Steve’s general cluelessness, he comes out with this gem stating that Google has no products, it only has search. He may not have heard it, but there is a whole bunch of businesses which don’t have products; they’re called services.

Yes, Google doesn’t have any products; it only has services. But the services produce something called search advertising revenue by matching advertisers with content providers using keywords and taking a chunk of revenue in the process.

Do you think that Steve knows why he’s buying Yahoo?

Frightening thought, isn’t it?