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

Last night (Sept. 3) I attended the Mobile Users Panel held by Mobile Monday in Beijing. This event was held at the Radisson Hotel. This event was the evening part of the Wireless Developer Forum sponsored by Sony Ericsson and Nokia.

I always like to listen to how users use new technology products and services. There are a lot of very smart technology and business people who, at the beginning of a project, have all kinds of ideas of what they are going to build into the next killer app. Then, when they test the product on a focus group, they are always humbled by the experience. I call this phenomena “the revenge of the user”.

Mobile Monday assembled a four-person panel: one 25 year-old research student (technology) from Chongqing and who had lived in Beijing for the past seven years; one 18-year old high-school student who called himself Rico, and appeared anxious to test his fairly good English on the audience; one 25 year-old female math teacher in high school and one 30+ tech startup guy. Because the 25 year-old researcher and the startup founder knew more about technology, I tended to discount their views, and was much more interested in how the 18 year-old high school student (Rico) and the 25 year-old female math teacher used their mobile phones.

Benjamin Joffe, CEO and founder of Plus8star, presented the questions, and a female co-host did the English-Chinese translation work.

The 25 year-old researcher spent about 150 yuan on service charges per month, and was a subscriber to China Mobile’s M-Zone service package, which is targeted at youth. He made about 10 calls daily, and received 20-30 SMS messages daily.

Rico also subscribed to the M-Zone package, which offered 800 SMS messages monthly. He would send about 40 SMS messages daily, which would suggest that even 800 SMS messages a month is not enough for him. He used a Samsung phone; previously he had used Nokia phones. Although he was only 18, this was already his 10th phone, which seemed to cause a gasp in the audience, and Benjamin Joffe did a double-take when he heard this.

The 25 year-old female teacher also used the China Mobile M-Zone service, but also used PHS service at home because of the low monthly charges. Her use was much lighter than Rico.

When it came to services used, Rico said that he had once used China Unicom, but the monthly charges had gone up to 300 yuan a month, and he had cancelled. The rate he seemed most comfortable was in the region of 150 yuan monthly.

Aside from the 25 year-old researcher, all had more than one phone and one SIM card.

Benjamin Joffe asked all of them if they knew about 3G. Rico said that he didn’t know the details, but that he thought that it meant there would be higher quality services at lower prices. All said that they occasionally played casual mobile games and never expected to pay for them. This would suggest that entertainment on the mobile platform is headed for an advertising model.

It became most interesting when Benjamin asked what single feature they would like their next phones to have. The answer from both the female teacher and Rico were maps. Rico suggested that he would also like GPS so that he could find his way around. The female teacher recounted how she got lost meeting her class one day on a day trip, and how helpful it would have been to her to have a mapping service; she said that it would have prevented her from being some 10 minutes late to meet her class.

Maps and mapping are still sensitive government-regulated issues in China, and it will be interesting to see how the different regulatory ministries will reach consensus on how to offer these services.

My conclusions are:

• It will be very difficult to monetize mobile content in the next 2-3 years because of government regulatory hurdles and a generally challenging environment.
• While China is a very big market in the mobile and Internet space, users are still very price-sensitive. Most teenage urban users would cap their monthly subscriptions at 150 yuan, and 300 yuan would be a ceiling for most salaried people. (Rico was spending his parent’s money; and I assumed that working people would be willing to spend up to 300 yuan of their own income on monthly mobile services.)
• Just because someone likes a service a lot does not mean that they are willing to pay for it, so please remove those rose-tinted glasses and stop fantasizing about the “China market” is my advice to those entering the Chinese market.
• Mapping and GPS on mobile phones are the killer app, but are currently regulated by different Chinese government ministries. Currently, there are still no standard published APIs for accessing an online mapping service. A lot of horse trading will happen before everything gets sorted out on the government level. When that is done, advertisers will have to figure out how to monetize maps and GPS services, which involves yet another round of horse trading.
• The times when telcos and their partners were fantasizing about people spending kajillions of dollars, yuan and yen on mobile services will be hit hard by the expanding credit crisis. I expect users worldwide to put fairly solid ceilings on their discretionary spending, at least in the US. In China, the government may further slow down credit expansion since they have already seen what fast credit expansion has done in the markets of Japan, South Korea and Taiwan, where there are swathes of the local populations which have become victims of their monthly credit card payments.
• The ultimate measure of how much users spend on mobile services is ARPU (average revenue per user). While China is much larger than Japan in population and market size, the amount of revenue generated by the telcos in the two countries are about the same. It’s going to be a long long time before the average Chinese user spends nearly the same amount on mobile services as the current Japanese user does.

Technorati Tags: averagerevenueperuser, China, chinamobile, japan, mapping, maps, mobilemonday, mobilemondaybeijing, mobilephone, plus8star, sms