The China Vortex

Alibaba has announced plans to consolidate two of its subsidiaries into one company. Alimama is the company’s ad network for Chinese SMBs, and Taobao is the company’s auction platform, which is best known for dramatically driving eBay China out of the China market after eBay bought Eachnet.

This is likely a measure to counter Baidu’s plans to enter the e-commerce market. According to this report from Keso, Taobao has blocked Baidu’s spiders from crawling Alibaba. Spiders from other search engines are not blocked. It is very unusual to hear of one search engine’s spiders being singled out for blocking; I have never heard of this until now.

Can you say hardball?

Spiders are software programs used by search engines to crawl other websites; they detect changes in websites and report changes back to the mothership search engine which are used to update the search engine’s search index.

According to Keso’s report, Jack Ma of Alibaba believes that Alibaba’s SMB e-commerce platform represent the family jewels, and he already has enough users to allow him to make such a dramatic parting of way’s with Baidu. Baidu is currently China’s largest search engine player, with more than 60% market share.

For Baidu, losing the capability to crawl Alibaba’s sites represents a huge loss, and puts more pressure on their nascent e-commerce platform to succeed. Otherwise Baidu’s e-commerce search results will look very weak, just as e-commerce is showing signs of takeoff.

Now, Google China is the wild card which might benefit from the Alibaba/Baidu faceoff. Significantly, Google China’s spiders are not blocked from crawling Alibaba’s sites. Jack Ma has three options:

• Build his own search engine team which would build its own search engine to crawl Alibaba sites;
• Make Google.cn the default search engine for Alibaba and its subsidiary companys;
• Go to Google China and propose a joint venture company which would have a separate search engine to crawl Alibaba sites. Search advertising revenue would be split between the two companies.

From a technology perspective, search engines are more challenging to build. Specifically, they need to continuously update their search index, although if the search engine is only pointed at the Alibaba community, it would not be as difficult. Search engines need to be continuously updated and modified to get accurate search results, although optimization on organic and paid search are very different in how they are updated and modified.

From the SMB users’ perspective, the key to success is providing a smooth and transparent transition between search advertising and online business transactions. Bad user experience has led to the downfall of many a business, most recently eBay in the US, which has continuously raised fees on its auction platform, driving away its originally fanatical loyal user base, and forcing it into a retail model which competes on unfavorable terms with Amazon, the online retail ecommerce leader in the US.

Things are getting interesting…

Last night I had dinner with five individuals in Beijing. Except for me, all of them had real hands-on experience in the gaming industry in China. (My experience in gaming is limited to the business side; not programming and production.) All of them were Americans, or had extensive experience in the US.

Long story short: China has become a boomtown for gaming companies doing development. There are several reasons for this:

• A large Chinese gaming population
• Smart programmers and artists
• A large cheap labor pool which is eager to work, and more importantly, learn

Significantly, most of the group had started, or were starting, their own companies in China. The president of one company, Gage Galinger, had been working in stealth mode for three years, quietly hiring and developing its own title for his company, Possibility Space.

Most of them were former Microsoft employees.

Gage was from Texas, and had come to Beijing to start his own game development studio. He is not Chinese, or Chinese-American, but Caucasian. I always admire someone who is not of Chinese extraction, and is willing just to jump on a plane to Beijing or Shanghai, learn, and start a company. More than anything else, that is what starting a business is all about in this age of globalization. This is the mark of a true entrepreneur.

After arriving in Beijing, he started hiring for his own studio where he is lead programmer and president.

I’m sure many of my readers may be wondering how someone who does not know Chinese could possibly function in an environment where many people do not speak a common language. How could he add value?

This is where his background at Microsoft came in handy, and the American style of collaboration for game development really shines. In Chinese gaming companies, the artists and programmers are just worker bees, performing repetitive tasks. They are not asked, and do not offer their opinions about the games they are developing; they are told what to do, and just do it. In his company, employees are required to show their day’s work to everyone else in the company, and others are encouraged to critique the work. Of course, most Chinese are reluctant to say bad things about other peoples’ work, afraid that it will hurt their colleagues’ feelings. For Americans, it is more natural to critique other peoples’ work because Americans are able to separate the work from the person.

Most of the time anyway.

Gage said that the path was not entirely smooth; he had to fire people who did not fit. But all in all, he was encouraged by the experience, and he had a very clear idea about how he added value to his company. He was very optimistic about his experience, and said that for him, living in China was about realizing the American dream of having his own company and making his own title, and launching it worldwide.

The economics of the gaming industry in the US is broken; developments costs are high, and game developers are always in debt and losing their IP to investors. But development costs in China are low, and Gage claims that his developers in China are better than any team he has worked with in the US by an exponential factor, or anywhere else.

He said that he has tried to get other game developers to come to China to partner with him, but while they have expressed interest, none have made the move. He has just opened an office in Austin, Texas.

If America had more entrepreneurs like Gage, who don’t overthink, overplan, have a solid core skill, and just get on a plane to China and start their company, and are humble and willing to learn, the US would be in a much better place.

America used to be a much more entrepreneurial country, now it is overly regulated, overly expensive, overly specialized, overly structured and overly corporate. In order to be competitive again, the entire society and culture will have to make major adjustments. The road will not be a smooth one.

That is why the smart entrepreneurs, like Gage, start their businesses in China.

In this new globalized world, China has become what America used to be.