The China Vortex

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?

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.

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…

In 72 hours, more than 600,000 persons in China, and 6-7M persons worldwide, are going to turn to that little something dearest to them and say those dreaded words, “Honey, you’re looking old”.

I’m not talking about their spouse, I’m talking about something they normally spend far more time with: their iPhones. Within 72 hours in San Francisco, Steve Jobs will take center stage at the Apple Worldwide Developers Conference (WWDC) to announce the second generation of the iPhone, which many refer to as the JesusPhone. We already know that the new phone will include 3G and GPS features.

Hmmmm…. Does that mean we can call the second generation of the iPhone the Second Coming of the JesusPhone?

For China, the big question is whether the new revs of the iPhone will include the Chinese government backed and developed TD-SCDMA technology, which is the local version of the 3G standard, and has now been handed over to China Mobile for care.

China Unicom and China Telecom will support competing 3G standards which are not China developed and are most likely already supported in the current chipset for the 3G iPhone.

The thing to watch for will be whether Apple starts ordering TD-SCDMA chipsets. In the meantime, dedicated users of the Apple iPhone in China will most likely switch their mobile phone accounts to China Unicom and China Telecom if they want to take advantage of China’s not-yet-launched 3G services. The thing that they should remember is that China Mobile holds the vast majority of mobile phone accounts, with China Unicom coming in a distant second and China Telecom just recently starting to offer mobile services. And 3G services have not yet launched in China, though everyone is expecting that to happen within the next six months.

In the meantime, you might not want to tell your spouse yet that she is looking old.

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.

It has been some time since I last posted an article, so I thought I better give you a pretty good excuse.

Long story short: I have said goodbye to my old Windows (Averatec) laptop, and have bought and am using a brand new MacBook Pro 2.4G 2/250 15″ laptop running OS X (Leopard), which I bought directly from Apple. After buying the laptop, I swapped out the 2G RAM for 4G, so now I have one sweet top of the line Mac. Right now, I’m basking in the moment since I’m sure that Steve Jobs will introduce something more cool at Macworld 2008.

Oh well, that’s the Apple tax…

My first computer, bought in 1989, was a Macintosh SE 4/40, which had its operating system on a floppy disk. From 1989 to 1997, I used Macs, and owned about eight Macs. In 1997, when I moved from Taiwan to the US, I moved to the Windows platform because the Office suite on the Macintosh was not compatible with the Windows version. At the time, Steve Jobs had just returned to Apple as CEO (for several years he preferred using the term interim CEO, or iCEO, because the company was in such bad shape.)

For a long time, I was a satisfied user of Windows. Unlike many Mac users, I don’t think that Microsoft is evil, and overall, I believe that the company has tried to develop and launch decent products which bring value to their customers. But I think that there are problems.

First of all, Microsoft has too many product lines and business units. The end result: there are too many mini-business kingdoms fighting for their piece of the pie. Apple does not have this problem; it is run by only two people, Steve Jobs and Jonathan Ive. By any definition, they are very smart, even brilliant. Ultimately, they make the call about every product and service Apple ships. This means that there are no mini-business kingdoms at Apple.

Unlike Microsoft, Apple is run by designers. Engineers are interested in technology and features; designers are interested in how to make technology usable. For designers, user experience is everything. Jobs and Ive are designers, not engineers. Most people are excited by design and usability, not by technology and features. Since Apple controls the hardware and software, Jobs and Ive are in a unique position to control and shape user experience in a way no other company, not even Microsoft, can. This is why the iPhone has been a runaway success, not just in the US where it was first launched, but all over the world. When it comes to the space where technology and design meet, Apple is in a league all its own, and the market is now rewarding it.

But Jobs doesn’t just understand design, he also understands marketing, which is all about managing peoples’ expectations and perceptions. Even though he is widely respected, he never hogs the spotlight; by saying less, he puts Apple’s products and services in the spotlight where Mac aficionados can work themselves into an excited frenzy and become evangelists for the company. By saying and doing less, Steve Jobs does more for the company.

Enough big picture stuff; let’s talk about the experience. Long story short: I love it. The OS feels mature, and it does everything I want it to do, and fast. I tend to be a fast thinker with bad short-term memory; when I want something I want it to happen right away. There is a Chinese saying xinxiang shicheng which means “to get something as soon as you can think of it”. That was always the ideal when talking about computing for me; why couldn’t the computer do what I wanted it to do NOW? For the first time, I feel that I’m close to that goal.

While Windows has been generally satisfactory, I have never been satisfied with Windows registry. While a new Windows computer was snappy, it would quickly decay into molasses mode when the registry got all gooked up. During the ten years I have been using Windows, I have used several different versions of Windows (Windows 95, Windows 98, Windows 98 Second Edition, Windows 2000, and Windows XP). And this does not include the software patches for all the different versions. From a business and customer point of view, it makes no sense that Microsoft could not take care of the registry problem over the past ten years. During the same ten years, Apple has been able to shift to an all-new Unix-based operating system which is rock-solid and continues to improve in performance.

At the same time, with Windows I still have to put up with some DOS commands and foibles such as the backward slash for directory navigation, instead of the forward slash used by Unix, and Windows failure to differentiate between upper- and lower-case in naming conventions. (I have a real problem with the backward slash “\” even though Bill Gates invented it himself.) If I’m spending most of my time on the Internet, why not just deal with Unix on the computer’s OS, which is the native language of the Internet?

Microsoft should be more like Apple and just explain to their customers why they are phasing out a lot of the obsolescent stuff including DOS commands and navigation, and should bring Windows naming conventions in line with Unix.

I bought and installed a copy of Windows XP so that I could run my favorite Windows application, MindManager Pro 7. Since Mindjet also makes a Mac version, I have downloaded the trial version and have been using that. Result: I haven’t been running Windows XP at all.

I can see that I’ll be doing some prototyping and maybe even development on this computer. For this reason, I’m keeping the configuration relatively simple and clean. Web servers use port 80; since Skype uses port 80 too, I’m keeping it off this machine. I’m thinking of getting a new ASUS Eee PC to cover that.

But then, maybe not. I have also bought an iPod Touch and a Nokia e61i.

They should keep me busy for a while…

When an ailing computer company which has lost a lot of its shine teams up with one of the leading ad agency groups, WPP, to form a new marketing agency called DaVinci to spend $4.5B in marketing money, I am, naturally, more than a little skeptical.

Consolidating adspend under one roof makes sense sometimes; it made sense for IBM in the nineties when it chose my former employer, Ogilvy, also a part of WPP, to handle all its accounts. IBM was able to consolidate its image, and Lou Gerstner, then IBM’s CEO was able to make a dramatic turnaround and a nice exit for himself.

More than 10 years later though, the challenge for Dell is more complex. Dell is a company which has surpassed at squeezing costs out of the system, making cheap computers for the office masses. The problem now for Dell is that it is getting challenged on this front by Lenovo, the Chinese computer manufacturing giant and Acer, the Taiwan company which has made a dramatic comeback after a near-death experience. And then there is the US giant, HP, which is doing some very interesting stuff.

When it comes to buzz, Apple sets the bar. After switching to Intel architecture, then using the iPod as a platform to generate buzz for the iPhone globally, Apple is on a roll. Dell has been left in the dust. Add to that recent customer complaints about quality, and Dell is not in a good situation.

So can DaVinci turn things around for Dell?

My initial reaction is that it doesn’t go far enough; it is made up of Dell and WPP people, and can serve as a buffer to any agency conflicts. But the problems which afflict Dell run much deeper than just quality problems.

They are management and perception problems.

One of the big problems marketing people run into is how to turn a product which is a stinker into something which people want to buy. The Internet has made the challenge even greater, because anyone who has the time, motivation and interest can find anything about a product.

It doesn’t matter how you spin a turd, when it stops spinning, it’s still a turd.

The problem is that once a company starts thinking that it’s all about an agency, or it’s all about the creative, the ground is set to place the marketing people and agency as the fall guys, when actually the problem is with bad management decisions. Then as the management panics because of falling share price, bad buzz, and everything else, their decisions get increasingly short-sighted and the options get worse and worse. When the management starts thinking in these terms, the company is basically in a death spiral; it’s all ends when it hits the ground and bursts into flames.

The problem with Dell is that they are very good at cutting costs, but they have not shown customers how they can ADD value. So naturally, Dell attracts the customers which are at the bottom of the value chain. Dell’s management has effectively commoditized their own product line. This is never a wise thing to do. If your own products have effectively become commodities, how do you position them against anything else?

The answer is you can’t.

Cutting internal manufacturing and component costs is something every computer maker should do internally, but you never want to make it the message you tell your customers and IT departments.

For the past several months, I have been debating what I should get for my next computer. It has been a match between the Santa Rosa Macbook Pro and the HP 2710p. The 2710p is a Tablet PC and has received some excellent reviews. It was the only PC I have been seriously considering.

Why? Because I have never owned a Tablet PC, and it looked like it had reached the right balance of functionality and design. Other HP lines, Dell and the other PC makers never entered the equation.

HP obviously likes the 2710p a lot, they have made it the centerpiece of a TV ad campaign in Asia.

That is why I say that the integration of Dell and WPP do not go deep enough. Instead of trying to flog a lot of commodity products which the market has tired of, instead they should think of how to come up with new products and a product line which actually make a person excited. We’re not talking about marketing anymore; we’re talking design marketing, the kind of stuff Apple excels at.

They should start with one product, then take it to a product line, then expand it, then kill all the boring stuff. Just like Apple did with the iPod, which expanded into the iPhone line.

Of course, in order to do all that, you need to be a dictator like Steve Jobs. The question is whether Michael Dell can be that kind of dictator, even if his own name is on the line.

Nothing succeeds like success.

Following on the successful launch of the iPhone, and surpassing HP in market cap, Apple is getting ready to announce new product/s on August 7.

Even in China, where the iPhone is not yet officially available, there has been a lot of enthusiasm for the Apple iPhone, and the halo is spreading to other Apple products too, starting with the iPod, and spreading to other computer products. However, if you visit Apple’s China website, there is no mention of the iPhone.

Apple should take a leaf from Hollywood, which over the past few years has shifted to a model of launching new movies in all major markets on the same day. This saves marketing costs and maximizes media and user buzz, which travels over the Internet and text networks at very fast speeds.

To Apple:

“Get your product marketing act together and your new product launches together guys! The US market is not the only market in the world. If you don’t, you are leaving money on the table! People in China and in other countries want new Apple products, and they want them NOW.”