The China Vortex

One of my biggest complaints about western observers of China is the overly used term “China market”. In fact, there is no China market, just as there is no European market. While there is a European Union, which many Europeans complain about as some kind of bloated legislative bureaucratic monster, it would be silly for any marketer to think that there is anything like a European market on the ground. After all, what are you talking about? Are you talking about the UK, Germany, Belgium, Spain or Italy? Even within these national markets, there are vast social and cultural differences within the same country.

While China is ruled as a single nation from Beijing, the political, regional, social and cultural differences within China are just as big as in Europe. While many western observers see Beijing as authoritarian, the truth is that Beijing has to play a huge juggling act among its own provinces. Every time the center asks for something from the provinces, it has to offer the provinces something in return. In this respect, China is just like the US, Russia and other big countries. There is endless bargaining, trading and swapping of favors, most of which does not occur publicly and is not common knowledge.

These local differences even extend to Internet businesses. The two biggest and most successful companies which dominate in CPC advertising and micropayments are both based in Shenzhen, and are not in Beijing and Shanghai. They are Tencent and Xunlei. Tencent is the leader in charging for micropayment-based subscription services and is the leader with its popular instant messaging client, QQ. Tencent is publicly listed in Hong Kong, and analysts love the company’s business model. Xunlei is a leader in P2P distribution of video, and inserts ads into video content before sending them on their way through its network. Although it is still private, it is already profitable, and Google has invested in the company.

If you go to Beijing, the media landscape is dominated by Sina, Sohu and Netease, China’s leading portals. I think of these companies as being like Web 1.0 national newspapers; they are like the Wall Street Journal and New York Times in China for the Internet generation. Because media content is a politically sensitive area in China, they need to be close to the government, which is why they are in Beijing.

And Shanghai is where most of the gaming companies are. While Beijing is home to serious media and sports, Shanghai is much more entertainment oriented. In the twenties and thirties, Shanghai was the home for China’s film industry; and the talent for entertainment had strong roots in Shanghai. After 1949, many of the producers, directors and actors moved to Hong Kong, but with China’s opening up, many have returned to their old base in Shanghai.

Think about it. Why is it the case that two of the leading micropayments companies in China are based in Shenzhen? I believe that being in Shenzhen forced these two companies to be much more consumer-oriented since fewer VCs ventured there. The paucity of easy access to capital forced them to be creative. In their early days, they were able to get favorable rents, cheaper employees and lower their other costs because of favorable terms from the Shenzhen municipal government. Micropayments really started in desperation as a payment system for poor people who had no credit in a nation without a national credit-ranking system who did not have credit cards. Without money from VCs, these companies were forced to innovate, and had to come up with a solution which got money from consumers.

Getting paid by your users; what a neat idea!

In China, many smart entrepreneurs go to second- and even third-tier cities so that they can get a local municipal government to support them. This is called finding a 靠山 or literally “a mountain to lean on”. After all, every city official wants to be able to say someday: “I helped set up Tencent (or Xunlei, or whatever.)” That would look good on their resume.

I’m always mystified that western-funded companies like to set up in Beijing and Shanghai; why don’t they strike out into other Chinese cities? Most of the time, I think it’s because their management are able to enjoy a level of living which is closer to what they would enjoy in the west. The problem is that because they are more like western cities than most Chinese cities, they give a skewed and sanitized view of what China is really like.

As a result, they unwittingly hand over the advantage to smart local Chinese companies. With the huge number of Internet companies in those two cities of Shanghai and Beijing, it’s almost impossible to find any Chinese government officials who can serve the role of mountains to lean on. And when you can find them, the cost of the mountains are much higher.

Victor Koo, CEO of Youku, recently wrote an article, Internet Measurement in China: How to Get Out of the Dark Ages, where he highlighted the major challenge for Internet companies in China: the lack of reliable metrics for performance measurement.

In the article he talks about how even some VCs in China still rely on Alexa for very basic measurement stats, when in fact, Alexa is not considered reliable.

Many American service providers do not measure audiences from Internet cafes, which as I have pointed out, are a major source of traffic from China. Since American software companies are not familiar with the audience profiles of what is now the largest national audience in the world, they do not break out Internet cafes into a separate category, which underlines how American software providers are out of touch with this very important market. (This Internet cafe trend may change as broadband becomes more available in households, but it definitely should be counted as a major separate category in any report which claims to cover the Chinese market.)

The situation is not helped by government-supported “big picture” reports by CNNIC which give too broad numbers on a national basis and support a government agenda, but do not provide any business insights. They are great grist for press releases and the politically-charged Chinese and western media, but that is about the only value they have.

What Victor Koo does not mention is that the lack of reliable independent statistics has a very real debilitating effect on the healthy growth of the Internet as a sector in China, and the revenue outlook for Internet startups. This is because independent metrics, statistics, standards and definitions are requirements for the global media business. In order for media buyers to make good media buys for their advertising clients, they need standard definitions and metrics on the quantitative side so that they can make better overall qualitative recommendations and decisions.

It’s a testament to the robustness and attraction of China’s economy that the Internet has been able to grow as fast and as far as it has without these independent numbers and stats, but it is also a tragedy that many dollars have not made it to China because of the comparative opacity of the market.

If this systemic bottleneck problem can be addressed, the volume of ad money which would go to Chinese online publishers would go up dramatically.

Several days ago, Sam Flemming of CIC, a Shanghai-based online reputation management company pointed me to a news article on Business Week called “Inside The War Against China’s Blogs”.

The article specifically highlighted a company called Daqi.com (in Chinese the name means “Big Flag” which has a certain nationalistic appeal), and cited a case in which it helped Toyota satisfy a customer who had not received his car after three months. According to the company’s CEO, her company, an Internet online reputation management company, helps its customers, mostly western multinationals, to monitor their online reputations and help put out fires with users in China.

Out of curiosity, I then entered Daqi.com into my browser address bar so that I could visit the site and learn more about the company and what they do.

What I found, and what I did not find, were very interesting.

First of all, I thought I was going to find an online reputation management company, or public relations company, or whatever buzzwords they are using now to lure in corporate business.

But I found nothing of the kind. Instead, I was confronted with what I would call a typical Chinese portal website, complete with channels for “Homepage”, “Society”, “Military”, “Strange and Curious”, “Autos”, “Digital”, “Women’s Makeup”, “Pictures”, and “Reputations” (in beta).

(I have uploaded the screenshots of the pages mentioned below to Picasa and you can access them here.)

Aha, I thought to myself, I’ll click on “Reputations” and see what I find. When I went there, I found that it was full of forums divided into the categories “Cars”, “Cameras”, “Notebooks”, “Digital Cameras”, “MP3″, and “MP4″. The page is very long, and like most Chinese pages, scrolls on quite a distance with recommended products in each product category. This page, like the rest of the website, was designed very much to lure Chinese visitors. To visit the page, you can go to http://exp.daqi.com/

My next question was whether they took advertising? The only banner advertising I saw was for Dell, which ran on the two pages I visited. But it would be foolish to think that their only revenue came from banner advertising. Looking at how the page was designed, and the way some of the products were given larger photos and highlighted, it was easy to see that some makers were paying for higher rankings for higher visibility.

But nowhere did I see anything about their online reputation management services. So I thought to myself, “Surely the person who wrote the Business Week story, Dexter Roberts, could point to a website where Daqi offered their online reputation management services, in either Chinese or English.”

I could find nothing of the kind.

Daqi claims that it regularly searches 500,000 forums daily for its corporate clients. I’m sure that it works on many sites which are not related to Daqi. However, it also raises the very uncomfortable possibility that it may actually manipulate online reputations by starting flame wars over product reputation, then charging their corporate clients money to put them out. (I’m not claiming that Daqi does, but the very fact that they run their own portal under their own company name and URI means that they have very little respect for their non-Chinese corporate clients and western journalists’ capability to conduct online research in Chinese.)

The clash of interests which arises from revenue from makers for higher rankings on their own portal site, and then revenue from non-Chinese corporate clients for “research insights” and “firefighting services” into Chinese online behavior is obvious to anyone. The temptation to use their own forums to “seed” opinions must be very great. These seeded opinions would then quickly proliferate to other sites.

There is a simple way to find out, and that is to check timestamps of postings. All forum software includes a posting timestamp, and it’s easy to check the timestamps on a subject to push it back in time to where and when a rumor started. What is harder to find out is the identity of the poster, but this can sometimes be done by checking the IP address of the poster if IP cloaking is not used. Different online identities sharing the same IP would most likely be the same poster.

I wonder how many corporate clients do this kind of checking?

I find the whole practice of hiring Chinese and paying them to post favorable comments on a per posting basis to be an unethical PR practice. According to the BW article, this is a common practice. A Beijing-based PR professional, William Moss, talks about this in more detail.

Online public relations firms will have to draw up and aggressively publicize clear guidelines on what they do, and what they don’t do when it comes to monitoring online behavior in China. Playing multiple roles as player and referee doesn’t make it in my book. I have talked about some of the skills needed in a previous posting.

This is part of the problem which actually slows down Internet growth in China. In spite of it all, there are healthy groups for product discussions.

Of course, each corporate client will have to make its own call as to what it is most comfortable with. And so will their VC backers. (I wonder if they read Chinese?)

But if someone does do an article on a Chinese company, at the very least, the URI mentioned should include, in either Chinese or English, the business they are in which is mentioned in the article.

Nobody likes bait and switch tactics, and I’m no exception.

Is that too much to ask for?