The Future of the Internet in China

The Grand Ballroom
Renaissance Beijing Hotel
1642 hrs.

During the panel at Under the Digital Influence, one of Matt Roberts' questions to my panel was what we saw as the biggest factor that will change the Internet in China over the next five years.

My response was that while there are a lot of trends that are affecting China's Internet, the biggest one I can see is mobility and wireless.

Unwiring China

The last part first.

China is in the final stages of upgrading its Internet access from dial-up to broadband, but over the next five years we're going to see wireless access start to displace wireline access for a growing portion of the individual's online day. By "wireless," I mean a combination of access via cellular networks, access via the growing number of publicly accessible Wi-Fi (free or paid), and via the quietly emerging WiMax wide-area wireless broadband.

That shift is already beginning, but I see it accelerating over the next half-decade.

Handsets Across the Divide

I'm prepping a longer post about this, but my firm belief is that while talking about the digital divide is no longer a fashionable topic among the digirati, the problem is growing in China. While a decade ago all of China was on the unplugged side of the gap, today about 12% of China has managed to leap across, on the back of a massive expansion in China's broadband networks.

But as the networks grow, the problem of access has devolved to the problem of the terminal. The 160 million people we see online in China today is an impressive number, but the number of people with access to computers is not growing fast enough to ensure that the unplugged 88% of China will have a hope of getting online in the near future.

Crossing the digital divide - and avoiding the long-term social and political implications of excluding 8 out of 9 Chinese just because they can't afford to shell out a year's salary on the price of a computer - is not going to be a matter of super cheap computers like the One Laptop Per Child (OLPC) program, or about creating stripped down computers with stripped-down operating system. It's going to be all of that, but more is needed. Given the success of the mobile phone industry in driving the costs of handsets down into a few tens of dollars, the easiest footbridge across the divide is clearly going to be the mobile handset.

More on this later.

Comments

[Florian]

David, I believe you are missing two important points in your post
A) In order for the "Unwiring" of China to happen, China Mobile need make data access significantly more open and less expensive. Looking at the vast number of Chinese mobile users, analysts & observers of the Chinese market have argued for the last 5 years that the mobile is the Internet terminal in China, but it has not happened. Unless bandwidth becomes a commodity, I do see any significant push in this direction.
b)The last time we bought a PC here in Beijing it was RMB 2,000. This is a month's salary for a fresh university graduate, and about the same amount this university grad would spend on a mobile phone.

[David]

Florian, I’m sure I missed several important points in the post, one of the reasons I’m planning a follow-up with a more thorough post.

In the meantime, to your points:

Taking the last one first, there is no doubt that a fresh university graduate could afford a low-end RMB 2,000 PC like one could find at Bainaohui or up in Zhongguancun.

What you have to remember is that a university graduate in Beijing is fairly close to the top of China’s income pyramid. My concern is with the Chinese who make a few hundred RMB per month and for whom even an RMB 2,000 computer is an unlikely dream. At this point, that accounts for - conservatively - 40% of China’s population.

And please note - I have no doubt that cheap computers will bridge part of the Digital Divide in China. However, cheap PCs won’t do it alone - not for generations, or unless the computer business changes its dynamics. That leaves a need for those other devices.

And yes, the handset-as-Internet-terminal idea has been around almost as long as the network-PC idea. There are a host of reasons the phone has not become the front end for the net in China. One of them, as you correctly point out, is China Mobile’s pricing on data. I pay RMB100 per month for unlimited data, and that’s just too much.

Part of the blame, however, must lie with the analysts, who sold mobile operators on the idea that a) their ARPUs were going to shrink, and b) data was the way to make that money back. Price resistance has proven that a false hope, and carriers are having to revisit their pricing models. That’s a process that is underway, and will likely continue to the point where there are more affordable plans - probably sold as device/service bundles - available to the low-end market.

There have been other issues that have contributed to the slow move to the handset as a low-end internet terminal. Devices at the low-end of the market have only recently started adding the capability, and the experience has, frankly, sucked. I expect that to change as high-quality displays, next-generation user interfaces, and other key features work their way down into the low-end.

China’s operators have failed to create, bundle, and market data services designed to meet the needs of the urban poor or rural workers. Giving the operators the benefit of the doubt, that’s more than likely a problem of priority more than ability - both China Mobile and Unicom have a lot on their plates.

On the other hand, Thailand, India, and Bangladesh have managed to create and successfully deploy data services for these purposes. The model - and indeed, many of the applications - simply needs to be adapted, priced intelligently, and marketed well.

The problem there, of course, is the cave-man approach the operators take to value added services - if it looks good, they take it. That’s going to have to change at some point, but we’re starting to see signs of a change there as well.

The whole brouhaha around TD-SCDMA has slowed down the roll-out of (and CMCC’s enthusiasm for) data services. Until we have a healthy HSDPA network, bandwidth will be a problem. Once that network rolls out, however, I don’t think bandwidth will be an issue.

Because here’s the thing - when we talk about the kind of mission-critical data services for urban and rural workers, we are not referring to these guys using YouTube or buying and downloading music. The kind of data services they need are not bandwidth hogs. Most of it will be text-based stuff that needs to be delivered in a manner and format that is appropriate and real-time.

Finally, when you want to do anything for the poor in China, it seems you’ve got to get the government to say something first. It’s early days yet for Hu’s second term, but there is growing talk among some of the smart people quietly advising policymakers in the NDRC that suggests digital inclusion - with mobile phones as a part of the solution - will become a national priority as a part of the drive toward indigenous innovation.

Thanks for the comment.

Cheers,

David

[Michael Butler]

Fairly extensive commentary that missed two things about the economics of computer buying. First, people aren't going to buy a computer before they buy a refrig, phone, or T.V.. There is simply no need for the poor in China to buy computers until they have the other things they need much more.

Second, you ignored the cost of second hand computers. They can be had for perhaps 300-400 RMB and can run reliably for perhaps 2 years. With the price of new computers falling to 1,500 soon we can expect 2nd hand computers to fall to less than 300.

This does not invalidate your argument but it certainly means the one of the largest costs of computing in the future will be the cost of sustained connectivity as you pointed out.

I put the price of a second-hand computer within range of 40% of the people in China. I think the biggest problem is that most people don't see a need for computers yet.

But more importantly, you aren't thinking like the other 88% yet if you assume that the price of a computer is fixed at 2,000 R.M.B. or more.

[David]

Hi Michael,

Thanks for your comments.

Actually, I didn't ignore the issue of second-hand computers. I ignored the entire issue of used electronics.

Now that you brought it up, allow me to retort. ;-)

I'm not sure how many used computers get sold every year, but I can tell you that one out of every three phones sold in China in a given year is used. That's probably 50 million-odd phones, and the system to resell them is well established. Last time I bought a phone in China, I handed in my old phone and charger and got a discount on the new device.

Essentially, you can get a used phone for about a 70% discount on the original retail price in China. That takes the cost of a used phone to as low as 100-150RMB. Prices of phones keep dropping even as features on low-end devices continue to improve.

So again, mobile devices - for the folks at the bottom of the pyramid, AND for people who don't want a computer, will still be that first footbridge across the digital divide.

Either way, please keep in mind my core point:

Digital inclusion in China is not a problem that will have a single solution. It will have multiple solutions, based on user capabilities, economics, consumer desire, network costs, genuine need, and network infrastructure.

We need cheap PCs AND used PCs AND village PCs AND OLPCs, AND, yes, mobile phones to accomplish all of this.

The key is to see and understand the role each of those can play, make them more capable and more accessible (in price and distribution), and see what people go for.

[Duncan]

Spoke to someone at Huawei recently and he too flagged up wireless as one of the most exciting areas to watch in the next year or two.