Silicon Hutong

Speak, Baidu, Speak.

High School Library, ISB

Misspending my virtual youth

0928 hrs.

Lonnie Hodge, who I would fairly say is something of a fan of Baidu, takes the search company's CEO Robin Li to task over his failure to show up to do his keynote at last month's ad:tech confab in Shanghai, ostensibly for a "sore throat." Most of the attendees to whom I spoke shared varying degrees of pique that Li didn't show up, and Hodge in particular sees this as emblematic of Baidu's disdain for Cluetrain-style engagement:

Baidu, or any company, would do well to join the party (not that one...) and join in on the many conversations, those that honor AND those that harangue, which can only make us better business people, more responsible netizens, and decent global citizens.

The Credibility Problem

Baidu has had its share of problems of late, extending from allegations about driving traffic through - and cashing in on - illegal music downloads to growing questions about the validity of its organic search results (given Baidu's apparent willingness to hawk those results to the highest bidder.)

These problems are not purely academic or legal. There is a small but growing negative buzz about Baidu among Chinese users and in the local media, some of it focusing on non-issues, but a growing amount questioning the value of a search engine that compromises its organic search results by prioritizing paid listings.

The Search Problem

That's not going to help things with advertisers. I am starting to hear from companies who have until now devoted their search advertising budgets to Baidu that Google has made huge strides in its search algorithms, and that search ad results on Google were improving quickly. One advertiser I spoke to said that at the end of 2007 Baidu had 100% of their search ad budget. They now have 90%, and that will drop precipitously in 2009.

None of that would be too worrisome if we could believe that Baidu was totally focused on improving its core product. Unfortunately, Baidu has chosen this moment to focus time, attention, and resources on becoming a diversified online conglomerate, venturing into e-commerce, e-payments, and other resource-intensive business in an effort to keep users on its site once they land there.

Leave aside the fact that they are creating enemies where they could be creating partners - or friendly acquisition targets. To diversify into businesses that are so far from your core, that are less brand extensions than leaps into completely new industries, all when you are facing fundamental issues running your core business looks less like wisdom than hubris.

(Unless, of course, this is the first phase of an effort for Baidu to abandon search over the long term. Hmm.

But we digress.)

Unless Baidu can demonstrate to advertisers that it is improving its search product faster that Google is, that it continues to deliver better and more meaningful search results, and that the company can do all of this while pursuing credible efforts in online TV, e-commerce, and whatever else it wants to do, the advertising cash from the big spenders is going to start to leak away.

The Communication Problem

What this all comes down to is a failure to communicate.

Whether comfortable admitting it or not, Baidu has always been seen as "Google with Chinese Characteristics." What Baidu needs to recognize is that China's characteristics - and specifically her Internet users - are evolving.

More of the nation's online populace is turning to online search as a pathway to seek truth from facts, not find stealth ads from snake-oil salesmen hidden among - or above - genuinely helpful information. Wall Street may be pushing for monetization, but the demand from Chinese consumers is for credibility, trust, and results they can believe in. Sincere testaments of devotion to such ideals and a few sackings are a good start, but it will not be enough: Baidu has to do more to balance the disparate demands of investors, advertisers, and users.

The history of the Internet is littered with the corpses of great search engines that were popular, then failed, and with dominant players that were challenged by Google and then imploded.

Baidu has had a dominant position in China, but to this observer it is starting to look like all Baidu has is its dominant position. It does not appear credible, it does not appear focused, and it does not look like a particularly good partner for for other online companies and a partner of declining value for advertisers.

Yet I give Baidu the benefit of the doubt. I assume it is a good company, just slightly unguided. As such, they need to prove they are on track.

• They need to engage with advertisers and their agencies at every opportunity, both collectively and individually.

• They need to focus on search, and if they want to get into e-commerce, for heaven's sakes go out and buy something, don't try to build it.

• And finally, they need to remember that consumer loyalty in China is ephemeral, and that if they do not engage, their user base can evaporate as quickly as it was built.

I have to believe that this is what their PR agency is telling them. But I also suspect that the lawyers are saying something else.

The lawyers are wrong. This is one of those times when silence is not golden, it is poison.

UPDATE: Check Paul Denlinger's excellent post on the matter at China Vortex. Paul looks at the BIDU's problems from an ad sales perspective. Not pretty.

Digital Video and the Coming Showdown with Broadcast

The floor of the CASBAA Dome, West Kowloon, Hong Kong

All the TV people are dressed like bankers

1320 hrs.

Just finished my panel at CASBAA 2008 on "Strategies for a Post-Olympic China." It's humbling to be on a stage with people like Gehua Senior V-P Li Danyang, Terry Mak from Celestial Pictures, Peter Schloss from BroadWebAsia, Paul Wang of CSM, and to have Cosmedia Group CEO Tony Tse moderate. These may not be household names, but they should be, because each of them has helped lay the foundation for China's media future by building companies that are testing the edge of what is politically acceptable and commercially viable.

But enough gushing.

We have seen the future, and it is Youku

We were all positive about the prospects for online video companies like Tudou and Youku in China, and not just because the issue of SARFT licenses has been so recently cleared up. What I said I though was exciting about online video is that the medium actually offers the first viable opening for foreign film and television into China on something other than constricted official channels or on pirated DVD. If the video site owners are smart, as their revenues begin to grow, they will cut deals with content owners. Content owners, for their part, will cut deals (probably revenue sharing) with the video sites.

Peter Shloss, whose company is actually deeply invested in one such site, told the audience "I'm ready to license now."

The audience, clearly moved (or taken aback) by our passion and relative unanimity, used their wireless voting devices to confirm that they saw online video as the most interesting media opportunity in China in the coming three years.

All good stuff. Very exciting. A win for all. Mostly. Because all of this is predicated on three issues:

1. Perfecting the advertising model with better measurement and business models tweaked to prevent things like click fraud; or finding another approach;

2. Convincing the content owners that this is a wise thing for them to do with their expensive programming;

And the one I kicked in:

3. Managing the eventual showdown with traditional broadcasters. Because the reckoning is coming, and it is coming right soon.

Gunfight at the Tudou Corral

Up until now, neither the government nor the broadcasters have seen new media generally and online video in particular as a threat to the traditional TV business in China. Revenues have been small, television ad income has continued to grow, and the people watching those videos had little spending power. Let them have their little games, the broadcasters seemed to say, we have Real Business to do.

But there is another meme growing quietly in the wings of this conference, and Paul Wang hinted at it during our panel. The Annual CCTV advertising auction is coming in two weeks, and three people I have spoken to in the last 24 hours all agree that this auction will break CCTV's winning streak. If this year's take (for 2009) beats last year's (for 2008), it won't be by much. Whether it's the post-Olympic hangover, a growing fear, uncertainty, and doubt spurting forth from the world's financial markets, or something more fundamental and tectonic is the only question.

My bet is on the "fundamental and tectonic." Which takes us to online video.

The most interesting part of the semi-annual CNNIC report is not the big headline number of how many Internet users China has, but the demographic profiles of those people. For a long time, the overwhelming majority of regular Internet users in the PRC have been of university age or younger, and they didn't have much to spend. But recent reports from CNNIC make it clear that this is slowly starting to change. As those people who used the Internet growing up are graduating from college, getting jobs, and looking for ways to spend their loose change, the "Internet generation" is turning into a very interesting target audience for a lot of advertisers, and not just the ones selling computer gear.

This demographic shift is happening at a time when many advertisers - including but not limited to the multinational corporations - are starting to worry about what they are getting for their money. Add to this picture the curtain of fiscal conservatism that is descending on marketing officers as a result of the global financial crisis, and suddenly advertising on television no longer looks like the automatic slam-dunk it did at the height of the Olympics.

Here is my scenario: either this year, next year, or in 2010 the results of the CCTV advertising auction are bad - so bad that they cannot be hidden. We're talking like a 10-15% decline, or maybe worse. Meantime, Youku, Tudou, et al are starting to rake it in. They've concluded content licensing deals, they've fixed (or kind of fixed) the measurement issues, and there are upwards of 300 million users online.

At that point, it is not going to take long for CCTV and its fellow broadcasters throughout China to add things up. They will turn to the State Administration for Radio, Film and Television and to the Publicity (propaganda) Committee of the Party, making the case that these private online companies are not only hurting their business, but, worse, doing damage to the ability of broadcasters to serve their propaganda/social administration function for the state.

At that point, the government's options become fairly clear: restrict the online video sites, let the broadcasters run whatever content they want, or force some kind of accommodation between the two sides (i.e., compel each of the sites to take on a state broadcaster as a part or majority shareholder.)

Don't Go Down that Dusty Street

China's broadcasters wield tremendous political power, (for all the expected reasons and for many others that we won't go into here,) and they will not go gently into a future where they cater primarily to people who cannot afford an Internet connection. There is just not enough money in it.

The wise thing to do for the online video companies is to recognize - right now - the danger implicit in their own success, and start working to prevent that showdown. But I'm not optimistic. These companies are so focused on the plentiful immediate challenges to their prosperity and existence that they can't worry about an over-the-horizon threat.

On the other hand, that's exactly what Boards of Directors are supposed to be for. Once they get done lecturing their management about how important it is to make money, the next topic on the list should be about how to avoid getting sat on.

Stat of the Week: China Internet User Update

The floor of the CASBAA Dome, West Kowloon, Hong Kong

Waiting for the Asian Pay-TV Panel

1426 hrs.

The statistic of the week came out of my panel this morning at CASBAA. According to Li Danyang, senior Vice President of Beijing Gehua Cultural Development Group, China's Internet has now surpassed 280 million users.

The country loves numbers, so I'm betting that the CNNIC January report puts us right around 300 million users.

So update your fact sheets, and prepare to update them again in two months.

By the way, If I hear the word "monetize" one more time, I am going to have a myocardial infarction.

No Mas Kaptial

In the Hutong

Listening to the dulcet tones of the jackhammer

1554 hrs.

Rocker-writer-marketer Kaiser Kuo quotes me generously in Ogilvy China Digital Watch on the prospects for venture-funded Chinese Web 2.0 startups who are staring down the gullet of the Global Financial Kraken. What prompted Kaiser's article was Sequoia Capital General Partner Michael Mortiz' come-to-Yeshua talk with the CEOs of his portfolio companies last week, letting them know that it is time to get religious about revenues and profits.

(Nota bene, I expect that this is not the first time said entrepreneurs have heard this refrain from Moritz. Indeed, I wonder how much Moritz and his Menlo Park neighbors really see capital to be a problem, and how much they are taking a singular opportunity to use the FUD-whip to great effect. I figure it is a bit of both.)

Mortiz' comments and those of his partners at the meeting are here. I suspect - as, I believe, does Kaiser - that there are a lot of similar conversations taking place in cold-sweat enfragranced boardrooms in the world's financial capitals.

The dragon in the outhouse is how much this all applies to companies in China. Or, more accurately, whether investors will see China as an exception to the thick cloud cover over the world's financial markets, and thus keep the cash flowing into China.

Kaiser and I agree that things are going to get tight for the time being. While the Hutong is far removed from both Silicon Valley and Wall Street, the picture we are getting is that Wall Street is still trying to keep liquid, unwind some arcane financial instruments, clean up the subprime mess, and lobby Washington for more help as the water rises. Everyone else is either hunting for carrion in the wreckage or hunkering down for the next round of bad news. "Flight to safety" seems to be the order of the day, not "what the hell, Frank, let's pump another couple hundred million of our cash into some cool stuff in China."

The key question is how long this will all last.

My bet is that the longer the downturn goes - and the longer that U.S. and European investors stick with conservative investments - the louder the capital sucking sound from China's online and technology ventures. With less offshore venture capital chasing Chinese investments, valuations will come down, and at some point those valuations will reach a point where local capital will start to get interested. The business cycles in China are fast, but I figure if local ventures face an extended capital drought - say, 18 months or more - we are going to see a flowering of China's domestic venture capital business.

RMB funds will come from a variety of sources, including large investment houses, state-owned banks, and possibly even purpose-built policy banks created by the government to funnel a modest chunk of China's US$2 trillion capital reserves to local ventures. All of this would dovetail nicely with China's commitment to independent innovation, and with what Paul Denlinger expects will be a tsunami of government cash into neo-Keynesian infrastructure spending across the countryside.

This is a golden opportunity for China to build a robust venture capital industry with Chinese characteristics.

iTunes Unblocked and The Corporation as Social Change Agent (Long)

Starbucks Pinnacle Plaza, Shunyi

Another fabulous post-thunderstorm fall day

1113 hrs

The Olympics have ended. The athletes are heading home. Songs for Tibet is off of the iTunes main page, but it is apparently still available for sale. The iTunes music store is once again accessible from China.

Maths over at Music2dot0 did us all a real service by expanding my Bipolar Apple post into a broader discussion. BTW, apart from excellent coverage of the realities and the posturing of all sides as the music industry evolves, Maths has the additional upside of having a very international view of the related issues. A superb blog and well worth a regular read if you follow the music business, and not just because he agrees with me.

Paul Resinkoff makes some wise noises at Digital Music News. He walks the line between two points of view: he urges Apple to weigh its response carefully.

Eliot Van Buskirk over at Wired, on the other hand, represents the "common wisdom" on the issue. He thinks I am urging Apple to "censor" their content in order to appease the Chinese government. He takes me to task for suggesting that Apple become a censor on behalf of the Chinese. He misreads my point, and misses the larger picture around this particular incident.

What Really Happened

One of the reasons I usually hesitate to post on something right as it is happening is that it is impossible under such circumstances to have the benefit of perspective. As it turns out, I should have waited on posting on this - not because it would have changed my point, but because I got my psychological terminology wrong and, mor important because the post would have been made stronger had I included some important chunks of information.

I won't recount what all of those chunks were, but do take a look at Joe MacDonald's piece for the Associated Press here.

A read through the story makes it clear that this was not a simple matter of Apple-carries-album-Chinese-slam-door.

The salient points:

- The album was featured on the front page of the site - a choice I would wager was made by Apple, not by the activist organization that produced the album;

- The album went live in the days leading up to the Olympics;

- Pro-Tibetan activists have been attempting to leverage Beijing's hosting of the Olympics to draw attention to their cause;

- The activists told the Associated Press that they had contacted athletes directly and provided free downloads to the athletes and urged them to play it in Beijing as an act of solidarity.

- The activists then issued a press release telling the world that this was, in effect, a protest, and that at least 40 athletes in the village had downloaded the tunes.

- The site was then blocked, fifteen days after the album went up.

- The Games ended, the athletes went home, and the site was unblocked.

- The album is available for purchase here in Beijing under the same conditions as everything else on iTunes - got a foreign credit card that bills to a foreign address, and the songs are yours.

If this were a simple matter of censorship because of some content, access to the site and the album would not have been restored. It seems clear that the content itself was not a problem - what set the Chinese government off was the concern over a potential protest in the Olympic Village. Apple was a target only to the extent that it was seen by the Chinese authorities as aiding that protest.

The implicit message the the government seems to be delivering is this: carry objectionable content in your overseas sites if you must, but use those sites as a springboard for protests within China, and they will be blocked.

Regardless of your stance on the rightness or wisdom of Chinese regulators taking this stance, as a businessperson you have to take notice where China seems to draw a line over which it does not want to see companies cross.

What you do with that information is another matter entirely.

To Cave or Not to Cave is Not the Question

The moral quandaries many companies face in doing business in China, whether they come from the hearts of the managers and employees or from the voices of their customers and home governments, are a part of doing business here. They vary from company to company, but they exist and cannot be ignored.

For example, many foreign-operated websites operating in China collect and retain information that could identify the individuals who come onto their sites. After the experiences of Yahoo!, Google, and MSN, any company seeking to operate a site that collects such information had better deal with the issue of what to do when the government issues a warrant for that information in advance, not after the door opens and the PSB is standing there.

Or something else happens that calls into question the morality of doing business in China.

(Or, for that matter, what to do when somebody from some government agency makes it known that your company registration problems can disappear in return for some cash, a computer, a car, or a college education. Or when a reporter tells your PR manager that he's happy to run a story on your press conference - for the reasonable sum of RMB1,000.)

But many companies do ignore these issues. A frustrating number of executives, activists, pundits, and others attempt to portray doing business here as a choice: either you check your morals at the airport when you arrive, holding your nose and hoping a some congressional committee, journalist, or activist doesn't find out; you do business in China your way and risk getting thrown out; or you stay out of the market completely.

There is considerable debate as to whether Apple played an active role in assisting the efforts of the pro-Tibet activists, or the activists simply gamed the iTunes system, duping Apple into playing a role it would rather have not played. It almost does not matter.

If this was an effort to throw a sneaky punch at China, Apple risked its business in China without the upside of brownie points from its fans and others elsewhere because it never owned up to its role.

On the other hand, if this was a case of Apple's systems being gamed by activists who used the company as an unwilling accomplice, Apple looks foolish, and risks its business in China, and calls into question whether this will happen again, all while getting no credit for it.

What is worse, none of the above affected any kind of measurable change. It was a net negative for Apple. As such, it needs to ensure that something of this nature does not happen again.

But that does not mean giving in to perceived, implied, or overt demands that go against the nature of Apple, its executives, or the people around the world who use its machines and want very badly to see the company as an unalloyed force for good.

The Middle Road

I am an idealist.

I believe - I know - that it is possible for companies to make money in China and be agents of positive social change. Doing so, however, demands corporate resolve, transparency, superb communications skills, and and a healthy understanding of Chinese politics and culture.

I believe those two goals are not contradictory but rather are mutually supporting, and that in playing that positive role you will win points in China with the government, the people, your shareholders, and your customers elsewhere.

But companies can best affect change when they are trusted and thoroughly integrated into the fabric of Chinese economy and society. Not only does that give you access, it also ensures that when you behave in a way that could be interpreted as anti-China, you are given the benefit of the doubt by both the people and by policy makers.

That influence is built over time - not necessarily a long time, but it doesn't happen in a week or a month - and in a systematic fashion.

Unfortunately, most companies miss this. The process of gaining the access alters them, defeats their resolve, makes them pliant.

Apple need not follow that route to ensure its success here.

Apple is already deeply embedded in the Chinese economy, but because it is mostly through manufacturing intermediaries, Apple has been largely invisible to policy makers and the people. That began to change with the popularity of the iPod and the growing number of Apple resellers around China, but the Apple Stores are really going to drive home not only that Apple has cool stuff, but that it is making that cools stuff right here in China.

If Apple can do that, all while proving that it is a responsible employer, pays its taxes, turns its back on corruption, and does good in the community, it will have more than adequate foundation to become a driver for social change without endangering - and indeed enhancing - its bottom line.

The one no-go place is publicly embarrassing, threatening, or insulting the country. You go there, and you damage your ability to drive real progress.

Nota Bene

There will always be people who question the value or the morality of doing business in China. When their arguments are sincere, intelligent, and thought-provoking they form a critical check on the often unbridled enthusiasm about China. Whether those voices come from within the company or without, they deserve their due and balanced consideration not just in the PR department, but in the rooms where major decisions are made about a company's future.

Woe to the company that ignores them. They deserve sincere, intelligent, and thought-through answers, regardless of what the decision may be.

As Paul Resinkoff suggests, Apple, for its part, would do well to consider those voices now. And if your company has not yet, it should as well.

The Youku Gambit

In the Hutong

Is it mist, or is it fog? YOU decide

1402 hrs.

Youku's public relations team are pumping out a release claiming bragging rights as the most popular video site in China, based on a survey by the Data Center of the Chinese Internet under the China Internet Society, a government-sanctioned trade group.

I question the impartiality of surveys that come out of trade groups singling out a paying member as a market leader, especially when those surveys just happen to use the success metrics advocated by the company in question. Given that iResearch, Baidu Index and Google Trends apparently confirm Youku's position, why bother leading with the weaker statistic?

But let's leave that aside for the moment, and grant that Youku may in fact be in the lead. What is more important is why, and what that means for Youku's future.

Quick, get the popcorn - Youku is loading

Youku is particularly happy about that the statistics suggesting that people spend more time on Youku than on its competitors' sites. There is a good reason for that, as Senior Analyst Elias Glenn at Pacific Epoch pointed out on Twitter today. Youku acknowledged in its release the importance of "professionally produced" long-form content (i.e. movies and TV shows) to the company's performance.

What is unclear is whether some, most, or all of that long-form content is being show without prior permission of the copyright owners.

There are two possibilities.

Is that the Union Jack or the Jolly Roger?

First, that Youku has reached agreements with all the copyright holders of the content on its site, including 20th Century Fox, the distributors of the Cameron Diaz movie "What Happens in Vegas" that I was enjoying on Youku (sponsored by 51jobs) just a few minutes ago. Or Universal, who kindly allowed Youku to show me "Leatherheads" with George Clooney, and this year's blockbuster, "Iron Man," courtesy of the generous folks at Paramount.

If that is the case, they are to be commended, and I will happily join the line of people seeking stock when Youku goes public. Somehow, I don't think that's happened yet.

The second is that Youku has not reached those agreements with all of the copyright holders, that its vaunted filtering systems are failing to pick up the pirated videos (despite being able to filter politically objectionable content), and that Youku is building its spectacular user numbers based on its role as a pirate multiplex.

That is going to be a concern to both investors and advertisers.

While China may not enjoy a reputation as an ardent defender of intellectual property rights, the time where a company with Youku's profile can openly operate as a copyright scofflaw are rapidly coming to an end. Baidu and others have learned that China's intellectual property laws are slowly growing teeth, and Youku, laying claim to the mantle of the most popular site of its type, would be an ideal chew-toy.

There's something happening here

As discussed in a post at the beginning of the month ("The online video Hail Mary"), it would be unwise to discount the collective wisdom of Victor Koo, his advisors, and his investors. These are not foolish people. They knew their license was in the bag, and they invested more money.

Similarly, I believe they know that a rights reckoning is coming, that at some point Youku will cross an invisible line in the sand and battalions of television copyright attorneys will descend from the sky, spewing paper death in the form of cease-and-desist letters, or worse.

There is a strategy afoot, one that could never work in the U.S., but can work in China because of the very restrictions the government has placed on conventional media.

I'm not sure what the strategy is, but here is my scenario:

The aforementioned regiment of airmobile copyright attorneys shows up at Youku, girded for battle. Victor Koo opts to parley. Koo suggests that the two sides are in a position to help each other. Content providers - especially the foreigners - need a way to provide access to their content to Chinese people that will help undercut DVD piracy. Youku needs content offered in a format that does not overtly threaten the broadcast powers-that-be.

Youku has the audiences, a decent relationship with regulators, and growing advertising revenue. For a cut of the revenues earned on their content, the copyright owners agree to hold off for a period of time on pressing any claims. Meanwhile, Koo and company engage in a vigorous four-way discussion involving Youku, regulators, advertisers, and content owners to evolve into the country's leading online TV outlet.

Youku then cuts similar deals with the local broadcasters, very few of whom have had much success building their own online offerings, and would be just as happy letting Koo do all the work in return for a cut. After all, 50% of something beats 100% of a cost center.

This would never play in the U.S.

But here? Where legal music goes for $0.15 a track and where Batman can't make it past the censors?

It might just work.

E-tailing: Report on E-Commerce in China

Starbucks Guomao 1

Deleting Spam. Again

1034 hrs.

Paul Denlinger over at China Vortex points us to a new report from the Research Institute Data Center of China Internet, which claims that online spending in China passed US$37.5 billion in the first six months of the year, representing a 58.2% jump over the same period in 2007. The report goes on to predict that overall spending online in China will surpass $86 billion for all of 2008.

Given that the report supports my belief that electronic retailing in China is on the verge of really taking off, I was pleased to see it. But I have reservations about the report nonetheless.

The first is a small thing. There appears to be no distinction made between "electronic commerce," which can cover business-to-business transactions along with business-to-consumer and consumer-to-consumer, and "electronic retailing," which is primarily business-to-consumer but also includes a large chunk of consumer-to-consumer.

This is important because business-to-business commerce in China is huge (remember the Alibaba IPO?), and could well be skewing the numbers. Let's set that caveat aside for the sake of argument.

The second concern the research itself. I used to conduct market research seminars for foreign students coming to China, and I noted that, with apologies to Mark Twain, there are lies, damned lies, and statistics, and that this holds trebly true in a country where there is a long history of massaging numbers to serve political, economic, and commercial purposes. I am concerned this might be the case here.

I didn't manage to find the organization that produced the report online, nor have I actually seen the report and reviewed its methodology, so I it is hard to judge the veracity of the numbers. What is more, AFP notes that the Data Center of China Internet is an industry group, so I worry that the report may have been influenced by its sponsor.

If you can get your hands on the report, give it a read, but have a full salt shaker close at hand.

The way I normally handle reports of this nature is to give more credibility to the overall trend than the actual numbers. The real takeaway from this is that e-commerce in China is - as Paul Denlinger says - hitting the bend in the hockey stick.

China's Coming E-Tail Renaissance: The Payment Myth

In the Hutong

Oh, look, the sky is leaking

0104 hours

One of the most persistent myths about the slow growth of electronic retail in China has been that the scarcity of credit cards have held the business back. There are still less than 70 million credit cards in circulation, one for every 20 or so adults in the country, and, more to the point, one credit card for every 3.5 internet users. 

No credit card, goes the thinking, no electronic retail. The ubiquitous Shaun Rein, CEO of Shanghai-based China Market Research Group, echoes this sentiment in an otherwise excellent editorial in Forbes magazine:

"Our findings suggest it is a lack of credit cards and other payment options, rather than a cultural aversion to buying online, that has curtailed the growth of e-commerce in China."

About half-right, I would say. The cultural aversion issue is a canard, and we will take that up in another post.

Yet elsewhere in his article, Shaun notes that 70% of the 500 18-to-32 year-olds he had interviewed had already purchased online, but "would use a credit card for purchases if they had one." In other words, all of these folks were already buying online without credit cards.

Hmm.

I don't mean to pick on either Shaun or CMR, but the implicit truth coming from their research supports a somewhat different conclusion. Coming from a research organization of bright and talented people, this illustrates a larger point: despite what very intelligent analysts are telling the world, electronic retail is growing in China in spite of the low numbers of credit cards in circulation, and it will continue to do so whether there are credit cards in China or not.

Money, like love, finds a way

Electronic commerce has grown in China over the past ten years because companies and consumers have found other ways to complete transactions that don't require a numbered sheet of plastic. 

A number of methods have been used over time. Postal money orders, prepays, local counter pickup, and company credit have all been tried. Most have been discarded because they required the consumer to physically go someplace to place an order. 

To date, the most successful has been that old reliable method, cash on delivery, or COD. 

COD is superb because it allows the company to ship a product from their warehouse, via either express mail service (EMS) or regular post, to almost any city in China. Back when I developed this system for electronic retailers with the China Post's EMS division in 1996, they originally promised to deliver any package to 100 cities within 72 hours. The number of cities grew to 500 within 18 months, and the delivery times - while 72 hours was always the promise - dropped near to 24 hours. 

Consumers love COD in China because it allows them the assurance of actually seeing a product before they pay for it. That's not such a big deal when you are selling small things or your company is well known. But if you are a new company, or you are selling RMB 10,000 digital camcorders, COD offers everyone one more level of assurance. 

Is it a pain to have to be somewhere to wait for something? It can be. But that can be an issue no matter how you are paying - delivery services are rightfully reluctant to leave packages unattended on door stoops.

COD is extremely popular among electronic retailers in China, but frankly few do much to promote it. The biggest culprits in this regard are the EMS and postal services, both of whom should be heavily promoting COD to consumers. They aren't, and in the face of the widespread myth about "no credit cards," a perfectly workable solution has to spread by word-of-mouth.

Why do I need that funny little plastic thing?

But COD is by no means alone. Online payment systems are growing with incredible speed in China. Take Alibaba's Alipay system for example. As of March of this year, there are more registered Alipay members in China - 80 million - than there are credit card holders, and the number continues to grow. Annualized transaction volumes are in the tens of billions of US dollars per year. 

And there are other means of payment on the way. We haven't even entered the discussion of the mobile phone as a payment device yet, but that is a business that China's carriers are studying with special interest. The cool thing about using mobile phones for payment is that apart from paying via your phone bill or a prepaid card, the phone becomes a credit card with a direct internet connection. No need to type anything in. Just push the button. 

Porter Erisman at Alibaba suggested to me that payment systems in China are evolving beyond credit cards. I'm not any more ready to consign credit cards to the dustbin of China's development than I am COD. 

Alipay and COD alone, however, underscore that regardless of how the credit card industry evolves in China, electronic retailing will boom. To what I am sure is the chagrin of both analysts and credit-card companies, the electronic commerce industry is not waiting for the day when your average Chinese has a credit card or three in his or her wallet. 

And a good thing, too.

Serving the customer - and the merchant

There are actually problems using credit cards in China for electronic payments. First, many banks, fearing fraud, remain hesitant to allow purchases using their credit cards or debit cards unless the cardholder is present and signs a receipt. While this is improving, it is still a challenge. 

Second, and perhaps most important, is that credit card companies are hard on merchants in China. Apart from having to bear onerous transaction fees, electronic retailers can often wait for weeks or even months to get payment, and disputes are almost uniformly settled on behalf of the consumer.

COD isn't perfect. All of my experience with COD using the EMS service was superb - we were paid within a few days, a week or two at most. Unfortunately, I'm starting to hear that some payments are dragged out for as long as six months. That's not acceptable, and the postal folks need to get their collective stuff together or they are going to lose the opportunity. 

Services like Alipay need to become more ubiquitous and flexible over the long term. Dominating payments on your own site is fine, but the real promise is being able to take payments from as wide a range of services and sites as possible. 

When organizations dominate a niche, they tend to get exploitative. China is no different. The good news about payments for both merchants and consumers is that there is competition among the different methods. The wise e-tailer would do well to enlist as many as possible.

Welcome to Planet Plastic

Among the many things Shaun and I agree on - and I'll be coming back to his article in future posts - is that the business of consumer credit in China is going to continue to grow, and that banks will find ways to put more plastic into wallets in the same way they have popularized home and auto loans. 

What will be different in China, however, is that even when credit cards manage to reach a sizable portion of China's population, they will face competition from a far wider range of payment options than they do elsewhere. 

In the meantime, electronic retailing is on a roll. 

The online video Hail Mary

Jiaodaokou Road, enroute to Gehua Dasha

No sign of the Olympics here

1221 hrs

Steve Schwankert at IDG covers off on Youku's recent US$ 30 million capital infusion, and treats the event with an appropriate dose of optimistic caution.

China video sites have been taking in a lot of cash lately, over US $100 million total in the past few months. The digerati have been understandably cynical: the State Administration for Radio, Film, and Television (SARFT) and the Ministry of Industry and Information Technology (MIIT) have done little publicly to hearten investors in the sector. Regulations passed last year make it seem at first glance that the sector is closed to all but state-owned broadcasters, while not documenting an alleged promise that current web video sites would be "grandfathered."

More ominously, a recent list of licensed broadcasters was issued, but Youku, Tudou, 56.com, and YouTube were conspicuously absent, and 56.com has found itself shut down, with no word as to why or when (if ever) it will return. When you put all of that against what is arguably the most conservative media regulatory environment in a decade, you can start to understand the cynics.

I have to admit, my first reaction was something like "I wonder what they were putting in the bottled water at the negotiating table."

Who knows what?

But there are indications that the investments - while certainly not on the "low risk" side of the portfolio - are not as ill-conceived as they might appear. (Disclosure - I have zero interest in any of these sites, and have no client relationships with them or their investors.)

First, my informal poll of the media people in the capital suggests that Youku and Tudou will get licenses at some point in the not-too-distant future. Chances are pretty long against it happening before the Olympics or even before the annual Party meetings in the fall, but I'd say it is in the offing.

Second is what I call my "wiser fool theory." We who have lived a long time in China have a tendency to believe that anyone who has less experience in China than we do is more likely to be taken to the cleaners on a given deal. Annoyingly, we're usually right. But not always.

One of the things that keeps China so interesting for both investors and business people is that unlike more transparent societies, information flows unevenly here. I'd say it is possible - if not likely - that the investors who just put their cash into Youku have information that is germane to the regulatory situation that is not public. They may have received what they feel is adequate assurance that a license is forthcoming.

At this point, you are probably remembering Samuel Goldwyn's legendary line that "an oral contract isn't worth the paper it's written on." You would be right to do so. Assurances from policymakers - however high in government - about future events are only good if the situation does not change in the interim. But a senior official in a position to know - or even decide - may well have helped (unofficially, of course) to assuage investor concerns. I would be floored if this was not the case.

There are also probably some other mitigating factors, such as agreements with local broadcasters, that give Youku additional regulatory air-cover.

The point is this: I'm willing to grant the investors the benefit of the doubt because they see the little picture more clearly. I only hope they're seeing what they think they are.

Contrarians at the gate

Third, the subjective value of Youku as a company is probably pretty low right now. This is the ideal time to invest, when Youku needs cash and the hardware to manage its growing traffic, when there is no license, and when a similar site has been forcibly shut.

I find it fascinating that no mention is made in Schwankert's coverage or the press release about what the VCs are getting in return. I'd bet Maverick Capital, Brookside, Sutter Hill Ventures, Farallon Capital, Chengwei Ventures, and Western Technology Investment all cut a pretty fair deal for themselves.

Playing the long game

So I figure licenses are coming, and the investors got in at a good time. None of that eases the uncertainty around the sector in the longer term, however.

This remains a profoundly sensitive environment for media - especially foreign-invested media - and the Internet is no exception. Among all types of Internet sites, the government is most cautious with online video: giving the people the power to broadcast makes conservative officials (who are used to total state control over the communication of information) feel like they're getting a wedgie.

No matter how much care Youku, Tudou, Ku6 and others take with what gets posted, a cold northern wind - a "crackdown" in response to a political crisis of some sort - could spell an instant change of fortune.

There is also the implicit competition problem. Broadcasters are state owned, these sites are not. Some very desirable viewers with money to spend are spending more time watching Internet stuff and less watching TV, and few broadcasters have demonstrated much skill in creating compelling online video offerings of their own.

At some point, broadcasters are going to begin howling about these sites that are showing video, are not state owned, and who are taking away their most prosperous viewers (and their advertising revenues.)

Either a change in the political environment or broadcasters falling into dire straits might be enough to foment a change in policy. But if both happened at the same time - and if that situation coincided with one or more of the sites running a video or two that stepped beyond the pale - you would wind up with a perfect storm that would see the government "re-examining the structure of the industry."

Caveat investor

None of this means that the VCs made a bad investment. I am certain they do not think everything to be smooth sailing after getting past the license problem. After all, we have not even discussed the problem of actually turning all of those unique visitors into ordinary cash.

What it does mean is that they - and we - should expect there to be problems in the future. What will determine the ultimate fate of the companies is how well they (and their investors) prepare themselves for and respond to The Perfect Storm when it finally does come.

China's Coming E-Tail Renaissance: Schereck's Five Logistical Challenges

In the Hutong

Updating OS X

1706 hrs.

There are many commonly accepted myths as to why electronic retailing has had such a hard go of it in China to date. Of those, perhaps the most persistent myths revolve around the logistical issues of actually getting something to the customer - logistical issues that do not exist in, for example, an America with pervasive credit cards, FedEx, UPS, and DHL.

The best summary of the issue comes from my old boss Bill Schereck, who led the creation of TVSN as a Sydney-based Asia-Pacific clone of QVC International back in the mid-1990s. Even though he was originally thinking of television shopping, the Five Logistical Challenges he isolated apply neatly to electronic retail.

Schereck's Five are:

1. Reaching the Customer - the first challenge is actually building a channel to the customer so he or she can find you and find the merchandise you are selling. That seems like a non-issue for electronic retail, until you realize that a) creating a decent, trustworthy-looking site is harder than it looks, b) most Chinese don't have Internet access, c) even if they do, how are they going to find you?  

2. Taking the Order - in the case of e-tailing, this means creating a system to take orders, actually getting someone to stick something in their shopping cart, then having them actually place the order. This is a challenge no matter where you do business, not just China. 

3. Getting Paid - getting the customer to promise to pay, and then actually collecting on that payment. This is usually the first issue people jump on about China - how do you get paid for an order when a tiny fraction of the populace even has debit cards, much less credit cards, and the banking infrastructure to clear online payments is not up to global standards?

4. Delivering the Order - ensuring that the right product is delivered to the right customer at the right place in the promised time frame. This is usually called "fulfillment." FedEx, UPS, and even DHL have limited rights to deliver products from one part of China to the other, and direct shipping from overseas is complicated (thank you, Customs) and prohibitively expensive for your average Chinese. Not only does actual delivery pose a challenge, but you need an onshore warehouse as well.

5. Processing the Return - people in the trade euphemistically refer to this issue as "reverse logistics." This is what happens when something is broken, is the wrong size, wrong color, or when the customer just changes his or her mind. How do you refund the money, get the product back to warehouse, restock it, and put it into a condition to resell or dispose of without incurring a financial loss? Surprisingly few novice e-tailers think this bit through, or even get it right, and it entails such issues as "what IS our return policy?" It is especially tricky in China. 

I would add one more that actually belongs between the #1 and #2 that has proven especially sticky in retail in China:

6. Stocking stuff people actually want to buy - merchandising - the art and science of choosing which products to sell in a store and how to stock, display, and promote them - is in its infancy in China. Most retailers are actually in the real estate business, leasing space to manufacturers or manufacturers reps who handle the merchandising functions. What that means is lots of look-alike stores with salespeople who are pathetically uninformed about their product. It also means that China lacks people who understand how to turn consumer trends and local preferences into a winning combination. 

So there you have the challenges. 

Challenges 1, 2, and 6 are perceived as largely micro issues: they can be solved by the individual company. Payments and delivery, on the other hand - and the related issue of reverse logistics - are seen as systemic deficiencies in China, and thus the most serious barriers to electronic commerce.

Our next installment will demonstrate that these aren't really issues at all in China - and haven't been for over a decade.

Xiaonei and the Illusion of Social Networking

Starbucks Lido Beijing

Body now rejecting caffeine

1308 hrs.

Kaiser Kuo of Digital Watch delivers an erudite, subtle, and telling analysis of social networking site Xiaonei's cautious steps toward adding third party applications to its site. 

If you are not a regular user of social networking sites, applications and widgets created by third party developers are really what makes these sites fun and engrossing to a wide range of people, and make it possible for you to maintain contact with someone for the cost of a few clicks. Taking a more macro, analytical view, third party developers are playing the main role in turning social networking sites from mere toys to something approaching an operating system for your online life. 

A Timid Effort

Xiaonei is, to the casual (and semi-formal) observer, an effort to create a Facebook with Chinese characteristics. What has been lacking to this point is third party applications, so the site has lacked much of the mojo of Facebook and Friendster. 

Facebook has an immense selection of third-party applications already, numbering over seven thousand. Friendster, for it's part, is not only already extremely developer friendly, it is helping to drive the Open Social standard that will make it easier for developers' widgets and applications to work on a wide range of social networking sites. Facebook is arguably the global perceptual leader, and Friendster has more users in Asia than any other social networking service. 

All of which makes Xiaonei's baby-steps into the world of third-party developers all the more perplexing. Certainly the company's managers, their investors at Oak Pacific Interactive, and (most important) the company's users must know in their guts that Facebook and Friendster are coming. Why aren't they putting more into the effort to get it moving forward faster?

Cannot, will not, or don't want to?

Four possible answers:

1. The Xiaonei team does not feel that third party applications will be important in China. I'll grant that this is possible, but one would think they'd err on the side of caution.

2. The Xiaonei team understands how important this is, but lack the managerial or technical skill to pull this off much faster than they already are. 

3. The Xiaonei team believes that as a local site they, like Sohu, Sina, and Baidu, are going to be the winners by default over the foreigners anyway, so why bother working hard on a third party developer program? Just make a few noises in that area so you can stick it into the prospectus. 

4. Xiaonei is less about creating an "insanely great" (to borrow Steve Jobs' superlative superlative) social networking site than it is about creating a vehicle to increase the wealth of its investors. 

Landing craft on the horizon bearing 090, Sir

Of those four answers, three suggest hubris, and one questions competence. Xiaonei can afford neither. International web players succeeding in China is no longer the laughable prospect it once was, and the SNS horde are learning from the mistakes of their predecessors in China. They'll be here soon.

I actually think we will see a more determined effort on Xiaonei's part in the future. Oak Pacific now has its own adult supervision in the form of Masayoshi Son following Softbank's $430 million cash injection. Mr. Son has a reputation for impatience with half-measures. He will not accept the idea that he has invested in a company that has created the illusion of social networking rather than delivering on the full promise of a "China Facebook.". 

The coming China e-tail renaissance

In the Hutong

Woke last night to the sound of thunder

1608 hrs.

Retail in China has come a very long way in the last two decades, from a time when the state-owned Beijing No. 1 Department Store was the absolute pinnacle shopping experience in the country, to a day when every major brand and luxury marque in the world seems to have opened storefronts in Shanghai, Beijing, and often elsewhere.

But few who have been overseas would suggest that the process of discovering, finding, getting to, buying, and using stuff you want or need is a particular pleasure in China. Not yet, anyway. 

Electronic commerce landed on China’s shores over a decade ago, and while a handful of companies engaged in online retailing (like Joyo, Dangdang and others) have done reasonably well, l e-tailing in China has not grown with the kind of vigor that it has in the United States, Europe, and Japan, or even with the sort of explosive growth of China-focused wholesale and trade e-commerce sites like Alibaba and Global Sources. 

A series of public legends have grown up to explain this phenomenon, but in practice most of the logistical barriers have not proven quite as severe as many analysts suggest. In short, they’re hogwash. 

And the biggest problem - trust - has been all but ignored, or twisted into a systemic reason why e-commerce "won't work" in China.

For most areas in the online world, all you have to do is mention the name of a successful online company and the word “China” in the same sentence, and the world’s electronic herd of investors will fight each other to give you cash to make it come true. Think Baidu (“Google + China = $$$”), think Sina and Sohu (“Yahoo! + China = $$$”)) etc. 

That has never been the case with electronic retailing (“Amazon + China = ????”) A decade on, electronic retail remains depressingly undeveloped.

But If you take a careful look around China now, you will discover that even though the buzz and hot air has long since leaked out of the China online retailing balloon, things are happening around here that suggest that China’s e-tailing boom is yet to come, and it will not be that long in coming. Not least of those factors is the stubbornly mediocre bricks-and-mortar retail experience on offer even in the toniest of stores.

Over the next few weeks, the Party Secretary and I are going to take a look at what we see in the market that is driving e-commerce forward. We will not simply be working from an academic or consumers perspective: we’ve actually built and run two non-traditional retailing ventures in China, and we have a reasonably good idea of what is possible. 

At any rate look forward to your thoughts as we post more.

The Education of a Mogulette

In the Hutong
Ignoring American Idol while the Party Secretary watches
0001 hrs.

Wendi Deng has told Vogue that she will be collaborating with her pals Zhang Ziyi and Florence Sloan to establish a new film production company based on the DreamWorks model. The first project of the unnamed venture is apparently an adaptation of Shan Sa's novel The Empress, and Ms. Deng dropped the name of Ridley Scott as a possible director.

Let us set aside for a moment the fact that DreamWorks SKG was built on the collective talent, track records, and Hollywood street credibility of Steven Spielberg, Jeffrey Katzenberg, and David Geffen. Ignore for a moment that whatever the strengths Deng, Zhang, and Sloan bring to the table, they are simply not in the same league as the the DreamWorks founders. All of that doesn't matter: with the support of Rupert's money and Zhang's screen success, they will likely get some movies made.

You may also remember that MySpace China was publicized as Ms. Deng's deal. From Joseph Kahn's piece in The New York Times last June:

Wendi Murdoch has stepped up her role in China. She plotted a strategy for the News Corporation’s social networking site, MySpace, to enter the Chinese market, people involved with the company said. The News Corporation decided to license the MySpace name to a local consortium of investors organized by Ms. Murdoch.

There is a pattern to all of this, an internal logic.

Ms. Deng is not a News Corporation executive. She plays no official role in the business. When she helped put together the MySpace China deal (assuming, of course, that her participation was real and not some form of positioning), she was basically doing it as The Boss' Wife, as News Corporation laobanniang. That would probably rankle anyone who had an MBA from Yale and a little ambition, so it probably rankled Ms. Deng.

The venture with Zhang and Sloan - let's call it QueenWorks - gives Ms. Deng more than a project on which to occupy her time. It is her first real job since marrying her husband, and her first shot at running her own gig. It is also her shot at a lasting piece of the action, a legitimate business she can build independent of News Corporation that she can use as the foundation of her own media organization. It makes her something more than Mrs. Murdoch, and yet she carries that cachet into every meeting she walks into.

Providing she is serious about it, providing it is not simply a toy for a bored wealthy housewife, she could actually make something out of the organization. Either way, what we will have will be a litmus test: given a wealthy backer (her husband) and interesting partners, is Wendi capable of running a successful business?

This is an important question to News Corporation. If Wendi can prove herself an able executive in her own Hollywood operation, it gives her considerably more credibility at a later date when the complex issue of Rupert's succession comes up. It is one thing for the spouse of the boss to seek a role in the business. It is another entirely when that spouse also has made her bones as a successful businessperson.

This new venture will bear watching.

Internet or eSludge?

Jingshun Road, inbound.
Any bets on the first sandstorm?
1028 hrs.

Living in China one gets so used to long lead times for web pages to load and email to download that when the Internet really slows down you don't trust your own senses. You sort of think to yourself, you know, the Internet is really slow today. Or maybe I just drank too much coffee.

But when the CTO of one of my clients grabbed my arm the other day and ask me if I've noticed that the Internet in China had slowed considerably lately, I had all the confirmation I needed that the issue had nothing to do with caffeine-induced impatience. The net IS slower, and not just with overseas connections.

There could be several explanations for this, some quite sinister, like "they're upgrading the GFW." (Part of the joy of living in China is that government conspiracy theorists who would be regarded as crackpots anywhere else tend to start sounding like realists here. It doesn't mean they're right about things, just that people actually have to consider what they are saying before discarding it as paranoia.)

But there are a lot of things going on in and around Beijing that could be contributing to this: network upgrades, Olympic-related projects, construction cutting cables.

Or, indeed, more careful and deliberate scrutiny of the Internet in the weeks ahead of the coming opening of the 11th National People's Congress.

Either way, it's making surfing more painful than it has been in years.

I want my VPN...

Interesting...

In the Hutong
Experiencing Sunday night paranoia
2043 hrs.

So, sitting here behind the firewall, the fledgeling Baidusucks.org is blocked.

The GoogleSux.com site, on the other hand, is readily accessible.

This might just be a problem with my connection.

Anybody else here in China getting similar results?

Microhoo China

Hiding in the International Club
Is it CNY yet?
1328 hrs.

The prospects of Microsoft buying up Yahoo! are providing considerable titillation for those of us who love industry gossip, are suffering election fatigue, and who dream about being flies on the wall of Yahoo! board meetings.

What few of us have started to consider is what such a combination is likely to mean to China. Certainly, MSN will probably continue to operate as the #2 chat application (far behind Tencent's QQ but a growing fave among office workers). Where it gets interesting is when we start to think about Yahoo! China.

Readers of this blog will need scant reminder that Yahoo! China is owned and operated by Alibaba. Along with a whole lot of other interesting things, Yahoo! owns 39% of Alibaba. If Microsoft buys Yahoo!, it becomes Alibaba's largest shareholder.

Assuming Jack Ma and Steve Ballmer got along (there is no reason to think they wouldn't), the Alibaba investment could be very interesting for Microsoft. In fact, it would provide them several potential avenues - the LEAST of which is the Yahoo! China property - for building their (indirect, but very real) opportunities in China.

Taobao.

Alipay.

Even Alimama.

Think for a moment what it would mean to have these properties backed not only by Jack Ma's savvy dealmaking, but by the sheer muscle of Microsoft.

And think what it would mean to Microsoft to have Jack Ma as its leading advocate in China.

Finally, here is a question - what about Jack Ma as non-executive chairman of Microsoft China?

All very interesting possibilities that, if Microsoft takes the time and brainpower to focus on China in this process, make for some really interesting opportunities.

A Wise Word about 210 Million Internet Users

In the Hutong
Downloading music
2126 hrs.

Donald DePalma, author of Business Without Borders: A Strategic Guide to Global Marketing puts CNNIC's recent report on China's Internet market into perspective in an article on Chief Marketer.

He introduces a compelling concept he calls the Online GDP, which basically translates to the buying power of the online population.

According to DePalma, China's 210 million Internet users account for only 1.1% of the world's online GDP. He doesn't give us enough information to check his figures, so it is hard to judge the validity of his claim.

Let us assume for a moment, however, that what he says is true. His point is simply this - don't make a decision about localizing for a market based on the number of people it has, but based on its buying power. All of which is easy to understand and hard to dispute.

Or is it?

I have a couple of problems with using the e-GDP as the sole means to evaluate whether it makes sense to come to China.

The e-GDP figure is static. What we need to understand the value of a given market is both that figure AND its rate of growth. I would bet, given the fact that China's population is slowly aging and becoming more prosperous as it expands AND that China's overall GDP continues to grow at double-digit rates, that the growth rate in China's e-GDP is fairly spectacular compared to other markets. At some point, that 1.1% is going to grow into something much larger.

The e-GDP figure assumes that Chinese users confer the same priority on all goods - or, more correctly, it fails to take into account that some goods and services are better sold online in China.

Similarly, the e-GDP figure does not tell you how badly advertisers on your site want to reach online users in China.

Finally, the e-GDP does not give an idea of what percentage of a country's overall GDP is represented by Internet users. In other words, if you are already IN China and looking to identify places where a certain group of buyers goes, an overall figure is unhelpful.

I like DePalma's analysis, but I think he (and we) need to dig deeper. To rush to China purely on the basis of 210 million users is madness. But to stay away on the basis of a snapshot of the market runs the risk of missing very real opportunities.

Telegraph: The Video Clampdown

In the Hutong
Seeking a sore throat remedy
2041 hrs.

Richard Spencer, fresh back from holidays, writes in the Telegraph about the new rules requiring websites offering video content to obtain a license.

He quotes me, but quite apart from that, his take is spot on - anyone who expects the government to swoop in and start closing down these sites is probably missing the point. Most of these sites are self-regulating already. Tudou and its kin were screening videos for content prior to posting from the beginning, and self-regulation extends beyond the frontiers: even Yahoo! won't let me watch a video on their English site from here in the Hutong.

China Securities News are quoted as saying that the government's main concern is keeping control over professionally produced films.

If you buy that - and I don't - there is a little problem: at what point can you determine if a film on Tudou or YouTube is professionally produced, or just created by a really talented amateur?

Here's my take:

China Central Television (CCTV) and the other state broadcasters have looked around the world and are worried. They see other broadcasters losing young viewers to user generated television. The Chinese broadcasters want to avoid that fate. They had no intention of losing their franchises to Sumner Redstone and Rupert Murdoch, and they're certainly not going to roll over and let programming created by a bunch of amateurs with camcorders and mobile phones take their business away.

So they turn to regulators for help.

The policy makers, however, are not of a single mind - an issue in a system of government that depends increasingly on consensus create and enforce the law. To be sure, the broadcasters do not lack for support, but there is a growing group who are either privately tired of coddling China's weak broadcasters, who see the Internet as the more important medium for the future, or both. They aren't so quick to leap to CCTV's aid, and want to see China turn into an influential power on the Internet.

So they come up with a policy that ensures they have the tools to maintain control, and that assures broadcasters that the government is ready to protect their monopoly over commercial broadcast content.

And then they sit back and watch and see what happens.

What the new regulations do is reiterate what is already government policy, and they leave room to allow the experiment to continue uninterrupted.

Investors are going to be wary for a time - this adds a level of uncertainty into the process that won't go away, but eventually they'll get comfortable again.

This does, however, serve as a dual reminder: these sites prosper not only at the whim of the government, but under the threat of a jealous broadcast sector with strong support in the party.

Telegraph: The Video Clampdown

In the Hutong
Seeking a sore throat remedy
2041 hrs.

Richard Spencer, fresh back from holidays, writes in the Telegraph about the new rules requiring websites offering video content to obtain a license.

He quotes me, but quite apart from that, his take is spot on - anyone who expects the government to swoop in and start closing down these sites is probably missing the point. Most of these sites are self-regulating already. Tudou and its kin were screening videos for content prior to posting from the beginning, and self-regulation extends beyond the frontiers: even Yahoo! won't let me watch a video on their English site from here in the Hutong.

China Securities News are quoted as saying that the government's main concern is keeping control over professionally produced films.

If you buy that - and I don't - there is a little problem: at what point can you determine if a film on Tudou or YouTube is professionally produced, or just created by a really talented amateur?

Here's my take:

China Central Television (CCTV) and the other state broadcasters have looked around the world and are worried. They see other broadcasters losing young viewers to user generated television. The Chinese broadcasters want to avoid that fate. They had no intention of losing their franchises to Sumner Redstone and Rupert Murdoch, and they're certainly not going to roll over and let programming created by a bunch of amateurs with camcorders and mobile phones take their business away.

So they turn to regulators for help.

The policy makers, however, are not of a single mind (which is a little bit of a problem a system of government that depends increasingly on consensus create and enforce the law.) To be sure, the broadcasters do not lack for support, but there is a growing group who are either privately tired of coddling China's weak broadcasters, who see the Internet as the more important medium for the future, or both. They aren't so quick to leap to CCTV's aid, and want to see China turn into an influential power on the Internet.

So they come up with a policy that ensures they have the tools to maintain control, and that assures broadcasters that the government is ready to protect their monopoly over commercial broadcast content.

And then they sit back and watch and see what happens.

What the new regulations do is reiterate what is already government policy, and they leave room to allow the experiment to continue uninterrupted.

Investors are going to be wary for a time - this adds a level of uncertainty into the process that won't go away, but eventually they'll get comfortable again.

This does, however, serve as a dual reminder: these sites prosper not only at the whim of the government, but under the threat of a jealous broadcast sector with strong support in the party.

Saying "SNAFU" in Chinese

Heqiao Tower, Guanghua Road, Beijing
Waiting for another meeting to start
1535 hrs.

Melinda Liu over at Newsweek blogs on the run-up to the Olympics in her Countdown to Beijing blog. Covering the Olympic ticket website meltdown, Melinda asks some really good questions.

She also quotes yours truly.

BOCOG Don't Get Web.

Worth a read. Her point is simple: right now everyone here is wondering what has gone wrong with the systems at BOCOG to allow this to happen. Clearly, the IT problem stems as much from radically incorrect assumptions about website usage, if not a complete breakdown of communications between the people building the web capability and the people giving them orders.

It would be really easy to point the finger at the IT suppliers, system integrators, and the like. Ugly truth time: Lenovo has the institutional memory of all of IBM's past Olympic IT sponsorships on their side. It strains credulity to believe the problem was the lack of advice from the tech team.

I think the issue is more systemic: none of the old folks running BOCOG - or even the IOC - truly understand how much of an online Olympics this is going to be. If 8 million people hitting the site sounds like a lot, what about 80 million, or 280 million, on the day of the opening ceremonies?

Good Morning, gentlemen. This is your Wake Up Call

The ticketing fiasco is a wake up call. BOCOG should by now realize that the online infrastructure for these games will be just as critical as the new airport, the new venues, the new public transport, and new hotels. Failure to address these issues will leave as much egg on Beijing's face come next August as any problems in meatspace.