Silicon Hutong Archive

Six Ways to Help Zeebo Succeed in China

Oriental Plaza, Beijing

Hiding from the heat

1445 hrs.

A few days ago, I explained why I thought Zeebo is going to have a tougher time succeeding in China than we - or Qualcomm, the backer of the cellular game console - may think.

Today, my humble suggestions on what Zeebo will need to do to overcome those challenges.

1. Speed the Approval Process

Zeebo, the local carriers, and the game developers need to work together to create a fast-track process for game certification and local approval. Otherwise this is going to open the door for the first rival consortium that is able to put such a process together. Make a target of 30 days for game approval from the date of submission by the developer, leaving about three weeks of that time frame for the government to work through its part of the process.

2. Experience, Baby: Get Gamers Out of the Internet Cafe and Into the Living Room

Those much younger than I will probably not recall the days when the only place computer games could be played was in a slightly seedy joint crammed full of stand-up game machines. The one I hung out in was called Westworld (named after the 1973 Michael Crichton science-fiction film), two doors down from the landmark Fox Village Theater and a block south of the UCLA campus in Westwood Village.

Westworld started out pretty cool. And then, over time, it got seedy. It stopped being a wholesome hangout for the neighborhood pre-teens and it started to attract an element that was, well, incompatible with what our parents saw as a good crowd to hang with: creepy chain-smoking adult monomaniacs who blew their paychecks on beer, smokes, and Galaxian, and regarded us underage gamers on tight monetary rations as irritants or suckers. The management didn't care.

It was this phenomenon - which I think parallels nicely what has happened in a lot of China's Internet Cafes - that led to the emergence of home gaming consoles from Atari and Mattel, and eventually home computers (used heavily for gaming) from Apple and Commodore.

It took a while - the first generation or so sucked. But by the time we got our Mattel Intellivision in 1978, the experience was good enough that we never really missed Westworld.

This is the real opportunity for Zeebo - give parents an affordable device that will get their kids out of smoke-filled Internet Cafes, while giving the kids an experience that is as good as - or better - than what they would get in their local wangba.

The Zeebo presentation at the Game Developers' Conference leaves us in a bit of doubt. We will know better when the first devices hit the market - in Brazil. But the experience will be critical

3. Mr. Jacobs, Tear Down These Walls

The initial Zeebo, as currently envisioned, uses its networking capacity only to discover, purchase, and download games into the box.

That's not going to cut it. Many of us in the West may have grown up with discrete, solo gaming experiences. Some of us still prefer it that way (no crude comments, please.) But in China, online and multiplayer gaming is the rule, not the exception.

Yet just as important as offering a networked, multi-player gaming experience is offering the other major advantage of a truly online game: seamless cross-platform play. Play at home on your Zeebo, then when you leave the house, continue playing on your mobile phone, and maybe even continue play on a computer.

This is the gaming triple-play, the promise of a game that follows you wherever you go and is always ready for you to pick up where you left off. Zeebo needs to be a part of that mix, not the heard of a separate gaming universe.

4. Don't Make Zeebo China All About Helping Foreign Game Companies

Success will come for the platform when Zeebo does more than give EA, id, Glu, and Digital Chocolate a way into the Chinese market. Sure, giving them market access is nice, and some people here do enjoy playing "global games." But as with music, literature, television, and movies, we all want stuff that is relevant, not just cool.

Getting lots of local developers of all sizes on the platform has to be an immediate priority, even before plans are announced for China. Near-term Zeebo needs to think about splitting the offering 50% localized non-Chinese games and 50% locally produced. Longer term, that needs to shift to 25/75. That means getting busy. Now.

5. Staff Up

You may be able to develop a product with five full-time employees, but the time has come to start selling the sucker, and you will need reinforcements. Resist the temptation to scoop from Qualcomm folks (as smart as they are), and instead find people who understand how to market these kinds of devices globally.

6. A Brief Digression

Some years ago, I was speaking to a colleague in Hong Kong about the prospects of a major international game company here in China. He knew the guys inside the company fairly well, and there came a point in the conversation that I realized the company had a huge blind spot in its plans. Rather than look around at the market conditions, the culture, the economy, and the opportunities, they were determined to do the same kind of business in China that they did in the US.

What I suggested to my colleague was this: the company should give up on localizing games created for the American market and trying to sell them in software stores. Instead, the needed to go to the cable TV industry in China and work on a system whereby online version of their games could be delivered to cable televisions all around the country.

The cable operators had the bandwidth, were building digital systems that allowed for interactivity, and needed the revenue. Kids in China were used to playing online games but there were a lot fewer home PCs that there were cable households.

My colleague humored me, told me they'd never go for it, and promptly forgot my idea. And the company has now been chased out of China.

The big loser in all of that is going to be the cable operators, I think, because it looks like Zeebo is about to lead the telecom companies into the future of online console gaming.

If, that is, Zeebo and its guides can forget about what they think China needs, and start thinking about how to make Chinese gamers drool.

Zeebo and It's Six Big Challenges in China

In the Hutong

Looking for a Snack

2020 hrs.

In case you missed it, one of the interesting developments coming out of the recent Game Developer's Conference in San Francisco - at least as far as China is concerned - is an interesting item about a new game console called "Zeebo."

Brought to you by Qualcomm, the people who invented third-generation wireless technology and the Eudora e-mail client (and many other useful bits of technology,) Zeebo is a game console designed for those of us who cannot afford - or cannot buy - an XboX, Wii, or Playstation. Created with the growing middle class in Brazil, Russia, India, China, and other emerging markets, Zeebo eliminates the need for game cartridges or discs by allowing you to select, buy, and download games directly to your console over a cellular telephone network - apparently even if you don't have a mobile phone account.

There is much sexiness to the Zeebo idea, not least of which is the elimination of piracy as an issue for game publishers, , the use of an already-ubiquitous network for distribution, a local partner (the wireless carrier) to run the business, and other advantages that I'll go into in another post.

From a business perspective, the device seems tailor-made for China. But Zeebo's path to success in China is fraught with challenges.

Open a Window

Wireless devices inside the modern Chinese home face nasty challenges to what engineers call "signal propagation." Most apartment buildings and free-standing homes in urban China are built of thick concrete reinforced by steel bars. These sorts of structures play hell on wireless signals.

In my home, for example, a wi-fi signal won't make it past the next room over, and if I am more than 10 feet from a window, I lose cellular signal - even though we can see our carrier's cell site form our windows.

Designed to be placed next to the TV set, Zeebo is not necessarily going to be next to a window within optimal range of a cell site. The value of the device, in other words, will depend on local signal quality. That's going to create a few issues, and could conspire to give the device an unfair reputation among consumers.

(This is not an idle concern. For a long time, and for reasons having more to do with local conditions than problems with the technology, people in China used to joke about having to "open the window and let CDMA in." That undeserved reputation has dogged the 2G and 3G versions of Qualcomm's technology, a challenge Qualcomm has overcome only after considerable effort.)

Brand Power (Or Lack Thereof)

Buying a Zeebo - or any of the console gaming systems - is a tough decision for a consumer. They are, after all, not just buying a device, they are making a bet on a gaming ecosystem, committing to software, accessories, services, and upgrades to that ecosystem for years to come.

That's a tough threshold to get consumers to cross. Just ask the XboX guys at Microsoft, or the Wii guys at Nintendo. If you want to get frugal consumers to place a bet on your new entertainment ecosystem, it helps if those consumers know you and trust you.

Zeebo, being new, has not yet cultivated this confidence, and Qualcomm has until recently placed little stock in building their brand with consumers. Why bother? The consumers, the thinking went, didn't buy Qualcomm products. That lack of foresight is going to hurt the new console's prospects in China.

A Brutal Approval Process

When it created BREW, Qualcomm established a rather involved certification process for the applications to be delivered over wireless networks. The reasoning was strong: given that these were applications that ran on the network as much as on the device, one bad line of code could not only crash the device, but potentially harm it and possibly affect the functioning of the network.

That involved process has come to the Zeebo. Apparently, first you need to become a BREW developer, then get Zeebo approval, then use the Zeebo software developer kit, then go through the approval testing firm NSTL, then reach the console.

In China, I can foresee two additional steps in that involved process. First, you would need to get approval from the carrier, who is going to want to have some say over what gets distributed over their network, and second, you are going to need to get approval from the General Administration for Press and Publications (GAPP), the government regulator with authority over games. And, if you're not a Chinese company, you'll probably need to find a Chinese distributor first.

And you thought it was tough getting your iPhone app approved.

That process will be time-consuming, costly, and for the last two bits in particular, frustrating, none of which endear Zeebo to already-overworked developers, nor will it help ensure a rush of new games to the platform. And that's important, because regardless of what they may believe at Qualcomm headquarters in La Jolla, Zeebo will need more than Quake and World of Warcraft to succeed in China.

Local Developer Support

One of Zeebo's advantages is that Qualcomm has already managed to corral the support of major game publishers and developers, including EA, PopCap, Capcom, Activision, Namco, and a host of others, giving the device 15 titles now and 30 within 90 days, with more to come.

Zeebo's succesess in China, though, will depend on cultivating the support of popular local game developers creating games that Chinese people want to play. For all of the success of companies like Activision-Blizzard with Worlds of Warcraft in China, foreign companies hold a shrinking part of the pie. The majority of games played in China are locally created, and that proportion is growing.

The good news is that Qualcomm has some experience here, having built a healthy local developer community for its BREW mobile platform. The challenge, though, is going to be convincing developers to invest in this new platform. Already developers need to spread their resources among developing online games, PC games, half a dozen mobile platforms, widgets, and games on social networking platforms.

Shanzhai Nation

What Qualcomm has created is an inexpensive device with an ecosystem. Even if Zeebo enjoys only modest success, we can count on local companies duplicating the effort, creating a device for even less money and with the support of local game manufacturers.

It does not take much imagination to see the Chinese government supporting the creation of a TD-SCDMA based Zeebo clone, created in China, sold through China Mobile, and packaged with sales of TD-SCDMA networks overseas. I would be shocked if Qualcomm's announcement didn't set at least half a dozen such initiatives into motion here in the Middle Kingdom.

Unless Qualcomm cuts deals with all three mobile networks in China, we could see our own version of the Console Wars playing out among China's carriers. Qualcomm would be faced with having to support an expensive marketing battle against a local champion (been there, done that, eh, Dr. Jacobs?) or bailing out entirely.

And if it chooses the latter, it opens the door for Zeebo competitors in its other markets as well.

It's the Experience, Guys

In reading through the announcements and other supporting literature, it is clear that Zeebo's primary appeal is how neatly it appears to solve several business problems in one fell swoop: piracy, affordability, and accessibility most prominent among them.

At the same time, I was amazed to see how Team Zeebo is playing down the importance of what is apparently an inferior experience. What is important, we are being told, is how inexpensive this thing is. So what if it is a little slow and the games are two generations behind the state of the art? What is important is that the games are in the homes.

If the average middle-class gamer had little exposure to what the world of games can offer, that would be one thing. But all you need to do to see an extremely cool, fast, and immersive game is walk into any Internet cafe in China.

The list of devices that have tried - and failed - in the PRC because they offered a low price but a downgraded experience should be enough to give the Zeebo folks pause. Just ask ASUS, or the One Laptop Per Child team in China. Or ask Microsoft. Anybody remember the Microsoft Venus Internet set top box?

Right. This is a place where workers save three months to buy a phone instead of one month because they want the best experience they can afford, not the cheapest.

Zeebo's biggest challenge in the PRC is going to be delivering an experience that players will find more fun, more immersive, more addictive, and more appealing than what they can already get in a Web Bar. The battle is to entice them back into the living room, and Zeebo can only do it with a kick-ass experience.

Take a hint from Debbie Fields, Zeebos. "Good enough" won't be. Not in this market.

A Step Back

None of this is to say that Zeebo won't be successful in China. But the great thinking that has gone into the product's design and the business model that will sustain it only address the most basic challenges.

But now comes the hard part: turning Zeebo into an awesome experience for gamers even as the company ensures it is a superior business for developers, mobile operators, and retailers.

Qualcomm's hurdle is that as a company it lacks experience running a consumer-oriented business generally, much less a multi-sided platform in the ever-changing emerging markets. The company has to develop a whole host of competencies very quickly, all while gaining the trust of consumer it has all but ignored for over a decade.

But I hope they succeed. And I'm going to explain why tomorrow.

Four handhelds, three computers, two email accounts, one little problem

Starbucks Pacific Place

Dreaming in Kodachrome

1412 hours

I'm about to spend a bunch of posts diving into the promise and reality of 3G in China, but before I do, a brief call to all of my friends in the information technology business.

Not Different, Just Extreme

I sit down at a table and lay them out: A Motorola ZN5 (phone and camera); a Blackberry 8707 (email); iPod Touch (PDA/games/vids); iPod Classic (the music monster.) And THEN I reach for one of two laptops in the bag. I'll admit that I'm hardly typical (I mean, even Steven Lin, aka "Flypig," calls me "the geekiest geek I've ever met.") But after constant trial-and-error, this is the system that makes me more productive and keeps the information I need close at hand.

Yet I am hardly alone. As I spend chunks of my days watching Beijingers native and naturalized live their digital lives, I've found that I'm simply an extreme example of a growing trend. For a lot of people in China, the early promise of convergence - your whole digital life in one device - misses the point.

Blowing Divergence

What we are getting in its stead is something quite different. Sure, some people ARE converging: there are some for whom cramming more and more features into a single device, (the digital Swiss Army Knife), is still a practical idea. But I'm seeing a growing number of people here in China using several complimentary devices. Call it "divergence."

The gadget and computer industry should be forgiven the error of predicting a single-device future. But now that the future is here, and the one-gadget-fits-all approach is a fit for only a small percentage of people, the hard work begins. The industry needs to help us recognize the challenge of living in a diverged world, and it needs to help us make the most of it.

Marketing is not going to be enough. Nor, for that matter, is complying with a handful of software and hardware standards like USB, Bluetooth, and Wi-Fi.

Harmonize my Gadgets...please

Instead, the industry needs to stop selling us "THE" device, and start showing us how these devices can fit into our lives and our personal information environments, and then giving us simple and workable building blocks so that we can store our digital stuff in different places and machines, and access all of it whenever and wherever we want to, and we want to do it without having to scratch our heads, much less read an instruction sheet.

(And before you roll out my beloved Apple as an example of a company that is making the personal information ecosystem a reality, I have one word: MobileMe. Serving to prove that enabling a personal information ecosystem is so hard that even Apple has a hard time doing it.)

Don't tell me my phone is a computer. Tell me what it can do better than my computer, or tell me what it can do that my laptop cannot.

Don't tell me your online document service can replace Microsoft Office. Tell me how well it works as an extension of my desktop software.

Don't sell me a platform of one-size-fits-all online services. You have no idea what I need.

And take a lesson from companies like Evernote, who simply offer an online/offline application that is so mind-bogglingly useful that people will look for new ways to use it.

That process will be hard. It will be messy. And in China it will be especially difficult, because most of the country is still figuring out how to get on the information bus, making the place a moving target.

But it is the standard by which the information industry is going to be judged. If you want credibility, stop promising us info-nirvana and start delivering ways to let us design our own information ecosystems.

Stepping off soapbox.

3G in China: ARPU as a Measure Doesn't Measure Up

Jingmi Expressway, Inbound

Cold, but not like you'd expect

1010 hrs

Now that the Year of the Golden Calf Ox is shaping up to be the year when all three of China's mobile operators - China Mobile, China Unicom, and China Telecom - will deploy third generation mobile networks, or 3G, it is useful to explore the extent to which 3G networks elsewhere in Asia are living up to 3G's promise to raise average revenues per user (ARPU).

The short answer is "pretty good." As the operators find ways to deliver new services for which users are willing to pay, the revenues are going up.

Nice revenue. Where's the profit?

The problem is that for some operators, particularly those in competitive markets, those increases are not translating to profits. To give but a single example, one well-run operator in Singapore has watched average revenue per user rise 41%, from $41 to $58 as a result of adding 3G services. Leaving aside the sunk cost in the network, profits should have risen accordingly.

Not so, according to an executive of the Singapore operator speaking at a recent industry conference. That growth in ARPU is not coming with an attendant growth in profits, because so much of the increase in revenues is being offset by the cost of acquiring content.

Given that the executive was speaking to a room filled in party by content providers, I would bet he assigns an unfair portion of the problem to content. I would wager that increased marketing and management costs that come with building awareness and usage of the new systems are also digging into profits, along with other fun things like amortization of network cost.

Regardless of source of the costs, however, the issue is clear. If executives, investors, and analysts are using ARPU as a measure of success for 3G networks, we are all looking at the wrong number. Revenue only tells half the story.

Building a Better Yardstick

What we really need is a metric that captures both the additional revenue and additional costs attributable to 3G services, and that still describes the additional net gain for an operator from 3G.

Two measures would provide a more accurate - and more telling - yardstick. We can either look at average margin per user (AMPU) or average profit per user (APPU.)

AMPU would subtract the costs of acquiring the user, providing service to the user, and keeping the user from switching to another network from revenue. As such, it would be a better indicator of whether 3G services were living up to their promise to the overall operator business. APPU, which would subtract all operator costs, would help determine whether the health of the enterprise was improving or declining as a result of 3G adoption. The measure takes into account such things as investments in network and business development that margin does not take into account.

I like APPU somewhat less than AMPU, but I think the former is still useful because it would account for the different ways each carrier accounts for the different costs involved in the network and in service delivery. Either would be better than ARPU, and the use of both AMPU and APPU in some combination would give a much better snapshot of the business.

If tracked over time (as adoption grows, technology matures, and competition drives down the costs of services and content), the two measures would give an indicator of how the fundamentals are improving.

More than Accounting

Okay, I'll grant that this seems like an esoteric question best left to accountants and others. In truth, though, this has a significance that goes beyond the ken of analysts and investors.
If we start using our two new metrics even alongside ARPU, we start getting a feel for how much the carriers are spending in order to get each additional dollar or revenue. While this sounds even wonkier, this little measure is going to be especially critical for China.

Chinese carriers tend to be more focused on revenues (for whatever reason) than on either profits or marginal costs. This revenue focus gets operator executives thinking "if I can keep a higher percentage of the revenue of a value-added service delivered on its network, I would rather squeeze out the outside provider and offer the service itself, even we have to bear the full costs of the service. That way I keep the larger share of revenue, and, after all, that's how my success is measured."

If, on the other hand, the operators were judged not only on ARPU but on AMPU or APPU, the pressure to deliver more services at a lower cost could force the carriers to evaluate whether offering a service themselves would deliver a higher profit, rather than whether it would increase revenues in exchange for even higher costs.

Once you start looking at the costs of delivering a service, rather than just the revenue, the best service provider is the one who can deliver the most dollars with the least cost.

In other words, you go with the guy who makes you money while you spend nothing.

Service Providers, Listen Up

What I suspect is that this kind of business analysis would be a good thing for independent value-added service providers (VASPs). It would enable them to make a business case for long term partnership, even when the service provider starts making a lot of money, to make the case that it is better to have a cash-cow than a cost-center, especially because network operators have enough cost centers as it is.

I also suspect that the operators will not come to these conclusions on their own, but will only be compelled in that direction when the investor and analyst community starts demanding it.

And that means that once VASPs have their business cases perfected, it behooves them to start making the case, individually and collectively, to change the way operator revenues are evaluated. If investors and analysts can see the wisdom of doing it the VASPs way, they can be a powerful ally in getting China's carriers to stop steamrolling the VASPs out of business.
China needs efficient carriers, not just massive carriers. It serves everyone if we start measuring them accordingly. Otherwise the benefits of the government's mix-and-match game with the nation's telecom assets will produce little more than price wars and mutually-assured value destruction.

Telecom Reform: The Sound and the Fury

On the Airport Expressway

Experiencing a tan-out

1445 hrs.

The government has finally announced the broad strokes of the long-anticipated plan for the restructuring of the telecoms industry, and a quasi-definitive time frame for the government to finally issue the coveted 3G censes. The business and industry media are having a field day with it, arguing about what it will mean for everyone in the industry, from China Mobile to Cisco to Nokia and, yes, even to Apple.

Here is what it really means: 

Nothing.

Oh, don’t get me wrong. This edict, which treats some of the world’s largest telecommunications operators like so many LEGO sets, is going to have some major short-term repercussions. Analysts and investors will spend the next 18 months figuring out what effect all of this has on the valuations of the carriers, opportunities for equipment vendors, and challenges for management consultants. Economists, for their part, will nod sagely about the creation of “more competitive entities,” “a more rational industry,” and so on. 

But in the end, these changes aren’t going to amount to much. And here is why.

First, the changes do nothing to alter the fundamentals of the market. No matter what sort of beasts this process creates, consumers and businesses are going to continue to suck up bandwidth, cellphones, and services about as quickly as they can be delivered. Wireline will continue to be a tougher business than wireless. None of the three merged firms are going to get instantly smarter about expanding overseas. Efficiency will continue to be a less important issue that keeping up with demand. The managers of these companies won’t automatically get wiser about delivering services. 

Second, the changes do not address any of the really pressing issues the industry faces. How do we deliver more services for less money? How do we get mobile phones the billion or so Chinese who have yet to place a call, much less buy and own a mobile phone? How do we make money on IPTV? What role do cable operators have to play in delivering telecommunications services? How do we connect the unconnected? How do we deal with the growing pile of e-waste coming from the industry?

Third, the mergers are taking place in complete disregard for the customer, the consumers and businesses who depend on these carriers to provide the communications infrastructure of their lives and livelihoods. Apart from the fact that these changes will cause a disruption that will throw the customer into fourth place behind the government, employees, and investors for the foreseeable future, aspects of the industry plan look to be designed - if not to make life tougher on consumers - at least to ensure that they reap as few benefits from the changes as possible.

Just one example: we will not only have three different mobile carriers, we will also have three wireless networks operating on incompatible technologies - one on WCDMA, one on CDMA-1X, and one on TD-SCDMA. Such incompatibility not only means that roaming across networks will be more difficult - if possible at all - it also substantially negates the potential benefits to the consumer of competition among three carriers. If everybody offered the same network, switching would be easy. This raises churn for the operators, but it also forces them to be more customer-focused. Now, buying a phone locks you into a carrier for as long as you carry that device. 

Nothing in the mergers is designed - or intended - to improve customer service, to lower rates, drop costs, or broaden the scope of services available to consumers or business. Now, it is conceivable that one or more of the companies will come across opportunities to improve service. But for the foreseeable future, each company will be engrossed in the simple effort of completing these disruptive changes without having the wheels fall off.

The fundamentals don’t change. No major problems are addressed. Not only are these changes not market-driven, they ignore customers completely. 

At best, things are going to look a bit tidier as the Minister of the reorganized MII looks out his window. 

Hollywood Icon Comes East

In the Hutong
Rolling with the changes
1842 hrs.

The Hollywood Reporter, long essential morning reading for the entertainment industry in the United States, Europe, and elsewhere, has had permanent roots in China for a couple of years now, with an official bureau led by Jonathan Landreth. The THR staff have provided a much-needed addition to the coverage of the music, film, television, and new media industries here in China. With occasional exceptions, however, much of the fine reporting coming out of THR in China has been trapped behind a firewall.

That all changed today, when THR launched The Hollywood Reporter Asia, a website that not only allows us to see the superb coverage coming out Jonathan and his team here in China, but also regional and global industry news. One other thing I really like about THR-Asia is that it is edited right here in Beijing, underscoring Beijing's growing role as the media center of the region.

Give it a look. Personally I'm adding it to Danwei.org as part of my daily routine. If I have one quibble, it is the lack of an RSS feed, but I understand that with THR offering their content for free, they want you in the site for the ads. A small price to pay.

Immovable Force Meets Immovable Object

La Capilla de San Pedro de las Migas
(aka Peter's Tex Mex, Beijing)
Thawing out
1300 hrs.

News now coming in suggests that China Mobile and Apple couldn't reach an agreement on revenue splits. No surprise there. The odorless-feces-factor in the negotiating venue must have been off the scale.

There are three ways of looking at this:

1. Apple has been offered another thick slice of Humble Pie, and it needs to wake up and realize that it is no longer the only guy on the block.

2. China Mobile will regret this. Deeply.

And my personal favorite:

3. The parties walked away from the table because they don't really need each other to succeed.

China Mobile will continue to be the largest (and possibly most profitable) mobile operator in China in the coming years, so they're not worried about kick-starting their business in a hyper-competitive environment.

What is more, the operator has a long line of people coming to their shiny new headquarters on the 2nd Ring Road, hat in hand, with ideas on how their devices and services can bring China Mobile even more revenue without lifting a finger. All of which makes Mr. Jobs' model of "you-sell-our-phones-we-take-your-cash" seem just a little unappealing.

(Apple will get a different reception in Japan, where DoCoMo, KDDI, and SoftBank - for their own, seemingly perverse reasons (that of course make complete sense in a Japanese cultural context) have managed to create three services with the minimum of compelling differentiation. Of course, the Japanese are no slouches at bargaining, and you can bet that if anything they will restrain the iPhone from it's maximum level of success in the market by either restraining availability or jacking up the price. But we digress.)

Apple has several options:

1. Cut a deal with Unicom, who are increasingly desperate in their search for a decent partner (the problem with THAT, of course, is that as of this writing Apple is not offering a CDMA-based iPhone, much less a CDMA-based iPhone with a SIM-card slot, and CU knoweth not GPRS.);

2. Wait until 3G rolls out in China and all (both) carriers are looking for ways to recoup their investments in network upgrades;

3. Go with one of the Hong Kong carriers, counting on growing China's already thriving gray market in unlocked/hacked iPhones.

4. Cave in and do it China Mobile's way.

My bet is on the waiting game, or a combination of #2 and #3). Apple has enough on its plate worldwide, ramping up production, working the bugs out of the iPhone, and bringing developers into the ecosystem.

In the meantime, Motorola, Nokia, Samsung, dopod, and the local guys creating iPhone look-alikes will be doing all they can to eat into the iPhone's potential market.

Indeed, we may find that the iPhone will radically increase the number of people in China willing to upgrade to a new and cool smartphone without even being in the market, creating a Halo Effect for the entire industry.

Why is this man suddenly talking?

Starbucks Guomao 2
Discovering foreigners are a rare species
1144 hrs.

From atop Ogilvy's digital watchtower, Kaiser Kuo points us to a highly readable Clay Chandler story in Fortune introducing China Mobile's Wang Jianzhou as "China's Mobile Maestro."

The story is a bit of a fluff piece (Chandler comes off as a bit of a fanboy), but it is interesting beyond the content. Wang is not normally a talky person with the foreign media. For that reason, one wonders why he's suddenly making himself more accessible to the global media.

You could attribute it to a long-overdue realization that the CEO of such a company needs to have some global visibility, but I wouldn't buy it. For all of their global ambitions, China Mobile's cash-cow - and its best near-term growth prospects - are in China.

There are probably a host of reasons for Wang to raise his profile, but one of them has to be a desire to buy for China Mobile greater independence from the fickle whims of regulators in Beijing. Having a moderately high profile amongst influential audiences overseas, and having a voice among those audiences, is a route to enhanced power and influence here in Beijing. A few pieces like Chandler's, and people will start to see Wang as a cross between Craig McCaw and Jack Welch.

Of course, his old colleagues at the Ministry of Information Industries can't be happy. In the eyes of the regulators, China Mobile responds first and foremost to the direction of the government. Wang's quiet, deliberate creation of a base of influence in China and abroad inveighs against that.

And well it should. If China is serious about creating companies that are both local and global champions, the enterprises that began as the wards of their respective ministries must leave the nest, no matter angst that might cause the aparatchiks. China Mobile will never be a world-class company until its responsiveness to its customers and the capital markets is no less - if not more - than what it gives government officials.

Wang is going to need the support of cool heads, and soon. The worst kept secret in China's mobile industry is how much the country's operators and handset manufacturers hate TD-SCDMA, which was described to me by one insider as "a politician's dream and an engineer's nightmare." Worse, there is growing rumbling about another forced restructuring of the mobile phone industry that would give Wang stronger competition and may even see him compelled to shed some chunks of his own company.

If I were to make a prediction for 2008, I would say we will be seeing many more puff pieces about Chinese CEOs. The importance of China, the business media's need for a stream of stars, and the tsunami of foreign journalists coming to China in the next eight months makes that a sucker bet.

One of the best profiles I've seen so far is James Fallows' profile of Broad CEO Zhang Yue in The Atlantic last March.

The iPhone and China: Possibly Not a Match Made in Heaven

The Mezzanine, China World Tower 2
Sitting at a coffee-free Starbucks
1022 hrs.

Longtime Hutong readers will remember that right after Steve Jobs announced the iPhone in January, a very noisy hedge fund guy emailed around an article saying that the iPhone was the "ultimate China-friendly gizmo."

Despite being an Apple partisan for over two decades, I took detailed exception to his point. I thought the iPhone and China were a gross mismatch.

Negotiations between China Mobile and Apple hit a snag earlier this month over the business model, and there is a rumor in the Chinese press that the parties have walked away from the table.

Realistically, I think Apple and China Mobile will reach an agreement at some point, and I also think that eventually Apple will introduce an iPhone that can be successful in China.

The only question is: will Nokia, Motorola, Samsung, and LG have eaten into the iPhone's differentiation by the time they do?

Blackberry: Not Exactly DOA, but Close

In the Hutong
Munching peanuts
2035 hrs.

About a week ago I was listening to somebody on CNBC (I don't remember whom, but he was in New York, not Singapore or Hong Kong) tout Research in Motion (RIM) because they are about to launch in China, and that's going to mean big things for the company.

With respect to the folks at CNBC, the guys over at Reuters have run a much more sober piece (via CNET) about the challenges RIM faces in marketing its BlackBerry devices and services here in China. Reuters correctly notes:

• Local push e-mail services already exist that are price-competitive.
• Chinese businessmen who can afford the device do not, in many cases, feel the same compulsive need to be hooked into e-mail. The phone is enough.

That's all quite true. But it gets worse.

Moose in the Shark Pool

The article implies that RIM is considering stepping beyond its core market of high-end enterprise users. That would be a bad move. The sharks are out for RIM.

I have no doubt that BlackBerry will have an appeal among many expatriates - at least, those who don't already have service from overseas - and senior Chinese executives of global firms. That's not a giant market, but it is one that will be willing to cough up nearly US$1,000 a year for the service. (And lest you think I'm just an old cynic, I walk around China with a BlackBerry myself. Of course, It's an unlimited global service plan from T-Mobile, but that's beside the point.)

• Device Cost - While pricing has yet to be set, a good indicator is Hong Kong. All devices are purchased in Hong Kong and China on pretty much the same basis - unlocked but no subsidy. My 8707, purchased from CSL, set me back the equivalent of RMB 4,000. There is no camera, no music, no external memory.
• Device Competitors - Unlike when BlackBerry launched in the U.S., there are very real competitors in China who have prepared for BlackBerry's arrival with devices that arguably match BlackBerry in email functionality and beat it in a host of other areas - for a lot less money. In fact, it is entirely possible that the launch of BlackBerry devices with China Mobile - delayed as it has been - will be accompanied by simultaneous launches of QWERTY devices from Nokia, Motorola, Samsung and Palm.
• No Brand - The percentage of potential customers who know RIM is tiny. Not only does this mean that there is a minimum "anticipation" factor that will drive initial sales, but also that RIM has a long battle to fight to build the BlackBerry name. There are over 80 brands fighting for attention in China, and all of them have a better brand than him. In the case of companies like Motorola and Nokia, we're talking decades more experience and billions in brand equity that RIM doesn't have yet - and would have to spend millions to build.

RIM's Smart Road to China

If the guys at RIM are sitting in their offices in Canada eagerly expecting China Mobile to reach into its cash hoard and pay to market BlackBerrys, they are in for a crushing disappointment. I suspect that, whatever their original beliefs, RIM now understands that this is not going to happen. If they don't push Berries, nobody will.

The company faces a choice: invest millions in a sales, marketing, and advertising effort in China in an attempt to expand its natural market into the hyper-competitive heart of the mobile phone industry, or focus entirely - at least initially - on building and defending its home turf with lawyers, professionals, and the local offices of their global customers.

Those "low-hanging fruit" could do a lot to jump-start positive cash flow and begin building brand, a basis from which RIM could later build with more targeted offerings.

Stay away from the temptation of the big numbers, guys. Remember your market and stick with it. Doing so will make the difference between you having a business in China, and China sending BlackBerry home to North America in a body bag.

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.

A Blade Runner Shows His Age

In the Hutong
Digesting Subway
1830 hrs.

Director Ridley Scott has in his career delivered a body of work that includes some of my all-time favorite movies (Alien, Blade Runner, Black Hawk Down) and some movies that I enjoy as occasional guilty pleasures (Black Rain, Gladiator, Matchstick Men). He is the unapologetic master of the high-end Guy Flick. (And let's be honest - even his Thelma & Louise was just a gender-bent buddy movie.) And, of course, he directed the commercial that introduced the Apple Macintosh to the world.

So it is particularly disturbing to hear the aging auteur getting all medieval on people who watch movies on their mobile devices. In an article in today's Sydney Morning Herald, Scott is quoted from the Venice Film Festival as saying that the shift to the small screen would kill cinema.

"I'm sure we're on a losing wicket, but we're fighting technology," Scott, the force behind Alien, Thelma & Louise and Gladiator, said.
"While it has been wonderful in many aspects, it also has some big negative downsides."

I'm Not In the Business. I Am The Business.

Now, filmmakers have been pulling their hair out over technology destroying cinema since the introduction of talkies, but here we are, eight decades after he introduction of sound, sixty years since the introduction of television, and thirty years since the first VCRs began landing in homes, and each one of these "horrible" developments with their big negative downsides has only brought more opportunities to filmmakers and more revenues to Hollywood.

The ugly fact is that the movie business is in grave danger, but to blame mobile phones is the reddest of herrings.

Because, you see, the problem is not technology. It is Scott and people like him, people who really like Things the Way They Are, because Things the Way They Are have made them rich and famous and lets them make expensive movies and take home little trophies. These folks do not particularly like technology (watch Scott's movies - he hates tech), do not understand people who do, and are deep down in places they do not talk about at Malibu parties they are just plain scared of anything with a microchip.

They see all of this change happening and are smart enough to understand that it means The End of the World As They Know It. And they are terrified. Hence Ridley's mobile device fixation.

The fact is, technology will save the motion picture industry.

Would you...like to be upgraded?

The movie business is beset with problems that could fill a library. Films have become too expensive to make. The industry is structured - from finance to production to distribution - to quash all but a small number of entrepreneurs carefully screened (pardon the pun) and selected at film festivals. The business is overwhelmingly American in an increasingly global/local culture. The cinema experience is outdated, overpriced, and of little or declining relevance in much of the world.

None of this is to suggest that movies are going away. Something is, however, very wrong when people (especially young people) are spending far more money and time on other forms of entertainment, and those alternatives are growing - and fast. Cinema is losing its share of our wallet, but equally important it is losing our attention. (Hell, I'm an old guy, but I've spent more on games for my Sony PSP this year than I have on movie tickets for my entire family.)

Technology, in its different forms, is getting set to bring about a cinematic renaissance. More people can make films, make them cheaper, and get them in front of audiences faster and easier today than anytime since Mayer, Zukor, Laemmle, Cohn, Fox, Warner, and Disney showed up in L.A. and started buying orange groves. Green screens, cheap gear, and powerful software means that you don't have to spend $200 million to make an epic - you just need a script, a camera, and a Macintosh.

Starting to see what's bugging Ridley?

I have the choice of watching movies in a theater, on my big-screen TV, on my desktop, my laptop, my PSP, my iPod, or my ROKR E6. I can buy a film from a store, order from Amazon, or download from iTunes, not to mention the illegal channels. In short, I'm in control of how I decide to experience a motion picture, not the National Association of Theater Owners.

The future of Hollywood is lean, streamlined, personal, and technology based, and there are dozens if not hundreds or thousands of filmmakers who are following this road. Today they may be uploading 5 minute clips to YouTube. Tomorrow?

Do you like our owl?

Nowhere does technology offer a greater opportunity to build the film industry than right here in China, if for no other reason than there is less legacy infrastructure to stand in the way. There are other reasons, of course.

Technology substitutes for mass in China the same way it does elsewhere. Despite being the most populated country on the planet, there is a dearth of talented people both in front of the camera and, more critically, behind it. Stars may get all of the attention, but a pool of talented craftspeople - from the director down to the make up girl - is essential to sustain a traditional movie industry, and China's pool is frustratingly shallow. The good people are expensive, and their lack forms an artificial bottleneck. The technologies that substitute for talented and experienced crew are the only way forward in the near term.

Production finance is another constraint to the growth of China's film business, and the value of technology as a substitute for cash cannot be overstated. As with Hollywood, big budget flicks might get the attention, but the future will come from people who make films with a small handful of people.

If technology is important for production, it is essential for distribution, because without those small screens, the movie will probably be seen by a tiny number of people - if at all.

China has one cinema screen for every 466,000 people. (By contrast, the U.S. has one screen for every 8,000 people.) There are around 300 movies released each year in China, meaning that these films are all fighting for screen time, not just audiences. Even at the current rate of production, the only way many of these movies is going to be seen is on the small screen.

Real estate prices and personal habits in China further inveigh against the movie theater experience becoming as common as it is in the US. In short, mobile phones aren't going to kill movies in China: they - in combination with other "small screens" - are going to give them their only possible market.

A tortise lays on its back, belly baking in the sun....

Ridley Scott will celebrate his 70th birthday on November 30 of this year and look back on a 42 year career of achievement that is the envy of many others who have sat - or dreamed of sitting - in the director's chair. As he celebrates his septuagenarian status with friends and loved ones, perhaps he will pause to consider that Louis B. Mayer, the founder and longtime steward of MGM studios, found himself sidelined by Hollywood days short of his own 69th birthday. Louis B, once the most powerful studio head in a day where the studios ran the show, couldn't change fast enough when the change started happening.

Ridley won't be going away soon. He's got a film in the can and at least four projects in development. But the Hollywood that created him is going away, and if he is not prepared to accept the changes that are driving Hollywood and the world's film industry, he'd better start planning a career change.

China Leading the World in e-Tickets. M-Tickets anyone?

In the Hutong
Back from the Hutong Summer Holidays
1950 hrs.

After a month's physical holiday and a month's writing holiday - in succession, not in parallel - the issues surrounding air travel remain fresh in the mind. So it was with great interest that I read cNet's report noting that the International Air Transport Association (IATA) was confirming that it would meet its June 1, 2008 deadline to eliminate paper tickets everywhere in the world, completing a switch to e-tickets.

Here's the kicker: China will be the first country to completely switch over.

This makes a lot of sense. Chinese airlines need all of the help they can get: constant price wars have driven profits in Chinese air travel into the sewer. $9 per ticket may not sound like much, but I'm sure the airlines of the PRC will take it. China Eastern Airlines, for example, lost US$365 million last year on 35.04 million passenger journeys. In other words, it could eliminate $315 million of that loss. It would have nearly doubled Air China's profit for the year.

Needless to say, that's significant. The question is, how else can this technology be applied in the industry to either improve efficiency or make flying more convenient?

Today, E. Tomorrow M

The systems that were the toughest to put into place for e-ticketing in China were reimbursement policies and ways of handling travel agents and ticketing offices that were, er, technology-deficient. Stunning as it is to believe, there is actually still an embarrassingly large number of places to buy air tickets in China that don't have computers or printers. No single solution appears ready to bridge this technology gap.

What would go a long way, however, would be a system that would send the e-ticket information directly to a mobile handset from a central office. I have no hard data, but apocrypha and experience suggests that the vast number of airline passengers in China are shlepping cell phones. All that would need to happen to make this system work right now would be to whittle down the information so it would fit into 1 or 2 SMS messages.

This way, a travel agent without a computer could call a central office with the necessary information, and that office could generate the m-ticket and send it to the customer's mobile. There would be all kinds of other benefits as well, including the ability to buy a ticket without having to set foot in a ticket agency (or, indeed, buy it as you drove up to the airport.) In other words, it would go a long way toward making air travel more convenient.

eBoardingPass

The mobile handset is going to be the key to the airlines' next step as well: the eBoardingPass. IATA is helping to work out the kinks in a uniform system to allow passengers to print their boarding passes at home, using a unique barcode, with which some airlines are experimenting already. At the same time, IATA is pushing self check-in systems that have been installed in some two dozen airports around the world.

Combine the two, and self check-in with the mobile handset, with the airline sending an MMS with the bar code and some basic information would be a logical next development step for China's busy airlines and overcrowded airports.

At least it would eliminate the problem of a dozen people cutting into the check-in queue at the airport.

Restructuring Nokia: Reading Between the Lines

In the Hutong
Battling burnout
2052 hrs.

Nokia made a major announcement today, telling the world that in 27 weeks the company will significantly reorganize itself. Ostensibly, the reorganization is to focus on "future growth opportunities around converging Internet and telephony services."

If that sounds pretty innocuous, you can be assured that this is intentional. Using buzzwords like "convergence" and "Internet," and even aping Apple and Motorola by talking about "rich, mobile experiences," Nokia appears to be taking a logical step in its evolution.

I applaud Nokia's efforts to change with the times. But as I read between the lines in the reorganization announcement, I'm disappointed to find that this reorganization merely appears to solidify the Finns' traditional approach to the market, an approach that is, in my opinion, tragically misguided.

CEO Centric

Getting past the obligatory jargon-laden CEO quote and digging into the Tell You As Little As Possible details, some interesting points pop up. First, the company is moving to a more vertical structure, an approach that should give CEO Olli-Pekka Kallasvuo more direct control over the company. That could be good thing for Nokia, arguably making them more nimble.

They're also apparently pulling their supply chain, sales channel, and marketing activities into one unit, divorcing them from the product divisions. Whether that's going to work or not depends on the details - me, I'm a big fan for keeping the marketing close to the product and both of those as close to the ultimate customers as possible. But let's wait and see.

The Rise of Services and Software

The real wake-up comes when you look at the structure underneath Nokia's consumer products division, Devices and Services. Devices, okay, that's handsets. We get it. The real juice of this reorganization is in the introduction of a new Services & Software unit. The wording refers to that unit as "reflecting Nokia's strategic emphasis on growing its offering of consumer Internet services".

This is not a small move. Creating an organization inside of Nokia that enjoys a status co-equal to that of the group that actually manufactures the mobile devices means that Nokia sees its future at least as much in the services side of the business as in the devices.

That's an announcement clearly designed to make investors wiggle. The problem is, the investors are not the only people Nokia needs to please.

Competing with Customers

Nokia believes the Services unit will help it "offer its customers complete solutions" that are "coupled" with their devices. Now, when Nokia refers to its customers, it is primarily referring to mobile network operators. So what it is saying here is that it wants its Services team to come up with end-to-end packaged solutions that it can sell to operators as is. One assumes Nokia will sell the software, or perhaps just partner with the operator.

In short, the justification for the services unit is so that Nokia can sell a single integrated solution to the operators - network gear, software, services, and devices. In other words, Nokia still dreams of owning the whole value chain, and selling it all as a package to operators.

The question - particularly in Asia, and especially here in China - is whether the operators are even interested in that proposition.

If anything, operators in Asia have demonstrated that they are willing to make mistakes - sometimes a series of very expensive mistakes - in their quests to develop bouquets of services that users find exciting, relevant, and worth spending money on. Initially these operators have tried to go it on their own, but most of them have come to the realization that they are better off working with a dependable group of service providers.

In the case of operators like SKT in South Korea and DoCoMo in Japan, the most successful mobile operators have created their own branded platforms that they have used to make their brands mean more than pipe providers. China Mobile and Unicom are studying them - and operators like Orange and Verizon - with great care, and are conducting their own experiments. And they seem to be getting closer to the right mix.

The question is - what does Nokia have to offer to mobile operators that the mobile operators cannot - or do not - want to create or acquire through partnerships with dedicated service providers? And why would they want prepackaged "complete" solutions over bouquets they assembled for markets and customers they understand far better?

Nobody Loves a Value-Chain Hog

As Nokia publicly preens itself for being different than what it derisively calls "point solution vendors," it risks alienating the entire mobile industry. It makes operators uneasy about letting them too close, service and software providers leery of working with them, and it hands their competitors all of the ammunition they need to sow fear, uncertainty, and doubt about Nokia's ulterior motives with everyone else.

Nokia may not care. Their scope of their vision is now clear. They are not satisfied with being the market leader. They want more. They want to own the ecosystem - or as much of it as they can get - and either lock out other players or force them to play on Nokia's rules.

In other words, Nokia wants to be Apple. Nokia hardware, Nokia software, Nokia back-end, Nokia services, all on Nokia's terms.

There are only a couple of problems with that. First, Nokia is not Apple. Despite pretensions to the contrary, it lack's Apple's cachet, design leadership, superior user experience, and history of delivering and selling a closed system.

Second, despite some resemblances, the mobile business is neither the computer industry nor the consumer electronics business. Apple has created an entire closed value chain because it has never had to work through a major intermediary. Nokia cannot realize its vision of service leadership without running afoul of its major customers - the operators.

Get Back To Where You Once Belonged

Nokia's market share leadership in mobile devices has served to obscure some fundamental problems in the business. The integration of Siemens on the networks is still unfinished, and the hollow-eyed looks among the lunch crowd at Pacific Century Plaza in Beijing underscore that layoffs are ongoing. In the mobile business, the design effort is still two years behind Motorola and a year behind Samsung. Nokia runs third in mobile entertainment behind Sony Ericsson and Motorola, and its leadership in entry level phones will be challenged by a resurgent Motorola and a Samsung that is now determined to take its fair share of that market. And, of course, Nokia is still recovering from its failures in mobile games and its perennial weakness in the US market.

Sure, none of these problems is insurmountable. But they are considerable, and collectively they argue for the company to focus on its fundamental business rather than undertake a major reorganization and shift focus to services and software.

Can Nokia do it all at once?

As I close this piece, Nokia's NYSE shares are up less than one half of one percent. That's far from a resounding endorsement, and Motorola is up by the same amount. It's clear the Street is as skeptical as the Hutong.

Manoj Menon Gets It

In the Hutong
High on Benadryl
1026 hrs.

Manoj Menan, a partner at Frost & Sullivan, was just on CNBC from the floor at CommunicAsia 2007, and while I missed half of his interview because of a con call, I think I heard the money quote.

"Our ability as an industry to visualize [advanced mobile services] exceeds our ability to execute. Asia's carriers need to embrace the open innovation model, rather than take a walled-garden approach."

Well said.

As we've said here before, the biggest barrier between China's mobile phone users and really useful mobile data services is NOT technology: it is, rather, operators' insistence on owning any piece of the mobile value chain that might make a little money.

I see signs of hope, especially in entertainment. With music, the carriers looked into the nasty maw of copyright issues and recoiled in horror, delighted to allow partners to deal with the beast of selection, rights clearances, and the like and happy to partner in the revenue stream without having to own the deal.

Let's hope, for the sake of operators, their shareholders, and users, that this continues.

Music Does Matter - Especially When It Is Mobile

In the Hutong
Dreaming of clear sinuses and carbohydrates
1958 hrs.

Lots of big music industry folks down at Music Matters in Hong Kong last week. For those of you not familiar with the confab, it is basically an opportunity for everyone who touches the music business to sit down and talk about the business in Asia.

The attendees included EMI, Mercury Records, Sony BMG, Universal Music, and Warner Music Group, along with a host of other companies in different parts of the industry.

It's Like a Royal Navy Symposium, circa 1740

Naturally, at the top of everyone's agenda was piracy, and that got a lot of play. Reading the coverage each music executive sounded like a cross between Babbit and Marvin the Paranoid Android, spinning tales of woe about how they are all getting ripped off by those bad kids ripping their pirated CDs.

Research house Synovate contributed their little bit to the gloom, with survey results from around the region suggesting that one out of five of Asia's young urban consumers purchased a bootleg CD in the last month, and one in four downloaded an illegal song from the Internet. Synovate's stuff is interesting, but all it offered was a snapshot rather than some inkling of how some of those numbers might be evolving.

The downer of the session likely came from industry group IFPI, who estimate that piracy costs the music business $400 million annually around the region.

Now, that's not good, certainly, and we here in the Hutong are scrupulous - nay, anal - about legitimate content. But with clients and family in what has become affectionately known as "the Biz," I'll grant we are no test case.

Nonetheless, there is a sunny side to the music business in Asia, and the folks at the record labels appear to have a lot more to be happy about than the movie, television, and shrinkwrapped-software crowds.

The Music Industry Eats Its Wheaties in Asia

Brian Bremmer at BusinessWeek did a nice write-up on the program ("Asia's digital Music Free-for-All",) and he points to the PriceWaterhouse Coopers study that estimates Asia's digital music industry at over $4.2 billion. In other words, if you believe the stats, digital music sales alone, not counting sales of CDs or cassettes, is four times LARGER than the total estimated piracy losses in the region. Think the MPA would kill for those kinds of stats? You bet. And the digital music industry is supposed to rise to over $9.35 billion in Asia.

(Okay, so can we fess up to the idea that digital media is not such a terrible thing after all? That while it eases piracy and cuts down on album sales because people are just buying the tracks they want, that it really is a significant market?)

And you need to look at what is driving the market: mobile phones. PWC says that 85% of that $4.2 billion were songs downloaded directly to music-enabled mobile phones. Half of the people MTV surveyed in Asia said they would listen to music more if they had a mobile music device like a music-enabled handset.

The Future of Music is Mobile

You look at all of these numbers, and you are led to a couple of inescapable conclusions:

1. Piracy sucks and still exists in Asia. (It still exists in America, for that matter, but we digress)

2. The future of music in Asia is mobile, and it's a robust business already with huge growth prospects. Any artist, label, distributor, or retailer not doing everything they can to make legitimate music more accessible to Asia's one billion (and growing) mobile device owners is both ignoring their future and giving the business away to pirates.

The challenge is for the industry to work together to make listening to music an increasingly fast, easy, and delightful experience. The model is there and its working. Now the challenge is to broaden the appeal.

It's absolutely stunning Apple didn't own this event. My friends at Apple need to get their collective act together. The music lovers in this region are shopping at other vendors and building that habit. Don't wait for long, guys. The market sure won't.

Nokia, Pots, and Teakettles

So Nokia wakes up one day and decides that it is tired of having to make royalty payments to Qualcomm.

Not content to roll up sleeves and sit at the negotiating table, or even to slug it out in court with a battery of countersuits, Nokia has now embarked on a global communications campaign to vilify Qualcomm by suggesting that the San Diego tech firm is, by its actions, slowing the adoption of 3G.

Carriers have made billions of dollars in investments in 3G licenses and gear, and Nokia's CTO, Tero Ojanpera appears to be trying to drum up a groundswell of sentiment from around the industry to force Qualcomm to give in to Nokia's royalty demands and to stop defending its intellectual property. Ojanpera was playing to a receptive crowd - Qualcomm has been the punching bag of Korea's techno-nationalists for years.

As a communicator, I give Nokia credit for trying to sow a meme that would get Qualcomm convicted in the court of public opinion. If it had worked, it may well have pushed Qualcomm into a corner and helped Nokia win its cases.

Unfortunately for the Nokians, in this industry, memories aren't that short. Too many of us remember how Nokia handled CDMA. First, they ignored it. When they couldn't ignore it, they ridiculed it. When they found they had to adopt it for 3G, they struggled for two years to figure out how to make it work because they wouldn't ask Qualcomm for assistance. Now that they're in the 3G market and paying royalties, they appear to be trying to cripple - if not squash - Qualcomm for being right in the first place. Remember, if you will, that Qualcomm is NOT a competitor - it is merely an upstream technology provider. A vendor.

Open note to Nokia. Look, guys, I know it really bruises the ego to realize that despite all of the handsets you sell, you are nowhere near as strong on technology or design as you would like us to think you are. But lighten up a little. Be grateful to the folks who invented all this stuff so you could find ways to package it, market it, and sell it. Stop trying to pretend that you are the font of all good things in the mobile communications industry. Be a little more of a partner and a little less a wanna-be Vainamoinen. You may well find out that the goodwill it earns you will help out in the long run.

McKinsey Likes SMS Payments

Starbucks
Pacific Century Plaza
Marveling at the quiet
1130 hrs.

The thinkers over at McKinsey & Company are becoming advocates of taking the cash out of China's cash-driven economy, something we in the Hutong heartily endorse. In a recent brain-tickler by three of their China consultants, McKinsey released an article advocating the use of China's SMS system a means to allow China's masses to make and receive payments and transfer funds. One hopes that the folks at ATM manufacturer Diebold (NYSE: DBD), smart-card maker Schlumberger (NYSE: SLB), and electronic payment gear-maker VeriFone (NYSE: PAY) aren't on McKinsey's client list, but we digress.

The Idea Givieth...

The idea is not terrible, and from the 35,000-foot altitude from which McK examines the option, it makes sense and seems simple. As is always the case with these "big idea" thought leadership pieces, the positives receive a lot of play, and the obstacles are minimized. The Philippines loves their SMS payment system, so why not China?

Without addressing the macro-economic problems of having so much cash in circulation (especially as the economy grows), there is much to recommend a consideration of McK's proposal. At first glance it seems more practical than adding tens of thousands of ATMs and point-of-sale (POS) devices. Over 15% of rural Chinese already use mobile phones, and that number is growing. The article is a little too dismissive - if not cavalier - about the severity of the challenges, however, and it takes a simplistic approach to a complex problem.

...but the Details Taketh Away

First, you would need China's numerous banks to work together to ensure that payments could move easily from one financial institution to another. Banking in China is intensely competitive, so much so that the effort to unify the clearance of bank and debit cards is still challenging the country. Ask any retailer how many different card machines they need to have at a point of sale - 15 years after the effort began to unify the systems - and you will realize the magnitude of the problem.

Second, as generous and public-minded as China's mobile operators are, I'm not certain they would be ready to give their bandwidth to a profit-making operation without taking at least a small cut beyond the RMB¥0.15 they take for the cost of an SMS. Quite likely they would levy some charge on the transfers, which would then need to be added to the commissions and transfer fees that go to the banks. The Charges, in other words, are already starting to add up. Ask anyone with on-the-ground retail experience in China and he will tell you: for most Chinese, especially the low-income consumers that are the target of an SMS payments system, such fees would create a powerful disincentive to use SMS payment versus simple cash. If you ask the merchants to take on those charges, it is a disincentive for them to accept payment versus cash.

Even if you reduced the payment to something even the poor would almost find insignificant - I'm thinking, say RMB 0.01, or one fen, it would require 46 billion transactions just to pay back the capital costs of the system.

Third, although the article lightly flicks over the issue of public trust, this will take time - and money. McKinsey estimates that it will take between US$40 million and US$ 60 million to set up the system. While they fail to give a cost breakout, the context of the article suggests that this would include purely the infrastructure costs. The effort to build and sustain public trust in the system would involve a considerable expenditure in marketing, including advertising, PR, point-of-sale support, and - most critically - a word-of-mouth program. Given the size of the market and the particular challenges involved in reaching and building safe-as-houses trust for the system, the costs for a program like this could easily run into the tens of millions of U.S. dollars.

Finally, McKinsey is a bit too optimistic in proposing the mobile phone as the nexus for a rural payments system. The 15% of China's rural adults who own mobile phones are the low-hanging fruit. Getting a large enough percentage of China's rural population to buy and own mobile handsets is going to take several more generations of innovation in handset technology, cuts in usage costs and, at some point, a system of subsidies that make handsets available to the genuinely poor. A $40 handset sounds like a great deal, until you realize that to a massive part of rural China that represents six weeks or more of family income.

There are other issues as well. Security for one - in a nation where your average mobile user changes phones every 15-18 months and the second-hand market in handsets is booming, the challenge of residual information on the handset is a tricky one. And that's just one problem. No aspersions on the ingenuity of Filipinos, but China's hackers are among the world's finest. Hacking the security on a digital phone network becomes extraordinarily lucrative if you have billions of monetary transactions taking place.

No thought is given to the banking infrastructure required to support this, especially since an immense proportion of the people McKinsey seeks to target with this system are "unbanked." Either you'll have to develop a safe and convenient debit system (read: pre-pay), or you'll need to come up with a Grameen Bank equivalent in China. Either way, without one or the other, the system is essentially a non-starter.

The Argent Projectile Fallacy

What is most concerning about McK's approach - in particular given the reputation of the source - is that it suffers from what we call The Fallacy of the Argent Projectile. It is frustratingly common in technology generally but in China specifically for an innovator or ideator (someone who creates or adapts an idea) to suggest a single-factor, simple solutions to a complex problem.

I am a big fan of simplicity, but I am also painfully aware of H.L. Mencken's reminder that "to every problem there is a solution that is simple, workable...and wrong." There are, in essence, no silver bullets.

The One Laptop Per Child (OLPC) project will not bridge the digital divide by itself, but it is a good step in the right direction. Unseating and executing Saddam Hussein did not by itself give Iraq a participatory, pluralist future. And even if you overcome all of the obstacles and challenges, SMS payments will not wean rural consumers off of their reliance on cash - the handset ownership numbers alone ensure that much.

Fix Problems with a Full Toolkit, Not Just a Hammer

Addressing the challenge the People's Bank of China (PBoC) has posed to the nations banks to develop a new rural payments system is a complex issue. I have no doubt the PBoC would love it if there was a silver bullet answer, but there probably is not.

There is an old saying that when you have a hammer, all of your problems start looking like nails. A wise carpenter, on the other hand, knows he needs a full box of tools. An intelligent approach to rural payments would be a complete, evolutionary, and inclusive system that provides consumers with the best of all worlds:

1. A system of rural banking that makes it economical, indeed profitable, to service micro-depositors. India and Bangladesh have made immense strides in this direction, and there is much to learn from them.

2. Companies like Diebold and VeriFone need to get going on innovations that will make both ATMs and POS equipment suitable to service China's rural masses (i.e., make them simple, rugged, and an order of magnitude cheaper.)

3. A unified national clearing system for micro-payments, debit, and credit cards that by sheer volume would drop the processing cost per transaction, and that could even use credit and debit card charges to partially subsidize a rural payment system.

4. A debit system based on pre-payments using commercially available smart SIM technology usable by inexpensive handsets.

5. An SMS payments system that integrates with - and compliments - all of these other initiatives.

There is already a natural propensity among policy makers in the PRC to try to shoot their way out of problems with simple solutions rolled out on a massive scale. This should be discouraged - the line between "simple" and "simplistic" is a narrow one indeed, and the last thing the nation needs is intelligent outsiders encouraging this misguided approach.

More Handset Manufacturers - Good-Oh!

The National Development and Reform Commission, China's super-ministry with the remit over driving the nation's economy forward, has just issued final approval for four new Chinese consumer electronics companies to begin making handsets, adding to the 80-odd manufacturers already in the market.

You could argue that the last thing China needs is another four mobile handset manufacturers. And you'd probably be right. People far wiser than I have been saying for a long time that there is a major shakeout coming in this market, and that in the end the 80 odd device makers will probably be whittled down to a round dozen or so.

Voting for the Market

I see something very positive in the NDRC's move. The senior economists and policy makers at the NDRC are not stupid - they know that China's mobile handset market - no matter how big it is - cannot hope to support nearly a hundred companies in the business. Frankly, I doubt the entire world, with a billion handsets made each year, could support a hundred handset makers.

The message that the NDRC is sending in this move is that rather than select champions to support and force the rest out of business, they are letting the market decide who will survive. Will this mean cannibalistic hypercompetition among manufacturers? Absolutely. But the thinking is that the companies that DO survive will be better suited to compete both locally and globally than they would if the winners were selected by the bureaucrats.

The Coming Agony

If anything, this move hastens the day when the big shakeout begins. Now, we've already seen some manufacturers depart the market completely. Mitsubishi appears to have packed up and left, Siemens is gone, its successor BenQ is on life support, and others are on the edge.

Here are the challenges that face the market:

1. 3G is coming (yes, really): Not all companies will find it easy to shift from producing GSM-based phones to producing phones based on 3G, especially TD-SCDMA. Some will never make the shift, relegated to fighting for scraps at the bottom of the mobile food chain.

2. Picky consumers. China's mobile handset buyers - regardless of whether they are first-time buyers purchasing basic handsets, style-conscious fashionistas, or wealthy young executives buying the newest, coolest handheld hypergadget, are expecting more and more from their devices. Delivering handsets with the mix of design, features, and experiences that appeal to consumers is no easy trick, and the chances of getting it wrong are growing. Smaller manufacturers won't be able to afford mistakes - a couple of mediocre handsets, and they'll be gone.

3. Market tempo: Tastes change fast out here, and your average handset owner picks up a new phone eveery 15 months or so. You have to move extremely fast to keep up with changing demand. Maintaining a reasonable level of innovation and product development will exact a brutal cost on companies, and many - if not most - of the current crop of manufacturers won't be able to keep up.

4. Economies of scale: Being able to sell a given design, feature, or handset across a global market will mean lower prices, even at the high end. The bigger manufacturers will deliver better value for the dollar. Period. At the low end, where economies of scale are everything, the kind of scale that Motorola, Nokia, and Samsung can bring to the party is going to be difficult to match. A lot of companies are going to engage in bloody price wars to try to hold onto the low end of the market, while the big boys can turn out cheap phones at a profit all day long.

5. Retail: Up till recently, phones have been sold in a bazaar-like environment in stores large and small around the country. The war for retail space and for the attention of the consumer is getting intense: the major manufacturers are making large investments in improving the retail experience across the board. This is no longer about how much display space you get - rather, it is about who can make buying the handset more enjoyable. Motorola is way out ahead in China with its flagship stores. Nokia is following, and Samsung will probably do so as well. The question is, can new licensee Fujian Furi or any of the other smaller manufacturers manage the same?

The Winners Will Be...

We can be pretty sure of about ten companies that will make it across the divide: Motorola, Nokia, Sony-Ericsson, Samsung, LG, Sanyo, Ningbo Bird, ZTE, and a couple of the larger original device manufacturers (ODM.) Beyond that, it's going to be anybody's guess.

A number of fates await the losers, not all of them dismal. Sure, some companies might go out of business. Others will merge with competitors to form larger players, move into specific niches or vertical markets, or move into other parts of the business: parts, accessories, and specialized devices like cellular modems and Wi-Max receivers. Many will wind up as either subsidiaries of or suppliers to the winning companies.

As the mobile handset market grows and evolves around the world, the value chain is becoming larger and more complex, offering more opportunites in these areas. What the NDRC needs to be looking at is ways to ease the transition of the companies to something new once they've been squeezed out of the handset business.

Here is the ultimate result, and I'd wager this is what the NDRC is betting on: China will be the global center of the mobile handset industry, not just in manufacture and consumption, but in research, design and development as well. If the cost of that is a little creative destrcution, that's a price the NDRC is (and should be) willing to play.