I’ve been using an iPhone with a China Mobile SIM card for over half a year now. The device is without rival in the industry, so when I put it on my wish list of things to get when they come to China, (let’s put Lou Malnati’s Chicago style pizza in there) I was ecstatic to find that friendly hackers had engineered a method for me to get around the barriers that the failed Apple- China Mobile talks presented.

While the Apple-China Mobile talks non-delivery is as common knowledge as the fact that thousands of the hacked phones run on other-than-AT&T networks, what is not so well known is that the Apple-China Unicom talks seem to have nonetheless gingerly moved along. In fact, I’ve been informed that you can buy a 4GB iPhone through China Unicom for around 4 thousand RMB. Mind you, every Chinese national that I know with the Apple phone has an 8GB version, which tells you something about the supply line it came from, but never mind that. I’ll be investigating the veracity of the Unicom situation this week. Still, I can’t get the Apple-China Mobile talks out of my head. While not seeing eye to eye on profit structures and distribution are to be expected, its a shame that Apple didn’t stay the course and decide to go another route, one that would have been better for them now and more importantly for their future in China.

The mistake that Apple made here is one bigger than just approaching the deal the wrong way. If that was it then I’d be lumping it together with the NFL’s unfortunate attempt at an exhibition game in Beijing and call it a day. Suffice it to say Western companies using Western “tried and true models” will land face first in a fall. First of all, Apple has failed to see the value of the street credentials they already have here: the iPhone is already desired by the Chinese consumer for its revolutionary combination of technologies, excellent usability, and its just more than slightly back breaking high price. One thing stands salient about the target relevant consumers here, the device’s price conveniently nestled just within a few months salary can do nothing but attract them to it, whether they can afford it or not. This is something China Unicom and China Mobile can confirm for us; they have phones for sale in their service centers that run past the 2500 RMB mark that do nothing to scare buyers off. Second of all, if Apple sold the devices out of their own stores, bypassing an exclusivity deal with the provider for a piece of the services take, then they would see realistic and long term tactical results in creating a sales channel and a brand exposure all in one. China is a market where brand recognition is nascent and rapid wealth accumulation is coupled with an appetite to spend and have the latest and greatest. Even if Apple sold the device out of flagship stores at a loss, they would be benefitting by associating themselves with the mystique of a product that almost stands apart from its brand. An early take on this approach would have been substantially more impressive, not least of all on a balance sheet, than the strike heard ’round the world that the China Mobile talks became.

Creating a lifestyle product at relatively or outright high prices is not a new winning concept in China. If Apple needs to know where to steal some good ideas from, the answer is Nokia’s Vertu brand. By Creating an association with luxury and exclusivity, Vertu continues to expand and turn heads even at an entry level price of around 35,000 RMB. Adjust the Vertu message and tone of voice to match the iPhone price and volume expectations as necessary, and Apple could recover gracefully from passing by a great opportunity. With their recent underwhelming unveiling of the Mac Book Air, now is as good a time as any.

In the world of IP, China is America’s recalcitrant stepchild. Software piracy runs rampant to the point where if one wants to purchase a legal copy of Microsoft anything, one will simply run into the software stonewall of unavailability - at every major computer outlet in whichever city you please. These same places are happy to install a copy of Windows Vista on your computer for free, assuming you bought, say, a hard drive from them. Registered, licensed, and real software products over the price of a hundred dollars generally don’t exist. To narrow the focus, I am only going to approach the gaming industry, or the online gaming industry to be specific.

Currently, the three major companies for game consoles are Nintendo, Sony, and Microsoft. Microsoft has the most integrated online gaming service with its service dubbed Xbox Live, by which console users can connect and play with each other for a nominal sum - $8 a month, or $50 for the year. Nintendo and Sony have both neglected to set up a unified online server system that connects gamers to each other. Can anyone say market opportunity?

The essential hubris of American IP attitudes in relation to China comes into play here. Microsoft’s Xbox Live service shuts down your account and restricts access to online gaming if they detect that you have a modified machine. Hardware modifications by pirates - who are scattered all over the city of Beijing and are readily available - cost about $20, giving you access to play pirated games for about 6 RMB each (less than a dollar). This is a very extreme difference to the retail price of $60 per game for the newest generation of Microsoft consoles, the Xbox 360. In China, the volume of unmodified, original Xboxes is negligible. Given that the average college graduate makes about 3000 RMB a month in Beijing, 400 RMB for a retail game is obviously ridiculous and out of the question. After paying the price for an Xbox, it is almost unfeasible to not modify the machine, considering the price differences. As for Nintendo, Wiis come pre-modified when you buy them at stores, meaning you can’t even find unmodified Wiis, if Nintendo even had an online game service. Sony currently does not have the piracy problems due to its Blu-ray formatting, although things like this are just a matter of time. The PS3 will surely be modified in the future.

So how does the Xbox Live business model work, anyway? Xbox Live commits subscribers to monthly or yearly fees, fees that are not likely to disappear once a customer has the taste for online gaming with his game console. Online gaming is an essential feature, and without it consoles become almost like a computer without the Internet. The costs for Microsoft to provide this service are negligible, since all Microsoft has to do is set up servers that connect gamers to each other. In general, anybody who owns of of these consoles will want to play online. It is one of the primary features that this new generation of consoles claims to have, and turns the consoles into vehicles for repeat subscriber purchases.

So how would Microsoft make money here? Microsoft must realize that, given a per capita income of $1740, China will not aggressively pursue mom-and-pop shopkeepers who modify Xboxes and sell games for a dollar. Instead, Microsoft should focus on aligning the interests of the government to make Microsoft money. As of yet, Sony and Nintendo do not have established online gaming services for its consoles. Microsoft should approach China Netcom, the main DSL provider for urban areas, and have it grant exclusive rights to provide online game services to all console service providers. The way in which Microsoft would do this is by having China Netcom create a partnership company that would have these exclusive rights, while the company provides a username and password service that connected, say, the Xbox Live service to users that had a DSL account - virtually all Xbox, or any other console owners. Imagine that! The government suddenly has an interest in providing online services for games through its own SOE. Microsoft could simply add its monthly or yearly fee for Xbox Live service as a line item on China Netcom’s DSL bill. When Nintendo and Sony are good and ready to provide online game services, it would have to do so through Microsoft, who would already have established itself in this essential market. This would also allow Microsoft to open up its Xbox Live services to users who may have modified machines, in that since China Netcom is an SOE, Microsoft realizes that the revenue from the repeat services it would be providing will accumulate revenues that would otherwise be completely lost. This would all be internal to China, essentially relieving Microsoft of responsibility in punishing pirates, given that the modifications on these console machines never stop. The pirates in Hong Kong were active and engaging in sales when the first games on CD-ROM were being released in the 90’s. The mainland certainly won’t be able to stop it for the foreseeable future. There are revenue streams open, though. You just need the right kind of fishers.

A wave of recent coverage on China’s Three Gorges Dam continues to criticize the project for causing everything from landslides to relocation nightmares for millions, ignoring the costs of alternatives and the market realities that must be taken into consideration when evaluating energy policy.

Frankly, it’s never been clear to this writer what’s so bad about a dam.

Having spoken with environmentalists on the issue of dams over many years, their impassioned arguments have never really added up.

Taking the Three Gorges Dam as an example, the facility will produce 18 gigawatts of electricity, thus removing the need for about 35 or so coal-fired power plants in China. And while the project’s detractors fault it for causing mudslides, disrupting ecosystems and relocating families, they are ignoring the fact that air pollution and global warming—principally caused by the burning of hydrocarbons like coal—does all of those things but on an infinitely larger scale.

Traditional renewable energy sources such as wind and solar cannot keep up with annual increases in energy demand. That is the market reality that the world must face for the next several decades. In China, despite heavy regulatory emphasis on renewables of late, the total percentage of energy from renewable sources in China is expected to decline from around 7 to 4 percent over the coming decade.

In other words, no matter how gung-ho we get on windmills, greenhouse gas emissions will keep going up. The only way to slow that rise is to get more pragmatic about nuclear, hydroelectric and clean coal.

Returning to the issue at hand, the New York Times piece on the Three Gorges Dam includes a figure that China has built an average of one large dam (over 50 feet high) everyday for the last 50 years and has several huge ones on the way, including 12 on the upper stretches of the Yangtze. Having hiked through Tiger Leaping Gorge in 2001, it pains me to know that such a beautiful valley might get flooded. But again, the alternative of creating more coal wastelands like most of Shanxi province pains me as well.

Despite the obvious drawbacks to dams, people need to accept that certain sacrifices will need to be made as China develops, and a dam may in fact be a lesser of two evils.

In the meantime, support the private equity firms who are financing most of the investment in renewable energy technologies these days, lobby your government to spend more on R&D, and hope that the talks going on right now in Bali lead to some strong and pragmatic compromises.

The Village Grouch doesn’t claim to the best technology observer in the region. But he may have the best memory.

He remembers the night that Jack Ma, Alibaba’s founder and CEO, stood before a packed house at the (now demolished and re-built) Furama Hotel. He addressed the salivating crowd at I & I (remember that?), less than a month after closing the company’s second round of funding–a US$25 million investment from luminaries including Goldman Sachs and Softbank. The next morning, the Grouch wrote on asia.internet.com (in an article incorrectly attributed to another writer): Jack Ma had told the crowd that Alibaba was “running too fast for revenue.”  Jack, you may now stop running.

TVG also remembers being the only foreign reporter to attend an event held in Hangzhou in 2001 billed as “Weekend with the Warriors.” Jack and some of his Net pals–including Sohu founder and CEO Charles Zhang, Sina’s then-CEO Wang Zhidong, once and future Netease CEO and founder Ding Lei, and then-CEO of then-company 8848 Wang Juntao–got together for a bit of panel discussion, a bit of stretching to pat themselves on the back, and the chance to hang out with a modern Chinese legend, kung fu novelist Louis Cha, a.k.a. Jin Yong.

The theme was that Internet entrepreneurs were the new “swordsmen.” And this was after the dotcom crash. Read that list. How many of those guys are still in the CEO’s chair.

Alibaba’s been around for a while. So has the Grouch. There have been a lot of doubters, but Alibaba’s gotten it done. It wasn’t long ago when the most popular auction site in China was owned by eBay. Taobao blew them so far out of the water that they packed up and went back to Mountain View, leaving a minority-held joint venture in their wake.

Has anyone else noticed the surge in Global Sources’ TV advertising, just before the Alibaba IPO? We used to talk about the two companies in the same breath, but not anymore. There was a company called MeetChina.com whose PR guy kept telling the Grouch they were in a “quiet period.” Try dead silent—their Web site now transfers to www.sexdvd2000.com–no kidding. With full coffers, one can only wonder whose lunch Alibaba will eat next.

Now the company’s worth billions, second in Asia only to Yahoo Japan. Yahoo China? That’s Alibaba, too. Sure, the stock is way, way overpriced. But frankly, the Grouch is glad that Jack and his team have cashed in. Jack was always a nice guy who always treated the Grouch with courtesy and respect. Good on ya, Jack.

So it looks like it might be true that Sohu has the exclusive rights to the any web-marketing inside of China, which can be read about in this Wall Street Journal report. At least that’s what Sohu is telling ad agencies… Here is an excerpt:

In 2005, Chinese Web company Sohu.com Inc. outbid fierce competition to become the exclusive Internet sponsor of the Beijing Games. For an estimated $30 million, Sohu bought the right to create the official Web site for the Beijing Organizing Committee and to use the Beijing Games logo of a runner in the company’s marketing.

And earlier this year, ad agencies say, Sohu started telling them that online ads from other sponsors that carry the Beijing Olympics logo can appear only on Sohu.com.

One would have to ask the question: does this cover any representation of the logo? All sponsors of the Olympics have a special Olympic logo with the company logo juxtaposed with the “Running Man” Olympic Games logo and I’m sure this would seriously hinder their marketing campaigns within greater China.

Now only this but it would seem to give Sohu a bit of a monopoly on the Olympic marketing pipeline, at least inside the country. For a county with over 162 million internet users this could represent a major coup.

You can see why some current sponsers have been “loath to comment”.

Here’s the one of the main cruxes of Sohu’s claim:

Sohu’s ad claim extends only to partners and sponsors of the Beijing committee and not to international participants in The Olympic Partner (TOP) program, who can use the Olympic rings in ads around the world. It also affects only Web sites based in China — including the localized versions of Yahoo Inc., Google Inc. and Microsoft Corp.’s MSN — because only the Beijing committee’s sponsors are allowed to use the running-man logo inside China.

Sohu is even saying that they will have exclusive access to events, further sweetening the potential for online ad revenue. Of course this is probably a PR ploy aimed at creating buzz where there is no honey.

“Sohu only got the right to run the official Web site, and except for that, they have no other exclusive rights,” says Chen Tong, rival Sina Corp.’s executive vice president and chief editor. Sina, which operates a heavily news-driven site, claims the alliance already has a team putting together content about the Games.

At this point I would like to get a hold of that agreement and see for myself.

Update:

I’ve pasted the full text of a Wall Street Journal article which sheds some light on the situation.

Olympics Organizers Back Sohu in Ad Dispute
By Geoffrey A. Fowler and Juliet Ye
22 August 2007

Organizers of the Beijing Olympics have thrown their support behind Sohu.com Inc.in a feud between the Chinese Web portal and its rivals over advertising during the 2008 Games.

The Beijing Organizing Committee, known as Bocog, confirmed a statement by Sohu, its Internet-content sponsor, that the site has the exclusive right to post advertisements by Olympic sponsors who are using the Games’ official logo of a running man.

Beijing-level sponsors are “only allowed to release their Olympic-related online advertisements on Sohu,” Bocog said in a statement to The Wall Street Journal.

Beijing-level sponsors include partners and sponsors of Bocog, not international participants.

In 2005 Sohu bought, for an estimated $30 million, the right to create and run the official Web site for the Beijing Organizing Committee and to use the Beijing Games logo of a runner in the company’s marketing.

Other Chinese Web sites, which have formed an alliance to counter Sohu, have said Sohu’s sponsorship of the Games bought it the right only to manage the official Games Web site and to use the Games logo in its own ads. There is little precedent for the issue, as the Games have never had an Internet-content sponsor like Sohu.

Bocog says the ruling doesn’t apply to international sponsors of the Games, which are allowed to use the Olympic rings in any market and in any media around the world they choose.

Lawrence Wan, China director of Omnicom Group Inc.’s OMD Digital, says the announcement answers one question — but raises new problems for marketers. “Now the use of logos becomes an issue. Strategically, do we want to have a split personality online?” he asks, using the logo on Sohu but not elsewhere. “Will brands still promote the Olympics when they can’t use the logo?”

Du Hong, marketing and sales manager of Web site Sina.com, owned by Sina Corp., says the alliance of Sohu’s rivals is still waiting for a public statement from Bocog and continues to challenge Sohu’s claims.

Bocog was less clear about another claim by Sohu: that it would get preferential access to report on the Games for its own commercial use. “Bocog welcomes all media coverage on the Olympics,” it said in a statement, without specifically commenting on Sohu’s claim. Generally, Chinese Web sites say they haven’t been granted access for their journalists to cover the Games.

Even without the exclusive coverage right it looks like the best spent $30 million dollars in a long time… I see litigation in the future. Maybe not in China but definently at future Olympic Games. With the promise of a more connected world populace in the future this is likely to grow into a bigger issue or at least needs to be better defined in the years to come. $30 million dollars just seems a little low to me for what they are claiming.

In a recent post, “China As One Massive Disruptor,” I described Professor Christensen’s analysis of why even very well established companies often lose to upstart companies with disruptive technologies. No sooner had I finished the post when I came across a story in the August 6 edition of The Wall Street Journal entitled: “In China, Lenovo Sets Sights on Rural Market”. (full text for subscribers only)

In describing Lenovo’s strategy, WSJ could have been quoting from “The Innovator’s Solution,” Christensen’s book, when it said:

“In the coming months, Lenovo Group, the world’s third-largest computer company by shipments, plans to begin selling a stripped-down low-cost personal computer aimed at China’s rural population. The PC, priced at between $199 and $399, will include a keyboard and processor, but it will use the customer’s television set as a monitor.”

The WSJ went on to explain that:

“As PC sales slow in the developed markets such as the U.S., the technology industry is increasingly developing simple, lower cost products aimed at first-time computer buyers in emerging markets who represent the industry’s growth prospects.”

Welcome to another disruptor! Professor Christensen could not have said it better.

In almost every Chinese city with electricity and computers, there is at least one internet bar. In the states the equivalent might be called “LAN Cafes” and they are few and far between, a niche market that has little place in a world where every kid has his own super-fast computer and plenty of privacy in their own room. In China however, internet bars are all over the place and the patrons are generally at least 20 years old ranging all the way up to about 35 years of age. They are there for a handful of reasons: they want to chat on MSN and use the popular video chatting feature that is available for about 50 cents or less an hour, or perhaps they want to get out of their apartment and get some alone time away from the wife or their roommates, often times they just don’t have a computer at home as is so common in the U.S., etc. In the end though, male and female, wet behind the ears or seasoned professional office worker, they come for the games. Go into any internet bar on any given weekday and you will see at least half the computers being used. Nevermind what time you go. You can check these places out at 3 AM and they are still packed. People spend an inordinate amount of time in internet bars playing multi-player racing games or the more popular role playing games such as the world renowned “WoW” aka World of War Craft. Companies have already taken steps toward monetizing the games from without by pasting posters aimed at the game playing demographic all over the internet bar rooms. Instant noodle companies do particularly well by not only advertising but having their product readily on hand. If a World of War Craft player can’t pull himself away from his computer for a quick snack, no problem. A quick call to the attendants and ten minutes later a piping hot bowl of the internet bar’s chosen brand of instant noodles is served up right to your computer. Monetizing, or I suppose I should say advertising, from within the games is underdeveloped though despite already having a strong presence, especially during load screens where software companies advertise heavily both for name recognition and for new software titles.
What that leaves open in terms of possibilities is for the companies with interest to decide, not me, but it is clear that messages can be put in front of people in the cyber world and be just as effective, if not more effective, than for people in the real world. Enter the local governments of China, the vanguard of China’s economic miracle and occasional source of continued brilliance.

I recently read in a Danwei article that the Ning Bo City government has sponsored a division which has dedicated itself to launching a multi-player game that “fights official corruption in its many insidious forms.” Heavy stuff no doubt. The idea comes from China’s young citizen’s love affair with the internet bar and multi-player games combined with what is perceived to be a very necessary endeavor: the education of the general Ning Bo populous concerning the corruption of government officials. The game is set in ancient China, inserting a less than comfortable buffer in the fact-is-stranger-than-fiction world of the game. The educational component seems to come from the level advancement system, a system that requires the player to digest Chinese history lesson before advancing to the next level. The fun comes in between where you decapitate officials and exorcise demons until you get to the next history lesson.

I have yet to play this game, and I probably never will, but I don’t have to play it to know that this is a valuable refresher course in what companies, governments, and educational institutions have been trying to do for years now, ever since the dawn of the video game age. Make a good video game and you have a vehicle for advertising that only you control. Say for example that you own one of the most popular role playing games of all times, say World of War Craft, and let’s say that Coca Cola wanted to advertise to your demographic, the same people that play your game are the same people that Coke wants to sell sugary beverages. Alright, so you already know that this exact arrangement has already happened. Brilliant idea and good campaign for the most part, considering the overlap in demographic, but it easy to advertise outside of the game in association with the product. Getting your product in the game is another story, even if you have the ability to add elements into the game. Putting a Coke bottle in the game just as putting a Nike Swoosh in a world dominated by Magic, Elves, and would be blatant selling out to attract a crowd that would get offended before they bought your drinks or shoes. Still, the medium is there and it is a powerful one. Advertise within these games and do it smart and you could change the way that advertising gets done forever.

Despite the fact that the new iPhone won’t be in China for at least another year, its sales launch in the United States was still a very hot topic on Chinese tech websites and internet portals.  This was highlighted in an article on Dow Jones Marketwatch and reminded me of my continued confusion and surprise every time I look around at the people crowded next to me on the post-work subway rush and discover that nearly everybody is buried in a brand new, several thousand RMB mobile phone.  Another reminder of the Chinese obsession with new mobile phone technology was the cab driver I had in Shenyang last week as I headed out to the Taoxian International Airport.  I pulled out my modest Motorola phone and before I had even opened my mail box he had pulled his brand new RMB 4000 PDA and shoved it, along with his two inch long pinky fingernail, in front of my face, exclaiming in his Dongbei accent, “it’s American!!!”  Why did this 45 year old man from Shenyang need a fully tricked-out PDA especially considering that his annual disposable income probably isn’t much above the Shenyang average of RMB 12,000 per year?   Read more »

In the EngagingChina Blog, Geoff Nairn writes that:

“In a puzzling move for the world’s biggest software company, Microsoft has paid 94m yuan for a small stake in China’s second largest TV manufacturer, Sichuan Changhong Electric Company.”

I don’t know what exactly is so crazy about Microsoft getting “into bed” with the second largest TV manufacturer in China. I think it is quite obvious what Microsoft is trying to accomplish.

In the wake of the Apple TV release early this year, Microsoft is attempting to keep up with Apple in the Home Entertainment sector. The technology they are hoping to develop in tandem with Sichuan Changhong Electric Company, through the ‘Media Galaxy Project’, is most likely going towards competing with the Apple TV.

Another application would be in taking control of one of Microsoft’s true advantages over Apple: The X-box. Linking up to the internet is one of the defining qualities of the X-box and sounds exactly like the kind of experience the ‘Media Galaxy Project’ is trying to improve and expand. When you look at it like this, the move is less “puzzling” than it is transparent.

In Rick Martin’s first post for the Little Red Blog, entitled Feeding China: Whose RSSponsibility, he argues that  Google buying Feedburner is a direct threat to the local giant in RSS technology, Feedsky.

Note: RSS is a format for syndicating news and the content of news-like sites, including major news sites like Wired, news-oriented community sites like Slashdot, and personal weblogs. But it’s not just for news. Pretty much anything that can be broken down into discrete items can be syndicated via RSS: the “recent changes” page of a wiki, a changelog of CVS checkins, even the revision history of a book. Once information about each item is in RSS format, an RSS-aware program can check the feed for changes and react to the changes in an appropriate way.

Here’s what Rick has to say on the aqusition:

“I got a feeling it means a slow and agonizing death for all Chinese challengers to the feed throne.

Sure, Feedburner China isn’t quite ready yet…
And sure, Feedsky has a headstart…

But does it matter?

When the general Chinese population pop their RSS cherry (and that may not happen until they discover it via Vista’s desktop widget), whoever is best poised to feed the Chinese Dragon should win out. The Google acquisition surely means that Adwords will be integrated with Feedburner’s service. And throw in on top of that the new Google Gears which looks to deliver RSS offline, and it’ll likely be pushing Feedburner as a big part of that.

Well, all that just spells trouble for companies like Feedsky…”

If by headstart you mean No.1 in the world then you would be right.

I would have to disagree somewhat with the overall sentiment here.   I think Feedsky has more to worry about from domestic startups than they do from the overseas giant, Google.  In a market saturated by the next great clone, Feedsky already has to look out for competitors like FeedTea who, with the right business model could go on a ‘feeding frenzy’ (sorry, I had to do it).

I think it’s also worth mentioning that there’s nothing the Chinese government likes more than to create a favorable environment for local products (as any country should). If  a foriegn company was to really take control of this portion of the technology sector we could see action on the part of the government.  We’ve seen forms of protectionism take place from the Mobile sector to the Macroeconomy and there no reason to think they wouldn’t be inclined to take action.

Google is an entity that virtually every company on earth has to be cognizant of given their scale and willingness to move into other business sectors. To say that Feedsky is not keeping an eye on this situation would be folly, but to say that the aquisition, “means a slow and agonizing death for all Chinese challengers to the feed throne” would be the same.

Note: The former Chairman of the Little Red Blog, Will Moss, has given up his throne and returned to blogging (hopefully more regularly) at imagethief.  Congratulations on a great year of blogging for Cnet.Asia and I wish all the best to Rick Martin in continuing the Blog.  I will certainly be reading.