ChinaJoy Special: a Foreigner's Guide to Digital China
It's ChinaJoy week. Some of you might be visiting China for the first time at this occasion. This summary guide will help you better grasp the current state of Digital China, and the gigantic opportunity it represents.
As some of you are in Shanghai for the 12th Edition of ChinaJoy, some of you maybe traveling to China for the very first time, I thought of compiling this summary article about the current state of the gigantic Digital China opportunity, which consists of no less than 700 million mobile Internet users at the time of writing. Hopefully you'll find some of these insights helpful.
* IP protection
Piracy and counterfeited knock-off goods are well-known and widely documented rampant issues of the China market. Even more so than anywhere else, your first step should be to ensure legal protection of your Intellectual Property. It is very important not to wait until you expand into the Chinese market to protect your trademarks and copyrights -- that's already too late. As soon as your product or service becomes a proven hit in some market, you bear the risk of getting cloned in China. But there is worse: if you didn't perform your copyright and trademark homework properly, there's a chance you won't be able to claim back your brand and that the copycats will legally get away with it. As a matter of fact, China is not covered by the Madrid Protocol. Therefore, registering your trademark or copyright in one western country will not grant you the right to extend it to China automatically at a later stage. China is its own system, and more importantly it is a "File First" based system, which means the "First Use" argument, so paramount out west, holds little water in Chinese courts. As a result, there is a trend in China known as trademark scalping or squatting, which consists of registering the hot up and coming brands from US and Europe in China and sell them back to their creators for a huge sum of money by the time the creators want to get in the China market. Apple notoriously got taxed this way for the iPad trademark, and so were many others.
Think about China early -- this is a market that doesn't wait for you to start the business.
The cost of hiring Lawyers in China and doing your registration early may seem like a waste of money when you are in the very early stages of your start-up, but it can potentially save you millions later down the road. So do it as early as possible. Extra tip: also do it as broadly as possible. There may be more than one core category of goods in which your brand will be relevant, and I'd recommend to think hard about this from the get-go. I know of a video game publisher that recently launched a global hit on the App Store. They did register their trademarks and copyrights in the Computer Games category in China ahead of time so they thought they were safe. One day, they wanted to produce some promo t-shirts with a local partner. The latter requested a license grant. When the publisher tried to extend their trademark into the "Apparel" category, they discovered that it was already registered by someone else. After conducting a thorough search, they found out that their brand was already copyrighted (in bad faith) by plenty of different applicants in no less than 70 categories out of a possible 140. Think about China early -- this is a market that doesn't wait for you to start the business.
* Governmental censorship
Another component of the China context that is unusual for western start-ups and entrepreneurs is the heavy interventionism of their governmental bureaucracy. This goes further than paperwork and administrative burden. To fully operate in China, there is a flurry of taboo subjects that you will have to carefully avoid. Everything is regulated and if you are an online business, things go one step further: you must give the bureaucracy access to your China servers so that they can make sure your content is appropriate. If it's not, it will get censored. If you regularly step over the line or represent a threat to centralized control of information, you will get shut down and kicked out. To make a long story short, this is why Google no longer has official presence on the Chinese web.
In China, our "Go Big or Go Home" maxim could be translated into "Comply with our way to go huge, or go home [literally]".
Trying to circumvent this by catering to China through servers located outside of the country will not work either. Yes, you are effectively preventing the Chinese government from legally interfering with your content by doing so, but there is another technical way to straight out block your web site for Chinese users trying to access it: the Great Firewall of China. The Great Firewall filters out web sites such as Facebook and CNN, for example, which the local government considers threats. The only way to use these blocked web sites from China is through VPN. Sometimes a web site can be temporarily blocked by the Great Firewall as well, like for example certain local social media around the anniversaries of events that the government would rather hide.
It is very hard to establish your business in China unless you show a bit of resiliency towards this core principle of their national system. In China, our "Go Big or Go Home" maxim could be translated into "Comply with our way to go huge, or go home [literally]".
Same as in any other country, once you get in business, you want to make sure potential customers can find you easily when they search for your company, brand, products or services on the Internet. Since Google is not allowed to operate in China, a local search engine rival has taken the dominant spot in this sector: Baidu. With over 500 million Chinese using its web site, Baidu holds 63% of the China search market. Baidu's algorithms don't work quite the same way as Google's systems. In order to rank your Mandarin web site higher in Baidu, I recommend reading this neat recap of the top parameters you should keep in mind.
* Social Media landscape
Facebook and Twitter being regularly blocked by the Great Firewall, they have been supplanted by similar services from Chinese companies. The equivalents of Twitter are called Weibo and there are two of them: one from blogging host giant Sina and the other from online mogul TenCent. With 280 million active users, Sina Weibo is currently leading the so-called "micro-blogging" race. Be of note that Tech giant Alibaba, TenCent's arch-rival has recently acquired an 18% minority stake in Sina Weibo for $586 million in April of this year.
As for Facebook, its Chinese substitute would be QQ (aka. QZone), also from TenCent, which boasts over 800 million billion registered accounts and 600 million MAU. Its closest challenger is RenRen.
If you want to upload videos and build a channel around them like you would on YouTube or Vimeo in the western world, then you will turn to Youku. Youku has recently merged with its competitor Tudou, becoming the de facto video-sharing platform in China. In preparation for its own IPO, Alibaba has acquired a stake in this key digital asset too.
The only foreign company that is doing well in the China social media landscape appears to be LinkedIn.
If you want to establish your brand or company in China, it is necessary to set up a firm presence and to localize and "culturalize" your content pipeline in Mandarin for at least Sina Weibo, QQ and Youku. These are the inevitables. There's also a new mobile-bound phenomenon called WeChat which is rapidly eating up the market shares of all the other social media, but I'll dig more into this topic below.
* Payment methods
When it comes to getting paid, credit cards don't prove to be as popular a form of payment for online transactions in China as they are out west. Chinese consumers are still wary of transmitting their digits over the waves and tend to opt for alternative digital solutions. On mobile, the dominant payment methods are "bill to carrier" or "pay by SMS", which are supported by all three legacy giants that are China Mobile, China Unicom and China Telecom. There are also PayPal equivalents, focusing on facilitating cash to virtual transactions across all digital channels, such as ePay or Alibaba-owned AliPay. Both are very popular and widespread in China and you would be well advised setting your business up to receive money in all these methods Chinese consumers like to use.
As a side note, Bitcoin and crypto-currencies are also on the rise in China, maybe even faster than in the western world.
* Mobile Boom
Same as everywhere else in the world, smartphone and tablet adoption in China has been growing at an explosive rate. China has now become the biggest market, ahead of the USA, in terms of App Downloads volumes. It is also fighting USA and Japan in the top 3 of the most lucrative markets in app revenue generated. There as well, the Chinese market presents a lot of particularities that a foreigner may find puzzling when compared with what he is accustomed to:
-- Android Wins Big Time
Apple is sure not be discarded, yet the domination of Android in China is more overwhelming than anywhere else on the planet. This is mostly a result of the Open License nature of the Android platform: all the local brands and device manufacturers are producing their own Android models. Lenovo, Mi, Huawei, ZTE and Coolpad offer a wide range of options, including very affordable entry-models. Xiaomi competes on the high-end, trying to be perceived as hip and stylish, like Apple. It is succeeding at that, with 2.7% of the total domestic market share. These Chinese brands, as well as the no-brand Shanzhai phones that copy the most fashionable western models on the cheap, benefit from the patriotic sentiment that inhabits many a Chinese national. Add to that the aggressive campaigns of Korean Samsung (which leads the market with a staggering 23% share) and Taiwanese HTC in the region, and aggregate it all: China is flooded with Android products. Even more so than in the western markets, supporting Android with your app is not optional. Elsewhere, you'd be giving up on about 50% of the market, give or take. Over there, it's more like 80%.
-- More fragmentation than anywhere else
It's a natural consequence of the previous point. Who says many device manufacturers implies more fragmentation, especially if they compete on the entire spectrum of specs, from the lowest and cheapest end to the highest. What's more, Google Play is not available in China, for the political reasons mentioned above. This increases the fragmentation of Android channels where you can download apps from to a paroxysm. Where there are about 400 different Android channels outside of China (covering 193 countries), there's about the same ridiculous amount within this single country. Out of these 400, the top 10 represents about 80% of the market in volume. The three major legacy carriers are of course among them, catering apps to their huge subscribers bases (China Mobile holds a 56% market-share of mobile phone subscriptions, China Unicom 31%, China Telecom 13%). Besides those, other specialized App Shops have emerged as popular choices: Wandoujia, 360 (from anti-virus software maker Qihoo), TenCent App Gem, App China, D.cn Games Center, HiMarket and 91, which have both recently been acquired by Baidu, now operating these venue on top of its own store.
One particularity of the China market that speaks volume of how pragmatic things can get over there, is that several publishers and distributors secretly engage in Revenue Sharing deals with even the pirate channels, offering them a revenue share on the back-end if they agree to spread their original game with ads and in-app purchases rather than the cracked versions. The revenue share is often as high as 60%, twice as much as with legitimate vendors, since the pirate channels have otherwise little incentive to work clean.
-- Filesize matters
Although 4G speed is available in Tier-1 cities, when taking the whole map in consideration only 52% mobile users in China still didn't have stable Wi-Fi access by end of Q1 2014. The sole means to download apps for half of the userbase is through cellular data network only. It is therefore well advised to keep your app filesize to the bare minimum. 20 MB is the optimal point if you want to propagate your app in high volumes. If your app weighs more than this, the best is to design a launcher and look into side-loading options for the bulk of the data transmission.
-- Gaming is almost exclusively Free to Play
The Free-to-Play (or Freemium) model implies that customers download the game and play it for free, with publishers only incrementally charging for additional content or power-ups through so-called micro-transactions (aka. in-app purchases) or monetizing through advertising placements. Asia is where the Free-to-Play model found success first, so much so that it's basically the only model that the vast majority of Chinese gamers have known. Even more so than out west, Free-To-Play is completely dominating the market, with very little room left for Premium games (requiring a payment up front).It's also worth pointing out that the consumers' commercial behavior inside a game is very different in China than in other markets. For example, would you believe that the best time to incentivize a Chinese player into making an in-app purchase is actually within minutes 4 and 8?
If you are a small video game developer or medium-sized mobile publisher, the cultural gap with the Chinese market, and the level of work it represents, can feel daunting. I usually recommend to my clients who enquire about this market, to find reliable local companies to partner with when entering this complex and disconcerting territory. In mobile gaming for example, there are hundreds of "Distributors" who will be more than happy to deal with the local channels for a cut on the revenue generated within the territory. Several of them are good, many of them are terrible, some are even straight out crooks, blatantly under-reporting sales and engaging in shady activities behind your back. A few have emerged as the best options for foreign developers with a hit on their hand: iDreamSky (distributes Fruit Ninja, Jetpack Joyride, Temple Run 2 and Subway Surfers, among other hits), ChuKong, Nexon and Yodo1. All four excel at so-called "culturalization" and they don't just pass out advice on what you should do, they have internal development resources to fly with your Android source code within a secure environment and adjust for the market themselves, much faster than you ever could. They also have hits in their portfolio around which they have built a strong cross-promotion network. Last but not least, they offer SDKs that streamline payment processing and social media hook-ups. For consumer goods, a good way to get started is to search for the most suitable licensing agency out of Hong Kong. There are plenty to choose from.
While about video games, quick parenthesis to point out that besides Mobile, the remainder of gaming activities mostly takes place on PC, where free-to-play MMO titles dominate the scene. The leading publishers on that segment of the market would be The9, Nexon and NetEase. Consoles are rarer due to the fact that they had so far only available through the parallel-import gray market. Up until January 2014, consoles were not officially allowed by the government in China. Since then, the Xbox One has been allowed to launch in the Shanghai special economic zone (in partnership with China Telecom), as a test-run. A few months later, in May 2014, Sony has announced a joint venture agreement with Shanghai Oriental Pearl Tower Group to bring PlayStation 4 into the free trade zone as well.
I refrained from talking about it too much in both Social Media and Mobile sections above, because with 400 million Monthly Active Users, and around the double in registered users, TenCent-owned WeChat has evolved into its own phenomenon over the course of the last 18 months. At its core, WeChat is essentially a mobile messenger chat app similar to Japanese LINE, Korean Kakao Talk or Facebook-acquired WhatsApp. As the audience grew from strength to strength, TenCent has kept adding new features and functionalities, using WeChat as its Trojan Horse to gain an always bigger share of the time spent by Chinese consumers on mobile.
At this juncture, there is a lot more you can do on WeChat in addition to messenging each other, as WeChat is turning more and more into the go-to destination on mobile, the platform within the platform that blends both Apple and Google eco-systems seamlessly into one giant community, becoming more prominent than both in the process. One of its key components is a twenty-year-old technology called the QR code, which WeChat has smartly utilized to simplify the life of its users. WeChat integrates a QR-reader on board and there are multiple functionalities that users can perform with one single scan: add each other, set up a virtual store, place an order, send and receive money, create private but also professional groups (WeChat is posing an ever bigger threat to LinkedIn in China), download games (with the smart link redirecting you to the page in the appropriate store, depending on which device you use and which stores are installed on it) and of course compete against one another in those games.
Where WeChat diversification has been the most successful is clearly as a mobile game discovery network. In the summer of 2013, WeChat opened negotiations and programming preparations with the three top mobile games distributors, iDreamSky, ChuKong and Yodo1, in order to bring 4 games, among which Fruit Ninja and Temple Run 2, to the WeChat platform as a test-run, which began in October 2013. The test run has been successful beyond expectations for all parties, including users, who love to compete with their WeChat connections. Many more games have followed, including Candy Crush Saga in May 2014, and hundreds more titles are waiting at the gate. By now, the majority of games up the top-20 charts in China are WeChat-enabled, the platform acting as a "discoverability" and "virality" booster. Everybody thus wants a piece of action, but TenCent is very selective about new partners. At the moment, it seems to favor proven hit games with global appeal, as this helps them nourish their own international expansion ambitions with WeChat, demonstrated by the huge TV commercial campaign featuring soccer superstar Lionel Messi.
However, TenCent doesn't allow games to tap freely into their Social Graph like Facebook does. Thepartnering publisher must upload to channels a new WeChat-exclusive version of the game, with special features, and must agree to a 30% cut on net revenue (after deduction of platform-holder fee) in favor of TenCent. It comes as no surprise then that the gaming activity is currently the most profitable of all for TenCent WeChat. This is where the big money is.
If you've looked into Alibaba because of the giant IPO they are prepping up for, you probably have discovered that a huge chunk of its profits and success comes from a platform called TaoBao. To get a quick idea of what TaoBao is, think eBay meets Etsy, with the China manufacturing backbone behind it. Alibaba.com at its origin was a web site listing thousands of Chinese factories offering production outsourcing services in a wide variety of sectors. This was a B2B web site, where foreign businesses would come and find the right manufacturer for the products they wanted to produce or export. The minimum order quantities were in the thousands of units. When TaoBao emerged, it sure allowed consumers to trade between themselves, same as eBay does, but it also tapped into its existing database, enabling factories and even farmers to become direct-to-consumer businesses overnight, through its order fulfillment centers and services. With the rise of the Chinese middle-class, the sheer domestic demand of over 400 million potential consumers has represented for these manufacturers a true shift of paradigm, for which TaoBao has acted as the catalyst.
TaoBao has a more brand-centric pendant called TMall, on which only well-known commercial names are allowed to trade. Whether through TMall or TaoBao directly, if your company deals in physical consumer products, you'd be well advised to try and figure out how to leverage this phenomenon.
I'll conclude where I started: despite all the overhead, entry barriers and trouble, don't drag your feet to enter China market -- they won't wait for you to develop the business. Despite their diametrically opposed strategies in this country, both Uber and Pinterest, to name just two examples, have countless of local copycats to compete with. Jeff Lyndon from iDreamSky explained this impeccably during a Pocket Gamer Connects conference in January 2014, using Fruit Ninja as an example:
"One hour after launch 30 sites already had pirated versions of the game up. Within ten days it was more than 200. After three months there was one clone. After a year there were 40. Ignoring China means you're creating a bigger problem for yourself later on." -- Jeff Lyndon (iDreamSky)
Pascal Clarysse has been doing business in China since 1998, three years before the country entered the WTO and grew into the economic superpower we know today. Pascal has lived in Hong Kong until 2006, witnessing the birth and emergence of the digital market from Asia. In the meantime, he has kept abreast with the latest market developments, being involved in regular negotiations with China companies for his international clients.