On September 19th, the Yale Center Beijing welcomed Winston Ma, Managing Director of the China Investment Corporation (CIC) and author of the best-seller “China’s Mobile Economy”; Andy Tian, Founder and CEO of Asia Innovations Group (with top live streaming app Uplive); and Adam Bao, Founder of The Harbinger, to share their insights on China’s mobile economy. Over the past decade, the mobile internet has catalyzed domestic innovation from mobile payments, to O2O, to today’s sharing economy boom. The speakers discuss underlying factors propelling this mobile revolution, key examples and trends, and how they expect the market to evolve, moving beyond a copy-to-China to a copy-from-China model.
Fundamental Factors that drive China’s Mobile Economy
Adam: Let’s talk about all the factors that drove the mobile economy in China. O2O (online to offline), live video entertainment, and startups like ofo and Mobike…all of these are happening now because of the fundamental structure that was already set up; all these things happened in 5 or 6 years, which is a very short period. What are the factors that allowed this to happen so quickly?
Winston: First of all, the infrastructure provides people a chance to jumpstart into the mobile area. The second factor is that China is the country with the largest population, which makes the network effect obvious. Naturally, it makes any app in China accumulate users much faster than any other areas. With that, we can get to the economy of scale. Even more importantly, such a large population provides a testing lab; you get feedback more quickly, and you can iterate and improve much better and faster. The third aspect is that, most of the netizens in China are younger, definitely younger than the U.S. According to BCG, the average age of internet users in China is below 30, and in the U.S. that number is around 42, so there is a 13 to 14 average age gap. The young people culture also drives this mobile economy.
Andy: Anything I expressed only represents my own opinion, not that of my company. I saw lots of forces that push forward the mobile economy. One is obviously technology, and the other one would be the entertainment-driven aspect of the Chinese people, which is more cultural than in the U.S. Chinese people consume more entertainment on mobile than those in the U.S. by a great deal.
So why does entertainment play such a big part in China? The number one reason is that, there is not a lot of fun things to do for many of the folks. I was born in Shuangliu, a small city outside Chengdu, where the airport is. Even these days when I go back, there is not much entertainment over there; the only entertainment we have is playing on our mobile phones. On the other hand, when I go back to the States, to my parents’ house, there’s a lot of fun stuff to do. I think the lack of offline entertainment really drives mobile as the single entertainment device.
Mobile entertainment actually goes beyond smartphone. In the days before Android came out, people were basically scrolling through the GPRS-based mobile phones. That was when the transmission speed of information in mobile phone was 20k/s, about 100 times slower than the current speed, if you can imagine that. But people were actually trying to watch animated GIFs of NBA competitions and sports events on a tiny, little screen. And with the mobile phone large screen and faster networking, the entertainment options and content just blossomed. It is interesting to see how entertainment applications have become the first and the most important information consumption behavior in China, then came e-commerce, then came payments, then came search and all other stuff. Because entertainment is always on, it drives tons of usage throughout the day. Entertainment was there before social media and Wechat, whereas in the States, there are too many entertainment options outside of mobile phone applications.
Business Models Based on Mobile Payments in China
Winston: You can push this even further. Essentially there is a lack of many different kinds of offline services, and it opens up opportunities for all these big developers in the mobile economy. For example, there is a lack of shopping malls in many areas at least for a few years. You can say the same thing about banks, or credit cards. Now average people get a chance to be efficient in the mobile economy context.
Andy: That's how you create now a very interesting reverse situation. It creates a lot of convenience and services that are here in China and are lacking in the U.S.
Adam: That's a really interesting exchange, and I like the comparison of how China is different versus US and other countries. I'm trying to understand why livestreaming didn't really take off in U.S., whereas in China. I think payment is a big piece, because you can pay the person streaming in a live video. It will incentivize the broadcaster to produce better content. If you can share your perspective on some of the differences, and what that payment enables that would be helpful.
Andy: I think there is payment in the U.S. too, it's called tips. You actually can tip on Twitch, like a tip jar. Send someone a dollar, 50 cents, so on so forth. And there are also services on Youtube, where someone can tip a content creator. They don't make much money, let alone to sustain the content creations.
But in China, people don't tip, they offer gifts. It's a much more entertaining experience to give gifts. You don't really tip to throw like a hundred dollars for a guy playing the guitar in the subway, it's for a dollar, two dollars. That's why the tipping culture in the U.S., unfortunately, won't make so much sense online.
Gift giving is a human, social and entertaining experience all wrapped into one. This is why, even though there is also tipping available in live streaming in the U.S., they monetize about 5% of the value of China, where the predominant form is not tips but that social bond between the streamer and its fans. So for example, we are able to get an average active user contributes three dollars in our business per month. Because we have really expressive and fun virtual gifts. You can even give virtual Chanel bags if you like. So I think that, again, wraps into the entertainment and gamification aspect that China society is.
Adam: In China, any of you guys can use Zhihu, Fenda, Himalaya, or Dedao, and those are very popular apps. People are paying money, subscription to access content. In the U.S., I don't think there are many such examples. What’s driving that?
Andy: I think a lot of it is culture. I am probably more American than Chinese, and we don't really pay for knowledge. On the other hand, China could be narrow-focused, but traditionally there is a big emphasis on education. I think that the long history of focusing on the value of education is driving the need to learn. In addition, for better or for worse, we worship victors in China, we worship kings and emperors, and we love to worship heroes. That's actually very cultural driven, rather than technology-driven. I grew up in the U.S., in college we value critical thinking, individual thinking, question everything, even if it's Steve Jobs, we would think: "is that right for me?" So we don't really value that as much, whereas in China, people would pay for knowledge if they really what to hear. So those are my observations in terms of culture.
New Trends and Advice on Starting a Business
Adam: When it comes to major trends these days, you hear a lot about online education, you hear about new retail market. Jack Ma takes a point off that, just question that name, there is a lot about artificial intelligence, people are trying to find the next trends. So you guys should speak based on what you hear in the market, what are the major trends are happening today, whether it pertains to mobile or just overall internet technology.
Winston: Back in 2009, at CIC we set up a vehicle for cross-border investments. We were trying to find a way to connect the oversea funds with the growing demand of the Chinese market. It wasn't fully tested back then, in fact in 2010/2011 we looked around in the market and we found two kinds of VCs: VCs that focus on Silicon Valley, or the VCs that focus on the China market. Today, you see more VCs claiming their possible strategies on connecting the two parts, the two different kinds of innovation centers.
It's no longer that the U.S. is the innovation centers with technology. China is the innovation centers with apps, and we invest in the U.S. to get the latest ones and then copy to China. When people get familiar with the cross-broader concepts, it is interesting in the areas you see different kinds of innovations emerging from two different markets, they have more competition, more than just copying from each other. Actually, optimistically they hope there will be cross-border organizations so there will be even better products coming out.
Andy: Mobile technology is different from enterprise technology. Mobile, by definition, is personal. You have it, and it is individual and consumer-based. Then all of a sudden I could see from consumers' point of view. No matter what kind of technology the innovation is, it has to satisfy consumers’ needs. I think there are three main drivers of all kinds of technology in China: our laziness, impatience and cheap services.
First, let's talk about laziness, which brings about all sorts of convenience. China is an incredibly convenient market. The user uses WeChat to buy stuff, you can hire drivers, flowers delivery etc. We are getting lazy and lazier, the mobile phone is always with us, and so all the innovations are helping us to be a little faster, easier.
We are also getting impatient. Artificial intelligence is getting more predictive of our needs, based on the stuff we bought. For example, on JD, a page would pop up and says: oh, you bought something last month, would you try it again. As another example, on DiDi, when it was about 6:00 pm, Didi would suggest that I want to go home. It's kind of scary for the app to be able to guess where I am going. That is what I mean by impatient, because there is less and less input I need to put in my mobile device to basically extract useful information.
Thirdly, cheap. Increasing waves of technology are cutting the middleman, making payments and transactions more efficient. In the world of Fintech, a lot of efforts are on the way. Zhong An Insurance (众安保险), for example, is preparing for an IPO in Hong Kong. They are one of the new purely online and personalized insurance product companies. There are a lot of creative ways to deliver services information that lower the total payment paid by the end user by making the delivery chain much more efficient. Also there is a rise of crypto-technology. Even though recently ICO was banned in China, the underlying technology behind crypto-technology also serves to cut out the middleman, by placing trusts on a cloud of blockchain. That would make everything less costly related to making a transaction.
Technologies or Business Models that can go abroad from China
Adam: Do you see any innovative technologies or business models in China that can successfully go abroad?
Winston: I think it would be the intersection of OEM on the manufacturing side and the user experience side. For example, we were talking about customized offering. People are going to content platforms for advice from peers or discussion groups on what to buy. Nowadays we see many discussions on overseas products, such as on the content platform Xiaohongshu (小红书). But on top of that, try imagining a platform that focuses on China-based, fan-based products because of its close proximity to the manufacturing base in Shenzhen which is also in charge of distribution and purchasing. China can become the perfect place for this type of business model: specialized demand, and specialized manufacturing distribution to the overseas market.
If you think about it, Xiaomi started like this. They started discussion rooms online for Mi-fans to provide feedback, and by doing that they fostered a community whose voices help them improve on their products. Now Xiaomi as well as Lenovo are doing the same thing in India. If you think on a broader level, China now may become more brand-oriented offering based on the large consumer-base and manufacturing base.
Andy: On the baseline, you have culture and language agnostic servers like Huawei. Huawei’s networks now play a huge role in the world and a lot of the manufacturing is done in China. TV brands, such as Skyworth, are going abroad as well. For the culture agnostic hardware, or standardized hardware, China is sure to become the best in the world. And this is not because things made in China are cheaper. China is not cheap anymore. Intel, Microsoft, have already moved large portions of their work forces to places that are cheaper. The real reason is that manufacturing in China has become very efficient. In terms of more advanced products such as smart hardware, China is also taking a lead. For example, Xiaomi is now one of the top smartphone makers in the world. They are the number one phone brand in India and many other countries.
The next level is pure software, including mobile software, apps and services. That's much harder to excel in. There are many culture-specific entertainment tools, like us (up.live). We launched our life streaming app last June, and introduced the Chinese gift-giving model to the international market. Now we feed about 6,000 broadcasters around the world every month, and that requires regional operations sensitive to the local culture. We had to be careful when entering, for example, the Middle East, where there is an excessive amount of censorship as well as strict restrictions due to religious reasons.
You need to take many cultural differences into consideration when launching consumer-based products in another country. As an example, when WeChat began to make inroads into the Indonesian market, it decided to spend $25 million dollars on TV ads. Not soon afterwards, my friend there came home one day and found his maids and drivers were all using WeChat. Why? Because TV ads go from 2 to 5 p.m., and guess who watches TV during that time? Very quickly, WeChat took over the entire maid and driver market in Indonesia.
Adam: Lei Jun once said that countries such as Vietnam and Indonesia are about five years behind China, so many Chinese practices and business models have the potential to be adapted to work in those countries. From an investor’s perspective, it is definitely worthwhile to look into those countries and then think back on what we've done in China. Last but not least, just by looking at our site The Harbinger, we noticed that a large portion of our audience is not from the U.S. It speaks to those countries that are very big and create opportunities for investors and those related.
Q&A (The Future of Media, AR, Blockchain, and ICOs)
Q: What is your prediction of the general trends in media and entertainment in the next three to five years?
Andy: I personally believe there will be a rise in interactivity. Traditionally, media is consumed passively. And then came live video, allowing content providers to interact with their audience for the first time. But this is still very rudimentary. The next stage of the media revolution, I think, is to bring interactivity to many other formats such as music. For example, how can we interact with live recording? And then there are also games. How can they become more mainstream? And is it possible to introduce more gamification into non-game industries such as education, e-commerce, and finance? In terms of technology, there is a lot more than that.
Winston: I think that's great point. Just to build off of it, if you think about video streaming, where providers are mostly losing money because professionally generated contents are too expensive, whoever can find a cost-effective way to acquire high quality contents will be in a very advantageous position. Live broadcasting, for example, provides some very important advantages. First, it is user-generated, which means it costs less. Second, live broadcasting enables interactive participation. Third, live broadcasting combines well with e-commerce, which enables not only professional advertising but also a convenient way to generate extra revenues. Fourth, for the usage of video, you have to deal with the length of the content. If you have short video, you don't have time for advertisement, while if you make it long enough, the cost might go up. There’s not any good solution for that.
Q: And what about frontier technology like AR or blockchain?
Andy: AR is super important. You can find AR useful in any industry where you need augmented information. In my opinion, more applications of artificial intelligence and big data should be devoted to AR, which has the potential to revolutionize how we interact with the world, how we conduct business, pretty much anything that the eyes can look at, by adding content-based and real-time information.
Blockchain is another thing to pay attention to, for I believe it has the power to take the world to a new stage, and not just in the finance industry. The concept of blockchain places the trust of servers that were previously exclusively associated with third parties. For example, The Great Firewall is claimed to make Chinese citizens safer, and Google claims to make you safer with their services. Every company and government is claiming to be the safest, but only blockchain can make you feel safe without the help of anyone else. If we can actually create a world where trust can be generated by mere technology, that could have huge implications.
Q: China recently banned initial coin offerings (ICO). Do you still see the value of creating new cryptocurrencies?
Andy: The current concept of ICO, as I understand it, is basically a bunch of guys pulling out a white paper and saying "Hey, I have a cryptocurrency-based project. Please crowdfund me with a lot of money, and don't worry that we don't have anything yet. Just fund me. Here's our url." I think China did the right thing. To be honest, it has been done way more out of hand in China than anywhere else. And because the Chinese government operates faster and more strongly than any other government, ICO gets shut down. Just yesterday, Japan legalized crypto-exchange, allowing people to convert real money into crypto-currency. So as of today, Japan now has 55% of the volume of trading in bitcoin. Where there's money involved, there's always a bubble at some point. Cryptocurrency and blockchain are two different things. Blockchain is a technology that is universally trusted, linked, set up as a block, and has many other applications.
Cryptocurrency, on the other hand, is an implementation of blockchain that holds some value. Even though China temporarily banned the exchange between RMB and cryptocurrency, you can still use cryptocurrency to buy other things. Moreover, China did not ban blockchain. In fact, a lot of Chinese government agencies and ministries are all looking at blockchain as a new financial technology to use for applications that are not cryptocurrency-based. I would say that in financial terms, this is a reasonable market correction.
The opinions expressed in this article are Winston's and Andy's own, and do not reflect the views of CIC and AIG (Uplive) respectively