For entrepreneurs looking for funding their startups this year, they might found the climate is much less forgiving than last year. I remember last summer almost anything can get a decent valuation. But this year, the VCs are much more cautious.

What are on the VCs’ minds these days? To find out, interested parties might like to join the event organized by Silicon Dragon next week. It said it has invited all the top VCs in Shanghai, including Steamboat Ventures, Qiming Ventures, GGV Capital, Morningside Ventures and Ceyuan Venture. Fritz Demopoulos, founder of Qunar will also be there, representing Queen’s Road Capital, an angle fund he recently founded.

As representatives of the entrepreneurs, David Li of YY and Feng Hong of Xiaomi Technology will also join the discussion. I guess a lot of people will be interested to know how Xiaomi fetched a US$4billion valuation, under current market condition.

Here is details of the event:
Link: http://www.silicondragonventures.com/Pages/SiliconDragonShanghai2012.aspx

Speakers: Alex Hartigan, Steamboat Ventures; Hans Tung, Qiming Ventures; Jenny Lee, GGV Capital; Richard Liu, Morningside Ventures; Fritz Demopoulos, Queen’s Road Capital; David Chen, AngelVest; Richard Chen, Ceyuan Venture/Yifei Investment; Joseph Chan, Sidley Austin; Frank Giglio, NASDAQ OMX;

Tech Star Founders: David Li, YY Inc.; Feng Hong, Xiaomi Technology

Program: A Dragon Enters The Yantgze in the China 2.0 Era
Discussion points:
– The Arrival of the Angel Investor & Serial Entrepreneur in China
– Exit Options: Going Public, M&A, Taking Private Again
– From Copycats to Chinese Micro-Innovations
– Tougher Deal Terms for Startup Financing
– Chinese Startups Going Global
– What’s Hot: Mobile Internet, Cloud Computing

When: September 13, 2012 4-8PM
Where: Knowledge & Innovation Community, Conference Center, Building 7, 1F, Seven KIC Plaza, # 388 Songhu Road, Yangpu District, Shanghai (nearby Fudan University)

Very soon, all the pinterest clones in China will have more than the Taobao products to capitalize on. Jindong Mall (aka 360buy), one of the largest online retailers in China, will open its platform in 2 months, said an industrial source. “Just like Taobao’s ‘Grand Taobao’ project, Jindong will have its ‘Grand Jindong’ project,” the source said.

Taobao affiliation program, a key component of Grand Taobao project, have been the backbone of all the pinterest-like social ecommerce services in China, such as Meilishuo, Mogujie and so on. Taobao (actually the small individual Taobao sellers) pays them commission when they help to sell Taobao products to their users. For example, Mogujie, one of the largest, fostered a monthly sales of over RMB 120 million (US$ 19 million) for Taobao with more than 3 million registered users and 1.2 million daily UV last year.

It makes people wonder what if Taobao decided to lower their commission or even not to support them anymore, especially, right now Taobao has its own pinterest-like services, called Taobao WOW. In fact, there is rumor that Jack Ma, CEO of Allibaba Group, told his staff in an internal meeting that, in the short term Taobao will support the pinterest clones, but in the long term it will squeeze them out, and replace them with Taobao’s own pinterest-like service.

However, if Jindong opens its platform, this is no longer an option of Taobao. This is because if Taobao ceases to support the pinterest clones, they might switch to promote Jindong’s products, a move Taobao cannot risk to happen.

With Jindong taking the lead, all major e-commerce players in China, such as Vancl, Dangdang might soon follow. In the future, opening your own e-commerce site will be very easy, as all the fulfillment and logistics are taking care of by the major e-commerce player. You just need to take care of the front-end, whether this is a website or a mobile app. I believe there will be a lot of such players, and the key of their success lies on how to attract and retain users.

Although online travel is no longer something new, planning and booking tours online is still growing fast in China.  Revenue for Tuniu, the leading online package and group tour company in China, saw triple digit growth to Rmb 1.2 billion (in gross revenue) last year.  In an interview with its CEO, Donald Yu, said the trend will continue and Tuniu’s revenue is expected to more than double this year.

The Nanjing based company was founded in October 2006 by Donald (Yu Dunde) and his partner and current COO Yan Haifeng. It provides travel services including packaged tours, group travel, DIY tours, and combined air ticket and hotel booking packages. The company covers both Chinese domestic travel, as well as international tours.

Focus on leisure travelers

“Compared with others in the industry, we concentrate on package and group tours. Some competitors offer package tours, but the bigger ones mostly focus on booking hotels and air tickets. Meanwhile, eLong does not offer package tours at all, instead focusing on hotels and airfares,” said Donald.

“I like their direction,” Don Jiang of Gobi Partners said when being asked why he invested into Tuniu in 2008.  Gobi is an early stage venture capital firm in China.  At that time, Ctrip and eLong dominated the online travel industry in China.  Both are listed on Nasdaq and focus on providing hotels and air ticket booking services for business travelers.  “The business travelers are well-serviced by Ctrip and eLong.  On the other hand, there is room for a player concentrated at leisure travelers,” said Don.

China’s white-collar workers are growing fast and their income is improving.  Like what happens in the West, traveling has become one of their favorite pastimes. Package tour is still something they prefer, especially for new destinations and overseas travel, said Don. “Also, the total cost is cheaper than booking your own tickets and hotels,” he added.

Steady and fast growth

The Chinese government expected total domestic travelers would be 2.9 billion this year, an increase of 10%, and domestic tourism income would be Rmb 2.22 trillion, an increase of 15%. Total tourism income (including both domestic and foreign travelers) will reach Rmb 2.57 trillion, an increase of 14%.  In an industrial conference in Guangzhou, Shao Qiwei, head of China National Tourism Administration, said travel industry would continue its steady and fast growth. On the other hand, industry experts believe online travel will be growing even faster, at 30% annually.

“I also like the management team. They are young and they learn fast,” Don of Gobi said.  Before founding his own company, Donald worked for a blogging site in 2004 and then a parenting site.

When Tuniu was founded in 2006, it had only 5 staff members but it grew rapidly.  By end of 2007, after just one year, its staff increased to 50. In addition, the Beijing and Shanghai offices were established in 2007.  In 2008, Tuniu expanded to provide greater coverage around China.

Tuniu also developed its own business operation support system (BOSS). It uses its BOSS to conduct database analysis, which allows it to understand trends in the Chinese travel market quickly and effectively.

“We make the booking process simple and we provide better prices for our customers.  That is why we are the market leader for package and group tours,” said Donald.

By the end of 2009, the company had 270 employees.  Last year, it saw triple digit revenue growth.  Total gross revenue increased to Rmb 1.2 billion.  And Donald expects Tuniu’s revenue to more than double this year.

Tuniu currently has about 1,500 employees. It provides tours leaving from 20 cities in China.  It has over 20,000 different travel products and it has booked more than 1 million tours for customers.

Funding

The company has had 3 round of fund raising so far and has received total investment of about US$60 million.  It had A and B rounds of fundraising in 2008 and 2009. Gobi was involved in both, while DCM was involved in the B round only.  The C round took place last year, and included DCM and three other investors.

Usually, consumers bid for what they want to buy on the web. But on Shajia, an e-Commerce site, incubated by Innovation Works, it is the suppliers bidding for orders of mobile phones, laptops, digital cameras, and other consumer electronics.

The idea came from the company’s founder, Peng Lin. He had worked for Tsinghua Tongfang, a leading PC manufacturer in China for 10 years before starting his own company. Before he left Tsinghua Tongfang, he was the general manager of its consumer product department, overseeing the company’s business of PC and notebooks for the whole country.

Opportunity in the Distribution Network

“At Tsinghua Tongfang, we distribute our own products. Our network has to cover every place in China, not only the major cities, but every small town and county,” said Peng. That is how he understood the distributor network in China for consumer electronics.

“China is unique in its distributor networks,” said Peng. “In the West, manufacturers, such as HP, have strong power in pricing their products. The distributors and retailers, basically, follow the pricing strategy of the manufacturers,” said Peng.

In China, manufacturers have little control on the prices of their products once they are sold to the distributors, said Peng. In fact, distributors at different places will price the same product differently, depending on how eager they want to close the deal. “If buyers order a lot and if they can pay cash, usually the distributors can offer a better price,” said Peng. They even compete with each other for orders. And that is the opportunity for Shajia.

Lowest bidder gets the prize

Users on Shajia can place order for what they want. As these orders aggregate, e.g. there are 100 people want to buy an iPhone 4S, suppliers can start bidding for the order. Price gets lower and lower. And the supplier who can offer the lowest price will get the complete order. Afterwards, users can pay for the items and the winning supplier will fulfill the shipments.

“The impulse buyers might regret and cancel their orders. But on average, 80% of people who make orders on Shajia will eventually pay for the items. This is acceptable to the suppliers,” said Peng.

The site was officially launched last October. Currently, total transaction volume is on average Rmb 200,000 each day. “This is quite good given we have not done any promotion yet,” he said. At the moment, Shajia’s service is free for both buyers and suppliers. But Peng believes it can charge a transaction fee once the service is mature.

Jump-Start or Acceleration

Shajia was incubated by Innovation Works’ Jump-Start program, which usually are for entrepreneurs with little experience. Innovation Works’ more well-known incubatees, such as UMeng, Wandoujia, etc., come from the more advanced program, Acceleration.

I wondered why Peng, who has 10 years of solid experience and a senior executive position at Tsinghua Tongfang, would apply for the more junior program. “In fact, the people at Innovation Works’ have asked me the same question. But, I thought my chance at getting accepted at the Jump-Start program would be much more certain,” said Peng.

Overall, the Innovation Works’ experience was helpful to Peng. He got an angle investment of several million yuan from Lei Jun, a celebrated angle investor, after he finished the program. And he and his team of about 6 people has moved out of Innovation Works and set up their own office.

Next step: Rmb 100 million a year

To further expand Shajia, Peng is looking for a partner with solid experience in marketing and promotion. “Shajia will start promoting its services soon,” said Peng, “I need someone with solid experience.” In the next 6 months, he hopes to increase Shajia’s transaction volume to Rmb 350,000 per day and that is roughly Rmb 100 million a year.

“And after that, I hope to get a series A investment of about US$3 million,” said Peng. These goals seem quite achievable for Peng and his team. Good Luck to them.

I met Feng Yue, founder of Stock Radar at the ChinaBang conference. The 30-year-old entrepreneur was one of the exhibitors at the event. He demonstrated a stock analyzing app, Stock Radar. Stock trading related tools are rather uncommon among startups in Beijing. I was intrigued and met him the following Monday at his office in Jianwai Soho.

“I’m always looking for new opportunity. I believe the key point to get success and become a great business in China is not to be a copycat. It is about being creative, niche, vertical, high profit and what we called the blue sea,” he said.

“In China, there are a few blue sea opportunities, such as the health care sector, the finance sector, real travel planner, tools for e-Commerce. And after some comparison and analysis, I chose mobile financial tool,” said Feng.

He started his career at a PE focus on Chinese internet and media and he has created 2 startups in the past. Afterwards, he joined Yahoo China, working on search engine, and then, Alibaba. Before founding Stock Radar, he worked at a semantic search engine, called Uptake. And the core technology of Stock Radar is something to do with semantic search engine.

Core technology: semantic search engine

“We gather all the information on the Web regarding a particular stock, such as news, analysts’ comments, people’s personal blogs, etc., and give user an indictor about how the stock will do in the future: will its price rise, fall or just stay the same,” said Feng.

Many of the information are in form of words. How to extract the meanings of these words and transform that into an indictor of how the current market thinks a stock will do in the future is similar to a semantic search engine, said Feng.

Google is currently the most popular search engine. Semantic search engine takes another approach to find relevant information. Rather than using ranking algorithms such as Google’s PageRank to predict relevancy, semantic search uses semantics, or the science of meaning in language, to produce highly relevant search results.

Users so far: One million

Feng’s team currently has about 10 people. They researched on the product for one and a half year before releasing it into the market. 6 months after its official launch, it has about 1 million users. About half of them use the iPhone version and the other half use the Android version.

“Our user growth was quite steady, even without promotion,” said Feng. In the next 3 to 6 months, they will start to heavily promote Stock Radar. “We hope to get 5-10 million users in 3-6 months,” said Feng. At present, the stock analyzing app is free, but Feng thought in the future some of users will be willing to pay for a more advanced version.

Funding

Matrix Partners has already invested several million yuan into Stock Radar. But for the company to grow further, it needs more funding. Feng is looking for a new round of investment. “This will be our series A. I hope to get about 20 million yuan,” said Feng.

Once the hobby of tech geeks, iPhone jailbreaking is now a lucrative business.  In the U.S., the primary jailbroken app store, Cydia — named after the insect that bores into apple trees — earned about US$10 million in annual revenue and counted about 4.5 million weekly active users hunting for apps, according to a report in the Washington Post last April.

In China, jail-breakers mainly use 91 Assistant to download apps onto their iPhones.  91 Assistant is offered by Fuzhou-based NetDragon Websoft, which earned Rmb 70-80 million in revenue from the smartphone management tool last year.  The tool also has an Android version. Currently, about 70-80% of iPhone and 40-50% of Android phone users in China use 91 Assistant.  It is one of the most important distribution channels for mobile apps in China.

NetDragon has already spun off the mobile division, 91 Limited, and plans to list it in either the United States or Hong Kong, chief financial officer Joe Wu said.

The business of iPhone jailbreaking

With 91 Assistant, users can easily download software applications (or apps) from the Internet with their computer. In the case of iPhones, however, they must first “jail-break” the phone or other iDevices. Jail-breaking is the process of removing the limitations imposed by Apple on its iPhones.

“It is like installing a new OS [operating system] for the mobile phones,” said Joe, “Just like someone may buy a new computer preinstalled with Windows, but does not like it and installs Linux on the machine.”

Jailbreaking iPhones is legal, although Apple has said the practice “violates the warranty”.

Apart from downloading software, 91 Assistant also helps users to manage data on a phone, such as transferring photos, music, video, and other files to and from their computers, making backups for phone numbers, and so on.

The rapid growth

Being the first of its kind in China, 91 Assistant spread quickly among iPhone users. Today, 70-80% of iPhone fans in China, or 12-13 million people, use 91 Assistant to download applications onto their mobile phone, said Joe.

NetDragon runs a third-party app store to support the operation. So far, it has more than 241,658 different applications available. “It is an alternative to iTunes,” Apple’s official channel for selling applications, said Joe.

91 Assistant also offers a version for Android phones. More than 20 million people are using its Android counterpart, or about 40-50% of all Android users in China. Joe expects the number of users will increase rapidly this year. “Smartphone users in China will increase another 100 million this year. We expect half of them, or 50 million, will use 91 Assistant,” said Wu.

Joe’s expectation seems very likely to happen.  Adoption of iPhones is set to grow in China following the announcement last week that China Telecom, the country’s third-largest wireless operator, will offer the iPhone 4S from March 9. At present, only the slightly larger China Unicom offers the phone in mainland China. China Mobile, the country’s largest wireless company, uses a domestically developed 3G technology.  It has yet to close a deal with Apple.

Revenue and investment

NetDragon earned about Rmb 70 million to 80 million last year from its mobile operation, generating revenue through advertising and partnering with game and e-commerce companies. “Our mobile division is already profitable,” Joe Wu, NetDragon’s CFO, said. He expected revenue would triple this year as the user base increases and mobile Internet becomes more mature.

Several venture capital firms, including IDG, Vertex and DT Capital, have invested a total of US$34 million into the 91 Limited, although NetDragon still controls over 60% of the unit.

“This year, we hope to get our mobile division listed in either US or HK market,” said Joe, ” We prefer the US market as it understands Internet business better.”

Competition

Still, the very success of 91 Assistant has encouraged competitors to rush into the market.

One is Wandoujia, one of the projects incubated by Innovation Works, an incubator established by former Google China head Lee Kaifu in Beijing after he left Google in 2009. Wandoujia was launched in 2010 and with its sole focus on Android phones, has attracted more than 10 million users, according to an industry insider.

Another rival is iTools, which specializes in iPhones and other iOS devices. It is produced by Think Speed Group, which was formed by Feng Linyi and Kung Hoising, two early members of Tencent, China’s biggest Internet company, who were involved in building Tencent’s flagship product, QQ instant messaging services.

iTools, which is more convenient compared with 91 Assistant as there is no need to jail-break machines, has attracted more than 3.5 million users since it was launched last July. About 40% are in China.

Last November, Hong Kong-listed Come Sure Group Holdings signed a memorandum of understanding to acquire 51% of the company. The deal is expected to be completed by April. The company is also talking to Tencent for potential cooperation. “If they can get the support of Tencent, iTools can easily get tens of millions users,” said an industry insider.

In addition, Tencent also offers a similar product on its own.  Wu understand the competition is keen.  “There is no use to be afraid.  We just have to do our best,” he said.

Partnership with Qihoo 360

But there is a bright side to the story.  Recently, 91 Assistant has made a partnership with Qihoo 360 Technology to promote its product. Qihoo 360 is the country’s leading anti-virus provider.  It has over 370 million active users per month and it is one of the top-three internet companies in China by user base.  The two companies’ co-brand product, 360(91) Assistant, is quickly gaining market share.

Recently, I met an early member of Tencent. His name is Feng Linyi, but most people call him, Night Cat, his nickname. He currently is the CTO of Think Speed Group, a company he founded with a few of his friends, including another early Tencent member, Kung Hoising.

Early days in Tencent

Night Cat joined Tencent in 1998, when the company had only Pony Ma (currently Tencent’s CEO), Zhang Zhidong (currently Tencent’s CTO), Xu Chenye (currently Tencent’s CIO) and a few early members. His technical skill is superior and the first edition of QQ, Tencent’s flagship product, was developed by Zhang Zhidong and him. At that time, the instant messaging system was called OICQ, a clone of the American product ICQ. The system architecture they designed is still in use today, without any major changes. The product was only continually upgraded and expanded. Kung Hoising, Think Speed Group’s COO, was also involved in the development of QQ.

Online games

In May 2009, Night Cat and his team began to make online games. They developed a series of web games for the overseas market. Their first game was launched in October 2009. It is called “Napwar”, which means Napoleon War. It is an online strategy game based on European military history of Napoleon. Basically the game is free, but user can pay for better weapons and other game items. Afterwards, they launched “War of 2012”, “War Flow”, “Athuria”, and so on. All of them are online strategy games.

The company has signed an agreement with Aeriagames.com, one of the largest U.S. online game platforms, to promote its games. It has also signed an agreement with Gamewave Interactive Technology, which runs a leading web game platform in China. Currently, its games have a total of over 1 million users and game revenue reached HK$ 7 million last year. Night Cat estimated its game users would reach 15 million and revenue in online game would be over HK$65 million this year. In 2013, users could grow to 20 million and revenue would reach HK$200 million.

iTools – the new focus

As iPhone became popular in the recently years, Night Cat and his team started to develop a new product, in addition to online games. It is called, iTools (http://itools.hk/tscms/index.php?a=webpage&pid=12), a tool for users to manage their Apple iOS devices, including, iPhone, iPad and iPod. Users can easily view information on their devices, synchronize music / ringtones / photos / book / document with their computers, install software, download files from Internet, and so on.

Currently, there is another product in the market having similar functions. It is 91 Assistant, developed by NetDragon. But user have to jail-break their iOS devices, in order to use 91 Assistant. But for iTools, there is no need for jail-break. “It is very easy to use and it is fast,” said Stephen Chen, co-CEO of Think Speed Group. Since iTools launched in last July, its user have reached 3.5 million. Out of which, 40% are in China. Night Cat estimated iTools users could reach 25 million this year.

At present, as iTools is free, there is no revenue. However, when the user base is large enough, there would be income from advertisers who want to promote their apps through the iTools platform. Night Cat estimated they could earn about HK$31 million from advertising fee on iTools this year. In 2013, as the mobile advertising market become more mature, iTools’ revenue could reach HK$159 million when it has over 60 million users, said Night Cat.

Fast Growth in mobile Internet

China Internet Network Information Center (CNNIC) announced, as of the end 2011, Chinese netizens has reached 513 million, an increase of 55.80 million from the end of 2010. Internet penetration has rose to 38.3 percent. Mobile internet users has reached 356 million, up 17.5% from the year before. Close to 70% of internet user has used mobile devices to go online.

These trends are beneficial to Night Cat and his team. However, competition in the online game market is intensive. Moreover, as they target overseas market, they have to overcome the culture difference.

As for the company’s new focus, iTools, it could be the future of the company. However, currently the market is dominated by another competitor, NetDragon’s 91 Assistant. Almost every iPhone user in China has heard of 91 Assistant or is using the product to download software. Although iTools is more convenient and technically advanced, as there is no need to jail-break, it is difficult to change users’ habit. How to effectively promote the product would be crucial to iTools’ success.

Potential Partnership with Tencent

Both Night Cat and Gong Haising are from the founding team of Tencent. It is heard that the company is talking to Tencent for a potential partnership.  Tencent is one of the largest Internet and online game companies in China. Its mobile QQ is also a must for every mobile phone users in China. If they can establish a good relationship with the Internet titan, it would help to promote iTools and their online game business.

San-Francisco based Airbnb matches people seeking vacation rentals and other short-term accommodation with those with rooms to rent. Its services become very popular, since the company founded in 2009.  In last July, we reported about Airbnb’s series B fund raising of US$212 million and a local company, Airizu, which had just started short term rentals in China.

Last week, I talked to Airizu‘s co-founder Adrian Li, to see how they are doing.  “Since we launched the service in June, we have had over 100,000 room nights booked,” said Adrian, “Through our service, people can book over different 40,000 apartments in 70 cities in China.”

Currently the company has 150 staff – about 100 work in its Beijing headquarters, with the rest placed in key hub cities all over China.

The China Difference

But, just as we mentioned before: “In China, Airbnb faces a very unique market that does not work in the same way as the rest of the world. One of the biggest issues is trust. Many Chinese don’t even trust each other, so it’s a stretch for them to even trust strangers staying at their place.” How Airizu solve the “trust” problem?

“Unlike the U.S. or Europe market, where most property owner rent out the rooms in their own apartments, Chinese property owners usually do not live in their second apartments.  They convert the whole empty apartment for rental purpose,” said Adrian.

Although it might seem unbelievable, given most people in China are living in crowded condition, there were over 65 million empty apartments in China in 2010, according to the local media. “These apartments are for investment purposes.  People buy them for seeking a rise in property prices, so they are not living in them,” said Adrian.

Many of these apartments are under the control of property management companies, which seek to make a return through renting the properties. “Of course, they hope to get long-term lease, but if they cannot, short-term rental is still better than leaving the apartment completely empty,” said Adrian.

By partnering with these kinds of property management companies, Airizu rapidly has expanded its network. Currently, it has over 40,000 apartments in 70 cities in China.  Most of Airizu’s apartments are located in the first tier cities, i.e. Beijing, Shanghai, Guangzhou and Shenzhen.

“70% of our customers choose to stay in the top cities, where business and tourism are most demanding,” said Adrian.  He hopes to expand the network to over 100,000 apartments this year.

Who are the customers?

“Most of them are of 20-30 year-old, traveling in groups of 2-3 people. Some of them are business travelers and some of them are just tourists,” said Adrian.  He expected, when school holidays come, there will be groups of parents traveling with their kids to attend various training schools.

And when school year finishes, there will be colleague graduates traveling to major cities, seeking jobs.  Since these are residential apartments, they are generally bigger and cheaper than hotels. 80% of the rooms are under Rmb 250 per room night.  There are kitchens and washing machines, too. Therefore, it is more convenient for people who are going to be staying for a while.

Next phase – Service Quality

In the next phase, Airizu is going to setup a call center to support its service and increase service quality.  “Service quality will be key to our success,” said Adrian. Right now, Airizu calls  its customer to review about their experience, 1-2 days after their stay. “We have to ensure the standard of quality,” said Adrian.  He hopes to setup some standard for the property owners, so that customers will have more or less the same experience in different places in its network.  “Just like Home Inn, customers know what they are expecting wherever they stay,” said Adrian.

Revenue and Funding

Airizu charges a commission for each room-night booked via their website.  In the future, Adrian also hopes to get advertising fee from property owners who want to list their apartments in top places.  “We can also try to arrange other services for property owners, such as cleaning, supplying towels and bed sheets, etc.  We could also offer car rental services to customers in near future, too.”

Airizu is funded by a German startup incubator, Rocket Internet, which has invested over 2 million Euros so far. Most recently Airizu has received a lot of interest from top tier funds and is actively in discussions for another round of funding.

The Management Team

Adrian, CEO of Airizu, is a serial entrepreneur.  Before founding Airizu, the Cambridge & Stanford graduate founded idapted.com, an online English learning service, which was sold in 2011.  His partner, CMO Alex Zhang, a Stanford graduate, is also a serial entrepreneur, who has launched his own wine brand before.  Another partner, COO Ben Zhang, a Chicago MBA graduate was one of the founding team members of Gaopeng, Groupon’s Joint-venture in China.

Continue from our last story about Angry Birds and its developer, Rovio.

The 52nd game

Rovio was started by three students from Helsinki University of Technology (currently Aalto University School of Science and Technology), Niklas Hed, Jarno Väkeväinen, and Kim Dikert. In 2003, they participated in a mobile game development competition at the Assembly demo party sponsored by Nokia and HP. They won the competition and Niklas asked Peter Vesterbacka, who was HP’s representative, what they should do afterwards. Peter said, “You should form a company and make many mobile games.”

So, the trio started making games. Firstly, it was for other companies. “We learn a lot using others’ money.” And then, they made they own. Finally, in December 2009, they launched their 52nd game, Angry Birds and became famous world-wide.

Startup Sauna

“Angry Birds is not a overnight success,” said Peter. He encourages young people to try and may one day, just like the trio in Finland and found their own dream come true. Today, Peter consults young entrepreneurs via a startup organization called, Aaltoes, or Aalto Entrepreneurship Society in full. It is one of Europe’s largest and most active entrepreneurship community. “We gather the most talented students and researchers to create more startups and build international connections in and around Aalto University in Helsinki, Finland,” said Antti Ylimutka, one of Aaltoes’ Board Member.

Based in Finland, where Sauna is favourite pastimes for locals, Aaltoes’ startup event is called Startup Sauna. According to Antti, they are expanding the tradition to Asia and will have a Startup Sauna event organized in Shanghai Tongzhi Uninversity.

Angry Birds next stop – Shanghai

Rovio is also expanding to Asia. And it will setup an office in Shanghai, the first one outside of its headquarter in Finland. “China is our second largest market after America, and it is growing fast,” said Peter. Out of the 500 million downloads Angry Birds has recorded, 100 million was from China. It is expected to hire 50 people, doing everything from developing games, to marketing, to doing animation, finding manufacturers to make physical goods, etc.

“Next year is the Year of Dragon. We will make an Angry Birds special edition for Year of Dragon,” said Peter, “In fact, we have done special edition of Chinese theme before – it was for the Mooncake Festival. It was a global distribution. Just image, for the first time 10 million of people outside of China have heard of the Mooncake Festival. We have even launched Angry Birds Mooncakes.”

In the future, Rovio will incorporate more Chinese favour in its products. “We want to be local. We are happy to learn,” said Peter, “We want to be more Chinese than Chinese companies.”

I guess most people have played with the game, Angry Birds. The tremendous popular catapult-puzzle game was developed by a Finland company, called Rovio Entertainment. Since the game was launched iPhone two years ago, it has been one of the most popular app on iPhone. Apart from iPhone, different versions of the game are launched on Android platform, game consoles (such as Playstation) and so on. It also launched many special editions, such as Angry Birds Seasons, Angry Birds Rio, etc. In total, the game and its different editions have been downloaded over 500 million times onto different platforms. Out of which, over 25% were paid download, making it one of the most sold games in the Apple App Store.

Angry Bird, next phase -> Hello Kitty

In a startup conference in Shanghai (ChinaStars), I met one of Rovio’s senior executive, Peter Vesterbacka, who is known as Mighty Eagle in the company and asked him about the future of the company. Surprisingly, he said, “we don’t see ourselves as a game company anymore.” After getting extremely successful with Angry Birds, he thought Rovio’s next phase is to build an entertainment Franchise, just like Disney, but not a game company like EA. In his opinion, the Angry Birds brand can be more than game, but expands to cover other area, such as movies, animations, physical goods, and even theme parks. “Angry Birds can be just like Hello Kitty or Micky Mouse,” said Peter.

Rio: The Movie – an attempt

The Hollywood movie, Rio, is an attempt to expand the Angry Birds brand to other area. Although not very obvious, there are some hints of the Angry Birds characters in the movie. Rovio also launched a special edition, Angry Birds Rio — the Angry Birds characters appear in Rio de Janeiro and interact with characters from the film. Recently, the company also published a cookbook, based on the Angry Birds characters. “We will build everything around the Angry Birds brand,” said Peter.

Angry Birds as a brand – is it possible?

However, not everyone agree Angry Birds as a brand can be a good business. “Many popular games have tried to expand their franchise to other area, but most of them failed. For example, Final Fantasy is popular game, but its movie did not do very well in the box office,” said a venture capitalist.

Peter thought otherwise. “In just two years, Angry Birds have recorded over 500 million downloads. We have 1 billion fan globally. 170 million people play our game each month and 30 million everyday. We are one of the fastest growing brand in the world. We are faster than Google, Twitter or Facebook,” said Peter. And, 10% of Google’s mobile ad comes from the Angry Birds game series, according to Peter.

If we look around, Angry Birds related video clips are everywhere on Youtube. And Angry Birds stuff toys can be easily found in shops, even when the company has licensed no manufacturer to do so. There seems to be a market for Angry Birds products for kids.

When we compare between different companies, one of the most important parameter we use is their sales volume. Given the same type of business, the more one can sell, the more successful one is. And we believe that should be true for the group buying sites as well.

However, when I talked with a senior executive of a leading group buying site in China recently, he disagreed.  “One of the joke we used to talk among ourselves is that if you are group selling rmb 100 for rmb 99, you can sell as much as you want,” said the executive. Sure, you are willing to make a loss on every deal, your sale volume is virtual unlimited.

And currently, the margin for group buying sites in China is razor thin.  A venture capitalist told me the gross margin group buying sites is about 40% in Japan and about 30% in the U.S.  “But in China, it is only about 4%,” said the venture capitalist, “And I believe that is a bit overstated. Most of them are making losses.”

If comparing sales is problematic, what is the better indicator for a successful group buying site? “Internally, we use rate of repeated customer – how many customers buy from us again, rate of repeated merchants – how many merchants willing to do another deal with us, and so on,” said the executive. These seem to be indicators for service quality, rather than quantity.

For a company to be sustainable, it is important to have repeated business and service quality is the key of for getting someone to deal with you again. “Many people believe customers for group buying sites have no loyalty. They don’t care about who is providing the deals. But we believe they do. If they have good experiences, they will buy from us again,” said the executive.

My own experience with group buying was lousy. I bought a discounted ticket to an amusement park, but I felt cheated, as the quality was extreme bad. That is why I never do it again, and I have been skeptical about the whole idea of group buying ever since.

Certainly, group buying is popular in China. But how many customers are buying again? And how many merchants are willing to do another deal? Out of the 5000+ group-buying sites in China, how many of them really have a sustainable business?

No doubt the sector will be consolidating soon. “Next year will be the time for consolidation,” said the executive. “Will the one trying to achieve the highest sale volume survive or the one with the best service quality flourish? Personally, I vote for quality. But in the meantime, most people’s (including investors’) attention is on sales volume. If funding keeps flowing to them, they can make it, too, even when they are not providing a good service. In the long term, only a few strong players will survive, and I believe both quality and quantity counts.”

After the chaos of competition settles, the industry should have a brighter future. “Afterwards, we believe gross margin can be improved to about 10% percent,” said the executive.

Hong Kong is not famous for providing the best environment to entrepreneurs. But if you look around, help is there. Established in 2001 by Hong Kong government, Hong Kong Science and Technology Parks offers incubation program for technology startups in the territory.

The program, called Incu-Tech, has been operating since 1992. At first, it was located in a downtown building in Kowloon Tong. Then, it moved to Science Park, a water-front county-side area in the north-eastern part of Hong Kong, in 2001. The place offers a rare campus-like environment in the crowded city.

The program lasts three years – long enough for a company to grow from just an idea to a big business. Apart from providing office space – free for the first year and substantially low for the next two, it also provides various support typical entrepreneurs would need. For example, mentorship, business plan consultancy, training for business skill, technology support and laboratory services, assistance in marketing, legal services, accounting services, meeting with potential investors, and so on. It also helps entrepreneurs to leverage on research ability of local and oversea universities. For example, if a startup would like to do research for certain project, it can hire some student interns from the universities and the program can offer subsidy for the students’ salary.

The best of all, the program requires no equity in exchange. As long as the startups get accepted into the program, they can enjoy everything. To be qualified, the startup has to be incorporated in Hong Kong for less than 2 years – no offshore company is allowed. It has to be financially independent, i.e., less than 20% is owned by other companies. It has to have more than 2 full-time staff. The entrepreneur has to own more than 10%. And most importantly, there has to be some innovation or research element in the startups.

Overall, it is not very difficult to get into the program. It is heard that last year, nearly half of the applicants got accepted.

Since the program started in 1992, it has incubated over 250 companies. About 77% still survive. In comparison, the survival rate for startups in the Silicon Valley is about 30-35%. Some of them were already listed. For example, TeleEye, a provider of network CCTV solution, was listed in HK Growth Enterprise Market (GEM) in 2001. Advanced Card Systems, a manufacturer of card and card readers, was listed in GEM in 2003.

One thing unique to Hong Kong and Science Park’s program is that it can leverage on the manufacturing capability of South China. Nearby region, such as Guangzhou and Shenzhen, are global manufacturing hubs for mobile phones and electronics. With a good idea and low manufacturing cost, a big business can flourish. In fact, both TeleEye and Advanced Card System are heavy into manufacturing.

TechNode has also reported some of Hong Kong Science and Technology Parks incubatees in the past. For example, Admomo, which develops online marketing analytical tool. And, Stepcase, which has over 7.5 million users on its photo app platform on iPhone.

Other good companies incubated by the program include:

• Radica Systems, which provides email marketing solution.
• Kanhan Technology, which provides Chinese text translation and voice recognition technology.
• Intuitive Automata, which develops a coaching robot for people on diet.
• Infotalk, a provider of multi-lingual conversational speech understanding technology.
• Pencake, which provides marketing solutions on Facebook in the Chinese community.

Founded in Jan 2009, Hong Kong based online marketing firm iClick Interactive has grown into a company of over 170 people and US$60 million sales in just less than three years. Recently, it has raised a second round of funding, US$25 million, from Bertlesmann, Sunitomo, SSG Capital and OTTO.

“Our focus is on performance marketing, e.g., how to buy keywords from search engines to generate more sales leads, visitors, revenue, and so on. Once our clients find out they can achieve a high ROI (return on investment) from using our solution, their marketing budget is virtually unlimited. It essentially is factored into their cost of sales,” said Sammy Hsieh, CEO of iClick.

Many of the financial institutions in Hong Kong, such as Citibank, iShare, etc., are i-Click’s clients. In China, e-commerce players, such as Joyo, M18, Dangdang, Travelzen, etc., also use its solution. In the past two years, its revenue grew over 300% a year. This year, i-Click sales revenue will reach US$60 million and Sammy expected its revenue to double next year.

Interestingly, when Sammy left Yahoo in 2008, he did not start his own company immediately. Instead, he joined another U.S. company, Efficient Frontier, to head its Asia division. But financial crisis hit the global economy and the e-marketing firm closed its Asia operation 6 months later. Afterwards, he started his own company, iClick.

When he was at Yahoo, he headed its advertising division, Overture, in Asia. “The eight years in Yahoo helped me a lot. Many of the executives in online marketing industry came from Overture,” said Sammy. By reaching out to his old friends and former colleagues, Sammy quickly built up iClick to be one of the leading online marketing firms in Asia.

Apart from its Hong Kong headquarters, iClick has offices in Being, Shanghai, Shenzhen, Taiwan, Korea and Singapore. About half of its 170 staff is based in Hong Kong and half in China. Sammy hoped his team would grow to 300 by the end of next year.

In comparing startup environment in Hong Kong and China, Sammy clearly favours China. “People and funding are two of the most important factors for building a successful startup. Both are more abundance in China,” said Sammy.

Also, because of the success of early internet startups, such as Baidu and Tencent, other companies in China are more willing to do business with a startup. “In contrast, many companies in Hong Kong and Singapore only trust major brands.”

Moreover, employees in China are more willing to accept stock option as part of their remuneration. “Many IT professionals in China believe their companies will one day go public. They value the stock option concept, and work with passion towards one common goal that aligns with the company’s direction. This is not the case in Hong Kong,” said Sammy.

However, once a startup becomes more established, Hong Kong can provide more funding raising opportunities, said Sammy. Hong Kong, after all, is a financial center and has lots of financial services professionals.

Hong Kong based Stepcase was founded by Leon Ho in 2007.  Its iPhone photo community, Steply, has over 7.5 million users. In comparison, one of the most popular Android photo app, Camera 360, has about 6 million users.

“When iPhone first launched, its camera was not very good, especially when taking photos at night or when your hands shake.  We developed a simple app to detect hand shake.  I remembered it was Christmas when it launched.  In 1-2 weeks,  the free app recorded over 100,000 download,” said Leon Ho.

After that, Leon and his team knew photo app is the way to go.  They develop their own apps  and they also open their platform for other developers.  So far, there are about 10 apps on Steply – five from the Stepcase team and five from third parties.   “A total of 7.5 million users have downloaded Steply’s apps – 4 million for our own apps and 3.5 million for the third party apps.”

In the future, Leon hopes to have more and more apps on Steply’s platform.  “I hope to have multiple apps, each providing a different function,” said Leon.  As all the apps are targeting for the same type of users – those who like to take photos with their iPhone, there is significant cross-marketing effect among the apps.  “There is a simple app, called ‘Label box‘, launched on our platform.  Its function is to add label to photo.  In just 25 days, it recorded 1 million download,” said Leon.

Although Steply is developed in Hong Kong, its users are mostly from oversea. “Only 20% are from Hong Kong.  The others are from overseas, including, 15% from Japan, 10% from Korea, 10% for China and 10% from the U.S.,” said Leon.

Before founding his own company, Leon had worked for Red Hat, a major Linux distribution vendor, for 6 years in Australia.  “I was heading a team of software engineers to localize Red Hat Linus into Chinese, Korean and Indian version.”

He also founded a blog, called Lifehack (www.lifehack.org), which discuss about the technique you can employ to improve your life, e.g. How to start eating and living like a human.  Lifehack has over 1 million visitors a month and it is earning a healthy profit from advertising.

If you are a mobile app developer, maybe you should check out Mobcent, who presented at Technode’s TNT event last Sunday.  Founded last October in Beijing, Mobcent provides tools  for mobile apps developers.   With a few lines of code, they can add the complete social network functions to their apps.

“Adding social network will naturally increase page-view of an app, and hence, its advertising revenue,” said James Zhao, co-founder of Mobcent, “Moreover, it is an effective way to increase user stickiness and user loyalty.”

Furthermore, as many of us might be aware of, adding social network also helps app developers to get user feedback and hence they can improve their apps accordingly.  And once an app has a group of loyal users, it is easy for the developers to launch a new app, by targeting the existing users in the social network.

However, the effectiveness still depends on the type of applications and how the developers manage their social networks, said James. He believes life style related mobile apps, such as those for travel, health and fitness, sport, etc., would benefit the most  from adding a social network, as most of their users have a need to discuss their experiences with others.

“We just provide the platform.  It still leaves to the developers to make their users active,” said James.  He expects 300 third party mobile apps will use Mobcent’s platform to build their social network by the end of this year, covering 2 million users.

Mobcent also provide the required servers and bandwidth, which is a good news for small developers.  “Most app developer teams are small.  They cannot afford to pay for servers and bandwidth,” said James.  According to Youmi Mobile Ad network, 42% of mobile app developers are individuals and 28% are teams of 2-5 persons.  60% started their business in less than a year, said Analysys International.

Before starting his own company, James was VP for technology of Yicha, a leading mobile search company in China.  Apart from China, Yicha also has a strong presence in Japan, where it partners with Yahoo Japan to do mobile advertising.  Currently, Yicha earns over US$1 million a month from its Japanese operation.  James was responsible for building the technology platform.   “Market in Japan is very different from China.  Mobile advertising is very mature there.  All the rules are clear and the cost-per-click is much higher,” said James.

Japan is one of the first market in the world to introduce mobile ad and Yahoo Japan is one of the first to do it, said Sammy Hsieh, CEO of i-Click, an online market firm based in Hong Kong.

Currently, Mobcent focuses mostly in Chinese market, but soon it will also develop oversea markets.  “In fact, many app developers in China are targeting oversea markets. English, Japanese and Korean version [of Mobcent’s platform] will soon be ready,” said James.

Aggregating offline communities seems the way to go in developing Linkedin like professional SNS in China.  Beijing based professional SNS Hengzhi said its registered users has reached 1 million.  Two months ago, there were only 600,000.

Part of the reasons was it started partnering with some offline organizations with huge memberships.

“One of the partner organization is WRSA (Western Returned Student and Scholar Association), a prestige organization that traces its root back to the turn last century, when the first batch of Chinese students returned from the US and Europe and help built China’s modern roads, railways, ships, and airplanes,” said Tong Li, founder of Hengzhi, “Today WRSA’s 2 million active members include the founders and senior management of almost all Fortune 500 Chinese companies, such as China Mobile, China National Oil, and Baidu.”

So far, Hengzhi has 6 of such partnerships.  Eventually, these could translate into a total membership of 20 million, said Tong.

The question is whether such members (originated from offline organization) will be active in their new online home.  The trend looks unbelievably promising. Hengzhi has seen its users’ time spent on the site increasing in the past two months, to over 45 minutes per day, from about 10-15 minutes earlier, according to Alexa.

As we covered in our previous posts, Chinese LinkedIn clones do not work very well.  The original Linkedlin relies most of its revenue on recruitment service. And, for most people, they open their LinkedIn account just to put their resume in. But that does not work in China, as there are not enough business professionals looking for jobs here. With GDP growing near 10% every year, the economic is red hot in the country. And any professionals with over 5 year experience are rare commodities. Head hunters are calling them every now and then. There is simply no need to put their resume online for recruitment purpose.

If finding a job is not a good enough reason for business professionals to put their information on a social network, what will be ?? Beijing-based Zaizher (means right here in Chinese) is trying a new angle – how about meeting other business professionals at conference ??

All of us might know how messy the process could be. You heard certain conference is good – so and so will be there and you have been dying to meet with them. You stock up your name cards and go to the event. You randomly walk up to a group of people and start chatting with them, exchange name cards and ask what they do. Only to discover they are totally irrelevant. Politely tell your new acquittance, “let’s meet another day”, you move on to the next group. Half an evening can be wasted before you find the people you are interested to meet.

Is that a better way? Can I know who are in the conference when I sign in at the door? For those I am interested in meeting, can I send them a message with my phone? And here is Zaizher’s solution – an app on iPhones and Android phones.  It allows users to check who are in the same event as them, and if they discover someone they are interested, simple add them to “friend list” or send them a message to meet later. “Valuable time can be saved and every conversation can be a meaningful one,” said Zaizher’s CEO, Robert Hsiung.

It also offers services to event organisers. They can send event invites via Sina Weibo and SMS, run real-time polls, conduct votes and surveys, and analyze behaviors of participants. “For example, how many digital business cards have been exchanged during event ? The list of people participating online on Weibo or through our app ?” said Robert, “This data is valuable to the organizers. It helps them to develop future events.”

Currently in the market, if an organizer wants to do real-time votes for an 50-people event, they need to pay about Rmb 5,000 for the service and renting the required hardware equipment. “Our solution will be less than 1 yuan per person,” said Robert.

Currently, it is working with 36Kr, a popular technology blog in China, and Tsinghua University MBA School. “We will be running the 14 day MBA Student Orientation from Aug 27-Sep 11,” said Robert.

Robert graduated from University of Pennsylvania studying computer science. He went to Stanford for an MBA in 2006 after working as a strategy consultant with Monitor Group for 5 years. In 2009, he came to China and started his own company. Zaizher, started in May, is his third project, after OneCircle.cc and Foxfly.com. Robert is raising a round of funding for the new venture. He hopes 10 million users will join Zaizher’s network and 100,000 events will be using their service in 18 months.

PPTV, the leading peer-to-peer video download services in China, will go for IPO in the U.S. in 6 months, said an investment banking source.

Founded in 2004 as PPLive, the Shanghai base was one of the first China online video media.  It changes its name to PPTV in 2010 to better reflect its business.  Most people use it to watch movies or TV drama.  It is one of  the largest aggregator of Chinese TV programs with thousands of TV shows and programs from over 120 TV stations.

As of December 2010, it had more than 200 million user installations and its active monthly user base  was 104 million, i.e.,  43% penetration of Chinese internet users. Average viewing time per person per day has reach over 2 hours and 30 minutes, the highest among all China websites.

Bill Yao, the president and founder of PPTV, quitted from Huazhong University of Science and Technology to start a business during his study for a Master’s degree in 2004. He set up Shanghai Synacast MediaTech.Co.,Ltd in April, 2005 which later became PPTV.

Currently CEO of PPTV is Vincent Tao, a former Microsoft executive. He was Director of Microsoft Online Services Division, responsible for the global business strategy and product development for MSN online services.

In February, Softbank invested US$250 million into the company.  Draper Fisher Jurvetson (DFJ) is another investor.

PPTV’s largest rival is Shanghai based PPS Net TV, which was founded in January 2006, by Lei Liang, Zhang Hongyu and Xu Weifeng.

According to iResearch, in the end of 2010, PPS Net TV has over 210 thousand sets of movies and TV programs and over 280 million subscribers.  It has over 25.12 million daily users and more than 100 million users per month. The market share of PPS reaches 55.30%. Monthly effective using time has been over 711 million hours. Qiming Venture Partner is one of PPS’ investors.

As we have reported earlier in February about the rumor that Baidu would resolve its long-time pirate mp3 issue and it also launched its new music service Baidu Ting back in May. Baidu finally revolved its dispute with the music companies, after infringing their copyrights for years with its MP3 search .

Today, the leading search engine in China signed a landmark deal for the distribution of digital music with One-Stop China (OSC), a joint venture whose shareholders are three of the leading global record companies: Universal Music, Warner Music, and Sony Music.

Baidu had been free-riding on the music companies’ intellectual properties to build its popularity among young internet users in China. In its early days, (2003-04) about 50% of Baidu’s traffic was from offering MP3, most of which with no proper copyright.  It caused the major music companies to sue Baidu in the Chinese courts in 2005 and again in 2008.  But the music companies lost their cases in both times.

However those days are gone. Now Baidu no longer worry about traffic. It is the leading search engine with has over 70% of China’s market. A recent check with Alexa showed that MP3 accounted for only about 1% of Baidu’s traffic today.  More importantly, it needs to clean up its image.  Being accused of copyright infringement is a hazard for its future development.

Investors will appreciate such move.  Its  stock price shot up almost 3% on Tuesday on Nasdaq, right after the annoucement.

Details of the Deal:

OSC shareholders will license to Baidu their catalogues and upcoming new releases, including Chinese songs (in Mandarin and Cantonese) and international tracks, which can be streamed or downloaded from Baidu’s servers.

Under the terms of the deal, Baidu will remunerate music content owners on a per-play and per-download basis for all tracks delivered through the Baidu MP3 Search service, as well as Baidu’s newly launched social music platform, ting!. The new product offers users the ability to discover and share music and music-related content.

Users will be able to sign up for membership free of charge through the advertising-supported ting! website, ting.baidu.com.

Found in 2009, Mamashi is a social network for mothers and fathers to talk about their experience in raising children.  Many mothers started from the day they got pregnant.

“There is a nature need for parents to recording the everyday changes of their babies,” said Tracy Ji, founder and president of the Beijing startup.  Most of the post (text and photos) are about the everyday life of the their’ children, good or bad, fun or not-so-interesting.

Graduated in Peking University, studying Chinese, Tracy was co-founder of HiPiHi, which was trying to make “Second Life”, the 3D virtual reality game, in China.  Before that, she was director of product at Founder, a Chinese PC maker.  And she also worked at Zhaopin.com, a Chinese leading recruitment site, for HR and PR.

Currently, Mamashi has over 100,000 registered users.  50% are of the age 25-34 years old.  Less than 7% are over 35 years old. “People born after 1980 are more inclined to use internet.  They like social network such as Weibo.  So when they become parents, they naturally use social networks to record their children’s daily life,” said Tracy, “For the older generation, they are not used to express themselves with social network.”

Apart from the typical blogs and photos, Mamashi recently also started publishing books using the content of its social network. An art teacher who has a two years old child became one of the first authors of such books.

The publisher is state-owned Post and Telecom Press.  “We started the discussion with Post and Telecom Press last October, and in January they decided to cooperate with us and they also invested in us,” said Tracy.

The company has started making a revenue.  Apart from selling books, it is also developing other channels to monetize its  digital content.  “We will share the revenue with the authors,” said Tracy, “currently, for publishing, most revenue is still from books.  But we expect next year, our revenue from digital content will be the same as publishing the tradictional books.”

Besides publishing, it also offer some paid services and derives revenue from eCommerce.  “We allows our users to see what other users with similar background are buying.  And we get some revenue from a partnership with Taobao,” said Tracy.

The company has about 20 staff at the moment.  Tracy expects it to break-even next year.   It will raise another round of funding soon.  “Our investor, Post and Telecom Press, hopes there will be a more experienced venture capital firm to back the company,” said Tracy.

Apart from Mamashai, popular Chinese websites about raising children include BabyTree and Yaolan.  BabyTree was founded in Beijing in 2007.  Yaolan was also founded in Beijing, in 1999.  Yaolan has over 3 million users.

Although Sina Weibo is spreading rapidly in China, investors are concerned about its ability to generate revenue. To address such an issue, Sina Weibo is to launch its own virtual currency. We already reported that the information about its virtual currency named Weibi had been leaked in its wiki page for developers. An industry insider has just pinged us saying Weibi will be soft launched next Monday (18th July).

In just 9 months, Sina Weibo users have increased almost 3 times, from 50 million last October to 140 million recently.  It becomes a popular social network in China for people to follow celebrities and news.   Many white collar users also use it to connect with their personal friends.

But industry experts criticize it lacks a working business model.  The introduction of Weibo virtual currency should help to address such problem.

To encourage the use of its virtual currency, Sina Weibo will not take anything from application developers for the first year.  But in the future, applications accepting such currency will have to pay Sina a certain percentage when they redeem it to Reminbi, said the insider.

The first batch of applications using Sina Weibo’s  virtual currency include about 10 applications.  Most of them are online games but there will also be an e-Commerce application, said the insider.

When I visited Papaya Mobile about 5 months ago, (in February, https://technode.com/2011/03/05/papaya-mobile-mobile-social-game/), it had 10 million users.  But, last week, when I visited the Beijing startup again, it has 20 million.

And it expected its users to increase three times by year-end.  “That is about the same rate as the market [Android phones],” said Shen Si, CEO of Papaya. 80% of Papaya’s users are from North America and Europe and 20% from the rest of the world.

Papaya has raised another round of venture capital, also.  Keytone Venture and DCM invested 18 million in it in April.  Including the 4 million it got from DCM last year, it has a total of US$22 million. It currently has about 70 persons, and is expected to grow to 100 by year end.  Apart from Beijing, it has office in California, London and Chengdu.

But, when it just started in 2008, things were not running smoothly.  “We started from making chess and poker games [on iPhone],” said Shen Si, “but they were not as popular as we expected.”

At the same time, Farmvillie type of games were very popular in China.  Every Shen Si’s colleague was stealing vegetables on Kaixin, Renren or QQ.  She decided to make a bold move.  “I told my colleagues to stop everything else and make a farm game on iPhone,” said Shen Si.

This was the turning point – Papaya Farm become quite popular on iPhone.  When the game has 1-2 million users, it launched another one – Papaya Fish.  The fish game reached global No.8 on the first day it was launched.  “We built a large user base with Papaya Farm, and when they knew a new game was coming, they all gave it a try.”   And then, Papaya Pet was launched.  Using the same cross marketing technique, it became popular, too.

With the three games, Shen Si had accumulated 4-5 million active game users in Papaya’s network.  She decided to open it to third parties game developers. “We can bring them users at low cost and help them to make money as we know all the tricks.  For the small developers, they also need tools and we can provide them with our game engine,” said Shen Si.

Currently, it has 300 third-party developers.  Some of them are well-known, such as Perfect World (a leading online game company in China) and Backflip (which develops popular iPhone games such as Nin Jump).

Some of them are just starting up.  “There is a team of three Tsinghua University students.  They had no working experience.  They used our game engine to make a game and ran it on our platform,” said Shen Si, “The first day the game launched, it made US$1000,” said Shen Si, “Now, about two months later, it is making US$2000 a day.  And it is still growing fast.  I expected it will make US$300,000 this year.”

In fact, Papaya Mobile has started its own incubation program for game developers.  Unlike the typical incubation program, it asks for no equity.  It does not provide seed capital.  But, it provides working space, training and free servers. Papaya has developed a game engine for the developers to use, so that they can speed up their development. Once the games are ready, it also provide free promotion on its platform.  The games will be running on Papaya’s platform and there will be revenue sharing.

“Any developers can apply, but they must have at least three persons.  One as game producer, one for UI design, and another one as technical staff,” said Shen Si.  So far, there are 3 of such teams in Beijing and one in Chengdu.

By year-end, Shen Si expected there will be 700-800 developers on the Papaya’s platform.

Launched in March 2010, App Annie is the global leading provider of app store analytics and marketing intelligence for the Apple App Store.  The company is incorporated in Hong Kong but the team is based in Beijing.

App Annie was, in fact, founded as a subsidiary of  Exoweb, a Beijing based outsourcing company with about 60 people.  When iPhone become popular in 2008, Exoweb’s founder Bjorn Stabell, started a game studio, called Happylatte, to develop iPhone games. “We have been doing outsourcing work for mobile phone makers, such as Motorola, for a long time.  When iPhone launched in 2008, it is completely different from the old mobile phone environment and we decided to give it a try with our own games,” said Bjorn.

Happylatte launched a very successful iPhone game called, Highnoon, which is popular around the world, in particular in Hong Kong and Singapore.  It has lots of fans in U.K, France, etc, too.  (See our earlier post on Happylatte.https://technode.com/2011/02/26/happylatte-mobile-social-game-company/)

In order to better track and analyze Highnoon’s traffic and user pattern, Bjorn started another division, App Annie.  It makes app publishers easy to track their sales, downloads, rankings, and reviews, and enabling anyone to research the market performance of any app.  It has more than 13,000 registered users such as executives, marketers, and developers — including more than 50% of the top 100 Apple App Store publishers.

Currently, Bertrand Schmitt is App Annie’s CEO.  He said that the investment will be used to expand the scope of the App Annie services to other App Stores, develop new features, and help build additional premium services.

“We are very excited to have IDG Capital Partners sharing our vision: all content will move from retail to digital downloads on digital superstores like iTunes, Google Android Market, Amazon, and this will create dramatic changes in the analytics and market data landscape” said Bertrand.

Xiaojun Li, Partner, IDG Capital Partners has joined App Annie’s board of directors. Xiaojun says he “is excited to support a company that has generated such momentum with an audience of international mobile app developers ranging from major game publishers to Fortune 500 companies”. He continues that “App Annie’s vision is supported by tectonic changes in the software and content industry, a time when business leaders and marketing teams need more market guidance than ever.”

Why LinkedIn does not work in China? This is one of the hottest questions being discussed recently in China because Linkedin went to IPO and apparently the massive Chinese market has no real professional social networks yet. A hedge fund manager recently gave me a very interesting point of view, which I also agreed.

He said the reason why LinkedIn becomes successful in the U.S. is that: there are many professionals (accountants, consultants, lawyers, engineers, etc.) with 10+ years, 20+ years or 30+ years of experience looking for jobs in the U.S.  They post their resume on LinkedIn, so that recruiters can find them.

Many of the LinkedIn users are doing that – posting their resume on their LinkedIn account. In fact, recruitment accounts for 65% of LinkedIn’s revenue.

The situation is different in China.  Deng Xiao Ping’s economic reform did not happen until 1980s.  There are no business professional with over 30 years experience.  In fact, those with 15+ or 10+ years experience are already rare commodity in the market and they are bombarded by phone calls of headhunters almost everyday.  There is no need to post their resume online for job purpose.

“Maybe in 10 years, Chinese LinkedIn will work, when there are more business professional with 10 or 20 years of experience looking for jobs,” said the hedge fund manager.

This reminds me of the interview with the CEO of Wealink, one of the earliest Linkein in China. Its CEO said,

Professional social network needs white-collar users which are mainly based in several tier-one cities like Beijing, Shanghai and Guangzhou, so there actually is not much room for a Chinese Linkedin to grow quickly.

We may have a big Chinese Linkedin unless it can find something else that is valuable to the business professionals.  Right now the players are trying:

• Tianji told me they have a lot of discussion forum, groups and activities, to help   the business professionals to socialize with each other.  And hopefully, friendship built this way can extend to business.
• Hengzhi said they have 8 business applications for the users to manage their daily agenda, such as  contact management, Q&A, and Power Point document sharing.

But so far, they haven’t found the “killer app” yet.  All the Chinese LinkedIn clones are still struggling. Whoever found what the Chinese professional need the most will be the winner.  Or just as the hedge fund manager suggested we just have to wait another 5-10 years.

RenRen claims itself as Chinese Facebook, but as we look closer into the Beijing based company, in many ways, it is not as successful as its U.S. counterpart .  We have discussed these in previous posts, Thoughts On RenRen’s IPO and RenRen is Just a Social Network Not a Chinese Facebook.

Another point worth noticing is that: while both started from university students, Facebook have successfully expanded its coverage, to anyone aged 12 – 60 years old, RenRen is still a predominated university students focus.

“People use RenRen when they are still in the universities, and switch to Sina Weibo when they start working,” said a hedge fund manager invested in Chinese internet stocks.

It seems that as Chinese Facebook (RenRen) is not outstanding enough, Chinese Twitter (Sina Weibo) have a much large room to manoeuver (We’ve reported that the new version of Sina Weibo might come with more social features). But can Weibo be Chinese Facebook? That all depend how people use Weibo.

A major difference between how people use Facebook and Twitter is that: people use Twitter to follow a lot of celebrity, news feeds, etc.  They read those posts, and then re-tweet some of them.  They usually do not add a lot of their own content.  The usual usage pattern is many short intervals a day, e.g. read Twitter 10 times a day, each time for about 5 minutes.

For Facebook, people are communicating with their own friends.  The relationships can be much more intimate.  They post a lot of their own content, such as the family photo, the personal feelings, comments, etc.  The usual usage pattern is once or twice a day, but might last for over an hour.

To advertisers, the more people revealing their own information, they more they can learn about the individuals and the more they can target the users with appropriate advertisements. That is why, given the same amount of  impressions, Facebook ad can be much more valuable than Twitter Ads.

In short, Twitter is still predominate a social media, while Facebook is a real social network.

In China, just like Twitter, Weibo started as a tool to follow celebrities and news, but the absence of a powerful Chinese Facebook makes people start using Weibo to connect with their own friends.  In fact, when people (white-collar) meet new friends in China, they exchange Weibo account. Just like we exchange Facebook account.

In this case, limiting posts to short message only (like that of Twitter), might not be convenient to the users.  That might be why Sina Weibo pretty much allow them to post anything, such as, photo, etc., just like Facebook.

But, can Sina Weibo really takes the role of Facebook in China (a social network for friends)? “We don’t know it right now. We have to track their usage pattern and see when it start to become like Facebook,” said the hedge fund manager.

Currently, the usage pattern of Sina Weibo is still more like a social media (Twitter): Many short intervals in a day and people don’t write much about themselves. But, it is changing.

Besides the usual suspects such as RenRen, Kaixin and Sina Weibo, actually, there is one social network in China, that is very popular among the local Chinese but gets much less publicity in the West. It is Douban. Founded in 2005 by Yang Bo, it is the leading social network in China for book reviews, music reviews and movie reviews.

At the beginning, Douban was modeled after Myspace.  But while Myspace lost its appeal in the West, Douban remains popular in China. According to an industry expert, it has over 50 million users.  Most of them are middle class, literature and art lovers and trendy young people.  Its Alexa ranking is higher than that of Kaixin.  And users spend more time on Douban than RenRen. Its pageview per user is also highest among all major websites in China. (see Alexa stats below) All of these indicates Douban is a very successful social network – something similar to Facebook for Chinese.

Renren‘s share price has been tumbling since its mega size IPO.   Investors worried if they have been paying too much for the so-called Chinese Facebook.  It went as low as US$6.55 last Friday, more than 50% off its IPO price of US14 a share.

But every cloud has a silver lining.  Renren released its first financial report after its IPO.  It significantly narrowed its loss: 78.5% decrease from a year earlier.  And it looks like the so-called Chinese Facebook might be break-even soon.  The news boost its share price.  It closed at US%7.6 on Monday, up 8%.

One thing Renren worried investors the most is Renren’s financial.  After all, last year it made a loss of US$64.2 million and its revenue was a mere US$76.5 million.  That means it lost 84 cents for every dollar it made. The company’s net loss for Q1 of 2011 was US$2.6 million, compared with US$12.1 million in the same period last year.  And its revenue increased 46.6% to US$20.6 million, of which, advertising more than double to US$8.1 million.  And  IVAS revenues (mostly game) was up 24.7% to US$12.4 million.

If the trend continues, it expects revenue to increase to US$29 to US$30 million next quarter, representing 46% to 51% year-on-year growth. If Renren can turn profitable soon, the company might not be overpriced any more.   Actually, it might start to look like a good investment.  Deutsche Bank analyst, Alan Hellawell, gives Renren a 12-month target price of US$8.42 a share.

Other points worth noticing:

– Renren has targeted 35% user base growth per year

– The number of activated users increased from approximately 91 million as of March 31, 2010 to approximately 117 million as of March 31, 2011, and further to approximately 122 million as of May 31, 2011.

– The monthly unique log-in users increased from approximately 23 million in March 2010 to approximately 31 million in March 2011, and to approximately 33 million in May 2011.

– Within the IVAS revenues, its social commerce services (Nuomi.com), which was launched in June 2010, had US$0.9 million of net revenues for the first quarter of 2011.

– Alan Hellawell, estimates that 30% of Renren’s traffic is mobile, and that the number of mobile users tripled since Jan 2011.

– Alan also views Renren as a clear beneficiary of the 3G & smartphone age in China, and expect location-based and mobile commerce user behavior to broaden over time.

– He also estimates that college students represent 35-40% of Renren users. Their daily activity is significant: roughly 50% of these students log in on a daily basis.

Development of Weibo or Microblog is getting more and more intensive and extensive in China everyday. Besides integrating weibo service into its LBS Weilingdi, group buying aggregator service Weituan etc, Sina is cooperating with multiple parties, including the telecoms, to cover the country with it Weibo services.

Sina Weibo x China Telecom

On 3 June 2011, Sina Weibo and China Telecom officially announced an intention to deepen their cooperation. According to the cooperation agreement, China Telecom users using e-surfing, broadband and fixed phone users could use their China Telecom accounts to log into the Sina Microblog, and Sina can gain identification services from China Telecom in the future.

Besides these, China Telecom would embed the Sina Weibo into 189 mailboxes that would let users apply for Sina Weibo synchronously. As a part of this cooperation, both parties would form the first BREW type mobile terminal. Thereafter, millions of BREW users can use the mobile to access Sina Weibo.

Sina Weibo x China Unicom

China Unicom and Sina reach a strategic cooperation agreement, to co-promote Sina Microblog video on 14 June 2011. Both sides will cooperate on basic telecom service, development and co-marketing areas.

In addition, both sides will co-develop the Sina Weibo derived products and launch new products including a Sina Weibo video.

Sina Weibo  x U.S. market (??)

And Sina is not satisfied with the local market only, Sina Weibo is arranging for an English version, and plans to enter the American market in two-three months, according to some media.

This means it would compete with Twitter directly It was conveyed in the Sina 2011 1Q financial report that registered user number in Sina Weibo has reached 140 mn, while the entire accounts in Twitter are over 300 millions and supported by nine languages including English, French and Japanese. However,compared with the total number of fans following the Top 100 accounts, Sina Microblog would likely exceed Twitter in May or June.

The CEO of Sina states that the main difference between Sina Weibo and Twitter is that Sina Weibo can convey every information to each user and make this product stickier.

Baidu x Sohu Microblog

Sensing it is difficult to compete with Sina Weibo alone, Sina’s competitors are cooperating with each other.  Rumour said Baidu may invest into Sohu Microblog.

Local media revealed that Baidu recently discussed about investment in Sohu Microblog with Sohu. However, this news is still unconfirmed by the two companies. Business insiders hold a positive view about this potential cooperation because it would be complementary to both companies, making some analysts believe this cooperation is possible in the future.

The question whether there is a bubble in the China internet sector comes up frequently in conversations.  In my views, definitely, yes.  There is a bubble in the sector.  And during the recent market correction, some of the most over-priced saw their share price plunged a lot. But my guess is: it is not over yet, the bubble will swell again, once the market recover from recent Greek debt crisis.

Five or six years ago when I just started following the sector, the Chinese internet companies had to be making profit before they got listed.  Actually, all of them, Baidu, Tencent, Netease, Shanda and so on, made healthy profit and had fast growth.   And that was what supporting their share price.

Today, that is still true for some of them, such as Baidu and Tencent.  But not so much for the others, especially, some of the recently listed.  Last October, ChinaCache, which provides Internet content and application delivery services to businesses and government agencies in China got listed when it was still in red.   Its share went up 95%  on the first day of trading.  Then came Youku.  It too was making a loss when it got listed last December.  Its share went up over 150% on its first day.  Recently, it made another public offer, selling its share at US$48.18, or 3.76 times of its IPO price.  Still, the company is making a loss and will be doing so in the next couple years.

Investors’ thirst for the next hot thing from China Internet do not stop with the IPOs.  Old boys with a pretty story to tell also see their share prices shoot up the roof, even there is no new revenue or profit to speak of.  Although Sina Weibo has only tiny revenue and no profit, it is worth more than Sina’s original business, which consists of its online portal, its wireless operation and a couple other business.  Sina traded as high as US$147 a share.  An analyst friend of mine value all its other business together at around US$50 a share only.  

As the “exit” can be very lucrative, the “madness” is rippled along the whole food chain.  Valuation for Chinese startups is also inflated a lot recently.  China is not cheap anymore for venture capitalists looking for a new star.   “I met with a US startup recently.  The management team are from large companies and with years of experience. They are asking for an investment of $1 million only,” said a China based VC, “Startups with similar background would ask for $5 million in China.”

A VC told me recently Rekoo’s valuation is more than Angle Birds when the U.S. company had the same revenue.  Many VC also though startups from Innovation Works, Lee Kaifu’s incubation center are pricey.

“We think this is bad, too.  That will raise the entrepreneurs’ expectation,” said Chris Evdemon, its general manager for incubation programs.  And, that is not good for their future growth.  “They should spend their money wisely,” he added.

“I believe this is only a temporary phenomenon.  It will not last forever.  I guess by the end of this year or next year, the situation will be different,” said Chris.

Just a few weeks after our conversation, the market got corrected due to the recent Greek debt crisis.  As expected, some of the most over-priced China internet stocks saw their share price plunged a lot.  Youku closed at US$28.04 last Friday, or 60% off its peak of US$69.95.   Sina dropped from its height of US$147 to US$80.57, an 45% decrease. (In comparison, Tencent dropped about 18% from its height of  HK$230.8 and Baidu lost 25% from its height of  HK$156.04)

But my guess is: it is not over yet, the bubble will swell again, once the market recover from the recent crisis.  And when it will truly burst?? Like the burst of internet bubble during 2001.

I think it is hard to tell.  While it is easy to spot a bubble, it is much harder to predict when the bubble will burst.  Japan’s real estate bubble lasted about a decade, and only burst in the 1990.  Nevertheless, the longer it takes for the bubble to burst, the more devastating  will be its effect.  Japan is still trying to recover from its last blow.

In the last part of our interview with Derek Ling, CEO of Tianji, he said professional SNS grows slowly in China because the Linkedin model does not fit China’s environment.

In Linkedin, people frequently get requests like ‘I need this and this,” or “I need to hire such and such”. However, in China, it will be “uncool” to state those requests directly, said Derek.  “People in China have to be friend first before they can do business together.”

They have to be familiar with  each other on other matters first, for example, through discussion of social issues, their common interests, etc. Afterwards, discussion of business can follow suit.  They cannot do business with each other the first day they meet.  This is very different from the social norm in the U.S.

“That is why Tianji has a lot of discussion forums, groups and events, for the member to socialize with each other,” said Derek.  In short, comparing the US and the China model for professional SNS, the value proposition is the same – it is for people to search and contact business partners, but the way is different, said Derek.

The phenomenon, however, is changing.  In the next few years, Derek believe the growth of professional SNS in China will speed up. ” In the next 2-3 year, there will be explosive growth in professional SNS,” said Derek.

Social networks such as Renren and Kaxin start to change people’s behaviour, making them willing to put their real information and real friends online – a very important step for building a professional SNS.

“Currently, most social networks are for entertainment.  Soon, people will ask what else they can do with SNS.  And professional SNS, such as Tianji, which help them to do business, will be the answer,” said Derek.

He expected Tianji’s members to reach 10 million by the end of this year, up from 6 million at the moment.  About 15% of its members visit it twice a month. Once, Tianji has over 20 million members, it will reach the critical mass.  (Linkedin reached its critical mass when it has 30-40 million member, but Linkedin is multiple country.)

As of competitors, Derek believe US-based Linkedin is the real competitor.  Linkedin is the only major global SNS that can be used in China.  Currently, there are about 1 million Linkedin users in China, according to industry expert.  That is more than some local professional SNS, for example, Beijing based Hengzhi has only 600,000 members and Shanghai-based Ushi has 200,000.

“Linkedin is the largest in English Speaking countries.  But, our group [Viadeo] believe in multi-local strategy.  Viadeo is the largest SNS for non-English speaking countries.  Our group’s strategy is Europe , plus emerging market,” said Derek.

Regarding to Linkedin, Derek said he is “watching them carefully”.  Also, although Linkedin can be used in China right now, Derek warned “it does not mean it always can”.

As of the local competitors, Shanghai based Wealink, which started about the same time as Tianji, is one of the largest.  An industry insider thinks it might has more users than Tianji.  But, Derek believes a lot of their users are fresh graduated or low-end users, which offers little value to other users.

In the last couple years, there are a few late comers, such as Ushi and Hengzhi, which focus on users of better quality.  One of the co-founder of Ushi was from Tianji (ref our interview with UShi founders).  His reason for doing so is that there are too much spamming on Tianji.

In response, Derek thought there are a lot of spam on Ushi, too.

If you are a mobile app developer, have you ever wondered which mobile ad platform should you use, which one can give you the highest payback, or CPM? Actually, you need not concern about such issues, if you use the services of Guohe Ad.

The Beijing based company integrates 10 of the most popular ad platforms in China, including Youmi, Domob, Wiad (from Wiyun), WooBoo, AdChina and SmartMad, and three global ad platform, iAd from Apple, AdMob from Google and Millennial Media. So that, app developers can dynamically adjust the sources and display of their ads and maximize their payback. For example, if today ads from Youmi is paying the highest rate, you can adjust all your apps to display Youmi ad.

Also, another important function Guohe Ad offered to its app developers is a third party monitoring feature. App developers can monitor the actual traffic and ad impression of their apps from Guohe Ad’s analytics platform, so that, they can check these with the numbers provided by the ad platforms.

“This is very important because some of the ad platform will reduce the payout rate for different reasons, for example, the ad is displayed to the same person too many times,” said Ron Zhang, marketing director of Guohe Ad, “With our analytics platform, App developers can at least know what is happening, rather than taking the ad platforms words blindly.”

Founded last year, Guohe Ad currently serves over 10 million ad requests per day and covers millions of smartphone users. Most of the apps using Guohe are games. Apps for reading fictions, news, jokes are also popular. Last but not least, the utility type of apps, for example those for weather, subway station, managing data of the mobile phone, etc.

The company just launched a new version, internally codenamed Guohe 3.0. “The user interface is greatly improved. The old interface has lots of limitation. With the new version, app developers can visualize the process of turning impressions into revenue more clearly and hence optimize the process,” said Ron.

Another new feature is called G-circle. It is like a marketplace for App developers to exchange ads with each other. “If app developers want to promote their apps but they cannot pay, they can use this function to do ad exchange with other apps. We have a formula to make sure the transaction is fair,” said Ron.

Guohe Ad got an angel investment at the end of last year and it is considering further funding plan later this year.

Founded in 2005, Beijing based Tianji is one of the first to do Linkedin type professional SNS in China.  Currently, it has 6 million members in the country and is adding 200,000 more a month.

Tianji’s founder and CEO Derek Ling was a former VP in Sina when it had just 20 person in the U.S.  He engineered the merger with Wang Zhidong’s corporation in 1998-9, which resulted in Sina.com.cn, the leading online portal in China.  After he left Sina, he founded Qzone, a youth entertainment sites focus on music and personal homepage, with Excite co-founder Mark Wong-VanHaren.  However, the operation closed down after the internet bubble burst in 2000.  He went to Apple for a while, heading its business development division for Greater China, before he founded Tianji in 2005.

“At that time, it was the first wave of SNS in China.  Most of the other players followed the Friendster model to do dating sites,” Derek recalled.

There were more than 20 competitors, but most of them failed.  “They only cared about growing their number of users, but fail to attract  users with real value and record their real information.  They soon died,” said Derek.

In fact, the biggest challenge for a professional SNS in China is to have users putting their real information on your network.  In China, the major trends for SNS is youth, entertainment and virtual oriented.  And one of the clearest examples is Tencent’s QQ. Teenager assume a virtual identity in QQ and make friends with strangers.  Inviting your real friends in the offline world to an SNS is less common.

Another challenge for building a professional SNS in China is how to manage your capital well.  “Unlike Facebook, a professional SNS takes a much longer time to grow,” said Derek.  He witnessed the death of a competitor just because its burn rate was too high.  “Linkist was based in Taiwan and they were expanding into China.  Just like us, they focus on quality of users.  Many of their users were from the Taiwan PC industry.  However, they were spending US$65,000 a month, while we spent US$15,000 a month.  They could not survive.”

It is hard for a professional SNS to get revenue, especially when they are small.  In fact, last year is the first time Tianji start to have some meaningful revenue.  It started to charge for recruiting service.  Recruitment (posting job ads, searching for talents) accounted for about 65% of Linkedin’s revenue.

Apart from recruitment, ads and users subscription are the other revenue source for  a professional SNS.  Actually, Tianji’s mother company, France based Viadeo, gets half its revenue from user subscription for premium services.  Something like 6.5 euro per month, for more power in searching, viewing profile or contacting other persons.  Tianji wishes to start charging for subscription next year.

In response to the question why professional SNS grow so slowly in China, Derek said it is because the Linkedin model does not fit China’s environment.  “It is just like DangDang in 1999 when  e-Commerce did not take off.  It was not until Taobao appeared and changed user behavior and improved infrastructure, that the e-Commerce started to get popular in China,” said Derek.

“On the other hand, Group buying sites got really hot almost immediately after Groupon-likers launched in China,” said Derek.  The reason is simple: people love cheap bargains in China and e-payment is ready.

“Changing people’s online behavior can take years,” said Derek. People’s altitude towards Internet is something of a culture.  People in China has not got used to the idea of “web as business tool”.  On this aspect, China might be 2-3 years behind the U.S., he added.

(end of Part I)

We reported about Shanda’s IPO plan for its online literature division.
The latest update: Shanda Literature, a division within Shanda Interactive Entertainment, plans to go IPO in the U.S. sometime this month, according to an investment banking source.

The division was formed in July 2008. It becomes the largest copyright owner of online literature in China by acquiring many smaller electronic book sites, including Qidian, Hongxiu, Rongshuxia, ReadNovel, Xiaoxiangshuyuan and so on.

Revenue comes from paid subscription. Usually, for online novels, users can read the first few chapters for free and pay if they want to continue reading the books.

The company is still making a loss, about US$50 million last year. But as more distribution channels for online literature and electronic books develop, such as, tablet computers, smart phones, e-readers and hence revenue should increase in the next few years.

“Reading fictions on mobile phone is very popular amongst Chinese mobile users. Even more popular than playing mobile games”, said an industry expert.

Beijing based Hengzhi (www.hengzhi.cc) was launched in Feb 2010, by serial entrepreneur Tong Li. Although it is still invite-only, the professional social network has grown to more than 600,000 members.

Hengzhi users come from China’s main stream business and professional communities, including governments, state-owned enterprises, private sectors, and multinationals, said its founder, Tong Li. Hengzhi is stickier than LinkedIn, according to website analytics company Alexa, Hengzhi users spend more than 15 minutes on the site, almost twice as long as the average time spent on LinkedIn, about 7 minutes.

Tong, a Chinese native and an MIT graduate, has worked for Merrill Lynch in New York and founded several successful startups. In 2006, Tong, together with his two other partners moved back to Beijing and started a venture investment fund, Origin Capital, which incubates China’s Internet ventures. The first company they incubated is Tokiva, which provides convenient and affordable mobile international call services for over 1.2 million users in about 200 countries.  It is a quite “profitable” business, according to Tong.

Since moving back, Tong and his partners have been frustrated by the fact that there has not been a suitable website that they can use to keep professional contacts.  “We tried several services, but didn’t really feel the user experience and quality are at the level where we are comfortable with to invite our friends in.” Tong said.  “On the other hand, LinkedIn is more of a recruiting tool and does not have a China focus”. After researching the market, Tong and his partners decided to build an entirely new kind of website for China’s business professionals.

In Chinese, Hengzhi has two meanings: “It takes time to know someone and a true friend lasts forever,” said Tong. In choosing the name, Tong and his partners are focusing on user quality and experience. From the get-to, the site offers 8 business applications that are proven to be very useful and help to drive quality user growth, including contact management, Q&A, and Power Point document sharing.

The seed users come from Tong and his partners’ friends, the consultants, the lawyers and the investment professionals.  While other professional networking websites in China are started by the expats, Hengzhi’s seed users are true business professionals with better understanding of Chinese business culture, said Tong. The site grew by word-of-month and now has more than 600,000 members.

Most of the members are from finance, legal, accounting, and other professional services industries. There are a lot of entrepreneurs and venture investors too.  The majority of the members is between 28 to 40 years old and has more than 5 years of working experience, 60% of the users hold vice president titles and above. Almost all of the users have colleague degree, and about half of the users are based in tier-one cities such as Beijing and Shanghai.

“The make up and demographics of business professionals in China are not as homogeneous as that in the US”, Tong said. “In the US, the private sectors are the largest employers and the entrepreneur spirits are promoted and respected. In China, the reality is that the state owned enterprises account for more than 80% of the economy, and the people open up their connections only for trusted friends. Those two factors have huge implications on how we structure and market Hengzhi as a business professional network”, Tong said. “Other professional social networks often just want to simply copy LinkedIn and fail to realize those two factors are what will eventually make or break a professional website in China”.

Hengzhi seems to be in a good position to grow, given the site’s focus on user quality and Tong’s background. Anticipating the future, Tong said “we are not sure when to open Hengzhi to the public, but we know we would not do that until after the checks and balances are there to maintain the user quality and experience”. Hengzhi is also in the process of closing a round of new financing.

As is known to all, Tencent‘s CEO Pony Ma has instructed his staff, they must make Tencent Weibo more popular than Sina Weibo this year.

“They try everything. Every editorial staff at QQ.com, Tencent portal, has to post at least 10 messages on Tencent Weibo each day,” said one people close to QQ.com.

A recruitment ad appeared on May 23, saying Tencent is hiring 10 more editors for its Weibo division. Besides posting headline news on Tencent Weibo, the editor will also cooperate with other media and organize offline events.

The key of Weibo is not number of users.  Everyone in the industry knows Tencent’s instant message platform has tones of users. The key is about having opinion leaders to use your Weibo service to distribute their messages, and attracts a lot of followers, who redistribute the message.

Industry insiders said Tencent are paying top dollar to attract celebrities to use its Weibo.  One of them is Olympic champion, Liu Xiang, who has 16 million fans so far.  Another is Chinese actress, Xu Jinlei, who is also a top blogger on Sina’s blogging services (not Weibo). Xu has about 7 million fans on Tencent Weibo.

In comparison, Sina Weibo’s top blogger, Chinese actress, Yao Chen, has about 8 million fans.

However, apart from these “hired” helps, most of Tencent’s users are low-end, who seem to not responding well to its own weibo service. According to a report done by Mirae Asset in Jan 2011, 14% of Chinese internet are microblog users today. Of which, Sina Weibo has 54% of the total users and Tencent’s has 21%. But if we take into account usage rate (i.e. pageviews), Sina Weibo has 87% of the market and Tencent’s has just 8%.

One thing Tencent can try to boost its Weibo usage is to automatically post a message on its user’s Weibo whatever the user change his/her statues on QQ. For example, a lot of people write something about their mood, their status, etc. on QQ. These can be Weibo contents.

However, Tencent has tried that before, but it failed to have any significant impact. That function eventually incorporated into Q Zone, Tencent’s social network.

It seems Tencent has a lot of work to do to make its microblog surpass Sina Weibo’s success.

Chinese classified site, 58.com, has filed for IPO in Nasdaq, according to local news.

The company was founded in late 2005, by Yao Jinbo, who previously founded the largest domain name exchange company in China and sold it. 58.com is modeled after Craigslist in the U.S.. It provides classified ads for flat rental, recruitment, second hand goods, selling car, restaurant, etc. Its services cover over 300 cities in China. Most of the ad are free. But it charges if the advertisers want their posts to appear in front of the listings.

Imitators Poping Up In China
Craigslist imitators started to mushroom in China in 2005, when the original classified site got famous in the U.S. Within a year, there were about 500 such websites in the country. “Many of them are portals for a particular region, such as Beijing, Shanghai, etc. They cover local news and events in their own cities or provinces,” said an industry insider, “As Craigslist proved popular, they started their own classified sections too.”

Apart from the regional portals, major Chinese Internet powerhouses also spotted the opportunity. Sina, Sohu and Netease, the country’s top three online portals, all started their classified sections in 2005. Tencent, which operates the country’s largest online chat platform, QQ, also started its own that year.

Consolidation After Overcompetition
Consolidation came in 2007. Lacking economies of scale to sell ads, many smaller sites had to close or tried to sell themselves to larger competitors. Even Tencent’s classified session did not survive.

“During 2007-2008, many competitors came to us saying that they could not go on anymore. If we wanted to, they could sell their sites to us at a bargain price,” said Baixing.com on its blog. X9898.com, a classified site that was quite famous at the time, switched business to do e-payments with fingerprint verification.

Baixing, started in Shanghai in March 2005, remains one of China’s leading classified sites. Other survivors include Ganji, 58.com, Koubei and eDeng. Of those, Ganji and 58.com are the largest. Ganji had 285 million page views in March 2010, followed by 58.com, with 272 million page views, according to comScore, a global marketing research firm. Baixing ranks third with 137 million page views.

A major difference from the original Craigslist model and its Chinese imitators is in sales. Out of the 500 staff Ganji has hired, about 200-300 work in its call center to cold-call companies to place ads with the site.

“Here it is China. No one will go online and place an ad on his or her own. This is the most effective way of getting sales,” said Mark Yang, CEO of Ganji and a Yale graduate, “Baidu (the country’s biggest Internet search company) is doing the same.”

Compared to Ganji, 58.com is probably even more aggressive. “Although Ganji is more popular, 58.com probably has higher revenue,” said the insider. “It has set up sales offices in 20 cities, while Ganji only has four.”

Besides of its headquarter in Beijing, 58.com has offices in over 20 cities in China.

“The Three Lows”
Most of 58.com and Ganji’s visitors are of the low income group. “We called them, the Three Lows. Low in age, in income and in education level,” said Mark, “They can found everything they want on Ganji. Job, place to live, second hand furnitures, etc.”

There are plenty of ads for house cleaning ladies, security guards, baby sitters, and so on. Ganji has secured a a major deal with US-based Wal-Mart, under which the supermarket chain will hire about 3,000 people per year through the classified site. Wal-Mart as of June 2010 operates in 99 cities in China, and “created over 50,000 job opportunities” across the country, according to the company’s website.

At our Collide Conference, UMeng’s System Architect, Gu Dikang said, they are moving towards two directions:

1) Developer Tools: Social and feedback

In the future, UMeng will also provide development tools to App developers.  One of the first tool to offer will be a SNS sharing function – it allows app users to share content to popular social networks, such as Renren, Sina Weibo.  Another one will be a user feedback function – it allows users and App developers to communicate with each other.

“We develop these tools because App developers in China think they are very useful.  In future, we will develop more,” said Gu Dikang.

2) Virtual storage space

UMeng will always provide some of the basic services required by app developers, eg., virtual storage space, which is very useful for photo sharing apps.

Founded in May 2010, UMeng provides software development kit (SDK) to app developers to help them to gather and analyse user statistics of their mobile applications. UMeng has about 30 to 40 people working at their Beijing office.  Over 4,000 mobile apps are using its statistics tool.  These apps have an aggregate of over 30 million users – that is about 50% of all smartphones in China.

Steve Bell is managing director of Trilogy VC.  And they specialized in funding startups found by Chinese university students.

“When I went to major universities in China and asked the students which IT companies they most admire. Several names always come on top.  They are Google, Facebook, Microsoft,” said Steve, “and all of them were founded by university students.

Steve believed people are most creative when they are still in university.  After they graduate, the reality of daily life will frustrate the young minds and let they believe many things are impossible.

“We believe the next game changing company will be founded by university students in China,” said Steve.

Moreover, in term of cost, team of university students are also less expensive. “In the university, they used to living on several hundred RMB a month,” said Steve, “Once they graduate and get used to be paid Rmb 10,000 a month, they cannot give up the life style anymore.”

Trilogy typically invest into the seed round of a startup and give the team funding enough for 2 years of operation.  On average, this is about Rmb 500,000.  It has invested over 10 projects so far and Steve plan to invested 15 more each year.

Some of them have already been quite successful.  Hangzhou based Droidhen, a mobile game studio, is making over Rmb 1 million a month. It is founded by three students from Zhejiang University.

Another one, jiathis, grew into one of the largest content sharing platform in China in nine months.  It has over 150,000 websites in China, using its button to share content to popular social networks, such as Renren, Kaixin, Sina Weibo, QQ, etc.  Jiathis has already secured another round of funding from a U.S. based fund, for about US$2 million.

It seems there are more troubles than getting government licence for Alipay.

360buy, the largest B2C company in China, was first rumored to have stopped using Alipay for its transactions in early May.  Some market analysts suspected as 360Buy and Alibaba’s Taobao are potential competitors, there might be a conflict of interest for 360buy to use Alibaba’s payment solution.  (Alibaba, and hence Taobao, would know what are selling well on 360buy.)  However, both sides have denied that.

Anyway, the debit card offered by Bailian Group, which own the Hualian Supermarket chain in China, has definitely stopped cooperating with Alipay.  In the past, users of the debit card could transfer money from the card to their account in Alipay.  And they could do it in Hualian Supermarkets.  Now, it is no longer possible.

First 360Buy and Hualian Supermarkets, now mired with Chinese banks

Another threat comes from Alipay’s partners – the Chinese banks.  They are all making in-roads to offer their own online payment solution. ChinaUnion Pay, which is backed by the Chinese banks, has also applied for the government licence for third party online payment.

But, Alipay is not giving up its position as China’s largest online payment platform easily.  It is working with UCweb, the dominant web browser for mobile phones in China, to implement mobile payment.

Currently, Alipay works with 81 financial institutions and over 460,000 different merchants.

Vancl, the leading online retailer for clothing in China, plans to go for IPO in the U.S. by the end of this year or early next year, said an investment banking source.

Founded by former Joyo executive, Chen Nian, in 2007, Beijing based Vancl specialized in selling clothes online.  It started from men’s shirts and expanded to categories like suits, pants, causal wear, shoes, etc.  It also offers women’s casual wear and children’s clothing.

When I wrote my book, Red Wired: China’s Internet Revolution, Chen told me why he chose to specialized in selling clothes is that the margins are much higher.

“When I was at Joyo, our gross margin [for selling books] was only 5-10%.  And we need about 30% to cover cost of marketing, logistic and administration overhead.  So, it was very hard for us to break even, although we were already the largest online book retailer in China,” said Chen Nian.

“For clothes, as we sell our own brand, our gross margin can get as high as 50%.  Deducting 30% for marketing, logistics and administration, we still have a health net margin of 20%,” said Chen Nian.

Kaixin, a leading social network in China, will be going for IPO in the U.S. in two months, said an investment banking source.

“They have finished every procedures. They are ready to go,” said the source, “They have to.”

With their largest rival, Renren, listed in the New York Stock Exchange, it is just nature for Kaixin to want to has its initial public offering and raise a few hundred million of U.S. dollar, so as to remain in the game.

50 million monthly active users in February

Founded in March 2008 by former Sina CTO, Cheng Binghao, Kaixin is one of the most popular social network in China.  It built its popularity by attracting white collar users with social games, such as parking war, farm, aquarium, etc.  In February, it has over 100 million registered users and over 50 million visited it every month. It has over 8 billion page views per week.

Recently, it started losing its appeal to some extend as other social networks, including Renren, Tencent, etc., also came up with their own social games. The rise of  Sina Weibo, the Twitter like service offered Sina, among the white collar users also make Kaixin’s popularity decrease.

For Kaixin’s IPO, the good news is: Renren’s IPO got huge interests from investor. Just a few days before its IPO, Renren increased its IPO price range by over 25%, from US$9-11 to US$12-14.  The final offering price was set at the top of the range, US$14. It  raised over US$743 million dollar for its IPO, much more than the US$ 584 million it originally planned to raise.

The bad news is: Renren has dropped below its IPO price just a few days after listing.  It is trading at US$12.84,  or 8% below IPO price, on Tuesday (at around 1:00 am when I write this post).

The good news is: People began to doubt Renren’s claim of being Facebook in China.

The bad news is: If Renren is not Facebook in China, Kaixin is not, either.  Why investors want to pay a high price for it?

eLong and Tencent said they plan to deepen their cooperation in the future, including forming a business partnership to develop online travel products and distribute eLong’s hotel supply to Tencent’s huge active user base in China. eLong’s hotel supply portfolio now covers over 150,000 hotel properties worldwide, including more than 19,000 hotels in China, and more than 130,000 internationally through its seamless connection with Expedia.

“We are not surprised on Tencent interest in the online travel, given firstly Tencent’s previous experience to provide airticket and hotels during Expo period; secondly, Tenpay has around 32% market share in the Online B2C online travel payment market,” wrote Wallace Cheung, analyst of Credit Suisse in a note.

“We believe the deal implied that e-commerce is also a viable monetisation approach on Tencent SNS platform. But, the market has not factored such potential into Tencent share price yet,” he added.

Wallace also noted Tencent participation into e-commerce in two approaches:

i) launch of open platforms (OP) on these e-commerce businesses, e.g. Paipai OP, Tenpay OP, Group Buying OP. These OPs are expected to improve the value of Tencent e-commerce platforms.

ii) Tencent invested in multiple entities to maximise its value under the e-commerce trend, e.g. Tencent and GroupOn (private), together with Yunfeng fund, formed a group buying joint venture (Gaopeng.com).

In January 2011, there is rumour that Tencent have invested Rmb50-60 mn for 30% of TongCheng (www.17u.net), one of the leading online B2B travel marketplaces in China. TongCheng has 140,000 corporate members and 10,000 VIP members, and provides online booking services to 12,000 hotels (a 30-70% discount), 3,000 travel hotspots tickets, 100+ limo firms services.

“Given Tencent direct investment into elong, we expect Tencent potential investment into TongCheng may not go through because we do not expect Tencent will invest into 2 companies with similar business models ,” said Wallace.

According to Bloomberg, eLong consensus net profit in 2011 should be US$10 mn, including around US$2.7 mn interest income. Given elong currently holding US$155 mn cash, the consensus implied multiple on Tencent investment should be around 39x 2011 PER (ex-cash).

Tencent had US$3.3 bn net cash and generated US$200-300 mn net cash per quarter. Thus, Tencent had enough cash to fund the deal.

According to a SEC filing, Alipay, the payment business of Alibaba Group was restructured so that it is now controlled by a separate company, owned mostly by Alibaba Group Chief Executive Officer Jack Ma.  Yahoo said the shift was necessary to expedite getting a license for Alipay.

Last year, Chinese government started to formally regulate its online payment industry.  Last December, the Chinese central bank, People’s Bank of China, announced the details for third party payment licences.  And following the announcement, the first batches of online payment companies started to apply for the licences.  They included Alibaba’s Alipay, Tencent’s Tenpay and government back China Unionpay, etc.

(Here are some of our earlier posts: https://technode.com/2010/12/30/17-companies-apply-for-third-party-payment-companies-licence/

To get a license from the People’s Bank of China to operate its payment business, Alipay was restructured as a Chinese domestic company to speed up the process.  And the company is mostly owned by Alibaba Group Chief Executive Officer Jack Ma.

The news cause Yahoo to dropped 7.3% yesterday, as Yahoo owned about 40% of Alibaba Group.  And shifting an important and valuable part of Alibaba’s business to Jack Ma’s private company sound like a dilution of value for Yahoo’s investors.

However, many Chinese internet companies are structured as domestic companies to get the necessary licenses. But, their profits are transfered to off-shore vehicles for listing in overseas market.    If you look carefully into company structure of Sina, Sohu, etc. , you would find there is a local company doing all the work and controlled by its founder or CEO.  But its profit is transferred to an offshore vehicle, which is listed in the U.S.

In my view, if Jack Ma’s private company will be transferring all its profit back to Alibaba Group, and therefore to Yahoo, there is nothing for investors to worry about.  But, if this is not the case, I think investors should consider firing the management of Yahoo, as they allow a valuable asset to shift out of the company right before their eyes.

 
According to a SEC filing, Alipay, the payment business of Alibaba Group was restructured so that it is now controlled by a separate company, owned mostly by Alibaba Group Chief Executive Officer Jack Ma.  Yahoo said the shift was necessary to expedite getting a license for Alipay.

Last year, Chinese government started to formally regulate its online payment industry.  Last December, the Chinese central bank, People’s Bank of China, announced the details for third party payment licences.  And following the announcement, the first batches of online payment companies started to apply for the licences.  They included Alibaba’s Alipay, Tencent’s Tenpay and government back China Unionpay, etc.

To get a license from the People’s Bank of China to operate its payment business, Alipay was restructured as a Chinese domestic company to speed up the process.  And the company is mostly owned by Alibaba Group Chief Executive Officer Jack Ma.

The news cause Yahoo to dropped 7.3% yesterday, as Yahoo owned about 40% of Alibaba Group.  The shift of Alipay to Jack Ma’s private company sound like a dilution of value for Yahoo’s investors.

However, many Chinese internet companies are structured as domestic companies to get the necessary licenses. But, their profits are transfered to off-shore vehicles for listing in overseas market.  If you look carefully into company structure of Sina, Sohu, etc, you would find there is a local company doing all the work and controlled by its founder or CEO.  But its profit is transferred to an offshore vehicle, which is listed in the U.S.

In my view, if Jack Ma’s private company will be transferring all its profit back to Alibaba Group, and therefore to Yahoo, there is nothing for investors to worry about.  But, if this is not the case, I think investors should consider firing the management of Yahoo, as they allow a valuable asset to shift out of the company right before their eyes.

And accroding to Shao Yibo, former founder of EachNet(acquired by Ebay for US$ 150 million in 2003 ), such move could
be a compromise among Yahoo, Softbank and Alibaba for getting Alipay a license. All three parts involved would make
further arrangements to make sure no one’s cake gets ravend.

SoftBank, the second biggest stakeholder of Alibaba, said that the three parts are still negotiating.

A Credit Suisse report remarks that, the Alipay restructure is a particular event, which will not reflect badly on Tencent or Tenpay, a Tencent online payment solution similar to Alipay. Credit Suisse believes that it’s the most conservative way to transform Alipay to a completely domestic company.According to a SEC filing, Alipay, the payment business of Alibaba Group was restructured so that it is now controlled by a separate company, owned mostly by Alibaba Group Chief Executive Officer Jack Ma.  Yahoo said the shift was necessary to expedite getting a license for Alipay.

Last year, Chinese government started to formally regulate its online payment industry.  Last December, the Chinese central bank, People’s Bank of China, announced the details for third party payment licences.  And following the announcement, the first batches of online payment companies started to apply for the licences.  They included Alibaba’s Alipay, Tencent’s Tenpay and government back China Unionpay, etc.

(Here are some of our earlier posts: https://technode.com/2010/12/30/17-companies-apply-for-third-party-payment-companies-licence/

To get a license from the People’s Bank of China to operate its payment business, Alipay was restructured as a Chinese domestic company to speed up the process.  And the company is mostly owned by Alibaba Group Chief Executive Officer Jack Ma.

The news cause Yahoo to dropped 7.3% yesterday, as Yahoo owned about 40% of Alibaba Group.  And shifting an important and valuable part of Alibaba’s business to Jack Ma’s private company sound like a dilution of value for Yahoo’s investors.

However, many Chinese internet companies are structured as domestic companies to get the necessary licenses. But, their profits are transfered to off-shore vehicles for listing in overseas market.    If you look carefully into company structure of Sina, Sohu, etc. , you would find there is a local company doing all the work and controlled by its founder or CEO.  But its profit is transferred to an offshore vehicle, which is listed in the U.S.

In my view, if Jack Ma’s private company will be transferring all its profit back to Alibaba Group, and therefore to Yahoo, there is nothing for investors to worry about.  But, if this is not the case, I think investors should consider firing the management of Yahoo, as they allow a valuable asset to shift out of the company right before their eyes.

In just four trading days, Renren dropped almost below its IPO price. Yesterday, the stock fell another 8% to close at US$14.75, which is almost equal to IPO price of US$14.

The so-called China’s Facebook seems to be losing its luster.  In fact, as we have previously noted, besides a valuation too high, the company has other problems, too.  And it is doubtful whether it is really “China’s Facebook”.

But what is pushing the Chinese internet stock, including Renren, beyond their fundamentals, to ridiculous high valuation, at the first place??  I read a comment from SeekingAlpha, a popular U.S. website on trading stock.  The post is probably from a typical U.S. trader:

Every single chinese IPO pullback has been a buying opportunity. Sure it looks scary…..but the scary trade is usually the right trade.

The trader “The Champ”, said, he “don’t know crap” about Renren.  Based on his past experience (“I’ve seen this in the charts before”),  he believe Renren will rebound and make new highs.

Clearly, what Renren actually does, this U.S. trader do not care at all.  He just trading on momentum.  As the previous Chinese internet stock has made him money, he believes Renren will be a winner, too.

I believe, a lot of U.S. traders of Chinese internet stock are like “The Champ”.  And that is why their valuation is not base on fundamental, but only on perception (China’s Youku, China’s Facebook, China’s Twitter) and trading momentums.

The point is most clearly illustrated in the trader’s remark, “Let the shorts worry about valuation and other nonsense… I just make money.”

Among the three telecom operators in China, China Mobile has the 3G license for TD-SCDMA.  But, how serious is the operator in developing the home grown 3G network?  According to an industry source, China Mobile is not serious at all.

“TD was forced upon China Mobile by the government.  They don’t want it, ” said the industry source, “Now, they are developing TD-LTE, the 4G standard, as fast as they can.”

TD-SCDMA: weak launch, improving gradually, yet still lagging

In 2006, China’s Ministry of Industry and Information Technology (MIIT) came up with an answer to what it saw as a vexing problem: the millions of dollars in licensing fees Chinese companies would have to pay to foreign patent holders as the country rolled out its 3G network.

The solution was to mandate the use of a homegrown standard, TD-SCDMA.  The technology, developed with government funding, had shortcomings. TD-SCDMA was slower than W-CDMA. It was less stable. In addition, it took a very long time to roll out; the trials finished two years later than planned.

China’s three state-owned telecom operators complained about the delay and at having to adopt a standard incompatible with the technologies being produced by the world’s major handset makers.  Beijing eventually relented, allowing China Telecom and China Unicom to have international standard 3G licenses (CDMA-2000 EV-DO and W-SCDMA) but required the biggest, China Mobile, to use TD-SCDMA.

While China Mobile has expended considerable efforts on improving TD-SCDMA recently, 3G connection speeds are still lagging significantly behind from that of China Unicom. A recent report by Credit Suisse showed that peak time (12pm-5pm) connection speed of China Unicom can range from 4X to 8X faster than that of China Mobile’s network.

TD-SCDMA is taking a toll on China Mobile’s market share

According to the newly released MIIT figures in March,  of the combined total of 61.9 mn 3G subs, China Mobile holds 44%, China Unicom 30%, and China Telecom 26%.

This is a big difference from the days of 2G when China Mobile used to hold 70% of the country’s mobile users.

With 3G handset penetration set to rise from 3.8% as of December 2010 to 10.2% in December 2011, data is becoming much more important for China’s subscribers, to remain competitive, China Mobile is trying hard in going for 4G. Although TD-LTE has TD as part of its name, it is developed mostly according to international standard.  If China Mobile can finish its 4G network in 2-3 years, it might be able to remain its leadership in the telecom industry.

Not every Chinese internet company enjoys a pop in their share price during IPO.  ADS of NetQin, which provides mobile security services, dropped 19 percent from its offering price of US$11.5 in their debut Thursday on the New York Stock Exchange.

It is not a surprise.  The company had a major scandal just before it filed its IPO plan. Government- backed CCTV accused it of cooperating with mobile phone virus maker Feeliu.

Yesterday, its share dropped further to close at US$8.4.

Last year, Sky-mobi also had a disappointing IPO, losing 33% in its IPO debut.  But thanks to the effort of its CEO, Michael Song, the stock had a miraculous recovery in the following 3 months.  It was trading at around US$20 just a few days ago . It dropped to US$14.8 yesterday, still 85% up from its IPO price of US$8.

I wonder what story NetQin’s CEO will tell investors to talk up his stock.

Not to disappoint its investors, Renren had a successful IPO on Wednesday.  Its share price went as high as US$24 when it just started trading, before ending the day at US$18, up about 30% from its IPO price of US$14.  By the way, this is after Renren increased its IPO price range by over 25% last Friday, from US$9-11 to US$12-14.

Yesterday, it price eased a bit more, to closed at 16.87.  (Dow Jones was down close to 140 points. So, it might not mean anything)  Anyway, Joe Chen and his team raised over US$743 million from the offering.  They should be celebrating.

And, I was discussing with a friend about Renren and Facebook and whether he thought Renren equals Facebook in China. Surprisingly, my friend also do not think so.

1) Facebook is the single most popular social network in the U.S. China has many popular social networks.

Also, Chinese internet users engage in many different internet services to connect with their friends and business partners. “Tencent’s QQ is one of the largest and oldest.  Recently, Sina’s Weibo are also popular,” said the analyst friend.

“Renren is not the de-facto way for people to connect with each other, not like Facebook in the U.S.,” he added.

2) While Facebook innovated a lot in the past few years, e.g. new way of advertising, applications connecting people, etc.  Renren did not try hard enough to innovate itself – a quality highly valued in any tech company.

“Although QQ got its original ideas from the U.S. instant messaging service ICQ, today its services is much better than ICQ or even Microsoft’s MSN.  Similarly, Sina Weibo started from cloning Twitter.  But its service has surpassed Twitter in functionality and convenience.  Renren does not try as hard to innovate itself.  It just following the footsteps of others,” said the analyst.

3) Open platform is the latest trend in the world and in China. The value of a social network lays not only on its own users, but also how many other applications are connected through the social network, said the analyst.  “In China, more application developers are willing to connect with QQ than Renren, as QQ has more than 600 million users. Over 80% of internet users have QQ accounts. Renren has just about 120 million users.”

Yesterday, I wrote a post about Innovation Works (Innovation Works or Shanzhai Works) and it got quite a few feedbacks.  Some agree with its general idea.  And of course, some don’t.  (One person in Innovation Works actually gave me a call to talk about it. )

First of all, I want to clear one mistake: Dianxin is not an Android clone.  It is actually built on top of Android – an Internet smart-phone operating system (based on Android) tailored for Chinese users.  And whether Wandoujia is modeled after 91 Assistant can be debatable.  (Maybe we can address this later after more research.)

But, Umeng is definitely very similar to Flurry and another Innovation Works project, DianDian, is close to Tumblr.

Innovation Works has 26 projects so far.  And some of them are very similar to other internet companies’ ideas.   The reason of it, according to the Innovation Works person, is because they work in China.  “These are not our ideas.  They are the entrepreneurs’ ideas,” said the person.

When I think of that, I suddenly realize: of course, if you are an incubation center and say, many of your applicants present you with business plans that are clones / remakes (or whatever you would like to call) of some successful western models, you will inevitably have chosen some.

The problem is not Innovation Works, or any particular incubation centers.  The problem is the general atmosphere.  Renren’s IPO price just increased another 30%, because it calls itself Facebook in China.  When Renren just started it looked exactly like Facebook and Joe Chen, CEO of Renren, admitted he was copying Facebook.   (And he is not ashamed of.)

The new generation of Chinese internet entrepreneurs are just following Joe Chen’s footsteps.  And this is encouraged by all the investors, who bid up the price of Renren, Youku, Sina Weibo, etc.

A few days ago, I was talking to some friends about entrepreneurs in China.  They asked me to summarize what I think, and there is nothing more apparent to me than the word “Shanzhai”.

Shanzhai means cloning.  But it is more than just a direct copying, but usually it also includes considerable localisation.  All of the biggest internet names in China started as clones of successful Western models, e.g. Baidu started as a clone of Google, Tencent tried to be ICQ in China, Taobao modeled after eBay, Renren is a facebook in China and Sina Weibo imitated Twitter.

Then, they tried their best to localize the services, making them popular among the local Chinese.  In the process, sometimes, they have out- performed the services they tried to  imitate in the beginning.  For example, Tencent’s QQ has over 600 million active users and the company earned over US$1.2 billion in profit last year.  ICQ is no longer a major player in the internet world.  Most industry insiders also believe Sina Weibo offer its users more functionality than Twitter.

And if we look at Innovation Works, the incubation center founded by former Google China head, Lee Kaifu, the trend is even more apparent.  Many of Innovation Works’ project are clones of successful internet companies.  In the list of portfolio companies (http://www.chuangxin.com/portfolio/), Dianxin is an Android clone, Wandoujia trys to imitate 91 Assistant, a popular mobile phone management software made by NetDragon and Umeng is modelled after U.S. startup Flurry.

Probably, readers who knows Innovation Works better can suggest even more examples.  Just a thought, maybe Prof. Lee Kaifu can change the name of  Innovation Works to  Shanzhai Works, so as to better reflect what it is actually doing.

Recently, I talked to Dominic Penaloza, CEO of Ushi, whom my partner, Technode’s Lu Gang, interviewed in February.

Within three months, Ushi has progressed quite a lot.  It doubled its number of members, to 200,000.  These includes 12,000 CEO and 5,000 CTO.  75% of VC active in China are also in Ushi’s network. (Entrepreneurs looking for funding probably should get a Ushi account, too.  But you better have a friend who is a Ushi member, as it is still invitation-only at the moment.)

Ushi wants to be Linkedin in China.  Dominic said they had the idea in March 2010 and it was officially launched in October 2010.   Apart from Dominic, the other founder is Quentin Zhang, a former Tianji product manager. One can also consider LinkedIn automation tools to make it easier to stay connected.

It is about one year since they started, I wonder whether 200,000 members seems rather low.  With close to 400 million Chinese internet users, many startups has over a million users in a year.  Just as another of my friend suggested, “in China, anything less than a million is just rounding error.”

Dominic did not think so.  “The failure of Tianji was because it grew too fast,” he said.  Tianji, another Linkedin want-to-be, once had over 3 million users in China, but it did not patrol their network very well.  Many of the high level users, the executives and CEOs, got feed up as they received too many requests for connection from people they did not know or have no interest in knowing.

“In our system, we classify multiple level of users.  Some can do more than the others.  For example, a newly joined member will not be able to send 100 connection request in a day. If your request got turn down frequently, you will get more difficult to send new requests,” said Dominic, “This is what Linkedin is doing, too.”

Dominic might have a point.  But, I still think a social network has to big to be useful.  I have had my Linkedin account for many many years.  It is only recently I found it useful, as more and more of my friends are on the network.   Also, it is not banned in China, making it even more useful, as I spend most of my time in Beijing right now.

A few days ago, I was at Great Wall Club’s Global Mobile Internet Conference in Beijing and I heard a speech from Michael Song, CEO of Sky-mobi.  And I immediately knew what meant by talking up one’s share price.

Hangzhou based Sky-mobi runs an App Store over feature phones.  (Most of these use Mediaktek chipset.) It is the largest of its kind in China.  In the twelve months ended March 2010, the company has over Rmb 540 million revenue and over Rmb 120 million in operating profit.  But it was not well received in Nasdaq.  Its  share price plunged 33% off its IPO price (US$8) on its first day of trading (Sky-Mobi, a Disappointing IPO)

The speech is about Song’s experience of getting his company listed in Nasdaq – mainly focus on the last few months. Michael said how he addressed investors’ greatest concerns:

1) operators.  In the past, Sky-mobi suffered whenever operators tighten their user protection policies. Song said they are cooperating with the operators.

2) Tencent.  Investors are concern if Tencent want to take Sky-mobi’s business.  Song said they are partnering with Tencent, which is moving toward an open platform policy of its own.

3) Android.  If more phones use Android operating system, which allows users to freely download apps, there is no need for Sky-mobi’s App store, which runs on feature phone only.  Song’s said the rate of decline of feature phone might not as fast as people expected.  And, they have an Android plan of their own.

And, how he saw there is no bubble in the mobile internet sector, as this will be opportunities much bigger than the tradictional internet (even 1000 times).    In the last three months, share price of Sky-mobile has increase more than 4 times to US$21.67  (closing price last Friday.)

He delivered his speech with such a passion that, right after the speech, I immediate wanted to open my check book and buy some of Skymobi’s share.  But, as I discussed with more people in the industry that day, I started to rethink about this.

“Of course, he can make a great speech. That is what they did during the roadshow.  They practiced until everything is perfect and tell a great story to investors,” said a friend, who is the CFO of an internet company, which listed a few years ago.

The three concerns he mentioned is real, especially the last one: the rise of smartphone and Android.  NetDragon just mentioned its 91 assistant has 35 million users.  And this is only 90% of all iPhone users  and half of the Android phone users in China.  A year ago, there are only 3-4 million iPhone users in China and roughly the same or even less Android users.

Sky-mobi’s strength is still on feature phones, the previous generation products.  Even it has a plan for Android, going forward, its dominance will be much less than before.

A few days ago, Tim, one of our readers, discussed with me about the Shanzhai iPad.  If Apple is suing Samsung, what about the Shanzhai iPad suppliers ??  I think it is an interesting topic, so I share it here:

Any readers wish to share their opinions are welcome.

Tim:

…

If any of the Chinese tablets do achieve significant success it would also be interesting to see how Apple would react. If they have the will to chase after Samsung and sue their own supplier it might be interesting to see how they might treat a successful shanzhai player.

Sherman:

…

I am not a lawyer, so I don’t know if Samsung has broken any laws. But to me, as an end user, I definitely think Samsung’s Galaxy is a copy cat of Apple’s iPhone.

Apple probably is aware of the Shanzhai players, too, but they are too small to pursuit legal action against. So, it sues Samsung. To set example that there are consequence for stealing other’s ideas. Whether the judges will agree with Apple is, however, questionable.

But, in spirit, I am with Apple. Companies should innovate rather than copy what is hot.

Another mega China internet IPO will soon hit the U.S.  Leading Chinese social network, Renren, finally filed for IPO in New York Stock Exchange.  It plan to raise up to US$584 million.

Many of the recent China internet IPO perform very well.  This one obviously going to be another hot issue. I interviewed Renren’s CEO Joe Chen for my book Red Wired: China’s internet revolution.  His first startup is Chinaren, a social network of Chinese students, which he later sold to Sohu, after 2000 internet bubble burst.  The following is an extract from the book:

ChinaRen was sold to Sohu, the second largest online portal in China, for US$33 million after the Internet bubble burst in 2000.  After a brief spell at Sohu, Chen went back to the U.S., where he made an ill-fated effort to start an optical networking company. With the industry reeling from the bursting of the bubble and the aftermath of the 9/11 terrorist attacks, his timing could not have been worse.

Chen returned to China to set up another company, Oak Pacific, in November 2002. He tried all kinds of internet businesses. In 2004, he acquired Mop.com and developed it into an online community focused on entertainment.  The next year, he bought DoNews, a tech blogging site.

After raising US$48 million in investment from venture capital firms, he was easily able to fund these acquisitions and develop their business.

In 2006, he returned to a favorite obsession, community sites for university students, by acquiring Xiaonei.

“College life has had a strong influence on me.  I have always had good intuition about what kind of internet products appeal to college students,” said Chen. “When I saw Facebook, I thought this model would take off.  That is why I started doing the same thing.”

ChinaRen is a kind of cyber forum where old schoolmates can leave messages for each other.  Each class has its own bulletin board for discussion. On the other hand, Facebook is arranged around individuals.

“This is a more efficient way of organizing information,” Chen said. “And it is stickier.” (In 2009, half of Facebook’s 200 million users worldwide were visiting the site daily.)

Shanda’s e-book unit or Shanda Literature?has just filed for IPO in the U.S. ?The news caused Shanda (SNDA) share price to rise 17% yesterday to US$51.45.

Earlier I have talked about this in Technode: Rumour: Shanda is going to list another of its divisions next year And I thought this IPO is going to be a good one, as the business is still growing.

Shanda has the copyright of most of the e-books in China. ?e-book download has already became very popular over the mobile phone. ?And, with the popularity of iPad and iPad-like devices, more and more people start reading books on their handheld devices.

Obviously, many investors are also thinking the same. ?Although it is unsure about the amount it is going to raise and the pricing, I believe it will be another hot Chinese internet IPO.

While a VC told me 60% of their chips come from a Fuzhou based chip maker, called Rockchip, Technode readers, Timothy Chen and Tim,  said Telechips and WonderMedia are even bigger.

I have yet to checked them all out.  But it definitely is an interesting question.  Taiwan based chip maker MediaTek built its empire by supplying chips to Shanzhai ji (or Shanzhai mobile phones).   At one time it supplied the chips of 90% of the Shanzhai ji.  The monopoly was only recently broken by Shanghai based Spreadtrum.

If a chip maker can control the Android pad market, it will be another great company.  If readers of Technode know any more information about the Shanzhai iPad, please send us a note.

Shanzhai version of iPad are everywhere in China right now.  They are selling at about Rmb 1000 – 2000.  They look very much like Apple’s iPad, but in fact, run on Android operating system.  If you check on Lightinthebox.com, an online retailer for Chinese products, there is one for sale at about US$200.

But what company make this possible?  I heard that 60% of these Shanzhai version of iPad have their chips supplied by Fuzhou based Rockchip.  Rockchip have complete solutions for tablet computers  running on Android operating system.  The factories just need to put together all the electronic components and a casing, and they will have a workable Android pad for sale.

If you are a VC and hope to invest in Rockchip,  you might be too late.  Rockchip’s revenue and profit soar so much with the rise of Android pad, it will soon be able to go for an IPO by itself.

Many VCs complain about valuation of Chinese Internet startups. In its latest round of fund raising, Dianping.com valued itself at US$800 million.

“And that is before the money of the new round of investment come in,” said a VC.  Dianping.com is a  review website where consumers share their experiences of about restaurants, nightclubs, golf courses, and so on.  It was found in 2003 and currently it has over 1 million restaurants and other places reviewed in its database. It gets most of its revenue from advertising.  And recently, it also jumped onto the Groupon wagon, and launch its grouping buying business.

Whether US$800 million is a too expensive price tag for Dianping might be arguable.  But as the size of most VC funds grow, so as their appetites.  Rather than funding smaller startups, most of they prefer putting their money to later stage companies.  So that, the investment size can be larger and the risk of complete failure decrease.  The end result is everyone chasing the same few hot companies in the market, and valuation surge, to sometimes a ridiculous amount.

Taomee (61.com), a leading social network for kids in China, will be going public in Nasdaq in a few days, said a banking source.  It plans to raise about US$100 million.

“The market cap is less than a billion,” said the banking source.

It was founded by former Tencent executive, Wang Haibing, in 2007.  Before he left Tencent, he was responsible for QQ pet, a virtual pet service for Tencent.  Taomee has 180 millions registered users and 30-50 millions active users. The Shanghai based company is reported profitable in January 2011.

Recently, I have been talking with an investment bank analyst about Sina.  I asked how he valued Sina’s Weibo (its miniblog or microblog services).  He said he will give its portal business 30 times PE or about US$30 per share.  Its wireless business about US$2.  And another US$5-6 for its other business (apart from Weibo).  It has US$13 in cash per share.  That means excluding Weibo, Sina should worth about US$50.  Currently, Sina is trading at about US$117.  Therefore, investors are giving 57% of Sina’s valuation to its Weibo alone, or about US$ 4 billion dollar!!

Is it too much for something has yet to prove its business model?? Revenue from Weibo is still tiny at the moment.

eCommerce site, LightInTheBox.com, will get IPO by the end of this year, said an investment banking source.  The company was found by Alan GUO, the former CSO of Google China, Xin WEN and Liang ZHANG in 2007.  It sells products from China to consumers all over the world.  It has customers in over 200 countries worldwide, mainly in the U.S. and Europe.

“It is like Amazon, but with an export-twist,” said an LightInThebox executive.

Mobile phones (in particular the Shanzhai ji), electronics, home and gardening equipments are popular items.  And recently, even wedding dresses are hot.  The company currently has about 600 employees.   Revenue is estimated to be over Rmb 200 million last year.

One of Shanda’s subsidiary is changing its business from online game to C2C e-commerce and the parent company is going to invest Rmb 200 millions into the venture, together with 2 other investors.

The new venture is headed by Ge Binbin, whose online game company was sold to Shanda in early 2010.  Market analysts are not optimistic about the new venture, as Alibaba’s Taobao is far too strong a competitor.  Baidu has scaled down its C2C venture, Yuoa, after failing to gain significant market share.  It focuses more on developing its B2C platform, which it cooperates with Japan’s Rakuten.

But Shanda might do so, just to help its online payment solution, Shengpay. Right now,  Shengpay are mostly just for selling point cards for Shanda.  With a C2C market, its use can be more widely spread.

MediaTek used to supply 90% of the chip of the low-end mobile phone manufactured in China. But, something happened in the beginning of last year. One of the new models of Mediatek’s chips is not stable enough. More correctly, its rival, Spreadtrum, after years of trial, finally, came up with a chip that is stable enough for the phone manufacturers. With a low price, about 10-15% lower than Mediatek, Spreadtrum quickly gained market share. It had 25% at the end of last year. Mediatek’s market share shrank to 70% while privately held Taiwan based MStar had the remaining 5%.

To rebuild its long-term competitiveness, Mediatek is hedging its bet on smartphones running Google’s Android operating system. Its Android 2.2 solution has been gaining traction since it launched in last November. It will have better and faster Android products coming out in mid-2011 and again in late 2011. At the current pace of price drop, Android phone at US$100 retail price can be reached for the entry-level models by mid-2011. Mediatek hopes to sell over 10 million unit of chipset for Android phones this year.

An added benefit of going after Android market is higher profitability. “Semiconductor value is more than 3 times higher than feature phones, as application processor, touch screen controller, WiFi and GPS are going to be part of the standard package (for Android phone),” said Alvin Knock, analyst of JP Morgan, “Our checks suggest that the average selling price is more than US$15 currently, vs. feature phone at US$4-5.”

Its rivals, Spreadtrum and M-Star, have yet to launch any Android products. “Spreadtrum and M-Star are more keen on eating into Mediatek’s market share in feature phones right now,” said an industry insider.

If its effort pays off, Mediatek can be the leading supplier of cheap Android phones in the mass market. It will regain its profitability and it share price will rebound. JP Morgan’s price target for Mediatek is NT$540, or 57% more than its current price.

But there are challenges for its ambition. Lately, supply of the touch screen is in shortage. If Mediatek cannot secure a stable supply of touch screen for its customers, it might not able to sell as much as Android products as it wish.

Moreover, although not totally related, 3G makes the experience much better for Android phones. Most people like to use fancier applications with their Android phones, such as watching videos or viewing large photo of their friends, and that requires high bandwidth. However, China’s 3G penetration is still low. Only 6.4% of mobile users subscribe to 3G services by the end of February, according to China’s Ministry of Industry and Information Technology. And, the price of 3G packages from the three operators (China Mobile, China Unicom and China Telecom) is still too high for the mass market. This could also hinder Android phone development in China and Mediatek’s plan for making a comeback.

The Beijing-based company, founded in 2005 by former Yahoo China head Zhou Hongyi, jumped to public prominence last year when it took on Tencent, China’s largest Internet company, in a high-profile battle after their initially quite different business interests started to overlap.

Zhou, 40, is a product of Xian Jiaotong University where he studied systems engineering. in 1998, he founded his first venture, 3721, an online service that allows users to access Internet websites using the company’s or the product’s Chinese name. It was sold to Yahoo for $120 million in 2004 and Zhou became head of Yahoo China, but the relationship ended on a sour note and he quit in 2005.

After being an angel investor for a while and working for venture capital firm IDG Capital Partner, Zhou was ready for another startup and founded Qihoo 360 in May 2005. In two years, it became most popular online network security services in China.

Zhou is generally praised for his ability to build hugely popular Internet services, but the measures he takes can be dramatic. His aggressive nature also offends many players in the industry.

Liu said 360buy will be going public in 2013 or later, in either U.S. or Hong Kong.

DST was found by Russian billionaire, Yuri Milner, in 2005.  It has invested in Facebook, Groupon and Zynga.

Funny enough, Tencent invested US$300 million in DST and has 10.26% of its stake.  That means a Chinese internet company invested into another Chinese internet company using a Russian Fund.  Why Tencent does not invest in 360buy directly ??

Many people in the industry wonder if consumers are willingly to buy products, specially big ticket items, using their mobile phone.  But, I think there is no more doubt.

Last Saturday Technode  organised a seminar, called NTalks, in Beijing to discuss about mobile e-commerce.  In the seminar, one of speakers said Taobao’s transaction through mobile devices reached Rmb 1.8 billion last year.

In January, Alibaba announced its mobile shopping registered a single-day high gross merchandise value (GMV or the value of merchandise sold across the platform)of RMB37 million (US$5.58 million) and 17 million daily unique visitors.

The speaker said most popular items are computers, mobile phones and camera.  And then, for women, it is cosmetic.  For men, it is items like sport shoes.

Beijing based Li Gou (lig.cn), a startup focus on selling merchandise via mobile phones, also confirms the trend.  “People are willing to buy products with their mobile phones,” said CEO Zhang Yang.  Most of Li Gou’s users are from the low income group, such as soldiers, factory workers, etc.  But surprisingly, they can buy item worth thousands of Rmb, such as laptop.  “Although a solider does not earn much, a few thousand Rmb per month, but he is station at place where there is nothing to buy.  There is no shopping malls near his camp, which is usually in a remote area.   We become his only channel to buy consumer electronics.”

Shanghai based chip maker, Spreadtrum, produces baseband chips for low end mobile phones.  The market was traditionally dominated by Taiwan based Mediatek, which supplies the chips for over 90% of the low-end mobile phones in China.

But early last year, Mediatek made a mistake in its new product.  The new model of chip was not stable enough.  This gave Spreadtrum an opportunity to quickly gain market share, with a lower price and a more stable product.  By the end of last year, Spreadtrum’s market share increased to 25% and Mediatek dropped to about 70%.  (The remaining 5% is taken by privately held Taiwan company M-star.)

This was reflected in their share prices.  Mediatek dropped from about 575 Taiwan Dollar in beginning of 2010 to about 350 TWD recently.  During the same period, Spreadtrum increased from US$ 5 to US$ 20.

Mediatek started a price war last October, so as to stop its market share from sliding further.    The situation was temporary established.

The following are the key points:

1) Not to underestimate the technical difficulty in making a real time operating system.  Apple has accumulated many year of experience.  Even with its technical background, Google has to acquired Andy Rubin’s Android before it started its mobile phone OS project.

2) Apple’s iPhone is a total integrated product from chips to hardware to software.  That’s why its performance is so good. Robin Li’s solution is software only.  It will be hard to compete, in terms of performance.

3) (I love this comment!) According to his knowledge, Baidu has no world class mobile phone OS developer.  Baidu’s mobile phone OS is largely based on Google’s Android.  If it is better than iPhone, it only means Android is better than iOS.

4) (And I like this even more.)  In FT’s article, Robin claimed mobile phone with Baidu OS is 45 times faster than iPhone, in term of the time for switching on the machine.  Lee Kai Fu questioned, why pick the time for switching on the machine?  There are many parameter in comparing mobile phone performances.  It seems to be back in the old days of 1990s when PC was racing for speed only.

Lee Kaifu’s Innovation Work is also working on an mobile phone OS project.   No wonder he is harsh on Baidu.  It is his rival after all.  There is however some truth in his remarks.  Investor should be caution about Baidu’s mobile OS.  It probably will not be as successful as Google Android.

China’s National Copyright Administration (NCA) is investigating Baidu for copyright infringement of books, said Wang Chih-cheng, deputy director for Copyright Management of NCA.

On March 15, fifty of Chinese well-known authors wrote a public letter, claiming Baidu Wenku (or Baidu Libary), one of Baidu’s services which allows users to read free e-book online, infringes their copyrights.  The letter is widely circulated in Sina Weibo (or Twitter in China).

They said, just like Baidu’s free MP3 download hurt the music industry, Baidu library is also killing the future of Chinese book authors.   In the long run, there will be no new books to read.

Here is an article about it in the local news: http://tech.sina.com.cn/i/2011-03-23/01465318179.shtml

If history can offer any guide, Baidu’s investors need not worry.  Because in music companies’ lawsuits against Baidu, which have lasted many years, Baidu was found not guilty by the Chinese government.

If fact, I heard the music companies had finally come to terms with Baidu, granting them copyrights, in exchange for sharing advertising revenue in Baidu’s free MP3 download service.

But anyway, it is great to hear someone inside China is rising the issue of copyright protection.  If there are more copyrights belong to Chinese citizen or Chinese companies, I believe the government will have a real incentive to enforce copyright protection.  And they should, if Chinese government want the country to be more innovative and more technically advance in the future.

Focus Media’s CEO, Jiang Nanchuan, said in his microblog, that Focus Media is working some form of LBS.  It would be integrated with Focus Media’s digital displays units, which are found in many office buildings and residential complex in China.   (Here is an article about it in local news: http://tech.sina.com.cn/i/2011-03-20/19495308277.shtml)

Jiang is not too specific with the details.  But it seems like people can use their phones to interact with the advertisements on the digital displays.  They can perhaps make a purchase orders, or download coupons, etc.  Jiang said the service will be ready by the fourth quarter.

Actually, I’ve seen something similar in concept from a startup.  It is called Getbuz, http://www.getbuz.com/.  It installs a box like device in a shop.  When people wipe their phone over the box, they can get some discounts at the shop, but a message is posted in their Facebook account saying he/she has made a purchase in the certain shop.  So to consumers, it is promotion for discount.  The founders (Lorcan McNeela and Caomhan Connolly) said when they tested run Getbuz with local coffee shops and other retailers in Boston. It was quite welcomed by the shop owners.

Getbuz was one of the six startups incubated by the Chinaccelerator program last year. Here is an earlier post about them and the program:

Dalian-based Startup Accelerator, Chinaccelerator Launches Six Startups in Beijing

Calling The Angel, MOBINODE Partners With ChinAccelerator

Tencent’s fall also affect its major shareholder, South Africa’s Naspers. which owns a 30 percent stake.  Naspers’ share price dropped 4.4% on Thursday and another 3.12% on Friday, becoming the biggest percentage loser among Johannesburg’s Top-40 index of blue chips .

But is Tencent’s result really that bad ??  The company posted a fourth-quarter profit increase of 46 per cent, which is generally inline with investors’ expectation. (Its net profit is Rmb 2.2 billion, compared with Rmb 2.24 billion average estimate of nine analysts compiled by Bloomberg.)  What really worried investor is its president’s remark of “slower growth”.

The company plans to invest into a lot of new businesses this year, which will not produce return in short terms.  They are microblog, e-commerce, search, and online security.   For people who has been pay close attention to Tencent’s development over the years, this is not a surprise.  The company used to branch out into new business regularly, using its huge QQ users as leverage.   Online games was only a tiny portion of its business 4 years ago, and now, it accounted for 50% of its revenue.

However, not all of its initiative resulted in a success.  In such a case, it will generally let the new business line be and maybe try again later if opportunity arise.   e-commerce and search are something Tencent has been trying again and again over the years.  However, Alibaba’s Taobao is too strong a rival for Tencent’s Paipai  and Baidu is a much preferred search engine than Tencent’s Soso.

Last year’s e-commerce boom in China has benefited benefit both Baidu andTaobao immensely.  And that is why Tencent want to make an inroad into both this year, again.  Sina Weibo’s success has also triggered Tencent to try its own microblog service harder.  And last year’s fight with Qihoo 360 made it want to enter the field of online security.  But the problem is: obviously, all the four new business lines have strong incumbent players. It will be a tough battle for Tencent to win.

Actually, there is a new sector that Tencent has significant advantage and could be Tencent’s next revenue driver – the mobile internet.  According to CNNIC, the total number of mobile Internet users in China increased by 29.7% to 302.7 million at the end of 2010, representing 66.2% of the Internet user base.  Tencent’s mobile QQ is the most popular mobile application in China, followed by UCweb, a mobile web browser offered by Guangzhou based UC Mobile Ltd. iPhone-like mobile revolution has yet to happen in China, as smartphone penetration is still low and high speed mobile internet is still too expensive for mainstream citizen.  But when it happens, Tencent will be the first one to benefit.

Qihoo 360, China’s largest anti-virus software provider, has filed for listing in New York Stock Exchange. It plans to raise US$200 million.

(I post a blog concerning it last week , but some of the details are wrong. http://en.technode.com/2011/03/11/360buy-going-ipo-in-a-few-weeks/)

According to its listing document, it had 339 million monthly active Internet users, representing a user penetration rate of 85.8% in China, as of January 2011.

While the anti-virus service is free, Qihoo’s revenue mainly comes from Online advertising and Internet value-added services, such as offering third party web games. Its revenue reached US$57 million in 2010, up 78% from the year earlier, while profit increase 103% to US$8.5 million.

B2B marketplace Alibaba.com reported fourth quarter result. Its net profit reached RMB410.4 million, up 46% from a year ago. Total revenue increased 37.6% to RMB1,521.5 million.

For the whole year of 2010, revenue was RMB5.55 billion, representing a 43.4 percent increase from 2009 level. Full-year net income was RMB1.46 billion, representing an increase of 45.1%.

Credit Suisse analyst Wallace Cheung called this “a mixed set of result”. While Alibaba’s operating profit was 6% worse than he expected, due to more G&A expenses, its net profit was 13% better because of low tax rate.

He also thought the China marketplace members growth is above expectation, whereas International marketplace members was below forecast.

Alibaba.com has 18 million register members for its International marketplace, up 55% from a year earlier. It has 43 million register member for its China marketplace, up 21%.

For paying members, it has over 121,000 China Gold supplier members and over 677,000 China TrustPass members, increased 26% and 35% from last year. The number of Global Gold Supplier, however, decreased by 41% to 10,434, due to a price hike in last September.

“Deferred revenue growth is 7% above our forecast, implying better 2011 revenue growth. Also, net cash was 2% ahead of our forecast,” said Wallace.

On Mar 15, Chinese CCTV uncovered a horrified scandal concerning Chinese mobile internet startups.  Netqin is a company, which makes anti-virus software for mobile phone.  It invested in a company called, Feeliu, which claims to make mobile apps and mobile games.  But once users install Feeliu software on their phones, the phones will have many problems, including being very slow. Only if they pay Rmb 2 to download an anti-virus update from Netqin can they solve the problem. (Here is an article about it in local media: http://tech.sina.com.cn/t/2011-03-15/21215289323.shtml)

After the scandal was exposed, Nokia said it will stop pre-installing Netqin software onto its phones.  It will also remove Netqin software from its App store and other distribution channels.  Besides of Nokia, Netqin has distribution partnership with many of the leading phone makers, such as Sony Ericsson, Samsung, ZTE, Coolpad, etc. The other phone makers have yet to respond, according to local news. (http://www.cnbeta.com/articles/137382.htm)

Netqin was invested by many well-known companies, including HTC (US$2.5 million) and MediaTek (US$2.2 million).  It’s just filed for an IPO in Nasdaq, trying to raise US$100 million.  (http://www.reuters.com/article/2011/03/15/netqinmobile-idUSL3E7EF40220110315)  Its listing document shows its revenue reached US$17.7 million last year.  It broke even in Q3 of 2010, but made a loss again in Q4 due to stock option given to employees.

But with the scandal exposed, obviously, its listing plan will be delayed or canceled, as investors wonder how much of its revenue was coming from illegitimate sources.

Out of which, 300,000 were sent from micro-bloggers in Japan, possibly, from Chinese students or workers living in Japan. Moreover, 12,000 Sina Weibo users have set up a group called “Japan’s earthquake helps and contacts in Chinese” to facilitate people seeking missing family members and other information related to the relief efforts.  (Here is an article in the local media: http://tech.sina.com.cn/i/2011-03-14/21465283908.shtml)

Social impacts of microblog has well been documented.  Twitter has played some important roles for people seeking their family members or looking for helps, in the times of disasters.  Unsurprisingly, Sina Weibo is playing a similar role in Japan’s earthquake, given the proximity of the two countries.

With its popularity in China, Sina Weibo is used to fight social problems, too.  I read another news earlier.  It is about people using Sina Weibo for anti-human-trafficking.  There are a lot of children in China, who are abducted from their families and forced to be beggars on the streets.  An university professor (Professor Yu Jianrong of Institute of Rural Development, Chinese Academy of Social Sciences) posted a message on Sina Weibo just before Chinese New Year (Jan 25), asking people to take photos of children beggars on the streets and post the photos on Sina Weibo, so that, their families can locate them.   Many people responded and it became a social movement.  In three weeks, more than 220,000 people joined the campaign, six missing children have been found, and one family has been reunited.

(Here is an article about it from China Daily U.S.:http://newamericamedia.org/2011/02/twitter-in-china-save-abducted-children-4.php)

Even the Chinese government responded.  The rescue of abducted children has become a priority in this year’s national congress.  Government officials have pledged they would tender proposals on the issue.

I am glad that social network can play a role in solving China’s social problems.  However, I am afraid once people’s attention switches and their interests decrease, the movement will discontinue and the problem of abducted children will deteriorate again.

Li Shanyou quitted his position as CEO of Ku6 because he disagreed with Shanda’s CEO, Tianqiao Chen, over strategic direction of the online video site.

(Here is an article about it in local news: http://tech.sina.com.cn/i/2011-03-11/18455275357.shtml)

Li found Ku6 in 2006.  Before that, he worked for Motorola, Alcoa Group, Bausch & Lomb, Sohu, and so on.  Ku6 is one of the leading online video site in China, together with Youku, Tudou, 56.com, etc.  But, the market consolidated in 2007-08, with Youku and Tudou emerging as the winners.  Unlikely to going IPO on its own, Ku6 was sold to Shanda for about US$37 million in 2010.

Recently, Shanda’s CEO, Tianqiao Chen, frequently have meeting with senior executives of Ku6.  He wished Ku6 to change its direction. Chen hoped Ku6 could focus on information and news.  However, Li wanted Ku6 to license more hit movies and TV dramas – a formula used by both Youku and Tudou to draw audience.  According to local news.  The two could not agreed with each other and finally, Li quitted.  According to local news, he would be going to an investment firm.

After a long holiday season, from Christmas last year to Chinese New Year,  the IPO frenzy of Chinese internet stock is ready to go again.  Qihoo 360,  the most popular anti virus software in China, will be going public in a few weeks.  Xunlei, the largest file sharing service in China, is also preparing to list in Nasdaq, raising about US$200 million.  Renren and Kaixin, two of the largest social networks in China, are also in the pipeline.

In 2010, four of the five best IPO debuts on American exchanges came from Chinese stocks, led by online video company Youku.com Inc.’s 161% pop in December, according to Dealogic. But the reverse was also true: The worst five debuts came from China-based companies, with mobile application company Ski-mobi Ltd. skidding 25% on its first day in December.  In the whole year of 2010, more than 40 Chinese companies listed in the US, more than 10 of which pertain to Internet industry.

This year’s candidates for IPO seems to be even stronger than last year.  Most of them are top dogs in their own categories.  There will be a lot of action in the public market.

One thing we discussed yesterday is about loyalty.  Ken said he had a former colleague who started from a junior position in Netease.  The person was quite smart and very soon got noticed by senior executives in Netease.  He was promoted again and again.  And finally, he became the project leader of a new game.   But, after working on the game for about a year, he quited and took the whole development team with him.

“Actually, at that time, he is already very well rewarded financially.  William Ding (Netease’s CEO) never badly treat anyone who can help him.  And, he could make total decisions on the game.  But, he was still not satisfied.  He thought the success of a game completely depended on his own talent.  So, why he had to share the benefit with the company ?”

Just like today, there were a lot of VC willing to support a game developer with a track record.  The person got funded and soon the game was finished and launched.  But, it was a total disaster.  “It might get 20,000 peak concurrent users (PCU).  Very far from a major hit,” said Ken.  The most popular online game in China is Netease’s Fantasy Westward Journal, with 2.5 million PCU.  A hit game gets at least 200,000 PCU.

“The person totally overestimated his own ability and underestimated the company’s contribution to his previous success,” said Ken, “Netease gave him a lot of opportunities to grow and try out new ideas.  But, he did not appreciated.”

Actually, similar stories happened in many internet companies in China.  Just recently, I heard the whole development team of 91 Assistant has left their company, NetDragon, and started a new one making similar products.  Again, they are supported by VC.   I don’t know what would happen in the end.  But, lack of loyalty among staff is quite common in China.  Many people leave their companies just for slightly higher paid in another firm.

A former Microsoft executive told me, he was asked by Steve Ballmer to evaluate Microsoft’s operation in Japan and China.  When he found out the way the Chinese staff are, he suggested Microsoft to concentrate its development force in Japan, where the staff are much more loyal.

“Microsoft like to invest in its own staff by training them.  If they are only going to leave the company in a couple years, for a few thousand more in another company, why we would want to invest in them ??”

He said Apple’s CEO Steve Jobs is very interested in TD-LTE, and promised to do R&D on it soon. But, he could say when there will be an iPhone with TD standard. (Here is an article about it in local press: http://tech.sina.com.cn/t/2011-03-07/03465253196.shtml)

China has been pushing its own 3G standard TD-SCDMA since its inception. It is a way for China to develop its own IP rights. But, TD’s development met with a lot of obstacle. Its official launch was delayed again and again. When it was finally ready in 2009, Chinese government gave it an ultimate boost by licensing TD to China Mobile, the strongest mobile operator in the country, with over 70% users.

This gives TD the best chance to develop. But, it becomes a curse on China Mobile. Although it still has about 70% of all the 2G mobile users, it has only 30-40% of the 3G users. Its competitors, China Unicom and China Telecom, which have better 3G standards (WCDMA and CDMA2000), have been gaining market shares. This is reflected in their share prices respectively.

Realizing the TD 3G standard’s weakness, China Mobile knows if it wants to regain market share, it has to develop 4G (TD-LTE) as soon as possible. It has already started testing TD-LTE in a few cities. Most expert agreed technically TD-LTE is not a bad standard.

An iPhone with TD-LTE might be still a long term dream. But China Mobile is trying hard to turn TD and its fortune around.

I talked with Papaya Mobile’s CEO, Shen Si, last week. She graduated from Tsinghua University studying computer science. Then, she went to the U.S., studied computer science and management. And later, she joined Google. Before she left, she was with Google China, responsible for its development in mobile.

In 2008, iPhone became very popular. The new platform attracted Shen Si’s attention and she believed it was time to form her own company – Papaya Mobile. The aim is to develop social game on mobile phone and iPhone is the perfect platform.

So far the Beijing based company has about 40 people. In the last 2-3 years, they built over 10 social games over iPhone. Papaya Mobile has a version of all the hit games on Zynga. There are over 10 million registered users for their games. Most the users are from the U.S., Western Europe, Canada, Australia, etc. APRU of its users can reach US$30 per month.

“In 2008, the most ready mobile platform for game developers is iPhone. Therefore, most of our users are from overseas,” said Shen Si.

Starting from last year, the mobile development in China is getting intense. Shen Si is thinking of focusing her attention back to China.

In the second half of last year, they started to build a social network on mobile , and opened it for third parties games and applications. “It is like Facebook, but with LBS (location based services),” said Shen Si. It is Android based, but will have iPhone extension. So far it has over 200 third party app.

“Profit is not most important at current stage. We focus on growing our user base,” said Shen Si.

Shen Si is not alone. Everyone in the mobile internet sector is thinking along the same line. Good news for people with an Android phone. There will be even more freebies on your phones.

In this way, he is a bit like Bill Gate. But Bill Gate,at least, went to Harvard. He just did not graduated, as Microsoft was so much more fun. Richard skipped the whole process and started his own game company and in 2004, he sold it to Shanda. Then, he started another one, Wistone. The company has over 100 people and a revenue of Rmb40-50 million last year. It develops MMORPG, and operate its games over multiple platforms (mobile / PC / social networks). It also expanded internationally, to Taiwan, Thailand, Korea, Germany, Greece, Russia, Spain, etc. Currently, overseas market accounted for about one third of Wistone’s revenue.

“I have been developing game for a very long time. I know what will make a game sell. And I am already tired of it,” said Richard. According to him, MMORPG games are popular in China because it allows people to display their anger in the games, something they cannot do in the real life. “In China, many people are angry and frustrated in real life. So, if we just give them a small excuse in the game, their anger will be ignited and they will fight fiercely with each other. The game developer will make a lot of money out of them by selling them different weapons,” said Richard, “It is just like selling a person a sword and another person a blade, and then, watch them fighting.”

This is the money-making formula for many of the hit titles in China. “But, in the end, people playing such games will not be happy. The ones who win might be happy for a while. But to the ones who lose, they are angry and frustrated not only in real life, but also in the virtual world. Anger is accumulate in the game playing process and it needs a outlet. That is why we have seen so many people curse the game companies in their official sites,” said Richard, “I feel game companies and game players are working against each other in China. We are not creating happiness, we are profiting from the anger within people and helping anger grows.”

“I have my own kids now. But I don’t want them to play my games,” said Richard, “If that is the case, why I want to make such game anymore?”

That’s why Richard is leading a small team in his company and they are trying out something new. This time the formula will be happiness. “If people play my games and feel happy about it, I will be even more happy,” said Richard.

In fact, such games are quite common overseas. Games which let you play with your friends and enjoy the process. All the popular social games, such as Farmville or Cityville, are like that. I wonder if Richard is thinking something similar.

Beijing based Happylatte makes a very popular mobile game, called High Noon, on iPhone.  In fact, it is the second most popular iPhone game from China, by revenue.

High Noon is a shooting game, using the cowboy era as background.  Players go to duel with each other, equipped with the many guns, accessories and customs the game provided.  It is very popular in Hong Kong and Singapore.  That is how I found out about them, as one of my Hong Kong friend ask me to check them up.

The game studio developed it, Happylatte, was formed by Bjorn Stabell in 2008.  “We have been doing outsourcing work for mobile phone makers, such as Motorola, for a long time.  When iPhone launched in 2008, it is completely different from the old mobile phone environment and we decided to give it a try with our own game,” said Bjorn.  He also runs an outsourcing firm of 60 people, called Exoweb.

The first game they launched is called Pee Monkey.  A very simple (but fun) game about training a monkey to use toilet.  “It became the number 1 download game in the U.S. when it first launched,” said Bjorn.  And it just took Bjorn and his team 2 months to develop it.

This experience significantly boost their confident and they tried again with something more serious.   High Noon took them 9-10 months to develop, with 15 people.  It has 2.4 million download so far and everyday, there are about 100,000 people playing the game.

It created quite a fuss in markets such as Singapores and Hong Kong.  It has lots of fans in U.K, France, etc.  But, so far, it has not picked up in North America.  “Every now and then, we see our traffic shoot up in a particular market.  We don’t know the reason.  Our guess is a core group pick it up and soon it spread in a particular country.  The game is quite contagious,” said Bjorn.  He plans to introduce a version for Android  soon and then Microsoft’s Window Mobile.

After working a few years, he returned to China and started his first venture in 2003.  eFriendsNet is a social networking focus on dating services.  At its peak, it had 5 million visitors per day.  Liu sold it to a  French public company in 2006.  And by 2008, he was ready to started another venture.  And this time, he started a social game company – Rekoo.

“It is easier to find business model for a game company,” said Liu.  Oh yes, people like games and pay for them.  Games are the largest revenue sources for Chinese internet companies.  And social games was the upcoming trend in 2008.  He started with China market, but very soon, find it much easier to develop overseas market.

“Problem with Chinese market is that the SNS operators are game developers themselves.  There is conflict of interests.  If your games are popular, they not only not helping you, but even put pressure to squeeze you out,” said Liu.

There are at least 4 popular SNS in China – Renren, Kaixin, Tencent’s QQ and 51.  And each with its own rules.  In 2008, their platforms were not completely open for third party game developers.  Kaixin, in particular, depended on games (its own) to build its popularity and was not ready to opening it for other game developers.  Moreover, people don’t want to pay.  “Chinese gamers has been playing online games for over 10 years.  They are spoiled.  They won’t pay easily,” said Liu.

In March 2009, Rekoo started to land on Facebook and very soon, found it had hit a gold mine.  By third quarter of 2009,  Rekoo was the top 10 game developers on Facebook, with its Sunshine Ranch and Animal Paradise.  It had 3 million daily visitors on Facebook and was earing a revenue of US$ 1 million per month.

(At the same time, it had 10 million visitors per day in China, but only Rmb 1 million revenue per month.)

He also entered Japan in August 2009.  “In June 2006, Japanese social network, Mixi, got listed.  We know each other and I thought it was a good opportunity.  Our games work in Facebook, and they should  work in Mixi,” said Liu.  Sunshine Ranch and Animal Paradise were launched.  Then, Sunshine Deep Sea.  They became very popular.

“It is easier for us to understand the Japanese culture.  Many of us grow up reading Japanese comic book.  We know their culture and aesthetic standard.  For the U.S. market, most of the time, we can only guess what they like,” said Liu.

Liu found out the Japanese market is as big as the U.S. People are as willing to pay.  And there are much less competitions.  At that time, Zynga in the U.S. was growing strong, with Farmville and other social games.  Farmville is very similar to Rekoo’s Sunshine Ranch.

In third quarter of 2009, Liu decided to focus in Japan market.  “We are a small company.  We could not spread our resources over too many places,” said Liu.  Besides, China, U.S. and Japan, Rekoo was also in Korea at that time.  “I started to learn Japanese.  We set up a local office in Japan.  Start hiring local Japanese,” said Liu.

Today, Rekoo has a 30 person office in Japan – most of the staff are game designers, game producers, customer service, marketing and business development.

Rekoo soon became the most popular game developer on Mixi.  It also launch its games on Gree, a mobile social network.  And lately, it cooperated with KDDI, Japanese 3rd largest mobile operator, to form a mobile social game platform together.

Today, Rekoo has 2-3 million visitors per day in Japan market and earns several million USD per month.  Its performance on Facebook, however, has since decline.  It has only 200,000 visitors a day and earns about Rmb 1 million a month.

Alibaba’s B2B market, Alibaba.com, doesn’t sell goods to the public, or arrange auctions like eBay. It helps businesses find trading partners online. And one way it attempted to monetize the process, and offer some protection from fraud for businesses, was by creating levels of trust for suppliers. Even though it warned all companies to be wary of fraud, it claimed that those it labeled “Gold Suppliers” had been checked out by Alibaba and found to be reliable.

What was particularly jolting for the company was that the fraud it uncovered was among these Gold Suppliers. And, even worse, they operated with the complicity of the Alibaba.com sales staff, who had a financial interest in boosting sales because they were paid commissions.  Here is an article about the incident from Alibaba, http://alizila.com/details/index.php/news/2011-02/92/.

The “phony suppliers” would establish a presence on the site, the article said, by selling consumer electronics at very low prices. Then they took large orders from overseas businesses that paid upfront and received nothing in return.

Though the company said only about 100 of 5,000 sales employees were implicated in the fraud, during the past two years more than 2,300 complaints were filed. According to the numbers the company supplied, the total losses suffered approached $2.8 million.

I think the most shocking part of the whole incident is that: quite many Alibaba internal staff  were involved in the fraud – 100 is not a small number.  And they have been doing that for 2 years.

The company’s stock price on the Hong Kong Stock Exchange dropped 8 percent on Tuesday.  It might dropped further, as this is an incident with long term impact.

I was hoping Alibaba will have a good results in the coming quarter, as it raised its price last September.  Now, I guess it will take much longer, as it has to fix the fraud problem and rebuild buyer confidence about its B2B market.

Yesterday, I was at an event at Lee Kai Fu’s Innovation Works in Beijing.  It is a round table discussion about games (social,  mobile and tablet ).  Beijing based ECitySky, which makes a very cool 3D social game, organised it.  And many industry veterans are there, including AJ Redmer，CEO of WeMade (U.S.), Andy Tian, general manager of  Zynga China, Edwin Chen of Ismole and Richard Wu of Wistone.

One of key discussion is whether game developers should copy a hit title in the market.  Some of us later have dinner together and the discussion continued.

While the ideal is that people develop their own original games, the reality is just the opposite.  Popular games titles are cloned overall over the social networks.  For example, there are over 70 farm games in Facebook alone.  Similarly for mobile games – numerous version of Chinese poker.

The reason is simple: it is much easier to develop a copy of an existing popular game, than to think of a complete new one.  And even if you have a new idea, someone will copy it very quickly, when it gets popular.

This is especially true in China, where IP rights are not protected and competition is severe.  To an individual game developer, he would rather copy than innovate.

But, the end result is: game developers as a group lack bargaining power against platform operators in China.  AJ Redmer pointed out in the rest of world, the content developers (e.g. Zynga) would have 70% of the total revenue, while the platform operator (e.g. Facebook) would have 30%.    This is the same for music, and other products which required creativity.

But in China, the platform’s share of revenue is much higher.  For example, Renren and Kaixin take 50%.  For QQ, as it is much more powerful, it takes 70% of the total revenue.    AJ suggested, one of the reason can be attributed to the tendency for developers to copy each other.  As there are multiple source of the same content, their value decrease and the platform operators can have a much bigger bargaining power.

To an individual developer, not respecting other people’s intellectual property might bring him immediate easy money.  But to all the developers as a whole, the tendency to copy each other makes them lose out in long term.

But in fact, Alibaba is working on something big. “The key is land,” said my friend. Alibaba is talking to local governments all over the country, asking them for land to build warehouses and logistic facilities.

“Once Alibaba gets lands from the government, they can borrow whatever they needs to build warehouses and logistic facilities from the banks, using the lands as collateral,” said my friend.

When I first heard about the US$4.5 billion investment, I felt that was too much even for Alibaba. Its B2B market only made US$140 million in profit last year. Even if Taobao and Alipay made the same amount, the Alibaba Group as a total should earn less half billion a year. And I don’t think they have more than US$2 billion at hand. They got US$1.5 billion from listing the B2B market and another US$1 billion from Yahoo, but it paid back US$750 million to its earlier investors. Of course, they can get financial support from other investors and they can throw all their profit in the next 5-10 years into the project, but that sounds too risky and full of uncertainties.

Now, I see what they are doing. Alibaba don’t need to spend a dim on the project. Land will be from the government and money to build warehouses and logistic facilities will be from the banks. Once the facilities are built, Alibaba can channel Taobao’s numerous sellers to use the services. If everything works well, apart from dominating e-commerce, Alibaba will be the king of China’s logistic industry, too.

The crucial part of the whole scheme is the first step – getting land. That is why Jack Ma talked about the logistic investment in such a lofty tone – spending US$4.5 billion over the medium term. It gives his subordinates a legitimate reason to go to the local governments and ask for land.

If Alibaba is going to invest billions of dollars in logistic, it will help local economy, and sure, the local government should support it by providing free land. Actually, local governments have been doing the same with other industries, such as software development, clean energy, etc. It sounds very reasonable.

Moreover, China’s logistic industry is indeed a mess. Service stopped during the Chinese New Year. (I talked about these earlier.http://en.technode.com/2011/02/05/problems-with-china%E2%80%99s-logistic-industry/) There are a lot of complaints about how poorly the logistic service is run. Alibaba finds the right moment to pitch government for land.

It is really clever of Jack Ma. Success or not, it is a scheme worthwhile trying – if it works, he will win billions.  If not, it doesn’t cost him a dim.

Beijing based Rekoo is famous for its social game in Japan. Although it is a Chinese firm and has 90% of its 400 staff in the country, it is the number 1 social game developer in Japan’s leading social network, Mixi. It is also very popular in Gree, a mobile social network in Japan. And it has cooperated with KDDI, the third largest mobile operator in Japan to setup a mobile social game platform together. Currently, its social games have 2-3 million visitors everyday in Japan, or 3% of the country popular. Revenue from Japanese market reached several million USD a month.

This year, however, its CEO Liu Yong expected Japan market will only grow steadily. (Still, its means over 100%.) The explosive growth will be in China. Liu Yong expected revenue in China to grow from currently about Rmb 1 million a month to US$1-2 million a month by the end of this year.

Why?? Because it just sealed a deal with Tencent. “We have just become Tencent’s strategic partner. We will be the first to get access to its many features,” said Liu Yong. QQ has over 600 registered users. With the promise of a closed cooperation from Tencent, Liu Yong, expected users to surge rapidly, from the current level of 5 million visitors per day to tens of millions per day.

Apart from the Tencent partnership, Rekoo is also going to introduce its best games to China and it has launched a new game called, Sunshine Town. “The existing problems of social games in China is that, although there are many players, very few are paying,” said Liu Yong. He believes better and more complex games is the solution for more people willing to pay. Sunshine Town is such a game. It allows you to build a virtual town. “There are many things you can do in Sunshine Town, not just simple repeating tasks, like those in the farm games. There are many more type of interaction with your friends, too. Not only stealing vegetables.”

Just like many Western internet companies, Groupon is using a foreigner to head its China division – a recipe for disaster. “If they want to hire a foreigner, at least they should hire someone who has been living in China for a while,” said the person, “These people have no clue of what is going on.”

Gaopeng, Tencent and Groupon’s China group buying joint venture, is headed by two persons from Groupon’s German office. He was interviewed by the younger guy (about twenty something). The guy said they plan to hire a total of 2,000 people. And just on that day, he was going to hire 100 to support 4 cities. “They have not done e-commerce before. They seems to be from some management consulting firms. They don’t even have an organisation chat for Gaopeng,” said the person

The offer is even more bizarre – a very low salary for the first three months and then they will decide. “You must take a leap of faith,” said the Gaopeng guy. This might works on a young man with just 2-3 years of experience, but the person I talked to is a senior executives with over 10 years of working experience.

“It’s a total chaos. The operation will run into problem very soon. Tencent is not satisfied with them already,” said the person.

I think the Western internet companies just never learn. Starting from eBay in 2003, to Google in 2005, and now Groupon, they totally underestimate the complexity of China Internet market. This is not a virgin land where they can just send a few low-ranking executives and a half-baked business plan, and hope to dominate the market very soon.

Group buying is already an intensively competitive sectors in China, with many local competitors, and the largest ones are rich with VC money. Groupon’s partner, Tencent, is also not someone you can mess up with. It is the world’s third largest internet company. And, it has a reputation of being tough, even with its own partners.

I think, Groupon will soon join its peers as one more Western internet companies failed in China. Thinking about it, that is not too bad. At least it is among some of best-known names in the world, such as Yahoo, Google, eBay, etc.

I heard a rumour yesterday, while chatting with a few friends. Baidu is going to resolve its disputes with three of the biggest music companies in the world (Sony BMG, Universal Music Group and Warner Music Group). There will be no more illegal downloads of MP3 from its site. It is going to pay for licensing fee for the music, by sharing ad revenue with the music companies.

Baidu has been free-riding on the music companies’ intellectual properties to build its popularity among young internet users in China. In its early days, (2003-04) about 50% of Baidu’s traffic was from offering MP3, most of which with no proper copyright.

My guess is: those days are gone. Now Baidu no longer need to do so. It is the leading search engine with has over 70% of China’s market. A recent check with Alexa showed that MP3 accounted for only about 3.3% of Baidu’s traffic today.

(200Baidu use

Given Chinese internet companies will clone whatever popular in the Sillicon valley, this is only a matter of time. Quora’s online community is famous because it includes such accomplished people as Marc Andreessen, Dustin Moskovitz and Steve Case. I wonder who will be the stars and the opinion leaders that kick off Renren’s query service.

As of today, Renren has no celebrity-tie yet. It started from several prominent universities in China, mostly based in Beijing. Renren (or Xiaonei at that time) was basically their student directories. And then it spread to all other universities, colleagues and white collar workers. (It basically follows the path of Facebook.)

Actually, Sina is better connected with the Chinese celebrities – maybe it should have a Quora like services, too, as an extension to its microblog, Weibo. Sina’s Weibo built its popularity by having Chinese celebrities to use its services. Now, the next step is to ask them to answer questions.

For people who are clear about Quora, here is some background info: U.S. based Quora was found by Facebook’s former CTO, Adam D’Angelo, and Charlie Cheever. It is a social network that allows users to ask questions and give answers. Additionally, users can comment on the questions and answers and “upvote” or “downvote” the answers. An “Answer Summary” can be created to reflect the consensus of the community. This summary is a wiki that can be edited by any registered user. It is still an invite only service. You have to have an invitation to register.

Skype head Zennstrom eyes China start-ups

Skype founder Niklas Zennstrom, who sold his innovative Internet phone-call business to eBay in 2005, is turning his talents to what may prove his toughest challenge yet – channeling funds into Chinese start-up outfits with a view to bringing them to the international stage.

Asia Times started as a regular newspaper in Thailand.  As newspapers lose their appeal due to the internet, it runs its operation totally on the net nowadays.  It covers Asia news, political and business.  It has 2.5 million readers a month – about 65% from North America, 18% from Asia and 12% from Europe.  It has offices in both Thailand and Hong Kong.

I work with them because one of my former editor, Chris Stewart moved there. Chris was my editor when I worked for South China Morning Post – he responsible for the tech sector.  A seasoned business editor, he also worked for Bloomberg, Asia Wall Street Journal, etc.

My previous articles with them included:

China gets smart

The iPhone-led smartphone revolution that has swept much of the world, as people find ever more reason to access the Internet while on the go using high-speed connections, has yet to sweep China, the world’s largest mobile phone market. That is about to change, with one major difference – Apple’s high-priced iPhones will be largely absent.

Ganji tops China listings

Five years ago, hundreds of entrepreneurs in China were trying to imitate the hugely successful Craigslist classified site. Today, the sector has consolidated, and Ganji, founded in 2005 by Mark Yang, is emerging the winner with revenue it expects to double to US$20 million next year.

Google clicks back with Beijing

The Chinese government’s decision this week to renew the license for Google to operate in the country was something of a surprise, not least as the United States-based Internet search company had delivered an insult to authorities in Beijing in March by bypassing their control and sending search traffic “overseas” to its Hong Kong site – and the Chinese government cares about losing face.

“Despite what it has done, the Chinese government does not want to kick Google out of China, as the entire world is watching,” said a former senior Google executive.

Recently, I was discussing with a friend about Alibaba’s B2B market. While its new logistic platform is just a “joke” (see my earlier posting: Alibaba’s US$4.5 billion investment in logistic – just a plan only! ), its decision to raise membership fee can be a real driver to boost its bottom line.

It is just a simple matter of price elasticity of demand (PED or Ed), a term used regularly in economics. “Many Chinese businessmen think the lower the price, the more you can sell. But that is not always,” said my friend.

Alibaba lowered its cheapest membership package from US$5,000 to about US$2,900 (or RMB 20,000) , when its key competitor, Global Source cut its price by half, during the financial crisis in 2008. But, last September, it raised its price by 50%. The cheapest membership is now about US$4500 (or RMB 30,000)

“Alibaba lowered its price in response to Global Source’s price cut. But in fact, Alibaba need not to. It is much bigger than Global Source,” he said. Alibaba’s revenue and profit in 2009 are US$550 million and US$140 million respectively, and Global Sources have only US$174 million in revenue and US$16 million in profit.

Also, to many of the small traders replying on Alibaba to get overseas buyers, they will not cease to use it just because the membership fee increase from Rmb 20,000 to Rmb 30,000. (Profit from one or two customers can be more than that.)

And if the small traders found Alibaba’s B2B market ineffective, i.e. they are not successful in getting more business after they sign up for Alibaba’s paid membership, they will not continue their subscription, even if the price decrease. (And there are many of such cases. It could be Alibaba’s fault – not enough active buyers. Or it could be the traders’, as they don’t know how to use the internet platform effectively – many small traders are not used to computers and emails.)

The 50% price difference will not cause a 50% increase or decrease of number of subscribers – the demand is rather inelastic. If that is the case, of course, Alibaba should raise the price. And, it is rather stupid for it to lower its price in late 2008. The effect: revenue only increase 30% and profit dropped by 10% last year.

With the price hike, Alibaba’s profit should increase again this year. In fact, one of my friend who knows Alibaba well said it is going to introduce more expensive packages in the future. “Something like, if you spend over Rmb 100,000 in total on Alibaba you will be a gold member. Silver and bronze for the ones spending less,” he added.

For companies with pricing power, the sure way of better profit is just raising prices.

By the end of January, Sina’s top-100 micro-bloggers had 198.2 million followers, increase 16% from previous month. This equals 68% of Twitter. Wallace Cheung, analyst of Credit Suisse expected Sina microblog to exceed Twitter by top 100 bloggers’ followers in the second half of this year.

How about Tencent’s Microblog ?? It has 100 million users, more than double the number of user Sina announced in October, 50 million. However, most industry experts believe in term of usage, Sina is still leading. Sina users are much more active. And it is active user define the value of a social network. So, Sina Weibo is still better.

But how about monetization ?? It seems advertisers are getting more and more interests in placing ads with Sina Weibo, too. Wallace expected Sina’s earning can increase 5% this year due to ad spending on Weibo.

Before this acquisition, Tencent was already an investor in Riot Games during previous round of funding. Other prior investors include Benchmark Capital and Firstmark Capital. The three of them invested US$8 milliion for minority stakes in Riot Games in 2009.

Founded in 2006, Riot Games is based in Los Angeles and its key product is called ‘League of Legends’ (LOL), an MMO battle-arena game. Tencent licenced LOL since 2008 and originally planned to launch LOL last year. In order to improve localisation, Tencent plans to launch LoL in China on open beta test this year.

Riot Games ‘s LoL was launched in Oct 2009 and currently have over 1 million active players logging more than 1 billion playtime minutes each month. Riot Game founding team is also the development team of DotA of Warcraft, the most popular map of Warcraft. DotA is the only RPG map of Warcraft in World Cyber Games (WCG).

Given new funding from Tencent, Riot Games will hire aggressively in 2011 to enhance LoL, expand into new markets and develop new games.

“We forecast Tencent should have US$2.8 bn net cash on hand at end 2011, and thus should have enough resources to support the acquisition,” said Wallace Cheung, analyst of Credit Suisse.

“The deal size is similar to other US social/mobile games acquisition in 2010. In general, we expect the deal should be mildly positive to Tencent, as it implies is expanding its reach beyond China market,” he added.

In local media, Tencent vice president Ren Yuxin said that Tencent has invested in more than 10 game development team, including both domestic and international. But, this is one of the largest overseas investment for Tencent. In May 2010, Tencent spent US$300 million to invest into 10% stakes in DST (the stakes were diluted afterwards).

Anyway, in the near future, financial impact of the deal is still small.
“We expect LoL will be commercialised in 3Q11 and contribute RMB67 mn revenue in 2011, only 0.3% of Tencent overall revenue forecast,” said Wallace.

But besides China market, Tencent would be able to improve distribution of Riot Games products in other developing countries, as they have investment in Russian language countries, Vietnam and Thailand. “Certainly, we are not surprised that Tencent and Riot Games would further develop new titles suitable for China market in the future,” said Wallace.

As any acquisition deal, the key challenge of the deal is how to manage the stability of Riot Games management team after acquisition, as management team would potentially lose incentives after acquisition and will leave the firm after contract expiry.

Many of the offering are heavy discounts on restaurants and hotels.  For people who plan to have dinner with friends or spend a night in another city, these could be helpful.  And then, there are a few spa, a few ski restores, some stuff animal, cosmetic, health food and so on.  Anyway, nothing I will call daily necessity.  But, if it is cheap enough, probably some people will give it a try.

Many of them also offer special promotion to boost usage.  For example, both Groupon China and Lashou are giving out “Red Pockets” to their users.  I got RMB2 from Lashou and RMB6 from Groupon.  Lashou also promise to count me in its next lucky draw – the winner can take home a Mercedes Benz.  No, you have not heard me wrong.  A real luxury car worth RMB 300,000.  (Click here if you want to register: http://www.lashou.com/?inviter=ic2hlcm1hbnNv) Last time, Lashou gave away a flat in Shanghai!!  A girl from Shenzhen won it.

But, I just wonder how many of the users attracted by such promotional gimmicks will stay on and become regular group-buyers.  (Just wonder how many times the Shenzhen girl who won the Shanghai flat has used Lashou.)  Overall, I don’t think the offerings are particularly attractive. I think most people will give group-buying a try, just because it’s hot.  But if the offerings stay the same, I wonder how many will stay on and use it regularly.   Once people have satisfied their curiosity, will the group buying sites have sustainable business??

I heard there are over 2600 group-buying sites in China by the end of last year.  (From http://www.goutuan.net/)  But, some experts said 700 have closed their businesses.  (See http://www.pedaily.cn/Item/205106.aspx) The low entry barrier and seemingly clear business model made many people  start group-buying sites.  But without clear positions to distinguish their services and under limited resourced, many have closed down.   Consolidation will be even more intense this year, as most of the leading sites raised tens of millions of investment and Groupon started operating in China.

To me, as a user, I sincerely hope, apart from graping headlines and spending on promotion,  they will find more attractive items to offer. After all, how many spa and ski resorts you can go to.    How about pet food and dry cleaning services ??  Both have demand on a regular base.

I read it and noticed something interesting:

1) Given China is the largest internet market in the world, this is only a matter of time.  But anyway, if you care about statistics, by the end of last year, China has also become the largest mobile internet market in the world.  CNNIC said it has 303 m mobile internet users.  Over half of of Chinese internet users, 66%, surf the net with their mobile devices.  9.4% uses only their mobile phones to go online.

2) No. 1 sector in high growth is e-commerce.  User of online shopping grew 48% last year.  Much faster than the overall growth in internet population – 19%.   Online payment and online banking also grew 45% and 48% – this obviously is to support online shopping.

3) Social network continued to grow fast.  User growth rate of Social Network site and blogs is 33%.  Even instant messaging grew 29%.

4) Sectors growing slowly are: music, games and video – their users  grew 13%, 15% and 18% respectively.   These are slower than the overall growth in online population – 19%.

5) Microblog penetration reached 13.8%.  Maybe finally, Sina can start monetize its Weibo this year.  They’ve talked about it for a long time.

6) Group buying penetration was only 4.1%, despite all the hypes.  Now every leading players have raised considerable capital and Groupon has come to China, it will be a battle field this year.

Just got more details about Softbank’s investment into PPLive.  It is USD 250 million for 35% equity stake.  It is the largest single private equity investment into internet venture since the financial crisis in 2008.

For more details, please see my early blog about PPLive: http://en.technode.com/2011/02/03/pplive-got-several-hundred-million-usd-investment-from-softbank/

Recently, I was helping a friend to source funding for his startups.  So, I paid a visit to a VC friend who I have known for a long time.  He is a early backer of Joyo.  He introduced me to Chen Nian, when I wrote my book on China internet.  Chen Nian built Joyo from scratch to the largest online book store in China and later he founded another online retailer of his own, Vancl, which is the largest online clothing store in China.

“What sector are you investing nowadays ?” I asked.   “Mostly the tradictional industries.  No more tech or internet,” he said.   “It is difficult to judge internet startups.  Who knows what business model will work??  And even if you pick the right sector, it is hard to select the eventual winner.  And it is usually a winner take all market.  No place for the second,” he added.

I was surprised because in the past, whenever he analysed an internet company for me, I found it very insightful.   Now, he is saying he quit.  “Who am I to tell what to invest?  Tech trends change so quickly.  Who knows what the company will become in 5 years? ” he said, “On the contrary, companies in tradictional industries are easy to understand.  Their business model do not change much.  Their growth is predictable.   The only thing leave to discuss is price.”

“I don’t like winner-take-all market.  The more fragmented the market the better,” he added.  “Something like a bakery shop,” I casually suggested, just to keep the conversation.  “Yes, in fact, we have invested in a bakery chain,” he said, “No one can dominate the bakery industry.  It will remain fragmented.”

I was totally shocked, as it contradicted most what I’ve learnt.  Just to be sure, I asked, “Is your company thinking along the same line??”  Yes, he said confidently, “That is what we have been doing in the past few years.”

In fact, I should not be surprised, because over the last few years, another VC friend of mine was also telling me he is investing in tradictional industries.  For example, a soya bean curb factory in Shenzhen. (This is another industry that will remain fragmented forever.)  He even got it listed in the A-share market.  And he also mentioned he visited sock factories, etc.  Just at that time, I was not paying attention because I focus on tech and internet alone.

But unlike the developed world,  tech and internet is only thing growing fast in China.  Many tradictional industry (like bakery stores / sock factories) are growing rapidly, too.  Look at the annual 9% GDP growth.  As an investor, if you only care about return, there are many to choose from, besides internet.  And the risk can be lower in the other sector, too.

I always wonder how far online retailers in China will go.  Can I buy my daily necessaries (say, toilet paper) online and save the trips to the nearby supermarket ??  The answer is yes.

During the long Chines New Year holiday, I was browsing the net for fun until I found a site called, Yihaodian (http://www.yihaodian.com/), which means The No.1 Store in Chinese.  Its mission is to be an online supermarket in China and toilet paper is on sale.  So are oil, rice, spaghetti, vinegar, chocolate,  coke, pots and pans, electronics, clothes, etc.  It doesn’t have fresh fruit and vegetable, or meat yet, which I prefer to buy them in person anyway.   The prices are very attractive.  Just like the supermarket (a Carrefour) I go often.

Found in 2008, it currently has over 4 million customers.  In total, it supplies over 50,000 different items. Apart from grocery, it has a separate site (http://www.111.com.cn/) to sell drugs. This is very thoughtful, as most supermarket in China don’t sell drugs. In China, you need special license to sell drugs, even the over-the-counter ones. Another services I appreciate is it can buy train tickets for you, too.  I  have tried its services and the goods arrived in 2 days – very good considering it is New Year time.

Overall, from a customer point of view, the shop has done very well.  I just wonder how it is doing financially.  My guess is: just like the other online retailers, it is making a loss.  Perhaps huge loss, judging from the scale of operation and the thin margin of most of its merchandise.  I hope it will survive .  Because I don’t want to carry my own toilet paper, soya source, and so on, again.

(But why we are spending so much time discussing warehouses and delivery crew?  Isn’t Technode a blog for technology??  That’s true.  But remember, logistic is one of the important pillar supporting e-commerce.  If it is in trouble, all the e-commerce players, like Taobao, Dangdang, 360Buy, etc., will be affected in the near future.)

China express delivery services ranks number three in the world in terms of amount of packages delivered.  By September last year, over 10 million packages are processed every day.  In Japan, number of packages delivered each day is 13 million and the U.S., it is 30 million.

Besides the multinational, FedEx, UPS, DHL and TNT, there are a lot of local players.  Among them, the largest are Shun Feng, Shen Tong, Chong Tong, Yuan Tong and Yun Da.  Each of the local player processes over a million packages a day.  But unlike the multinational, they don’t have deep pockets.  They cannot afford to expand their services by their own capital.  They reply on franchising.  After paying a fee, a small company can join them and serve a particular area. That is how these local services grew so quickly in the last few years, recruiting hundreds of franchisees.  They in terms hire hundreds and thousands of workers, running up and down the cities, riding on motorcycle or bicycle to do their jobs.

As you can image, competition is keen among them.  The benefit is: express delivery service is very cheap in China.  Cheaper than the regular mail from the post office.  A package shipping from Shanghai to Beijing arrives in 2-3 days and needs only RMB10.

The downside is: the low margin force most of the logistic firms to save on costs.  That means lack of training for their staff.  Lack of facilities and equipment.  Many people complained about the service quality – package damaged or lost, late on delivery, etc. Recently, during the Chinese New Year holiday season, there is no service at all.

The government is thinking of regulating the sector and a new law has passed. It requires certain minimum capital for running a logistic firm. Only time can tell whether this is effective to improve service quality.

But, one thing is certain the development of logistic service in China has reached a bottleneck. The current situation cannot sustain the high growth in demand, from online shops and now the group-buying crowd. At present, e-Commerce accounts for 30-40% of express delivery services in China.  Soon, many of the e-Commerce players will feel delivery is their biggest headache.

Small shops on Taobao will be first to be affected, as they rely totally on third party logistic services.  (During the holiday season when they could sell a lot, they have to close down their operation, as there is no delivery service .)  Large online shops, which run their own logistic team, will be affected in a later stage, as costs of running logistic service (e.g. hiring delivery staff) increase by competition.

A friend recently told me, Linxun (linxun.com), one of the leading LBS in China has only 4 million users despite spending millions in promotion.  What’s more: most of the users are not even active.  There are only a few thousand daily visitors, or 1 in a thousand of its users is active each day.  It seems most people, who try the services, don’t like it very much.  Very few stay around and use it on a regular base.

“People check-in at a location and share their experience about it.  This has not caught up in China yet,” said my friend, “Most of the mobile internet users today are still the low-end ones.  To them, foursquare type of services is not very useful.”

Since it is still an early stage, we cannot say LBS is a total failure in China yet.  As smartphones get popular and more people from middle class using their mobile phones to get online, LBS should become more popular.

Maybe, the service need to be fine-tune and offer something that can grab everyone’s attention.  Almost every business model popular in the West can be popular in China.  But that is after considerable localisation – adapting the basic services to the particular situation in China.   Like Tencent did with ICQ, Baidu with Google, etc.  I believe the same with LBS.  Just move it to China is not good enough, you have to re-think about the whole processes – who are your users, why they need your services, how to reach them, how to keep them entertain and use it on a regular base.

By the way, there is another obstacle in developing LBS in China.  Because China Mobile switched their base stations address to dynamic-id, many of the LBS in China do not work right now.  If the LBS want to continue their operation, they have to pay China Mobile’s fee or think of something fast.

I was chatting with a founder of an internet startup recently. And the person mentioned, Netease’s CEO William Ding started a pig farm. What?! The king of online game becomes a pig farmer – you are not kidding me ??

But, here is an article in the local media about it: http://tech.sina.com.cn/chuangye/r/2011-01-27/18085140228.shtml. The project started 2-3 years ago and by June this year, Willam Ding brand of pork should be ready for market.

“Why not?” said my friend, “Many people care about the quality of their food nowadays. Selling pork can be a lucrative business, if the quality is good. Also, pork is staple of our diet. This can be making more than online game.” (I doubted it. But … kept my silent.)

Giving the prosperity we’ve seen in cities like Beijing and Shanghai, many of us (foreigners) have forgotten China is in fact a developing country. A lot of its industries are underdeveloped, including farming. It is carried out by millions and billions of small farmers, each working on their fields individually. It is not to say quality-control is not in their dictionary. But, there have been many and many cases of problematic food incidents in China. For example, the contaminated milk powder will cause tens of thousand of children in China to fell ill in 2008 (http://news.bbc.co.uk/2/hi/asia-pacific/7628622.stm)

Others less well-known but equally horrified cases include using hair to make soya source, using last year moon cake filling to make this year ones, and so on and so for. Many of my friends, who are in the so-called “high-end” category, also worry about their foods and believe a line of good-quality food can have a market. In fact, a VC friend of mine is thinking of selling beef stew online. (Again, I doubted it. But … kept my silent when he told me.)

For the last few years, we have seen many VC investors branched out from technology and internet sector to tradictional industries.  For example, GGVC, which has invested in Alibaba and Tudou, put their bet in Chamate (www.chamate.cn), a restaurant chain. Some internet entrepreneurs also tried their hands in tradictional industries. The most famous example is the founders of Ctrip. After their success with online booking of hotels and airlines, they actually tried running hotel chains themselves. The first is Home Inns, and then Hanting. Both are listed in the Nasdaq.

“Many of internet business are run by colleague graduates, if not PhD. Most of the managers in the tradictional industries are less educated,” said my startup friend, “Also, running an internet business, you rely on operation data and information. You used to make decision from user behavior. Very few companies in the tradictional industries in China run their companies with modern management practices in mind. Most of the decisions are made based on experience or guesswork – some can be good, and some can bad.”

Overall, he thinks there is an advantage for internet entrepreneurs to do tradictional business. “Running an Internet business in China, you are used to cut-throat competition.  Unless the industry is government controlled, I believe internet entrepreneurs can have a good chance of success.”

I wonder what will be his next startup…

On the first day of the Year of Rabbit, a huge VC investment deal was announced. Chinese P2P Streaming company, PPLive got several hundred million USD investment from Softbank, said its CEO Vincent Chuang Tao in his personal microblog.

While not disclosing the actual sum, Vincent, who is a former Microsoft executive, said the amount is greater than what Youku raised in its IPO, which was about US$233 million.

Found in 2005, the P2P Streaming service allows users to watch video online, most of which are movies and TV drama. For a long time, the legitimacy of PPLive is questionable, as much of the content it carried are pirated. Although the service is extremely popular in China, it was not a darling of VC investors until recently. Maybe Softbank thought if Youku, which has the same piracy issue, can go IPO in the U.S., PPLive should have no problem, either.

PPLive claimed 200 million users has installed its software and every month there are about 100 million users using their service. In terms of easy of use, Youku and Tudou are better, as there is no need to download and install software. But in terms of video quality, PPLive are better, as it allows users to download HD quality of video.

And while Tudou and Youku have to use loads and loads money to buy bandwidth in order to satisfied their users’ thirst for more movies and TV shows, PPLive needs not. It uses peer-to-peer technology. That means users supply their own bandwidth. (Clever!!)

It seems there are quite a few bad news for Youku recently, (and the same for its closest competitor, Tudou). Firstly, both Sohu and Baidu claimed their online video business are doing very well, eating into market share of the two. Now, PPLive, which is offering a similar service, has got a strong booster.

Duke of Mount Deer (DMD), one of the most anticipated online games in China, will start a nation-wide marketing campaign in March. With the marketing campaign, its developer, Changyou, said the full version of DMD will, for the first time, be available to players to try out. Good news for the fans (to-be).

Since Changyou launched its major hit Tian Long Ba Bu (TLBB) three years ago, the company has been working on DMD. Both games are based on martial art or Wuxia fictions of Jin Yong, (whose real name is Louis Cha). Jin’s fifteen works written between 1955 and 1972 earned him a reputation as one of the finest Wuxia writers ever. He is currently the best-selling Chinese author alive; over 100 million copies of his works have been sold worldwide, not including unknown number of bootleg copies.

DMD’s launched has been delayed again and again. This time Changyou seems to finally get it ready. Changyou was span out from Sohu after its first game, TLBB, became a blockbuster. TLBB’s success also allow it to go for an IPO in Nasdaq.

Analyst Wallace Cheung of Credit Suisse expected Changyou will launch DMD in late 2Q11 or in 3Q11 (open beta test). “We have delayed the DMD monetisation quarter from 2Q11 to 3Q11 and assume DMD will generate US$16 mn revenue in 2011,” he wrote in a note. With the new game launched, Wallace expected Changyou’s revenue will grow 20% next year and its profit grow about 10%.

In the fourth quarter, Changyou made US$91.7 million in revenue, up 30% from a year earlier. Net income reached a record US$47.8 million, up 23% from the same period last year.

Sohu has just reported its fourth quarter result. One thing stood out: it’s online video business has been gaining market share. In terms of time spent, it increased from 3.4% in December 2009 to 13.4% in December 2010, at the expense of the top video portals, i.e. Youku and Tudou. (No wonder Youku’s share price keeps dropping after its IPO.)

Sohu video unique visitors reached 100 million. Management said, Sohu video strength is partly because of an exclusive content deal – Sohu had 23 of the 30 top primetime TV dramas in 2010 and five of these were exclusive. Sohu indicated its video revenue reached US$28 million (based on Youku accounting treatment). Analyst Wallace Cheung of Credit Suisse estimated Sohu’s video business will break even in 2012. He valued Sohu’s online video business at US$581 million (against Youku at US$3 billion).

Other points worth noticing are:

• Baidu is not the only one benefiting from Google’s leaving China. Sohu’s search engine, Sogou, is also doing very well. Fourth quarter revenue was up 125% from a year earlier.

• Brand advertising was up 31% from a year earlier due to ad spending from the auto, financial services, online games and FMCG sectors. The second largest online portal in China expected this will grow even faster. First quarter brand ad revenue will increase 39-44% from a year earlier.

• Overall, total revenues were US$173.2 million, up 27% year-over-year and 6% quarter-over-quarter. GAAP net income was US$41.5 million, up 41% year-over-year and 7% quarter-over-quarter.

As there is considerable price different between iPhone and iPad in China and in places like Hong Kong, many people bring them home whenever they travel aboard.  In fact, there are more iPhone coming from aboard (called parallel import) than sold by its official channel, China Unicom, in China.  China Unicom sold about 1 million iPhone so far, but there are about 3 million parallel imported ones.

In my opinion, the best way to fight parallel import (or struggling) is to lower the price of iPhone and iPad in China, so that there is no more significant price differences.  Actually, I don’t quite understand why iPhone and iPad have to be more expensive in China than in places like Hong Kong.  After all, they all come from the same source, Apple.

Due to the popularity of online shopping,  demand for express delivery service in China has outstripped supply.  In 2009, total transaction volume of online shopping in China was RMB258.6 billion.  By 2010, it was over RMB500 billion, increasing 100%.

As of express delivery service, the total number of packages delivered in 2009 was 1.86 billion. It increased to 2.4 billion in 2010, up 30%.  This is 3 times more than China’s GDP growth.  Still it is not enough to meet the demand.    Since the second half of this year, many orders were delayed because of not enough capacity to handle the packages.

The coming Chinese New Year has made the situation even worse.  As  people (including those working in the express delivery services) traditionally take long holidays during the festival, there are simply not enough hands to handle the packages.  Many express delivery services have already stopped taking new orders.  Here is an article about it in the local media:  http://tech.sina.com.cn/i/2011-01-24/08105124183.shtml

Thing will get better after the holiday.  But in long runs, costs for express delivery services  will definitely increase and that will put pressure on all the online retailers.  Not good companies like Dangdang, 360buy, Vancl, and all the small shops on Taobao.

Lady Gaga is the most popular Twitter user with over 7.8 million followers.  Similarly, in China, the most popular microblog user is  a film and TV actress, Yao Chen.  She has over 5 million people following her on Sina Weibo or Sina Microblog in just 6 months. Here is an article about it in local news: http://tech.sina.com.cn/i/2011-01-28/14345144372.shtml.

It seems, actually, there is not much difference between China and the rest of the world.  We all like beautiful women.  And we all like to spread news (or rumours) in short messages.  According to Mirae Asset, 14% of Chinese internet are microblog users today.  Of which, Sina’s Microblog (Sina Weibo) has 54% of the total users and Tencent’s has 21%.  But if we take into account usage rate (i.e. pageviews), Sina Weibo has 87% of the market and Tencent’s has just 8%.

This might be partly due to the nature of Tencent’s users.  Most of them are younger and less educated.  They might not enjoy the microblog as much as the more mature and sophisticated users of Sina.

Besides actors and actresses sharing their private lifes with their fans, a lot of people use Sina Weibo to discuss property and car. (Another sign the Sina users are the more affluent group.)  Many major industry conferences in China also use Sina Weibo to facilitate discussion among participants.

And mobile phone is the perfect device for microblog.  40% of Sina Weibo’s traffic came from mobile devices in the fourth quarter last year.

Beijing based Runes Soft (http://www.runes-soft.com/) develops customer relationship management (CRM) system for mid-sizes companies in China.

The company was founded in late 2008 by four software engineers, Li Hui, Li Jiajun, Meng Guangyu, and Jin Shunlong.  “Two of the founders worked in a firm which makes software development tool. They use it to develop a CRM software and they think there is a market for it in China,” said Jeremy Chau who has invested in Runes Soft.

While the largest companies can afford solutions from Siebel and SAP, most of smaller firms in China have no particular CRM system to manage their customer information and selling processes.  “In the U.S., there is a CRM software vendor called Salesforce, which targets the mid-size companies.  But its price tag is still too expensive for a typical company in China,” said Jeremy.  Salesfore charges about US$30 per user per month.

“Also, Salesforce uses a Software as a Service (SaaS) model.  Companies’ data is kept in the central servers at Salesforce.  This does not work in China as most Chinese companies believe their customer information are too sensitive to be hosted away from their own premises,” said Jeremy.

Instead Runes Soft uses the simple licensing model. And it charges a super low rate.  “About RMB1000-2000.  And you can have it for life,” said Jeremy.  A few local consulting firms have become Rune Soft’s partners and selling the CRM software as part of the total solutions to their clients.

“Runes Soft can be easily modified to suit a company’s particular needs. This helps our consulting partners to have fast selling cycle,” said Jeremy,  “In fact, when they (the founders) designs the system, they hope even a salesperson can make the changes himself.”

Looking forwards, Runes Soft hopes to penetrate the market by partnering with more local consulting firms.  “Our strength is in making good quality software.  They (consulting firms) have the local connections and clients networks,” said Jeremy.

Yicha, which is famous for its mobile search in China, plan to list its Japanese division in Japan next year, said an industry source.

Beijing based Yicha was found by Liu Bin in 2004, to provide mobile search in China.  Its investors include Tencent, TDF, Hikari Tsushin, CE Yuan, etc. At its peak, it has 4 million daily visitors in China.

In 2006, the company started a Japanese division to operate mobile ad network in Japan.  As it partners with the largest portal in Japan, Yahoo Japan, it business flourishes.  Currently, the division earns about US$1.3 million a month in revenue.

“Yicha has already span out the 20-person division,” said the industry source, “it will be listed in the Japanese market, although there is no concrete plan yet.”

Many Chinese companies have tried to expand overseas.  But their fates vary.  Beijing based Yicha seems to be one of the good fortune ones.

For investors who want to benefit from the surge of smartphones globally, apart from Apple, maybe they can also consider Taiwanese phone maker HTC.

The company had a good year in 2010.  Its bet on Android has paid off handsomely.  Year-over-year, its smartphone sales jumped 111% from 11.7 million to 24.6 million devices. In the fourth quarter of 2010, the holiday shopping season alone accounted for 9.1 million of HTC’s yearly sales. Higher sales translated to higher revenue and profits for the company, which jumped 93% and 75%, respectively, when compared to 2009.  And it is very likely its momentum can maintain this year.

JP Morgan analyst, Laura Chen, pointed out, the company’s 4G products is going to drive its sales. HTC debuted two 4G WiMax devices with Sprint in 2010. “Thanks to Verizon, AT&T and Sprint’s push on 4G service, we expect 4G product (including LTE, Wimax and HSPA+) to contribute 15-20% of HTC’s 2011 sales,” she wrote in a note. The company is also working on its first dual core product called “Pyramid”, which will be introduced to the market in early second quarter.  Laura expected HTC’s “ASP to trend up with stable margin outlook”.

HTC predicts it will ship about 8.5 million devices during the first quarter of the year. That would represent a slight dip compared to the holiday quarter, but an improvement of 157% compared to the year-ago quarter.  Fully 50.6% of HTC’s global sales in 2010 came from North America, with Europe contributing 32.2% of sales and Asia and other regions responsible for 17.1% of HTC’s yearly sales.

Alibaba recently announced it will invest up to US$4.5 billion into developing China’s logistics industry together with financing partners.

I called up a friend who knows Alibaba well to see what it is really about. Does it mean Alibaba will build warehouses, or it will operate a logistic company?? No, my friend said. At the moment, it only means Alibaba will setup a platform for small traders to choose between different logistics providers (e.g. UPS, Fedex, etc.) And Alibaba can take some commissions from facilitating such service.

Taobao sellers have been doing that already. Alibaba is just expanding the services to its B2B platform. You can argue this is a global expansion, as most Taobao sellers are trading domestically, while Alibaba’s B2B traders are mostly exporters targeting overseas markets.

But if there is no warehouse, no logistic company, why Alibaba needs to invest US$4.5 billion? “Well, it is just the first step of an overall plan. If everything goes well, of course, more can be done and the investment can gradually increase,” said my friend.

However, history showed a lot of Alibaba’s previous plans have not been realized. For example, Alisoft, its plan to provide inexpensive business software to SMEs in China. It basically has fail. Alisoft is a small department with less than 50 staff in its listed B2B company now.

Another example is its plan to provide bank loans to SMEs, Ali-loan. “Another failure” said another friend of mine. There are 2 parts of Ali-loan businesses. One of them is to act as a middleman between banks and SMEs. “After 4 years, the banks find out they can deal with the SMEs directly. No need for Alibaba’s involvement,” said my friend.

Another part of the business is lending Alibaba’s own money to the SMEs. “Alibaba does not have a lot of capital. How many SMEs can it lend to ??” said my friend.

In brief, be careful what you read in the press. A lot of them are plans only, with no solid commitment in execution.

Shanghai-based Admaster (admaster.com.cn) provides online ad performance tracking, research, analytical and optimization consulting services for advertisers. According to its CEO Vincent Yan, advertisers can save up to 30% of their online marketing budget using their services.

“In China, there is no third party organization to provide accurate market information about the online media. A lot of websites overstate their daily visitors and pageviews, which is unfair to those high quality media who tell the true traffic. Moreover, click-fraud is still prevalent in China. Many pageviews and click-throughs are artificially created by machines,” said Vincent.

Admaster’s services help advertisers to track real traffic to their advertisements and detect incidents of click-frauds. “If a publisher has overstated its traffic, we will know and the advertiser can ask for a refund or another forms of compensation,” said Vincent.

Apart from these, it can also track if there is overlap between media coverage. There are tools for media saturation and reach & frequency analysis. Advertising spending is wasted if the ad is shown to the same users many times without a proper frequency control. Admaster can also provide the demographic data of audience of different websites, helping advertisers to evaluate the target audience concentration of each website.

“Through a partnership with a global research agency, we have installed hundreds of thousands cookies onto a well-managed online user panel pool in China. We know their demographic data and where and when these panel are reached by advertisers’ ads (coded). We use these data to estimate the demographic data of audience in different ad campaigns and on different media. And then, we can evaluate which media has the best cost per target audiance reached” said Vincent.

Admaster charges about 3-4% of the advertiser’s online budget as fee for its services. Vincent said, this is worthwhile as Admaster can improve advertisers’ ROI – usually 10%-30% of their online ad budget is saved. The core product Ad-Master has launched about one and half year and Admaster has 60 clients so far, including McDonald, Puma, Johnson & Johnsons, Unilever, Acer, etc. It expected to have 200 clients this year.

“Also in 2011, new products such as Survey-Master, Panel-Master, Buzz-Master will be introduced to the market to meet the more sophiscated needs from Chinese advertisers,” said Vincent.

He thought there are 5,000 potential clients for his services in China. “There are 3,800 advertisers just on Sina alone,” said Vincent, “Every of them can be our clients.” By 2013, Vincent hopes to expand his company to the global market. There is already a believer of his ambition. Admaster has got an investment of several million USD from GSR Venture, a China and silicon valley based VC firm.
http://www.gsrventures.cn/en/index.html

“Skype’s hyper growth was from 2004 to 2007.  At that time, I believed we scaled much faster than the ones before us, such as Yahoo and AOL.  But, today, we can find companies growing even faster than us, like Youtube, Zynga, Groupon, etc.,” said Niklas

“This is because more people are connected to the internet and the market is much bigger.  It is easier to build company.  And I expect there will be more innovations and companies will be growing faster than before,” said Niklas.

Another trend is about the emerging markets, such as Latin America, China, etc.  “These markets are maturing.  I think we will see some Latin America internet firms grow into global companies soon,” said Niklas.

He also though well of mobile.  “Mobile internet is growing fast. Smartphone has over 50% penetration in some developed market.  There will be more smartphone than PC very soon,” said Niklas.

And how about the startup environment in China?? Niklas thought overall this is a well functioned market.  “There are lots of funds and talents.  And it is a fast growing market.  There are public markets for IPO,” said Niklas.

“In Europe, there are also a lot of talent.  But people are more comfortable with cooperate life.  Afraid of failure.  I was like that.  I worked for a large telecom company and I was afraid of starting my own business,” said Niklas, “Here in China. People are more risk taking.  Many start their own businesses.  But, the competition is very keen.”

However, he thought, most of the companies in China lack originality.   “It is less about having a new idea.  But more about taking a successful US model and adapting it to China market,” said Niklas.  All of the biggest Chinese internet companies, such as Tencent, Baidu, Alibaba’s Taobao, followed the same pattern.

I agreed with Niklas.  We have yet to see a transformational / game changing/ big idea growing out of China, despite China is the largest internet market in the world.  Hopefully that will change soon.

A question that worry many young entrepreneurs is whether the large and more established internet companies, such as Facebook, Google, etc., will take their ideas and compete with them in the same businesses.

Skype co-founder,  Niklas Zennström, thought, young entrepreneurs need not afraid of competing with big established company.  “Large size has its disadvantage.  These companies cannot focus on new ideas.   Because of revenue pressure, they have to focus on their core business,” said Niklas.

Although companies, such as Facebook and Google, have lots of users, usually, one brand can be associated with one idea only.  For example, Facebook is social network and Google is search engine.  “The leveraging effect is limited,” said Niklas.

History showed Niklas is right.  Although Google has its social network services, such as Blogger, it is much less successful than Facebook.  If we look at what happened in the past two decade in the tech sector, we will see the same pattern: despite Microsoft was more established, it could stop Yahoo becoming the leading online portal.  And when Google emerged, Yahoo can stopped it becoming the leading search engine, although Yahoo had much more users at that time.  And the same for Facebook – Google could not compete with it in social network.  Each new idea has its champion and the others cannot compete with it, despite being more established.

Niklas’ other words for young entrepreneurs are:

1) Think Big.

2) Do it differently – never simply copy what the others are doing

3) Try to address the pain point of consumer: if your products or services can solve an existing problems of your customers, they will certainly like it.

4) Changing environment is important – when there are changes in the environment, when the established rules are breaking down, there are more opportunities for new comers.

5) Team – pick the right team to executive the idea.  You have to play with your strength.

6) Investor – pick the right investor, too.  Find one with the same risk appetite and ambition.  Find one who work well for you.  .

By the way, Niklas has become an investor himself.  His fund, Atomico, is interested in Chinese startups with a global ambition.  For startups who wants to be invested by the seasoned entrepreneur, you can us your information and we can forward it to Niklas and his team.  Here is our email: mobinodetv AT gmail.com

Yesterday I talked with Skype co-founder, Niklas Zennström during his trip to China. He said his venture capital fund, Atomico, want to invest in Chinese startups which are looking for overseas markets.

“If a Chinese startup wants to develop, say German or Brazilian, market, I believe Atomico, will be in good position to help it,” said Niklas. After Niklas and Janus Friis sold Skype to eBay, the pair found a venture capital fund in 2006. Capital of its first fund came from their own pocket, about 40 million Euro. Last year, they raise a new fund, about US$165 million, from mostly European institutional investors. They have invested in European and U.S. tech startups, and they have also invested in 2 companies in Latin America (Brazil). But nothing in Asia yet. Maybe that will change soon after this trip.

In his trip to China, Niklas has met many of the Chinese internet titans.  One thing he realized from the meetings is that Chinese internet market is very different. The rules are different (e.g. you cannot rely on IP protection to defense off competitors) and so are the players. Most of the major players in Chinese market are local companies, such as Baidu, Tencent, Alibaba, etc. “It is very hard for international companies to succeed in China,” said Niklas.

The venture capital market here is very competitive. “There is lots of capital. Money alone is enough, you have to add value,” said Niklas, “For Atomico, we are an international venture capital fund and we can help companies to grow internationally.”

The most famous example is Skype, which grow from its origin in Sweden to practically everywhere in the world. “We understand the market environment in each region – the regulations, consumer behaviour, etc,” said Niklas, “We can help Chinese companies to export their products or services.”

One area he is interested, in particular, is game. “Games, no matter, mobile or casual, are popular. You can see most of the top iPhone App are games,” Niklas. China has a strong game development community and many of them are developing the intentional market. For example, Beijing Rekoo, has become a top social game operator in Japan. Niklas and his team should find what they like pretty soon.

In the next few days, we are going to talk about what Niklas believe are the coming trends ?? what are his words for young entrepreneurs ??   What does he think of the Chinese market?? etc.   By the way, here is a video clip about yesterday’s interview: http://mobinode.tv/archives/1762

Shanghai based AdChina (http://www.adchina.com/)  runs the largest online Ad network in China.  Industry expert estimated it has about 50% of the market share.   As mobile internet becoming more mature, it is also entering the mobile space.  Recently,  it has allowed its advertisers to put their ads on WAP sites, via its network.

This puts it into direct competition with Shanghai based Madhouse (http://www.madhouse.cn), which runs the leading mobile ad network at the moment.  Madhouse covers most of the leading WAP sites in China and it has a exclusive deal with Kongzhong as its advertising agent.

Madhouse also covers most of the mobile internet users in China.  When I visited Madhouse in August, CEO Joshua Maa said, their network covered 145 million mobile internet users in China.  At that time, total mobile users in China is only 233 million.  That means they covered over 60% of mobile internet population in China.

It would be interesting to see how AdChina is going to battle with such as strong competitor.

When Apple’s iPad launched last year, sales went wild within a month.  Since then, many computer manufacturers launched their version of iPad like device.

China’s leading computer maker, Lenovo, is not going to miss the party.  It is also going to launch its iPad like tablet.  The device looks and feels like iPad, but it is Android inside.  It has a larger and better screen.  And it is going to be a bit cheaper than iPad.  The list price is about US$ 520.

The device supports Wifi and 3G.  Both WSCMA and CDMA 2000 3G standards are supported .  But not TD-SCDMA.  Reason: Android has not built the necessary module to support TD yet.  And it is too difficult for Lenovo to do that itself.

It seems only China Telecom and China Unicom users can enjoy the devices.  Too bad for China Mobile.

While less than 5% of China’s mobile users have upgrade their services to 3G, the Chinese operators are already pressing for 4G.

As expected, the most urgent one to do so is China Mobile.  It has the worst 3G licence, TD-SCDMA. And this is causing it to loss market share.  (In 2G, China Mobile has 70% of the users.  In 3G it has about 30-40%.)

So the only solution for China Mobile to regain its dominance is to launch 4G as soon as possible.  While the performance of TD-SCDMA is less the satisfactory, TD-LTE is surprisingly decent.  And China Mobile better do so before its 2G users loss patience and switch to other operators for faster and better services.

According to local news,  China Mobile will test its 4G standard TD-LTE in 6 cities in the first quarter.  They include Shanghai, Hangzhou, Nanjing, Guangzhou, Shenzhen and Xiamen (Here is an article about it: http://tech.sina.com.cn/t/3g/2011-01-04/01585055379.shtml) Each city will have more than 100 base stations involved.  China Mobile will invest over RMB 1.5 billion for the testing project.

Another interesting point in the article is a comment made by a unnamed China Mobile senior executive.  He/she said TD-LTE is “the future of China Mobile”. As of TD-SCDMA, it is “a mission given by the  Chinese Community Party and Chinese State Council”.   I totally agree with this exective.

Recently, there are many Chinese tech IPO, and some of them are pretty famous, such as Dangdang and Youku. There is one company that most people have not heard of, but I believe it is a good one.

The company is Beijing based iSoftstone (www.isoftstone.com). It is the last the last Chinese company to debut in the U.S. for 2010. Found in October 2001, it provides outsourced IT services to clients in China and around the world, with about 56% of its revenue derived from China and the remainder from the U.S.(28%), Europe(6%) and Japan (10%).

In the last three years, the company’s revenue grew 3.6 times and it turned profitable last year with US$9 million net profit, compared with a loss of US$10 million in 2007.

The trend continued this year. Net revenue rose 50% to $135 million in the first nine months of 2010. Net income during that period decreased from $5.7 million to $300,000 primarily due to share-based compensation charges linked to employee and director options. (This is probably one time only, due to IPO.)

In fact, iSoftstone is not alone. In the recent years, the whole outsourcing sector in China is blooming. The overseas market is growing strong, and so is China domestic market. The Chinese government changed labour law and required employers to pay substantial compensation if they want to layoff their employees. (N+1 months of salary. N is the number of servicing years.)

So, many of the major technology companies, such as Huawei, outsource their work. I believe the trends will continue for a couple years. And companies, such as iSoftstone, Hisoft, Vanceinfo, etc., will enjoy a few high-growth years. If you have not noticed these companies yet, maybe you should check them out. They all grew over 50% a year.

Some of the readers are quite mad that I am not supportive of the home grown 3G standard, calling it the worst among the three licences.

First of all, I call it the worst, purely from a performance point of view. I don’t care where it is made. And if you have problem with that, check with a technician, or someone who has tried the different services, i.e. China Mobile’s 3G, China Unicom’s and China Telecom’s.

Secondly, I would like to take the opportunity to discuss about TD. Whether it is a blessing or a curse for China, as a whole. I first studied TD in 2007. There was a national conference on technology in Shenzhen. I was still working for South China Morning Post in Hong Kong. So, I crossed border to attend the conference. Lots of interesting stuff. And there was a whole section about TD-SCDMA. I’ve already known by then, it is something important. And I spent a whole afternoon, talking to the persons in the different booths. I also made friend with one of them. His name is Andy and he worked for a company called Commit. It was one of the four companies that made TD-SCDMA baseband chip. For people who don’t know what is baseband chip – it is one of the most important chip in the mobile phone, responsible for communication. And it is the key of TD technology. Before Commit, Andy worked for Datang – the company which invented TD-SCDMA and holds its core IPs.

Andy currently works for Huawei on TD-LTE. So, he basically built his whole career on TD. But, what is he view on TD ?? He thought China did not get anything out of it.

Datang, which invented the standard, does not earn much on loyalty fee. The domestic manufactures, which are supposed to benefit from making products of the home grown technologies, do not prosper, either. In fact, Commit has gone out of business. (ZTE and Huwei are benefiting from making 3G infrastructures for the operators – but they offer solutions for all the three standards.)

Originally, as Qualcomm holds most of the 3G IPs, China hoped by developing its own standard, it can bypass Qualcomm, and save the loyalty fee in building its 3G network. But TD is not original enough, and TD products still have to use many Qualcomm IPs. (That is part of the reasons Datang does not have much loyalty fee. Another reason is TD is not popular enough.)

As the development of TD was funded by China only, it was slow and painful. The deadline for finishing TD development was delayed again and again. So, the granting of 3G licences in China was also delayed again and again. Andy said, all in all, if there was no TD, China would have 3G five years earlier.

A five-year delay is critical for many of the startups who was banking on the popularity of mobile internet. 5 years ago, many of them started their business hoping 3G would come and people would start surfing the net with their phones. One of them is a Shanghai company which provide mobile search. But, 3G did not come until recently. And today, that company is still small, with about RMB 20 million revenue. The CEO is very supportive to Chinese government. China Mobile is his business partner. But, even he agreed, if 3G could come 5 year earlier, his business will be in a much better shape.

As of the end consumers, if 3G could come 5 year earlier, today, they can enjoy a much cheaper rate for going online with their phone.

In conclude, I think no one win in this TD business. Andy said, for 4G, the Chinese government is not going interfere anymore, it will let the market decide.

Many people already know the reason.  It is because it was grant the worst 3G licenses – TD-SCDMA.  The home made standard does not have a hot product, such as Apple iPhone, to promote it.  It is seldom used in the rest of the world.  So, many China mobile users switch to China Unicom, when they want to upgrade to 3G phones.  China Unicom uses the more widespread WCDMA standard. Chinese government is helping them to make the decision. People can switch between operators and keep their original numbers.  Many of my local Chinese friends are doing so.

If we check the MIIT data, we will see, for 2G, China Mobile has 70% of the market.  But for 3G, the three operators, i.e., China Mobile, China Unicom, China Telecom, have more or less the same number of users.  By July 2010, China Mobile had 11.8M 3G users, China Unicom 8.5M and China Telecom 7.75M.

This could be a good news for companies providing mobile services. China Mobile used to be the absolute monarch. It has 70% of the country’s mobile users and 90% of the data business – the part mobile services providers can participate. Now, the playing ground is leveling. There are three operators to choose from. Terms and conditions for partnership could be fairer and more stable.

Of course, the transition will be a long term process. And no one dares to not consider China Mobile’s response in any mobile related development at the moment.

But there are signs showing China Mobile cannot dictate mobile development anymore.  For example, the mobile payment.  China Mobile is the first to launch mobile payment in China, with a proprietary 2.4G Hz technology.  But, the other players in the industry, such as China Unicom, China Unionpay, the Chinese banks, prefer the 13.56M Hz worldwide standard.  Recently, China Mobile has softened its position. It will keep using 2.4G Hz for the existing cities that it has launched the services, e.g. Shanghai.   But for the other cities, it will also adopt the 13.56M Hz standard.

It has tested its mobile payment solution in Beijing, Shanghai, Guangzhou and Chongqing.  Now, it is ready to commercially launch the services.  The first city to be offered the service will be Beijing.   China Unicom has order 2900 payment enabled sim card, as the first batch of the commercial launch. (Here is an article about this in Chinese:  http://tech.sina.com.cn/t/3g/2010-12-30/02215043537.shtml)

China Unicom’s solution is based on a 13.56MHz technology.  13.56MHz is also the world wide standard for mobile payment.  China Mobile, which has launched mobile payment solution earlier in Shanghai, uses a 2.4G technology. This is a proprietary standard, developed locally in China.  And China Mobile has ordered more than 1 million 2.4G payment enabled sim card.

The two camps are still arguing which technologies will be better for China.  Observers expected, in the end, may be China will have both 13.56MHz and 2.4G technology running together.  Each for different operators or different regions.

As expected, they included Alibaba’s Alipay, Tencent’s Tenpay and government back China Unionpay.  In fact, four of China Unionpay’s subsidiaries are applying for the license.  Two of them base in Beijing.  One in Shanghai and one in Guangzhou.  Shanghai based 99bill is also in the list. So far, the government has not grant them the licences yet.  They are still in the process of application.

According to the Chinese article, there are over 130 companies providing third party payment services in China.  They have been providing such services for online shops, online game companies and other merchants for quite some time.  Their business expanded quickly in the recent years, as online retailers exploded in China.  A Beijing based payment solution companies told me their transaction volume increased 5 times from 2007 t0 2008 and another 3 times from 2008 to 2009.  Transaction fee is also getting lower and lower.  At the moment, Alipay charges about 0.3% for collecting online payment for merchants.

According to market research firm Analysys International, in the third quarter this year, total transaction volume of online payment in China reached RMB 725.5 billion.  And it could be over RMB 1 trillion in the fourth quarter.

But there is no specific regulation about payment solution providers until recently.  Obviously, the government wants to start regulating them.  Will the licencing process force some of the smaller players to merge or close their business ?? It will be interesting to watch.

Shanghai based online game company The9 is moving its direction to mobile internet.  One of its key initiatives is to bring U.S. social gaming network OpenFeint (http://openfeint.com) to China.

OpenFeint is a mobile game platform running over iPhones and Android phones. It has over 3,400 games and 45 million users.  Besides playing games, it also allow game players to interact with each other, for example, competing for the best score, inviting friends from facebook, Twitter and address book to play together.

In July, The9 bought some of the share of  U.S. based Aurora Feint, which owns and operates OpenFeint.  It also secured a 5 year contract to operate  OpenFeint in China.  Apart from The9, Intel Capital also has invested into Aurora Feint.

Earlier, the9 has set up a US$100million funds with other investors to develop mobile internet.  It is expected many of the invested companies will distribute their applications via the OpenFeint platform in China.

I attended the event last year and found it very useful for making contacts and understanding the overall industry landscape.  I started my own study of the mobile internet in China afterwards.

This year the theme is “Asia to Global”.  How mobile internet trends & technologies, once only common within Asia, are spreading to various regions around the globe.

Every major figurehead in the mobile internet world is going to be there.  Confirmed speakers include Pony Ma, CEO of Tencent, Charles Chao, CEO of Sina.com, Joe Chen, CEO of Renren.com, Bill Huang, GM of China Mobile Research Institute, Richard Robinson, Co-founder & President of Youlu and Song Tao, CEO of SKY-MOBI.  LEI Jun, a renowned angel investor who has backed UCweb and many successful mobile internet companies will be there, too.

There will also be a startup competition – mobile internet startups from around the world can show off their services. As usual, the event will be held in Beijing, in the China National Congress Center.  And if you register in the next few days, you can still enjoy a 50% early bird discount.

For people don’t know the Great Wall Club yet, it is CEO member-based industry trade organization focusing on mobile Internet.  Many of the speakers mentioned above are members of the club.  And if you a CEO of a mobile company, perhaps you should consider joining them.

The truth is there are many incidents that Tencent was defeated by its competitors. For examples, in search engine, Tencent’s Soso cannot compete with Baidu. It is not even as popular as Google in China. Another example is online auction. Market share of Tencent’s Paipai is tiny compared with Alibaba’s Taobao.

Even small companies can win over Tencent if they try hard enough. Recently, I visited a Beijing based company, called Ganji. It runs a classified site in China, just like Craigslist. Ganji started in 2005 and within a year, there were over 500 Craigslist-like classified sites in China. Tencent also started its own. But by 2007, consolidation came. Lacking economies of scale to sell advertisements, many smaller sites had to close or tried to sell themselves to larger competitors. Even Tencent’s classified site did not survive. Today, Ganji and 58.com are China’s largest classified sites. Together they might have over 70% of the market.

In fact, Tencent’s key advantage is its huge QQ user base (over 600 million register users). This allows Tencent to promote its other services very effectively and at a low cost. But if its service quality is not as good as its competitors’, users will not choose to use Tencent’s services.

In conclusion, I believe in a particular sector, if there are one or two very strong players, Tencent probably cannot dominate the sector. But if the sector is quite fragmented, Tencent can probably dominate it, with a few trials. For example, online game. There are over 10 listed online game companies in China. With a few years of hard work, Tencent finally became the largest one, with 2 major blockbusters, Crossfire and Dungeon and Fighter.

Yes, given Chinese government like to control everything important, the doubt is reason.

But, I don’t think Chinese government has anything to gain by taking over or suppress Tencent, if control is what it wants.

All the large internet companies in China are working closely with Chinese government, in term of political control, sex, violence and different kind of censorships. I once chatted with a leading online video operator. He said in order for them to get the licence, they talked with the government for over a year. A key point the government want to make sure is how well they can censorship the materials posted by their users. How they use technology, as well as human editors, to screen out problematic materials.

Tencent, obviously, will be following similar guild lines from government to make sure no political sensitive issues can spread among its 600 million plus registered users. (That is almost half of Chinese population.)

Another friend once told me, to run a instant messaging service, actually, the message can go directly from one user to the other, without going through a central server of the operator. But in Tencent’s case, messages on QQ pass through its central server before going to the other users. This obviously provide a good channel for control and censorship.

So if Tencent is doing a great job, why replace it? And if Tencent’s QQ fail, the most to gain will be Microsoft’s MSN. (If fact, during Tencent’s dispute with 360 Guard, number of MSN users shoot up in China.) And MSN would not be as cooperative as Tencent, regarding to government’s requests.

Beijing based Truth Soft makes a series of a very cool iPhone App on Travel, such as tour guide for Forbidden City, Temple of Heaven, Shanghai French Concession, Beijing subway map, etc. A total of 17 – under the brand name of TouchChina or WildChinaTouch.  Most of them selling for US$0.99 – 2.99.  About half of them are in English, catering for foreigners visiting China.

The company is founded by Joey Shen, James Sit and Byford Zhang last year.  Joey was a Java evangelist at Sun Micro.  James, a graphic designer at Yahoo and Byford was working for Apple on on iPhone project at that time.   Recently, a former Sohu Travel channel editor, Xian Wenmin also joined them.

“When I was working for Sun Micro.  I got to travel a lot around the world for Sun’s conferences.  Each time I would take a few days off, and visit places nearby.  I love travel, especially as a backpacker,” said Joey.

When Joey visited many of the museums, e.g. the Louvre in Paris, he discovered they were still using very old technology for audio tour guide.  “I found out this can be easily change to an iPhone App.  In fact, I am the person who can do it.”

His first attempt is the Forbidden City in Beijing.  Joey might know the technology involved, he still need a good graphical map for Forbidden City.  He searched the internet, and found a blog written by James.  James did a project for Forbidden City sometime ago and had produced a very good map for the tourist spot.

So, that is it.  Together with Joey’s classmate at Tsinghua University, Byford, who was working for Apple at that time, responsible for marketing iPhone, the three formed their own company.

Their first apps, tour guide for Forbidden City, took almost a year to finish.  But it is so well produced that it was featured in Apple’s TV ad when it launched iPhone in March this year.  Their other apps are also well received.  Many of them are among the top 20 of iPhone Travel App in China.

Nevertheless, the problem of piracy is serious in China.  “Our apps for Shanghai Expo is download 40,000 times from us, through the official Apple store.  But the jail-break version is downloaded 110,000 times through 91,” said Byford.  91 Assistant is a mobile to PC software offered by NetDragon.  It also allows user to access 20,000 jail-break iPhone app, including True Soft’s tour guide apps.

If you cannot fight it, you better join it.  True Soft is thinking of changing business model.  In future, True Soft want to have their Chinese apps for local tourist attractions free for users to download.  “Once our user base is large enough, we can start selling advertisements, tickets, coupons, etc,” said Byford.

Without a doubt, there are advantages for RMB funds.  Firstly, it is easier for them to invest in local companies, especially for government regulated projects, such as water treatment, etc.  Moreover, with the A-share market offering attractive valuation for tech companies, RMB funds need not to worry about finding exist strategies for invested companies.

In fact, the current situation for tech investment in China is quite odd.  All the companies, such as Tencent, Baidu, Alibaba, are operating in China.  But they got their initial investment from overseas (the USD fund).  So, they had to list in the oversea markets, such as Hong Kong or America.

The phenomenon creates a huge information gap between investors and the companies they invested into.  I think that is why Nasdaq listed China tech companies always have their price fluctuated on the slightest rumour.

RMB fund might be able to correct such information gap, as both investors and the companies are inside China.  If Baidu or Tencent are traded in the A-share market, their value might be better reflected as investors are the local Chinese, who can use their services on a daily base.

But, there are still many obstacle for RMB funds.  The first problems might be lack of LP, or investors for such fund.  Although China is getting more affluent everyday, compared with the mature  worldwide money market, investment funds in China are still not as abundant. Also, Chinese laws are not well established.  If something got wrong, will  investors’ right be protected?

A friend recently told me, Shanda, one of the leading online game company in China, is going to spin off another of its division and get it listed next year.  But, the person is not sure, which division is it.

Shanda listed its online game division, Shanda Game, in September 2009. My guess is: the next time it is going to list its e-book division.

After Shanda Game was listed, its share price kept dropping.  This is because Shanda still depends on its first 2 games (Mir 2 and WOOOL), launched 8-9 years ago, for most of its revenue and there is no major hit among all of its new games.  In other words, that business is dying.

On the other hand, I believe Shanda’s e-book business could be a winner if it is listed.

Shanda has the copyright of most of the e-books in China.  e-book download has already became very popular over the mobile phone.  And, with the popularity of iPad and iPad-like devices, more and more people start reading books on their handheld devices.  I believe Shanda’s e-book business will have a bright future.  Something worthwhile investing in.

Recently, many Chinese tech companies were able to have very successful IPO in the U.S. But Sky-mobi, which listed on Dec 10, was an exception to this rule.

First of all, it scaled down its IPO size, from raising US$150 million to US$58 million.  Its share price also dropped significantly after the IPO.  It closed at US$5.3 a share last Friday, 33% less than its IPO price of US$8.

The Hangzhou based company is in fact running a very lucrative business.  It runs an app store over low-end phones in China.  Most of these phones are manufactured in the Guangdong or Shenzhen, using MediaTek chips.  They are the so-called Shanzhai Ji.

Sky-mobi app store is called “Maopao”.  But most of the 400 million plus users who had used it in the last 2 years were not aware of this.  Because it is preloaded on half of the Shanzhai Ji, through Sky-mobi’s relationship with the mobile phone designer houses.

The app store has over 700 applications.  And it relied on China Mobile or China Unicom to collect payment via the operators’ value added service providers (SP), such as Kongzhong.

Problems occurs when the operators wants to change their policies, which happens frequently.  Sky-mobi found it could not charge its users when China Mobile tightened its user protection policies in late 2009.  The problem extended to this year.

In fact, it is heard that Sky-mobi once hoped to get listed in March this year.  But the sudden drop in revenue made it changed its plan.  (It also changed its  investment bank.  Morgan Stanley, JP Morgan, etc. were no longer involved.)

From the hindsights, Sky-mobi might be better off not to list at all.  Not every business are suitable for the public market.  Some might be better to be run as a private firm.

Two of the largest online retailers in China are having a price war.  One of them is Dangdang, a leading online book store in China that has just listed in Nasdaq. Another is 360buy, the largest online retailer in China by revenue and the most aggressive player in the industry. (Here is an article from local media: http://tech.sina.com.cn/i/2010-12-17/00114993519.shtml.)

It all started on Dec 8, when Dangdang  had a very successful IPO in Nasdaq.  On the very same day, its competitors, Joyo and 360buy were slashing prices on books.  When Dangdang’s president, Li Guoqing, did his TV interview, he swore he was going to retaliate.  So that is it.  The price war began.

Li said Dangdang is selling everything (books, computers, cosmetics, etc.) at lower prices than its competitors.  And it prepares to back up its plan with a RMB 40 million war chest.  In response, 360buy further lowered its prices and it said it prepared to spent RMB80 million.

No matter what happen, it is certain that the price war will hurt Dangdang’s bottom line.  Share prices of Dangdang has been dropping since its IPO.  It is currently trading at US$25.41 a share, 26% off its peak of US$34.46.

Once again, it shows how brutal the Chinese market is.  Your competitors will always strike at your weakness.  Just when Dangdang needs to show its investors some profitability, its competitors start a price war.

I’ve just read an interesting article in the local media.  It said China is going to change its public telephone booths into Wi-Fi hotspots.  (Here is the article: http://tech.qq.com/a/20101217/000109.htm)

If that is the case, it will be great.  Firstly, ever since mobile phones became popular, the use of  public telephone booths is getting less and less.  The article said in some area of Guangdong, a telephone booth gets less than one person to use it in a day.  That is really a waste of resource, considering it has to be maintained regularly.

Secondarily, Chinese 3G services (no matter provided by China Mobile, China Unicom or China Telecom) are still slow and patchy.  With Wi-Fi hotspots to complement them, the user experience can be much better.  (I am personally on China Unicom’s 3G services for my mobile phone, and I am not very happy about it.)  Telephone booths, which are dotted in every corners of the streets, seems the perfect places for Wi-Fi hotspots.  At least for the cities.

The article mentioned, besides of telephone booths, the telecom operators are also trying to setup hotspots in restaurants, hotels, sport facilities, and so on.    If the idea is really implemented, they will turn every city in China into a giant Wi-Fi network for fast internet connection.

For me, as a user, the more hotspots the merrier.  Even better if their services are free.

I just heard from an industry insider that China Mobile’s Android project, Ophone, is dead.  China Mobile is no longer pushing its own operating system, which is based on Google developed Android.  Rumor about Ophone’s failure has spread in the industry since Li Yue replaced Wang Jianzhou, China Mobile’s longtime boss, as general manager of the company in June.  Now, it is more or less official, said the insider.

Hopes for the OPhone project were initially high within China Mobile. Bill Huang,president of China Mobile’s Institute of Research, hoped OPhone would take at least 50% of China’s smart-phone market in three to five years, when Ophone first launched in September 2009.

China Mobile at that time saw OPhone as a competitive lever against rivals such as China Unicom, which has a deal with Apple to sell iPhones in China. And, many vendors supported the project with their models of Ophone handsets, such as  Lenovo, Dell, Philips and Samsung.  However, in just 15 months, these are all history.  Things can change really fast in China.

The industry insider also warned mobile application developers that they should be careful.  Although Android is hot, they should not to put all their hopes into Android platform alone.  “Partially because of Ophone’s failure, China Mobile is rather caution about Android,” said the insider, “It has not set up a special division for Android yet.  And usually, for anything China Mobile consider to be important, it will set up a special division for that.”

Do you know who are the top web developers in the world? And what they are good at? You can find the answers in Gurudigger.com. The website was recently founded, by Mike Cai in Shanghai. Through its in-house developed analytic tool, Gurudigger can identify the strength of different web developers, what projects they are working on and have done in the past, etc.

“We collect web engineers’ footprint on the internet. And then, we analyze and compare each web engineers’ technique ability,” said Mike. The website will rank each engineer according to different skills ( Python, C++, Java, etc.) and rate the engineer a score (level 1 to10) depending on his/her strengths. Level 10 being the best.

Currently, the company is working on ranking all web engineers identifiable in the world. It will announce the results by the end of this month. “The process is still going on. Base on current result, most of the level 10 web engineers are from the U.S. and Europe,” said Mike. Chinese developers can also send their profile to Gurudigger.com for ranking. (Just go to their homepage: Gurudigger.com)

In the future, Mike hopes Gurudigger.com become a source for venture capitalists looking for good investment projects. “I guess a lot of VC will be interested in what projects good web engineers are working on. Because this might be the next Google or facebook,” said Mike.

I recently found out that if you have more than 1,000 friends over Chinese leading social networks, such as Renren, Kaixin or QQ, you have to pay a fee.  For Renren, you have to upgrade to VIP services, paying RMB10 a month, to have 1,001 friends in your account.  Similar for Kaixin and QQ. Only Sina’s Microblog service (the Twitter of China) is exception to this rule.  

I double-check with a blogger friend of mine (a Chinese girl) and she said that is true and in fact she is paying for such a service, willingly.

First of all, it shows that Chinese internet users are really the most easy going consumer in the world!! No question ask, just pay.  No wonder, Tencent and all the game developers make tones of money.

Secondly, it shows sometimes Chinese internet companies have no clue what they are doing.  Facebook or Myspace will never ask their users to pay if they have a lot of friends.  As this is not making any sense!! As a social network operator, you will want your users to be as active as possible.  The more friends a user has, the more traffic you will get, and that help you to sell ads.  So, why limit your users’ friend network?!

I asked a friend who runs an online marketing firm in China, whether this will create a problem for them.  He said no, because they always pay Renren / Kaixin to setup marketing campaigns for their clients. (Maybe some kind of professional services.)  “Once you pay, you have a lot more options and can use a lot more features (e.g. do a poll) to help you to manage your marketing campaigns,” he said.

So, the rule is purely set up for individual users. Even my marketer friend thinks it is totally ridiculous.  Probably, Renren and Kaixin are under pressure to get some revenue to show to their investors.  So, they try everything possible.

That’s my view about it.  Any idea ??

Dang Dang and Youku are finally listed. Both performed very well in their IPO debut in Nasdaq. Share of Dang Dang, one of the largest online bookstore, jumped 87 percent to close at US$29.91 on Dec 8. Youku, the leading online video site, surged 161 percent to US$33.44 yesterday. Its surge was second only to the record set by Baidu.com, the most popular search engine in China, which soared 353 percent when it was first traded in August 2005.

For Youku’s CEO, Victor Koo, his effort in past 4 years has finally pay off. For Dangdang’s Peggy Yu, this is a day she and her husband have been waiting for over 10 years. In the last six months, many of the Chinese tech IPO in the U.S. also have done very well. Data complied by Bloomberg showed that the previous average first-day advance for four Chinese internet firms was 57 percent.

In a venture capitalists conference in Beijing, it is heard 40 more companies are in the pipeline, trying to get listed in such a good investment atmosphere.

But, while congratulating for their efforts, it is also worrying to see Youku has not broke even yet. And Dangdang’s profit is very thin. It seems back to the old days of internet bubble in 2000, when a company with no profit and unproven business model could fetch a ridiculous high valuation. At that time, investor were crazy about anything related to internet, and blinded to the fundamental of business.

Today, investors are enthusiastic over China’s economy and the country’s fast-growing Internet sector. But, at the end of the day, a company’s share price depends on its fundamentals – that is profit and profit growth.

Everything has to come down to the earth eventually. Mecox Lane, another Chinese e-commere firm which debuted on Nasdaq in October has tumbled almost 50 percent after a weak third-quarter report. It is facing a lawsuit by investors for violation of US securities laws.

[image via http://www.jgreghenderson.com/]

The next move Spil Game Asia will be focus on is mobile. But rather than developing an App like everyone is doing, Marc thinks they should develop with html5. “I am a big believer of html5,” said Marc. One of key advantages of html5 is that it works on all platforms, whether they are iPhone, Android, Blackberry, Symbian, etc. Most smartphones already support it. For app, you will have to develop a version for each platform.

“Most people like app because they look cool. But, in fact, html5 can do most the function already. Html5 program looks and works like app. And contrary to most believe, they can work in offline mode, too,” said Marc. “I think app is only temporary. Html5 is the future.” But how long before html5 can surpass App in popularity?? “No one knows,” said Marc, “but its development is very fast.”

Having laid the foundation of Spil Game Asia, Marc will set down from the position of CEO soon and start a new project. “It is something about fashion.” He will tell me next week in details. Stay tune, if you are interested.

By the way, Spil Game is sponsoring a html5 game contest. Winners can be award up to 5000 Euro !!! Here are the details: http://html5contest.com/

This is expected to be the last step before the government finally issue third party payment licences to companies such as Alipay, Yeepay, 99bills, etc., although they have been in the business of providing third party online payment for a considerable time.  The first one to get the license is probably Chinapay, a subsidiary of the government owned China UnionPay.

Payment used to be a bottleneck for the development of e-commerce.   After Alipay solved the issue of online payment, e-commerce took off in China.   Currently, payment is the bottleneck of another industry, the mobile internet.  Many mobile internet players (d.cn, Easou, etc.) thought payment is a problem that limit their growth.

China Mobile, the leading mobile operator, used to be the one that collect fee for the mobile internet companies.  But, the commission is too high – it charges about 15% commission and another 10% for bad debt.  Moreover, it change its policies often and each time the mobile internet companies suffer.

There is going to be a conference on mobile internet in Beijing.  For people interested in the topic, they can go to the “Mobile Payment Leaders Forum” during Dec 16-17. Here is the details http://www.mobile-net.org/mp/2010/

Mecox Lane, the first publicly listed online retailer in China, was sued by investors after reporting a disappointing third quarter report.

The company was listed on October 26 in Nasdaq. At its debut, its share raised as much as 68%, as investor grab a piece of the online garment and appeal retailers. Everyone believe it will be a winner. At US$17.26 a share, Mexco Lane’s is selling at 157 times earning. In comparison, Amazon was only trading at 47.5 times earing.

But after it reported its third quarter result, investors’ mood changed 180 degree. Its share dropped 40% on Nov 30 and another 18% on Dec 1. Its share price was as low as US$6.45, before recovering to US$7.8 last Friday.

The result showed Mexco Lane’s sales grew 36% and profit almost triple from a year ago. But it expected its fourth quarter revenue to only mildly improve from the third, US$57.2-60.4 million, compared with third quarter’s US$55.3 million. Obviously, that is too small an increase to support a PE ratio of over 150.

Now, U.S. based Rosen Law Firm is suing Mecox, in a class action, for inaccurate registration statement in its IPO prospectus.

The incident makes you wonder how much oversea investors really know about the Chinese companies before they buy their shares. Only a few weeks ago, they thought Mecox Lane is an hot issue as online retailing is growing fast in China. But, when the result came out, they realized the company’s growth was only average.

Should Mecox Lane’s executives and the bankers arranging its IPO be blamed for misleading the investors?? Maybe. Should the investors be blamed for not doing their homework and really studying the fundamental of Mecox Lane, before they invested?? Maybe, too.

Many people in China can point out: Mecox Lane is not the best among all the online retailer. Its offline business (about 30-40% of revenue are from its own and franchised stores) is also dragging its growth and profitability. So, they are not surprised at the third quarter result.  It is why Mecox Lane could fetch such a high price during IPO debut they are surprised at, said a China based industry analyst.

The incident obviously will have an impact on the other online retailers planning IPO. With such a disappointing starter, would investors have appetites for the main courses ?? Dangdang’s IPO seems to be delayed, until the Mecox Lane incident is resolved or forgotten…

It decided to change its Chinese operator from The9 to Netease 2 years ago.  Although it had the support of  the Ministry of Culture, it got another government authority, GAPP, mad.   GAPP banned World of Warcraft from charging its users for quite some time.  And then, WOW’s expansion pack, Wrath of the Lich King, was delayed again and again. The whole incident was finally out of the picture, when GAPP granted the necessary licenses this summer.

But recently, another incident has hit Blizzard. Local media said Blizzard’s China office leaked sensitive information about the company’s operation.  Its product promotion plan, global user number, marketing plan, etc. was posted on the internet.  (Here is the article about it: http://tech.sina.com.cn/i/2010-12-03/01414937053.shtml)  The company’s China head had left his position. And, Blizzard put a former Nokia executive in charge.

First of all, I wonder whether it is true.  Just like a lot of things you read over the internet, not everything is right.  And the local media which wrote the article said it could not find the alleged Blizzard information on the net.

But, if it is, Blizzard will not be alone.  Industry espionage is serious in China. I have a friend who works in one of the leading internet company in China.  He said a person approached him for a very well-paid job offer.  They had a few rounds of conversations, and during the process, my friend felt the person’s main objective was to get inside information about my friend’s company. In fact, one way to tell about your competitor’s situation is from job interviews, said a venture capitalist.

For me, I could not help but noticed among the Top 15 Global internet companies Mary Meeker listed out, 3 are Chinese.  They are, as you would expected, Tencent (ranked no. 4), Baidu (no. 6) and Alibaba (no. 12).

Six years ago, in 2004, only one Chinese company made into the Top 15 list – Shanda ranked no. 11.

I wonder what the list will become six years from now.  I imagine ever more Chinese internet companies will be in the Global top 15.  Just consider the fact that China is the world’s largest internet market with 384 million users. But that is only 29% of its total population and the growth rate is a breathtaking 29% a year.

The U.S. market, the world’s second largest with 240 users, meanwhile, is only growing 4% a year, as the penetration is already 76%.

I image, some companies from India and Russia are also likely to made into the Top 15 list in 6 years.  Russia, the world’s fifth largest, has 60 million internet users.  Penetration is 42% but it is growing very fast, at 31% a year.  India with 61 million internet users is the world’s fourth largest right now.  But, penetration is very low, only 5%.  Its growth rate is 18%.

He thought as long as there is no infringement of copyright, the production of “Shanzhai” products should be encouraged. For readers who don’t know what “Shanzhai” means, maybe you cannot see the irony. But, “Shanzhai”, in fact, means copycat.

So, how could a copycat product not infringe copyright?? A professor in Foreign Trade University explained, it is because many of such copycats do not do a perfect job. They are not exactly like the real ones in close examination. For example, currently, “Shanzhai” iPad is a hot item in the market. But, in fact, the “Shanzhai” version of iPads use Google’s Android as operating system. So, strictly speaking, there is no copyright infringement. It even has a bit of innovation, as the manufacturer changes the OS to Android.

WOW!! So, that it is. Just like negative times negative equal positive, it seems to suggest: if you do the wrong thing, but not doing it perfectly, you are in fact doing a right thing. And you should be encouraged to do more.

(hmm … really interesting … something worth a deep thought …)

But, how about the person who really innovate and make the first iPad?? Should we encourage what he did?? Our government official seems offer no answer… And as the person lives far far away, in a country called the United State, he is not even in our government official’s jurisdiction!! So, why should our government official care?

That is how I see it … anyone has any ideas ??

Do you want to know how much McDonald was spending online for brand advertising and for what campaigns this year ??

Admomo, a Hong Kong based online advertising intelligence startup, offers the answers to questions like that. (Admomo.com) A few clicks on its self- developed tool and a complete report with all the details is ready in a few seconds. It shows which sites McDonald was using to show its ad, for how long, and for which product.

The cost details are also shown. Admomo CEO, Winston Law, said, discrepancy is roughly 20-30%. A friend who has tested the tool using a company he known of said, the error in cost estimation is down to 5%.

With such a report, you can easily second guess what McDonald’s online marketing strategies are. Who are they targeting, with what products, and using what promotion gimmick. This is a very powerful tool. Just imagine what its competitors (such as KFC) can do with such information.

And it is not just for McDonald, Admomo can track every brands which has advertised in over 300 sites in Hong Kong and 700 sites in China. And, CEO, Winston Law, is thinking of expanding the service to cover leading sites in the whole world.

I wonder if the online retailers in China have known about Admomo yet.
If not, they better beware. Vancl, 350buy, Redbabay, Dangdang, Joyo, etc., are all big spender of online advertising. With such a deadly tool, how they position themselves online and allocate their marketing budget can be known by their competitors easily.

On October 26, the first Chinese online retailer, Mecox Lane, was listed in the U.S. Its share gained as much as 68% in its Nasdaq debut, as investors grabbed a piece of the online clothing and accessories shop.

Online retailing is red-hot in China. Total transaction volume of Chinese online retailers more than doubled to RMB 252.77 billion (US$38 billion) last year, according to Beijing-based market research firm Analysys International. The trend continued in the first half of this year, when total transactions surged 103% to RMB 213.31 billion from the same period in 2009. Nevertheless, the country’s online retail market is still at an early stage and has lots of potential. Where about 4% of consumer goods in the United States were sold online as of the end of last year, only 1.98% were sold via the Internet in China, a figure that could more than double to 5% by 2014, estimates Shanghai-based iResearch. The overall business-to-consumer (B2C) market will be worth RMB 1.27 trillion in 2013, or up over 380% from the 2009 level, the research says. After Mecox Lane, Dangdang, the largest online bookshop in China, will be the next to go – probably list in Nasdaq this month. IPO of Vancl, another leading online clothing and accessories shop, and 360Buy, the largest online electronic store, are also in the pipeline. They are expected to be listed next year in the U.S.

Founded in 1999 by ex-investment banker Peggy Yu and her husband, Li Guoqing, vies to be the leading online bookstore in China with Joyo, Amazon’s subsidiary in the country. After selling book for over 10 years, Dangdang has about 10% of China’s overall book market (excluding academic books). But growth in its core business is slowing down. Last year, its revenue from selling book grew only 60%, while other online retailers grew over 100%, on average. To boost sales, Dangdang introduced a new business line in 2008, which sells a wide range of products from electronics to linens, slippers, home decor and milk powder. The new line grew about 230% last year, although it is still only a small portion of Dangdang’s overall business.

Vancl was founded by Chen Nian in 2007. It started from selling men’s shirts under its own brand, and then expanded to women’s and children’s clothing, shoes and other accessories. Recently, apart from products of its own brand, it also sells other manufacturers’ merchandise. Chen Nian was also a founding member of Joyo. He has a deep understanding of how e-commerce works in China. Selling clothes can be more profitable than selling books as the margin is much higher. On average, books has only 5-10% gross margin, while gross margin for clothes can be 20-50%. Vancl, however, has not yet broke even as it is still expanding its scale and infrastructure. Its market share in overall B2C sector is 5.3%, while Dangdang has 8.9%, iResearch estimates.

>>>Continue your reading, please download the report English version and Chinese version for free.

We heard that, venture capital veteran, Robert Chau, has left Northern Light to start his own firm. The new company will run a 6 billion RMB fund. While he was at Northern Light Venture Capital, he has invested into budget hotel chain, Hanting Hotels, online community, Kaixin001, and energy storage developer, Prudent Energy, etc.

Apart from the attractiveness of A-share market, another reason VC want to have RMB fund is that there is less restrictions in investing into domestic companies, especially those concerning government projects or nature resources. There are tight regulation in sectors, such as water supply and water treatment. US dollar funds, treated as foreign investors, could find it hard to invest, whereas, RMB fund, treated as a domestic investor, can get involve more easily.

We expected to see more and more RMB funds in China’s venture capital industry.

First of all are the touch screen manufacturers. These companies, located mainly in the Guangdong province in China, are finding it hard to meet the ever increasing demand for their products. A security house in China estimated the supply of small and medium size of touch screen can only meet 55% of the demand in 2011. Shipment of Lenovo’s LaPhone (Android phone) was once affected because Lenovo could not find enough touch screen suppliers.

But, this is not going to be a long-term problem. Many suppliers are expanding their facilities. Shenzhen based LaiBao Hi-tech, supplier for iPhone, has announced it planned to invest RMB251 million build a new manufacturing plant for large size touch screen (probably for iPad).

Despite all the hype, Android is still small among different smartphone platform in China. Researcher estimated there were only about 250,000 – 280,000 Android phones China, at the end of October. Nevertheless, industry experts have high hope in the free and open-source OS. Many phone manufactures have embraced it as the de-facto smartphone OS, as it allows them to easily control applications preload and distribution. HTC, Motorola, Samsung, and Chinese local phone markets, such as Lenovo, Huawei, ZTE, Meizu, Coolpad, etc., have all launched their version of Andriod phones.

MediaTek, which supplies the chipset of about a quarter of all mobile phones in China, has also started shipping Android supported chips since October. This will make Android affordable to the mass market. Already, there are Android phones selling at RMB 1000 (about US$140) a piece in Shenzhen. Many expected next year, Android phones will flood the China market.

Surprisingly, there are more Blackberry than Android phones in China. Researchers estimated there are more than 300,000 Blackberry phones in China. Blackberry has been the love of bankers and traders since day one. As long as they survive (and no doubt they will no matter how many market crash there will in the future), Blackberry will always find its fans.

As of Apple’s iPhone, which started the whole mobile internet revolution in the West, experts believe it will remain a niche market for high end users in China. Its price, about RMB5000, is too high for the common white collars, who are earning about RMB3000-5000 per month. Researchers estimated currently there are about 1-2 million iPhone supplied by the official channel, China Unicom, and another 3-4 million imported from places like Hong Kong and U.S.

Although many have little faith in Nokia’s Symbian platform, experts believe it will remain a significant player, if not the largest. Finally, Window mobile, which almost everyone has forgotten until Microsoft launched WP7, experts believe it will capture certain portion of the high end market, together with iPhone and some of the most expensive Android phones.

By the way, Data Center of China Internet (DCCI) has forcasted by 2013, there will be more smartphones sold in China than the feature phones (the not-so-smart ones). Currently, the researcher said smartphone only accounts for 16% of the market. The following chart is DCCI’s forecast. (The blue indicate feature phone and the orange smartphone. Click to enlarge the chart.)

Source: DATA CENTER OF THE CHINA INTERNET

Recently, I have been studying the mobile internet sector in China closely, and I have talked to most of the major players. Many people told me Alibaba is a player I should watch out for.

Although currently Alibaba Group has no substantial mobile business, it has huge ambition in the mobile internet sector, and has been quietly acquiring assets.

One of the key investment they have done so far is Guangzhou based UCWeb. UCWeb is the leading mobile web browser in China. It is the second most popular WAP application in China after Tencent’s QQ. (QQ has about 25% total WAP traffic, according to an internal report from China Mobile. UCWeb has about 6% and another 4% for its mobile video service, Uodoo.) UCWeb has about 60 millions visitor every month.

It has also tried to acquire “91 Assistant” from Fuzhou based NetDragon. “91 Assistant” is one of the most popular iPhone Apps in China. It is a mobile to PC software, which helps you to manage your phone. It also connects to a portal, which has over 20,000 jail broken iPhone Apps. It has over 200,000 daily visitors. However, after a closed to 6-month due-diligent process, the two companies could not reached an agreement. NetDragon found Alibaba’s terms were too harsh. NetDragon is currently raising fund from venture capitalists and it plans to spin out the 200-people mobile team soon.

An industry insider told me, Alibaba’s plan is to build a mobile portal, where everything you can see, either services or products, you can buy and pay by Alipay. The Group’s e-payment solution, Alipay, has dominated the PC internet world in China. Now, it wants to expand to the mobile world. But, so far, some industry players told me Alipay is still not very good for mobile payment.

Anyway, there is still time for Alibaba to gradually build its mobile kingdom. Most industry players think the real mobile internet revolution in China has not started yet. It might take another 2-5 years.

By now, I guess everyone in the industry knows how much Alibaba wants to get rid of its major shareholder Yahoo. Today, there is not much help Yahoo can provide to Alibaba. Their relationship got worse after Carol Bartz became Yahoo’s CEO. Bartz’s American style of management alienate Alibaba. Jack Ma’s previous relationship with Jerry Yang no longer count.

I was talking to a friend a few days ago. He was a former senior executive in Alibaba. He told me about Alibaba’s plan.

Yahoo has about 40% of Alibaba Group. My friend said Alibaba hopes to get it back and sold 20% to eBay and another 20% to a bank in China. Alibaba’s e-payment solution, Alipay, is getting more established everyday. So, it wants to have a Chinese bank as shareholder. Otherwise, it might get into trouble with the government in the future.

Recently , ebay started to collaborate with Alibaba. Its payment solution, Paypal, become the first choice for many Alibaba and Taobao traders when they want to develop international business. eBay’s CEO John Donahoe also became the keynote speaker in Alibaba Group’s Netrepreneur Summit in July.

My friend said many of the senior staff of Alibaba secretly hope that the transaction could succeed. It is because many of them hold equity in the Alibaba group (from staff options). These shares cannot be traded publicly. They hope if eBay or a Chinese bank invest in Alibaba group, they can liquidate some of their shares and cash out. Many of them have been with Alibaba since its early days.

Nevertheless, this will not be a easy transaction, involving so many parties, i.e. Yahoo, Alibaba, eBay, a Chinese bank. And Yahoo seems not eager to sell. Probably it is waiting for a better price, after Taobao’s IPO. Taobao was setup by Alibaba in 2003. It is China’s largest e-commerce market. Its public listing of is going to create huge upside for Alibaba’s shareholders.

In the coming trip, Niklas hopes to understand more about the internet environment in China. The source said Niklas has already arranged private meetings with many of the internet titan in China, such as Baidu’s CEO, Robin Li, Alibaba’s CEO, Jack Ma, Kongzhong’s CEO, Wang Lei Lei and Netease’s CEO, William Ding.

But he is not going to neglect the general public. He will also speak at a public event organized by Baidu. By the way, Niklas’ wife is also coming with him and she would like to meet with some green and environmental groups in this trip.

The source said he and his wife would also like to meet with some Chinese media. Interested parties, please contact with Cindy Jiang of Mobinode (yichenjiang AT gmail.com)

I was talking to a friend yesterday. He told me, just as Google fails to localize in China, Baidu faces the same localization problem when it develops the Japanese search engine market.

The Reasons: The Japanese has a different preference in their search from the Chinese. One thing they like to search over the internet is peoples’ names, as they like to read blogs of other persons. They are also very superstitious and like to search for information such as fortune telling, palm reading, etc. The different in preference require the search engine to be designed with a different ranking system. And Baidu has to readjust its search engine for these.

Another problem Baidu faces when developing Japanese market is the political tension between the two countries. Whenever there is a quarrel between the two, Baidu’s traffic in Japan could be affected. For example, recently the two nations argued again over Diyutai, an island over South China Sea which both claimed to be theirs. Just as the Chinese protested in China, the Japanese were doing the same in Japan. Baidu’s search engine was boycotted and traffic dropped.

However, Baidu still hopes to develop the Japanese market, as the online advertising market is much more mature than that in China. Japanese advertisers are much more willing to buy keywords from search engines. Also, cost per click for each keyword can be much more expensive than in China, something like 10 times.

I was having a lunch with a friend today. And he told me, next month, i.e. November, the largest Chinese online book retailer, Dangdang, will be going public in Nasdaq.

As one of the first major Chinese e-commerce sites going public, it must create lots of fuss. I heard from an investment bank source that Dangdang will go for a very aggressive valuation, about 1 billion. With about only US$5 million in profit last year, it suggests 200 times earning.

However, growth of the company’s core business (selling books) is slowing down (60% last year) as it is over 10 years old. Its new business line, which sells everything from electronics to linens, slipper, home decor, milk powder, etc, grows fast, over 230% last year. But that is only a small portion of the business. And it is doubtful Dangdang has any advantages in this area, as there are many competitors selling those items online. Dangdang is only famous for book in China.

When people think of books in China, they can think of Dangdang and Joyo (Amazon’s China subsidiary). But for the other items, not really. For electronics, 360buy. For milk powder and other baby products, may be Red Baby. All other items, most likely Taobao, the ultimate online shop, which almost has everything you can imagine.

What in the IPO pipeline is 360buy, the largest online electronics shop, which is growing much faster than Dangdang. Another one is Vancl, the largest online garments shop. Besides growing fast, Vancl also has better profit margin, as it develops its own brand, rather than solely reselling other manufacturers products.

An industry insider told me online book stores has gross profit margin of about 5-10%. Electronics, 3-5%. Garments, 20-50%.

I personally like Vancl the best, for its fat margin. But, many others like 360buy, as the the management is real ambition and aggressive.  Everyone believes 360buy is “the Amazon of China”, rather than Dangdang. But, Dangdang will take this credit when they go for IPO next month.