Business models Reengineering in China

Innovation & Business Models Re-Engineering in China TechCrunch EDITION more inside! Benjamin Joffe | CEO, Plus Eight Star Ltd. Startup2Startup| Beijing, 2010.05

Benjamin Joffe I’m not Chinese. I’m not even Asian… 4 years 1 year 5 years (Japan) (Korea) (China) …but I have been researching digital innovation in Asia for 10 years and built a company doing just that.

Those are some of the things +8* has been working on for some time.

What I do Now • CEO, Plus Eight Star | www.plus8star.com • Digital Strategy & “Innovation Arbitrage” • Best practices from Asia’s web and mobile • Partner, Cmune | www.cmune.com • World’s First FPS game on social networks • Facebook, MySpace and Apple.com • Founder | Mobile Monday Beijing • Monthly forum for mobile professionals • 35 events, 120 speakers, 3,000 participants • Angel Investor, Advisor, Speaker • Asian startups with global ambitions • 50+ events, 13 Countries

Why it’s hard to understand how China innovates And why talking about “Copy-to-China” only does not help…

Our Challenges • We are old Those challenges are mine too. • We are not local • We are not users • We have (lots of) cultural stereotypes • Things have been pretty good this way so far

General assumption #1 Everything from USA is great

General assumption #2 Everything from Asia is weird (and sometimes funny)

2000 2001 2002 2003 Japanese like texting on mobile 2004 2005 Because they have small fingers 2006 2007 2008 2009

2000 2001 2002 2003 Asians like avatars 2004 Because they watch animations 2005 2006 2007 2008 2009

2000 2001 2002 2003 Chinese like ring-back tones 2004 2005 Because they go to karaoke a lot 2006 2007 2008 2009

2000 (The fun never ends) 2001 2002 2003 Chinese like Farm games 2004 2005 2006 Because of their agricultural history 2007 2008 2009

Awareness Test

PHOTO: MOBILE PHONE, BEIJING, APRIL 2010 © Benjamin Joffe / Plus Eight Star Ltd.

Dual SIM, Music Player, Photo… …and some unclear Windows-like icon PHOTO: MOBILE PHONE, BEIJING, APRIL 2010 © Benjamin Joffe / Plus Eight Star Ltd.

But did you notice that? PHOTO: MOBILE PHONE, BEIJING, APRIL 2010 © Benjamin Joffe / Plus Eight Star Ltd.

This is a “FarmVille” button There is a link to check your QQ Farm PHOTO: MOBILE PHONE, BEIJING, APRIL 2010 © Benjamin Joffe / Plus Eight Star Ltd.

QQ Farm (or similar) You don’t get that much on your phone but still…

By the way…

Case Study: Farm Games

Highlighting the world’s rich farming history

Quiz Who Created the First Farming Game? • Game MAU Dev. Country • FarmVille 61.6M Zynga USA • Farm Town 18.6M Slashkey USA • Country Story 8.1M Playfish UK • Barn Buddy 6.8M TheBroth USA • Happy Farm 2.5M 5 Minutes China • Happy Harvest .6M Elex China Source: Appdata and Facebook, 2009.10.26

Answer: “It’s Complicated” 1. Five Minutes (China) 2. Slashkey (US) “culturized” it 3. Zynga (US) copied Slashkey 4. Playfish (UK), Elex (China), followed If you have other sources let me know! benjamin@plus8star.com

The Mother of all Farming Games? or “where is the innovation?” • Harvest Moon (1996) – On Super NES, by Victor Interactive – Inspired Happy Farm • Sim Farm (1993) – On PC, by Maxis • Where is the innovation? – Not in the game concept, but in viral & social mechanics

Innovation Models in China • Innovation Model: 5C’s of Innovation • Simplification hurts • Innovating in and from China

The First Part 5C’s of Innovation™ We are strategists – we can’t help creating acronyms!

5Cs of Innovation™ 1. Copy 2. Competition 3. Constraints 4. Combination 5. Context

1. Copy Entry barriers Many web businesses have low tech and capital Technology? requirements Capital? Talent? Intellectual Property? Censorship?

1. Copy Entry barriers Technology? Capital? Talent? Intellectual Property? Censorship? IP issues and Censorship are issues that all companies have to face, so at least it’s more or less on par… (though not ideal)

2. Combination Will it blend? IM + Avatars + Games + Payment via mobile or scratch cards… Tencent (US$1.8bln)

2. Combination Will it blend? We published a detailed report about this company. Check www.plus8star.com Tencent (US$1.8bln)

3. Competition What happens with Lack of competition make 4 Facebook companies slow at innovating… 4 YouTube 5 Match.com 3 Yahoo 4 Twitter ?

3. Competition What happens with 4 Facebook 4 YouTube 5 Match.com 3 Yahoo This is not a 4 Twitter problem China has… (in many cases) ?

Artists set 4. Constraints themselves constraints to be more creative. Low GDP/capita Limited advertising No credit cards No legacy industry

4. Constraints Low GDP/capita Limited advertising No credit cards Why not entrepreneurs? No legacy industry

Large scale, or very high urban 5. Context concentration can help Scale / Geography / Demography make some services viable

5. Context Scale / Geography / Demography make some services viable So can a younger Internet base

After spending The missing C’s more time in Silicon Valley we added a few “C’s” to highlight what was missing in the startup ecosystem 1. Copy in China 2. Competition 3. Constraints 4. Combination 5. Context 5. Collaboration 6. Culture 7. Comedy

The missing C’s 1. Copy 2. Competition 3. Constraints 4. Combination 5. Context Culture stands for “ability to 5. Collaboration tune to other cultures” (the US is not that great at it, BTW) 6. Culture Comedy is about creating emotional connections 7. Comedy

Business Models Re-Engineering The second part

Box vs. Online Games • Box games – Traditional retail model – Virtual goods in US: 1 billion in 2009 • Online games – Copy-proof – Virtual goods in China: 5 billion in 2009

Taobao vs. eBay This is how Taobao, entering the market in 2003, overtook eBay • eBay who was #1 in China – Commissions – Don’t want buyer-seller direct communication • Taobao – Free listing – IM welcome – BUT no crawling by search engines

Tencent vs. AIM / Facebook • Facebook – Advertising model – Social graph / Social web • Tencent This is showing the – Virtual goods fundamental difference in business models between – Closed system Facebook and Tencent

Zhenai.com vs. Match.com Most Match.com copycats in China don’t make much money. • Match.com Zhenai does! – Advertising – Subscriptions with self-service • Zhenai.com – Value-added subscription: Matchmaking Manager – 300+ people in call center to help your dating! – 3,000 rmb (450 USD) for 6 months

China’s Tech Stocks This is a side note but might interest you. The list is not exhaustive.

Market Caps Quiz • Tencent 33.4 bln USD – Time-Warner 33.9 bln USD • China Mobile 188.4 bln USD – AT&T 144.36 bln USD • Alibaba.com (~20% of Group?) 9.2 bln USD (x5?) – eBay 27.9 bln USD • Netease 3.87 bln USD • Shanda 1.64 bln USD – Activision Blizzard (WoW, CoD, GH) 12.75 bln USD – Electronic Arts 5.32 bln USD

Quick word on Yahoo • Yahoo’s market cap 21.5 bln USD • China – “Alibaba.com would represent about 20% of the Group value” (David Wei, CEO, Alibaba Group) – Total group value = 40+ billion USD? – Yahoo’s share = 16 bln USD? • Japan – Yahoo owns 34.79% of Yahoo Japan, JV with Softbank – Yahoo Japan market cap = 19.8 bln USD – Yahoo’s share = 6.85 bln USD • Total Asian assets >22 bln USD? Ask your usual vendor for financial advice.

China’s Internationalization You did not expect Chinese champions to just sit there, did you?

Chinese Companies Going Abroad • Mobile companies – Yicha (mobile search) | Japan – NetQin (mobile antivirus) | Russia, etc. • Software companies – Antivirus | Japan – Office suite | Japan

Things change and China’s Assets are case-by-case but as a macro view in IT, this is my opinion. • Skilled IT workforce • Expertise in several IT sectors – Gaming, virtual goods, scalability, etc. • Good execution • Lower cost (fraction of US for a social game)

China’s Hurdles: Soft Skills Building • Fundamental vs. Incremental Innovation • Design Companies (especially foreign • Product/Project ones) train many Management staff in this, though. • Quality

China’s Hurdles: Soft Skills Building Selling • Fundamental vs. • Culture Incremental Innovation • Design • PR “Designed by XXX • Shenzhen”, for in Product/Project • Country “brand” Management instance, is not fashionable yet • Partnerships • Quality

Thanks for your Thanks! attention! More about “Innovation Arbitrage” www.plus8star.com benjamin@plus8star.com +81 | Japan benjamin0123 +82 | Korea +86 | China http://twitter.com/benjaminjoffe Telecom & Internet www.linkedin.com/in/benjaminjoffe + Added Value * High quality www.slideshare.net/plus8star

About +8* This is more detail about +8* • Innovation Arbitrage – “Bringing proven best practices and business models from Asia” – +8* (Plus Eight Star) is the leading cross-market consultancy on mobile, telecom and Internet in China, Japan and Korea. – We work with large companies, SMEs, investment firms and governments worldwide to bring them strategic advice and the best practices from advanced Asian markets. • Our expertise – Internet: our work covers social media, communities, ecommerce, online gaming and virtual worlds. – Telecom: we have extensive experience with mobile and telecom services (e.g. mobile marketing and advertising, mobile commerce, mobile TV and mobile communities). There are more ideas outside of your country than inside. Tom Kelley Author, The Art of Mobile & Internet Innovation © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 55 | 9

Our Clients EUROPE USA We work with large and small organizations around the world ASIA Most of our projects are custom-made Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 56 | 9

Selected References • Adidas | E-commerce and mobile commerce market analysis and strategic recommendations for China, Japan & Korea • Bouygues Telecom | Cases studies of leading Asian Web 2.0 services and virtual worlds • Deutsche Telekom / T-Online | Benchmark of Korean mobile & Internet convergence strategies • EU-China Information Society | Research on e-commerce and virtual worlds to support the regulatory dialogue between the EU and Chinese authorities • Microsoft | Analysis of Japan’s key players and market catalysts for mobile commerce market positioning in China • DeNA | Benchmark of leading SNS in China and South Korea (DeNA operates Japan’s leading mobile social network) • China Mobile | Benchmark of Korean leading online communities • Sands Capital Management | Evaluation of investment opportunities in social networks in China • MIH / NASPERS | Analysis of leading online verticals in China (MIH is the largest shareholder in Tencent, China’s leading online community) • IMVU | Benchmark of monetization and engagement best practices in Asian virtual worlds & SNS (IMVU is a leading US-based 3D virtual world & chat) Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 57 | 9

Customer Testimonial | IMVU Inc. A Silicon Valley reference for TC readers  COMPANY: IMVU Inc. Lee Clancy, VP Product Management & GM of Direct Revenue August 2009 Q Has the service performed by +8* met your expectations? A The consulting services provided by +8* met IMVU's expectations. Benjamin and his team showed a deep understanding of major Asian virtual worlds and gaming companies, as well as their potential implications for IMVU. In our communications with them, they were very responsive to our follow-up questions and completed their final deliverables on-time. Q How have you used or plan to use this research within your company? A Only a few weeks after +8* delivered their findings to IMVU, we had already identified and roadmapped various product enhancements that were a direct result of our learnings from the +8* study. What is more, we have since launched pilot versions of those new features that have received extremely positive feedback from IMVU users (e.g., "My Pets" mode). Additionally, +8*'s comprehensive report is an invaluable reference that I consult often when considering new product enhancements. Q What decided you to hire +8* for this project? A We chose to hire +8* for this project because 1) they had a strong professional track record, which we confirmed with representatives from several blue chip clients of theirs prior to the study; and 2) we felt that their area of expertise and past studies were strongly aligned with our research needs. Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 58 | 9

Speaking Engagements Our presentations are based on our research… • Regular keynote speaker & moderator in IT, Media & Investment events. • Engagements in 2008/09/10 • Echelon 2010 (Singapore , Upcoming) • Infinity Ventures Summit (Sapporo, Japan) • CHINICT (Beijing, Upcoming) • LeMobile 2.0 (Paris) • Global Mobile Internet Conf. (Beijing , Upcoming) • Asia Venture Capital Forum (Hong Kong) • Startup2Startup (Beijing, Upcoming) • Graphing Social Patterns (Washington, D.C.) • Ignite Shanghai (Shanghai, Upcoming) • iGaming Asia (Macau) • Virtual Goods Forum (London, Upcoming) • Unite Conference (San Francisco) • Dell Online Summit (Beijing) • China Mobility International Summit (Beijing) • Microsoft Entrepreneurship Lecture Series (Beijing) • 3G Summit (Kunshan, China) • Mobile Social Networking Asia (Hong Kong) • …but generally only Red Herring Asia (Hong Kong) • Stanford University (Entrepreneurship) • China Internet Forum (Beijing) • Berkeley University (MBA) • Media’08 (Sydney) • SXSW Interactive (Austin) • scratch the surface China Internet Forum (Beijing) • PICNIC (Amsterdam) • Wireless Developer Forum (Beijing) • Virtual Goods Summit (San Francisco) • Open Web Asia (Seoul) • Inside Social Apps (San Francisco) • XMediaLab: Virtual Worlds (Seoul) • eComm 2010 (San Francisco) • Mobile Monday Global Summit (Helsinki) • eComm 2009 (San Francisco) • Mobile Monday Global Summit (Kuala Lumpur) • Ad:Tech (Beijing) • EU-China Virtual Worlds Conference (Beijing) • Ad:Tech (Shanghai) • EU-China eCommerce Regulatory Workshop (Beijing) • Ignite (Amsterdam) • Startonomics (Beijing) • Ignite (Beijing) • UnConference (Singapore) • Ignite (Paris) • BarCamp (Shanghai) • Mobile Asia Congress (Hong Kong) • La Cantine (Paris) • Lift Asia (Jeju, Korea) • Mobile Focus (Stockholm) • ITU Asia (Bangkok) More information at www.plus8star.com/presentations/ Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 59 | 9

Media Coverage Various media that quoted our work or views… • Media Coverage – Our research and views have been quoted by numerous media outlets on topics ranging from Telecom and E-Commerce to Social Networks, Gaming and Virtual Goods. – Selected media: Forbes, The Economist, The New York Times, International Herald Tribune, The Guardian, Advertising Age, VentureBeat, TechCrunch, ReadWriteWeb, Gamasutra, etc. More information at www.plus8star.com/press/ Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 60 | 9

Event Organizer & Advisor We also help the community  • Founder & Organizer: Mobile Monday Beijing – Mobile Monday is the leading network of mobile industry professionals, counting over 50 chapters around the world. – We founded the Beijing chapter of in 2006 to support the ecosystem. – Results: 35 events, 125 speakers, 3,000+ participants (avg.100). • Co-Organizer – Startup2Startup (Beijing, May 2010) – Geeks on a Plane (Beijing, May 2010) – Startonomics (Beijing, May 2009) – Startup2Startup (Beijing, May 2009) – Open Web Asia (Seoul, October 2008) • Advisor – TEDxBeijing (November 2009) Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 61 | 9

Contact To get in touch • Benjamin Joffe, Founder & CEO – 10 years experience with Telecom & Internet in Asia. – “China’s Top 100 mobile industry influencers” in 2007 & 2008. – Senior Expert for the EU Delegation to China. – Regular speaker at events on mobile and Internet in Asia. – Fluent in English, Japanese, French with working knowledge of Mandarin, Korean and Spanish. +81 | Japan • Contacts – benjamin@plus8star.com +82 | Korea – benjamin0123 +86 | China – http://twitter.com/plus8star – www.linkedin.com/in/benjaminjoffe Telecom & Internet – www.slideshare.net/plus8star + Added Value * High quality Beijing Office (HQ) Tokyo Office Sanlitun SOHO A-710 Flat Hagiwara 2D Chaoyang District Setagaya-ku 6-36-8 100027 Beijing, P.R. China Tokyo, Japan Zaijian! Tel: +86 (0)10 8447 7985 info@plus8star.com Mobile & Internet © Copyright 2010. All rights reserved. www.plus8star.com Innovation Arbitrage 62 | 9

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Business models Reengineering in China

by Benjamin Joffe on May 25, 2010

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