Harbinger Asia Tech Digest — Issue 1
Hi there, welcome to Harbinger Asia Tech Digest (subscribe here). It’s the first week of 2017, so we’ll kick off our inaugural newsletter with a review of top news and trends coming out of China over the past 12 months. Moving forward, expect this newsletter in your inbox every couple of weeks, based on the quality of breaking news in market. Enjoy!
Live Video
If 2015 was the year of O2O (online to offline) in China, then 2016’s headline would be entertainment, with series of clever new consumer use cases and business model innovation brought to bear across gaming, film, video, and more. This was supported by significant and characteristically ‘Chinese’ levels of investment, both domestically and overseas (some of which were controversial, including Wangda’s $3.5bn acquisition of Legendary and Tencent’s $8.6bn take-over of Supercell).
Out of many compelling examples, the live video craze in China is particularly interesting, as it is taking off in a way there that it never has in the US. Of the premier live video apps in the states, Meerkat — once media darling of SXSW 2015 — has already failed, and Periscope has yet to live up to its potential within Twitter’s ecosystem. Facebook Live is giving everyone a run for their money, but the jury is still out on its impact on user retention and incremental revenue growth for its indomitable ad sales machine.
By comparison, live video is significantly more mature in China, with nearly half of China’s internet population actively engaging with live streaming in one form or another. So why is live video so popular in China, one might ask? There must be something more compelling than just watching normal people stream their lives, eating meals, putting on make up… or sitting at their desks. The secret sauce lies in the importance of interaction between broadcasters and viewers. Chinese live video apps allow viewers to not only ask questions, but also send virtual gifts to broadcasters (e.g. viewer gifts a sports car sticker worth $45 in real currency, see illustration below). This can be done as passive support for popular streams, but in many cases serves to grab the broadcaster’s attention and encourage the fulfillment of specific requests (e.g. reward broadcaster to give you a shout out or sing your favorite song) in a public chat room. In many cases, popular broadcasters end up making more money live streaming than via their formal jobs, and can even become bonafide celebrities. This ability to monetize via interaction provides a strong incentive for broadcasters to create compelling content, and likewise for viewers to engage and feel that they are part of the action.
She will keep ~$15 with remainder going to the platform (source: a16z)
We’ll keep a close tab on how this plays out in 2017. Despite relative market maturity compared to the US, it’s still early days in China with over 150 live streaming apps competing for share. Expect more consolidation moving forward, perhaps with the pooling of talent onto more established platforms that offer either a larger audience base or more appealing revenue share structure. Regulation is already playing a bigger role with more stringent censorship requirements (say goodbye to softcore porn), and this should have an out-sized impact on smaller players unable to comply. If you are interested in this area, be sure to read a16z partner Connie Chan’s article that articulates the implications of live video in China in further detail. I’m a huge fan of Connie’s, and if you’re interested in China tech I’d generally encourage you to read anything she writes (a16z archive).
Virtual Reality
2017 was also the year of VR (and some AR). Sure these are global mega trends and the anointed future platforms for computing, but as with live video, there appears to be early consumer uptake in China. Let’s start with VR, which is the more immediate market opportunity (already $300m hardware sales in China in 2016). In the US, many of us may have seen early demos of VR at tech events, electronics retailers, or tourist hot spots (e.g. Oculus at Bryant Park over winter holidays). But most of us are still waiting… waiting for VR to be perfected, for motion sickness to be fixed, for cheaper headsets, for more accessible content… frankly it’s just not a thing yet.
Not in China though, where we are already seeing mass deployment of VR, with hundreds ofVR arcades established and accessible via pay-per-hour of game play. Up next, VR roller coasters and theme parks that provide a sense of full immersion thanks to the VR headset and ability to move around in an obstacle course created specifically for the VR experience. VR zones aside, consumers are also buying mobile VR hardware to use at home. While cheap hardware has been more popular, consumers have demonstrated a surprisingly high willingness to pay for premium VR devices. For example, a survey done by Niko Partners earlier this year showed that more than half of Chinese gamers are interested in VR, and that nearly 30% are willing to spend up to $200 USD on a device (significant considering that the average income in China is only ~$12,000).
Given this environment, leading Chinese tech companies such as Alibaba, Xiaomi, HTC, Chukong, Shanda, and Tencent are piling in, investing in not only local VR companies, but also increasingly in foreign AR/VR leaders so as to accelerate R&D and establish beachheads for future market expansion (e.g. Alibaba in Magic Leap, Lenovo/Tencent in Meta, and more).
Augmented Reality
And let’s not forget about AR, which many believe has the potential to be much bigger than VR. For those who are not as familiar with AR, I would recommend that you first review some of the excellent materials from Digi-Capital. And I quote Tim Merel here: “where VR puts users inside virtual worlds, immersing them, AR puts virtual things into users’ real worlds, augmenting them. VR is closed and fully immersive, while AR is open and partly immersive — you can see through and around it” (old but useful primer). In other words, VR is like entering the Matrix whereas AR is like looking through Iron Man’s helmet display.
In China, as it is overseas, AR has not yet gone mainstream but is poised for rapid user growth (Pokemon Go illustrates speed of adoption for light, mobile based AR). In the meantime, Chinese AR shops have been predictably clever in creating simple but relevant consumer offerings, including AR enhanced flash cards to facilitate learning or AR card games (think Magic, Yu-Gi-Oh! or Hearthstone) that bring to life favorite characters and have sold like hot cakes. Many tech execs are still carefully watching the space, seeing AR and its enabling technologies as a longer term investment for compelling future uses cases — a future in which consumers can point their smartphone camera (or smart glasses) to scan and recognize anything around them in order to get more information, to buy products direct or on impulse, to play immersive AR games with their environments, and much more. China has all the ingredients to do this at scale and speed, with the behavior of scanning objects already there (via QR codes), wide acceptance of mobile payments, and consumer openness to trying to new technologies.
Expect continued investment in AR in 2017 and beyond — when the dust settles we’ll have more clarity on AR’s mainstream use cases and the platform winners that will invariably capture most of the value creation in this market.
Foreign Entrants Stumble
Foreign tech companies continue to struggle in China. This shouldn’t come as a surprise, as there are few examples of these players successfully entering, creating a new market, and dominating. Instead the battleground is littered with examples of failure, from Google and Facebook that were outright blocked, to eBay and Groupon, companies that experienced significant growth in other markets but ultimately could not match the speed and ingenuity of domestic counterparts. I’ve written two articles on this topic (Part 1, Part 2), so will paraphrase below.
Uber selling to ‘uber’ rival Didi Chuxing was the big news of the summer. As a refresher, Uber entered China aggressively in 2013, having raised over $2 billion and set on conquering the China market at all costs. 3 years in, after having spent $ billions on unsustainable subsidies designed to gain market share, Uber was still unable to thwart local competition — embarking on a race to the bottom against Didi, and even finding itself blocked on WeChat, one of the most important avenues for customers to book an Uber car in China. Uber’s eventual capitulation to domestic competitor Didi, which acquired Uber China for a 20% stake in Didi worth $7 billion (making Uber the largest shareholder in what is effectively a monopoly business), is in many ways a great outcome. Bruised egos aside, $7 billion of value creation and significant ownership in a market that could never have been theirs is nothing to be ashamed of, and in fact is far superior to other deals brokered in China.
Apple also paid its dues in 2016. By most measures, Apple has won in China, owning a lucrative cut of the China market and booking upwards of $50 billion in annual revenue. Its China strategy is relatively straightforward — continue to design and produce the best phones in the world, then sell in China via its own retail stores or resellers. Even so, domestic competition has heated up in recent years, with Xiaomi at first, and then Huawei, Oppo, and Vivo producing increasingly better phones and selling them at incredibly cheap prices. Apple is clearly feeling the pain, and its recent $1 billion investment in Didi was reportedly executed toimprove its relationship with the Chinese government. Then again, Apple may have more fundamental issues to deal with than just a cooling China market.
Must Reads
15 tech stories that rocked China this year
The 10 largest investments in China in 2016
Analyzing China’s mobile advertising technology market
10 key points on the Chinese internet (In Chinese, so please use Google Translator. Significant improvements made via deep learning techniques, so translation should be very comprehensible — details here)
Expert Q&A of the Week
Question: Foreign tech companies can’t seem to win in China… are there any examples of success?
Response: It depends on how you define success — is it to generate x levels of revenue in the China market, get x return on investment, to become the market #1 or #2? Foreign players can be successful, they just can’t expect to dominate the market, especially in core areas (e.g. search, social networking, media, etc.). Let’s focus on one example here.
In 2008, Tencent successfully brought League Of Legends to China, which gave it confidence to acquire a majority stake in LoL’s maker Riot Games in 2011 and eventually complete the full acquisition in 2015. Over the years, Tencent has helped turn LoL into the world’s number one MMOG in China. So why did Riot succeed in China? Simply put, Riot it retained competitive advantages that could not be easily surpassed. Typically, your basic technology leadership buys time value, but in most cases Chinese competitors are able to eventually reverse engineer and replicate. However, LoL at the time was already the world’s most popular MMOG, with a brand and fanatic user base so strong that Tencent could not possibly replicate.
