Harbinger Asia Tech Digest — Issue 2
Hi there techie and welcome back to Harbinger! Newsletter #1 (archived here) was quite successful thanks to you, and I must admit the steady stream of positive feedback has surpassed even my highest expectations. There is a genuine interest in this area, so I’m encouraged to keep writing and to share future findings with you. I’ve also gotten specific requests from readers, with asks to cover topics ranging from AI and bots to self-driving cars and the sharing economy. I do hope to tackle many of those topics, but must caveat upfront that my pieces will typically cover areas that I know well and can speak to with either experience or some form of conviction. This week we’ll stick to the mobile theme given particularly interesting announcements in this space, especially around messaging as a platform and mobile based augmented reality. Please subscribe here if you enjoy these!
Smartphone Wars (Attack of the Clones)
China is indisputably a leader in consumer mobile innovation and this begins at the smartphone level. Firstly, it is important to understand that, perhaps more so than in any other market, the pace of change in China is driven by brutal competition and the fundamental need to survive. As such Chinese companies are forced to move faster and make out-sized bets both financially and in terms of business model/product innovation.
In most markets, Apple and Samsung generate the lion’s share of smartphone sales, but in China 90% of sales are split across 4–5 domestic upstarts. Moreover, while global vendor rankings have remained relatively stable over the past few years, in China there continues to be significant turnover, with the periods 2014–2016 won by Xiaomi, Huawei, and BBK (owns Oppo and Vivo) respectively. A thorough explanation of these dynamics would require a full write up, so I’ll summarize high level drivers for now. Let’s start with Xiaomi — dubbed the ‘Apple of China’, Xiaomi experienced rapid growth by selling high quality smartphones at low prices, deftly managing its cost base by selling strictly online, leveraging flash sales, P2P and other earned media. This strategy of selling ‘good enough’ smartphones was quickly replicated by Huawei however, whose strong relationships with telcos and commitment to strategic partnerships (e.g. joint lab with Leica to improve smartphone camera) allowed it to capture mindshare amongst fickle consumers eager for the next deal. In 2016, Oppo / Vivo one upped both Xiaomi and Huawei by aggressively executing on a retail strategy for tier 2–3 cities (less saturated markets) and blasting its feature focused marketing strategy (fixated on the smartphone camera) across popular TV shows.
The chart below from IDC clearly describes this trend:
User retention figures from Toutiao analytics tell a similar story. Low retention rates are the norm for all smartphone brands in China; even Apple, once considered untouchable, has seen it retention rate fall to 50.3% (thanks to Ben Thompson from Stratechery for this insight)
In other words, there is low consumer loyalty for smartphones, as everyone wants the best, the latest, the best deal possible. Chinese consumers are willing experimenters, and they aren’t afraid to upgrade phones especially when switching costs are so slow (not just low cost of phone, but in China smartphone owners aren’t tied to specific carriers and their phones can use SIM cards from any vendor). As such, a consumer base that craves and expects change presents an ever present business opportunity for incumbents and new disruptors alike, fueling competition and invariably spinning the flywheel of innovation.
Messaging as a Platform
Given how fragmented and fickle China’s smartphone market is, the most dominant mobile platform in China is arguably not any traditional OS but rather a messaging app: Wechat. Most readers should already be familiar with Wechat so I won’t profile them here in detail. At a high level, Wechat started off as a basic messaging app comparable to Whatsapp, but has become something much much more. Today, Wechat is used by over 800 million active users (incredible ARPU of $7 vs. FB APRU of $1), and offers a wide array of services that includes messaging, social media, payments, food delivery, taxi hailing, AI personal assistant, and more, often created by 3rd parties and all rolled into one super app. Increasingly in China, developer networks are no longer established around traditional mobile operating systems, but rather for Wechat’s mobile messaging platform.
Which makes the latest news about Wechat’s roll out of ‘mini-programs’ so interesting. These mini-programs are essentially embedded apps within Wechat that do not require installation, freeing up storage space on phones and further removing friction for end users by allowing them to access services immediately.
So why is this important? Well to caveat, this concept of app within a app is nothing new. Google rolled out something very similar called ‘instant apps’ this past summer (albeit in beta), and Baidu introduced the ‘light app’ back in 2013, but both experienced skepticism within the tech community and achieved limited user traction. Wechat’s foray into this space is much more noteworthy, because 1) Wechat operates at an incredible scale of 800+M monthly active users; and 2) these users are already actively using comparable services from within Wechat. Mini-programs serve to facilitate this further, and while it’s still early days, Wechat just might make this work, taking us beyond the app constellation paradigm of the past 10 years and introducing messaging as the new dominant access point.
If mini-programs take off for Wechat, then there will massive implications for the entire Chinese tech ecosystem and beyond. Remember, the most valuable platforms operate at a user choke point, and because Wechat monopolizes attention across smartphone devices, content creators and developers are incentivized (and in some cases forced) to build for that base. This is comparable to Facebook owning media distribution, forcing content and media stakeholders to play by the rules of its ecosystem, changing the advertising model as we know it. Wechat’s impact will be much much bigger, because it is the direct gateway to not only content and social interaction, but also the more valuable services and commerce transactions. Just think about that for a bit…
There is a lot to absorb on this topic, and we could probably spend several newsletters worth of content exploring just Wechat’s outsized influence in China. If you’re interested, I’ve included in the ‘must reads’ section two terrific articles that examine Wechat in detail and offer a detailed analysis of mini-programs, including its impact on the consumer experience and its very important role in Tencent’s broader strategy.
Mobile AR is the (Near Term) Future
Baidu is making a lot of noise these days, and in a series of recent announcements — starting with launch of its AR platform “DuSee” in August ’16, to the establishment of a $200m venture fund for AI/AR, and finally the opening of its AR lab this past week — Baidu is strongly indicating its commitment to building smartphone based AR applications (i.e. view AR animations overlaid on top of real world environments). For example, Beijing subway goers can open up their Mobile Baidu app to scan specific images around the city and view 3D simulations of Beijing’s historical gates (some more examples here).
So why are they doing this? As context, it’s helpful to first understand dynamics in the broader O2O (online to offline) market. At the forefront we see the three largest Chinese internet companies (Baidu, Alibaba, and Tencent) with core competencies that are directly linked to O2O behaviors — search, mobile, payments, commerce — each with leadership in its own area. While Baidu is dominant in search/mapping, Alibaba owns commerce/payments, and Tencent leads in mobile/gaming/social, and for these giants O2O is at once an opportunity and an existential threat. Recall my earlier point that Chinese innovation is often times driven by brutal competition — in this case, allowing a competitor to win the O2O battle could severely cripple Baidu’s current strength in search. And in this ongoing battle, Baidu is already losing, suffering from tightened internet regulation that directly impacts its bottom line, while gradually losing share in search / discovery to Alibaba (offers better product search) and Wechat (houses significantly more services). Baidu is suffering and needs to offer something fresh and differentiated to grow user acquisition while retaining its existing base.
While this all sounds good, let’s not forget that there already exist numerous AR companies overseas whose product offerings surpass DuSee both in terms of technology and business model maturity. While these players have experienced varying levels of success, to date none has yet scaled to become a mainstream consumer platform (although Snapchat does offer basic AR features, and Blippar has achieved good initial traction and has been working on some pretty innovative stuff). That being said, I do believe Baidu has a shot at accelerating the mainstream adoption of AR. Firstly, I cannot emphasize enough how hard it is (and how long it takes) to change consumer behavior. Here the China market itself offers unique advantages, with hundreds of millions smartphone users familiar with the scanning action via QR codes, already transacting via mobile payments, and willing to experiment. From an execution perspective, Baidu has all the required pieces, including a strong foundation in AR/AI technologies, instant distribution through its existing apps, powerful brand recognition and user influence, and financial/strategic commitment from senior leadership. And lastly I comment from a product perspective, Baidu is smartly treating AR as a complementary feature on top of its existing app functionality (as opposed to a standalone offering which can fail where there is not enough utility to warrant download and consistent usage). This approach is similar to how Wechat unlocked tremendous value with the QR code (e.g. scan to add a friend, to unlock payment or content, etc.) on top of its core messaging solution whereas on the flip side, in the US the QR code died as a standalone app before it could take off.
Here’s to hoping this works out for Baidu. If AR can go mainstream in China first, that will be a boon for the entire sector and massively benefit user education globally (think impact of Pokemon Go) while providing a blueprint for success overseas (i.e. FB’s product roadmap borrows generously from Wechat). It certainly doesn’t hurt that Baidu just picked up Qi Lu, world renowned authority on artificial intelligence and a seasoned exec who most recently ran Microsoft’s applications and services business.
Oldie but goodie… the best deep dive on Wechat I’ve come across — When One App Rules Them All: The Case of WeChat and Mobile in China
Yale entrepreneur Yelin Qiu cuts through PR fluff to examine specific use cases for ‘mini-programs’ and the implications of Tencent’s long term strategy — Wechat Mini Programs Explained
Tencent Company Party Subjects Female Employees to Humiliating Game… this is sad and unacceptable
And related… Chinese VC: We don’t invest in female CEOs