Tangos Chan on the Chinese Internet (Beijing 05/13/2008)

This post contains parts of a 2 hour interview I did with Tangos Chan from China Web2.0 Review. Among others I asked him about his views on the globalization of Chinese Internet companies, the future of the Chinese Internet market, and the role of VCs.

Pieter-Paul Walraven: What are your thoughts on Chinese Internet companies going abroad?

Tangos Chan: Actually most of the Chinese companies will not consider a globalization strategy so far because the Chinese market is huge. So if they can serve this market well they could become very big companies. Look at for example Baidu and Tencent. Of course there is also the language barrier. I think an English language service in the US such as Google is automatically a global service because it serves all the English speaking people. In China companies are bound to be a Chinese service.

So I think there a really 2 kinds of services that will consider to go abroad. Firstly it is the very big companies such as Baidu, Alibaba, and Tencent. These companies will start to consider to get more users in overseas countries. I think most of these companies will start from some developing countries. Or some eastern Asian countries such as Japan or maybe they are also considering Korea. I think Tencent actually has a dedicated team to learn from new applications in Korea and copy it to Tencent.

Secondly, another kind of service is the new start-ups that have been established by returnees. Or established by someone who has worked for a big international company such as Microsoft or Google. So someone who has international market experience. These kinds of people will launch their service with an English version from the first day.

You should check out a web service called Mojiti. I am not sure whether this start-up is still alive now, it is actually established by one of the ex-Microsoft guys. The service is about video, you can make subtitles or add text on a video. The service was acquired by Hulu, a video-site launched by NBC and News Corp. So the whole Mojiti team is working for Hulu now. I think Hulu just thought that the Mojiti technology was good so they have acquired the team for their technology background. I think these kinds of services will consider a global entry from their first day.

PPW: So do you think that there are enough innovative ideas that stand a chance internationally?

Tangos: I think p2p video streaming technology is quite good in China. So services as PPLive and PPStream. They are leading in the global market. I heard that France Telecom is currently partnering with a Chinese company in order to try to implement the technology in the French market. So I think that there is innovation in the Chinese market but it is still only a small percentage. Most of the Chinese companies just copy ideas from countries overseas, they copy many ideas from the Silicon Valley. But I think that for p2p video-streaming China is quite innovative.

Also IM bots is something that China is good at. So you chat with a robot with your IM service. There is a company called Xiaoi that is the most well known IM bot in China. They are the official partner of Windows Live Messenger in China. So if you want to check the weather you just ask a question to the bot. They received plenty of VC funding, I believe IDT has invested in them. I have blogged about this a while ago.
Actually in China there are also some companies that offer IM bots where you can order your lunch. You can just type in what kind of food you want for lunch and maybe half an hour later it is delivered. So you just ad this bot as a contact in your MSN. So then you just type in what you want to order.

Also gaming companies like Shanda and Perfect World are going abroad. I believe Perfect World is besides their operations in the US also starting in Europe. Tencent is also cooperating with AOL to provide casual games. I think for online games, casual games will have a greater chance to succeed overseas when compared to MMO’s. This is because Asian and Western companies have very different cultures among MMORPG games. So I think that games that are very popular in China or in Korea might not be as popular in western countries. Also in China over 60% of the netizens play online games and I think that percentage in the States is much lower.

PPW: Do people in lower tier cities play games more often than in metropolitan cities?

Tangos: Because the currently available statistics are only on everybody that plays online games we have no idea about how many of them are playing casual games and how many are playing MMO games. I think in China more and more people are starting to play online casual games. So if we consider the whole landscape including MMO and casual games I don’t think that percentage will drop.

According to a recent report the percentage of users who play online games in urban cities is even higher in rural areas. It is about 10% higher. It is a report about Chinese Internet users under the age of 25. I think that the numbers for urban cities are about over 63% and in rural areas it is only about 50%.

PPW: Why is this? I would expect differently because in urban areas people have alternatives for entertainment.

Tangos: According to the report the usage rate of almost all-online services in rural areas is lower than urban areas. Only 2 services share a similar percentage of urban and rural. One is online chatting so QQ. And the other is music download. For the rest of the services the usage rate is higher for urban areas. I think that these numbers are not about how much time users put into online games, but it is about how many of them have played online games. So maybe in urban areas people play short games during their break at work. But also maybe for the people in rural areas, they mainly use the Internet for QQ. Therefore they have similar usage rates compared to urban cities.

PPW: How should companies cope with the rather skewed user base of China; sophisticated users in the eastern metropolitan areas and less experienced netizens in the more rural areas in the west?

Tangos: Actually I think that some companies just focus on one kind of user. For example the SN website called 51.com. I think they are the MySpace of China. They target users in 2nd or 3rd tier cities. I believe they have only a low percentage of users in the big cities. Xiaonei is more targeted on university students so they don’t have many members in the more rural big cities.

But it is not easy to cover all the users across China. It also depends on your service because if you are a search engine like Baidu it is not really a problem because everyone uses a search engine in more or less the same way. For SN websites it is different. Maybe for video-sites it is not really a big deal either because in both urban and rural areas people will watch dramas.

PPW: And what about MMO companies, is the skewed situation a problem for them?

Tangos: I don’t think the big gaming companies will have a problem. Maybe the only problem is whether the Internet cafés in rural areas are able to run the games or not. But for users I don’t think it is a big problem. If you look at the figures, for Internet users younger than 18 years old, the percentage of them that has ever played online games is over 76%. So this is the highest group of users that play online games. So when people grow older the percentage decreases.

PPW: Do you think Social Networks have a lifecycle, like games have?

Tangos: I think the challenge is whether Facebook can provide enough applications or new services, which can attract users. Because as a user when you are in a SN for maybe 2 or 3 months you can sometimes feel fatigue. When you log in you just don’t know what to do on the network. So I think that is one of the success factors of Facebook; they have launched a developer’s platform. So users have many new applications to play with everyday.

I think that will be a trend for Social Networks in China. So far none of the Chinese SN’s have opened their developer platform. MySpace China is working on OpenSocial and also some smaller startups are doing this. City!N is working with OpenSocial too.

PPW: You think that there is a Chinese Internet bubble coming up?

Tangos: I don’t think that there is a bubble in China. This year investors became more cautious in new investments though. Of course there are some very big investments but generally speaking the investment market environment in Internet start-ups is not so good. There are many small start-ups that have difficulties in raising funding. Especially Chinese companies that do not have a very good business model. I think 2 years ago the market environment was much better. 2 years ago there were plenty of little start-ups without a good business model that have received funding from investors, but after 2 years investors realized that some of their investments are not doing very well now. So now they become more cautious.

PPW: Do you think that another reason for VC’s becoming cautious has to do with the fact that there are not so many ideas to copy from other countries anymore; Chinese entrepreneurs have to start coming up with their own stuff?

Tangos: A copy is not a problem for an investor. But also every investor is looking for something unique on a global level. If you have a service, which is truly unique, in China investors will hesitate and they will be more comfortable to invest in copied ideas. I also think there are too many companies that want to invest in China. I think a lot of VC’s are managing too much money so they are eager to invest and make some big deals. So for new start-ups it is not easy for them to raise small funds, small rounds. Many VC’s just ignore fundraising for under maybe $5 million. There are VC’s that used to invest maybe $1 million to $3 million, but currently they will only consider investments from over $3 million. So they have too much money and they need to invest it all within 1 or 2 years and they don’t have enough energy and time to invest in many small start-ups. They need to look for other bigger investments.

PPW: It seems that the Chinese government has a pro-active approach in the development of the Chinese economy, they realize that the next step is innovation and setting up Chinese brands in order to sustain the development.

Tangos: Yes. But it is really not easy. If you want to make Chinese more innovative and creative you have to educate them from the bottom up, so start with the children. According to my experience I think the educational system in China, from kindergarten to primary school, does not encourage children to think creative and does not stimulate creativity overall.

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