Note: The Week in Geek continues to post less regularly during the summer months.
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How Microsoft Conquered China
China is different. The struggles of eBay, Google, and Yahoo all attest to this. It took Microsoft 15 years of lost revenue to learn how to do business in China, but IP-based firms can learn a lot from Redmond’s gameplan. I’ve had the good fortune of visiting MS Beijing and have seen their impressive operation first-hand. Microsoft took several steps in retooling its strategy to demonstrate its interest in cultivating local tech, rather than forcing high-cost products down the throats of the relatively poorer Chinese, Microsoft now offers low-cost Windows & Office suites (one version sells for $3), it invested heavily in local startups, it offered options for the Chinese government to swap out portions of Vista with its own code (allowing, say the Military to use their own cryptography instead of one ‘made in the USA’). A Shanghai center handles global e-mail support, and Microsoft’s Beijing research group has contributed key components to Vista and other products. Gates also concedes that initial piracy helped Microsoft, saying “It’s easier for our software to compete with Linux when there’s piracy” (China has its own Linux flavor – Red Flag). While China has a long way to go, IP rules are gradually changing, with China now acknowledging that IP protection is key to its long-term goal of developing a home-grown software industry. Beijing now requires PC manufacturers to ship PCs with legitimate operating systems. As of last year, market-leader Lenovo shipped as few as 10% of its boxes with an OS, and even US firms were selling ‘naked’ PCs, most of which would eventually sport pirated copies of Windows installed by buyers or even by retailers at the point-of-sale. Another mandate requires state-owned enterprises to use legit software. Gates claims the number of PCs shipping with legal code is now up to 40% – a big improvement. Projected ’07 sales are already 3x what they were in ’04. To be sure, the Chinese market is still small for Redmond – only about 1.5% of global revenue. The average Chinese PC nets the firm just $7 vs. $100-$200 in developed countries. But all trends point to key growth. Gates states “We were a naïve American company”. China is a big, important market that’s not an easy win. For students looking for a study abroad opportunity, get thee to China. MBAs – I can get you there next May.
Back to India
Harsh Manglik left India 35 years ago, became a US citizen, and had a great career spanning Booz-Allen, IBM, United Technologies, Accenture, and Symmantec. But he recently re-joined Accenture and headed to his homeland, charged with the task of heading operations for the consulting giant’s India-based staff of 35,000 (4,000 more than its US workforce). Manglik joins an increasing trend. In the prior decade we’ve seen Irish leave Boston as the emerald Isle raced from worst to first among European economies. Now the Asian exodus is in full effect. Indian returnees are referred to as NRIs (non-resident Indians), In China they’re Hai Gui Pai (or Sea Turtles). In Vietname, they’re Viet Kieu (overseas Vietnamese). Over the past two years, 20,000 Indians returned (the joke is B2B means ‘Back to Bangalore’). Even Bangalore’s frequent blackouts and snarled traffic (1 hr.+ for a 9 mile rush-hour commute) aren’t enough to dissuade those that have acquired a taste-of-the-west from returning. And last year over 40,000 Chinese resettled in the middle-kingdom. Given the number of returnees in tech professions, it’s easy to see how the trend will hurt those hunting for geek talent.
As promised from an earlier entry: I rarely recommend business books because it’s usually more valuable to focus reading-time on the trade press. Let’s face it, Tom Friedman could have made the key points in “The World is Flat” in about 30 pages; and if there’s ever a book based on a Harvard Business Review article – skip the book & go to the magazine. But here are two exceptions covering the critical topics of China and India – cover-to-cover great reads with popping prose and riveting examples on each page. Both are written by pros with significant and broad in-country experience.
In “China Shakes the World“, James Kynge, the former Financial Times Beijing Bureau Chief, draws on his two-decades of experience in covering Asia, creating what’s likely the very best book on contemporary China. Among my favorite facts in Kynge’s book:
- On growth, consider that in 1949 the year of the revolution, only 5 Chinese cities had a population above 1 million and just 8 had between 500,000 and 1 million residents. In 2000 (the last census year), those numbers had risen to forty and fifty-three respectively. Japan, by contrast, has only 6 cities with more than a million inhabitants. Each year since 2004, China has installed the equivalent of all the generating capacity of Spain, with no slow-down in sight. If China consumed oil at US per capita rates it would need 3x annual petrolium production.
- Consider one example of what this growth means for commodities markets. Demand for scrap metal is now so high that worldwide it has now become profitable for gangs to pilfer manholes and cut them up to sell for scrap. 150 manhole covers have disappeared in Chicago alone.
- While China is on track to soon overtake the UK as the world’s 4th largest economy, on a per capita basis, China barely ranks above the world’s poorest nations. Average income is just over $1,000/year. Even if China’s GDP becomes as large as the US (some predict that’ll be around 2040), per capita GDP will only be about 1/6th the current US figure.
- Some say China may grow old before it grows rich, given that the children of Mao’s baby boom (population roughly doubled in the last half of the 20th century) will be supported by workers born after the one-child-per-family policy. By 2040, some1/3 of China’s population, some 400 million people, will be over the age of 60.
- When reflecting on labor costs, one wonders how long the trend will continue. “Communist” China is far less socialist than Europe. European cows get a federal subsidy of about $2 a day, less than the income of seven hundred million Chinese. 120 million migrant workers in China receive no benefits at all. A generation of Chinese has known nothing but economic growth and few know how they’ll react if living standards stagnate with no social safety net in place.
- By some estimates, US, Japanese, and European companies may have been losing more than $60 billion a year through Chinese piracy of one sort or another. This loss exceeds the total flow of foreign direct investment into China (which was $56 billion in ’04).
- On piracy, consider that within months of Yamaha’s launch of its flagship Chinese motorbike, exact replicas were being made in 36 factories throughout the country at selling prices roughly 1/3 of the original. VW found original Jetta parts inside a knockoff by China’s Chery. The firm later created the QQ mini-car, a dead ringer for GM’s Chevy Spark, but which sells for nearly ½ the price. The main Chinese investor in Chery is SAIC, a firm that also partnered with VW and GM. Also consider the case of Harvard Business School Professor Paul Thomas, author of a series of how-to business books, and a regular contributor of jacket quotes and book forwards. Problem? There is no Paul Thomas – he’s as real as Mrs. Butterworth or the Hamburglar.
- Despite the economic boom, profits at most firms are non-existent or razor thin. Kynge points out the shockingly underreported fact that about 90% of the goods made in China are in chronic oversupply. Consider motorbikes again: By 1998 there were more than 1,000 motorbike factories in China, producing more than 15 million units a year. 5 million more than were sold. All manufacturers are in a brutal price war. Customers who want to buy a motorbike will also want to shop around for cheap motorcycle insurance, so it’s important for them to get a good deal on both the bike and the insurance cover to ride it. China’s Hongda (that’s not a typo) sells its cheapest model at 2,500 RMB a motorbike costs just a shade above its scrap value and just a bit more than the per-kilo cost of a live pig.
- The book profiles visist with Chinese ranging from peasants to high-flying execs like Lenovo’s founder (who in the mid 80’s lived in a tiny communal space at the back of a bicycle shed and dried his socks on a coal-burning stove in the middle of a single room his whole family shared). If the snippets above piqued your interest, you’ll love Kynge’s book.
The other strong recommend is “In Spite of the Gods: The Strange Rise of Modern India“ by Edward Luce, former New Dehli-based South Asian bureau chief for the Financial Times. Luce provides history and context to the economic and political rise of modern India. Nearly every major business is engaged in some form of outsourcing or service partnership on the sub-continent, but Americans know appallingly little about their partners. Some items from Luce’s book:
- India will have a population larger than China’s by 2032 (some predict as early as next decade) and will have more English speakers than the US by 2050.
- In 2005, the CIA predicted that India will be the world’s fourth most powerful nation by 2012, as measured by a combination of economic, military, and technological strength.
- While India has emerged as an R&D leader in biotech, has built a credible space program, and is the off-shore back office of the Fortune 500, India’s Tech sector employs only about 1 million people.
- Only about 35 million Indians (out of a population of 1.1 billion) have jobs formal enough to pay taxes.
- Roughly 750 million Indians continue to live in villages, almost half of which lack access to all weather roads, and many out of reach of hospitals or functioning elementary schools.
I’ve offered fewer ‘facts that pop’ above but “In Spite of the Gods” is equally highly recommended. The book provides a riveting introduction to Indian democracy, ethnic and religious diversity, geographic disparities, endemic corruption (Duke Cunnigham would be at home in New Delhi, where 100 of the 545 members of parliament have criminal backgrounds), and the wellsprings of hope.
Tearing Down the Wireless Fortress
As US TV stations are forced to go completely digital, a tasty slice of wireless spectrum, previously occupied by analog transmissions, will be auctioned. This is prime real-estate because signals in this space travel far and can penetrate walls (it’s the same space used by ‘rabbit ear’ TV antennas). Google and others lobbied heavily for a more open system and had half of their demands met. Carriers securing the new space will be required to allow third-party phones and software on their networks (in contast to the ‘walled gardens’ found on traditional U.S. mobile networks and a big step toward openness). The tech lobby wasn’t successful in convincing the FCC to require the auction winner to wholesale spectrum to third parties, though. While long term objectives are still unknown, the changes allow that if Google or another firm could secure the spectrum (the auction price is expected to be north of $9 billion), it could offer free or cheap wireless service to users who agree to view ads and content. For a view of how this would work, look to Microsoft. The firm will serve content and ads via WiFi networks through JiWire Inc. If the Microsoft ad-supported approach succeeds in driving revenue, Wi-Fi network operators might be persuaded to drop the subscription fees for public hotspots. It may make sense for a firm like Google or Microsoft to allow third-parties to build and manage the network. Competition within the spectrum could beef up ad firm margins and keep quality high, all while others maintain the network. Owning spectrum is just a small step. Firms would still have to spend massively to build an infrastructure of cell towers linked to land networks. That’ll cost about 75% more than the spectrum itself.
Jesuits in Second Life, while IBM issues Virtual Dress Code– (scroll to ‘And Now a Virtual Dress Code’ ½ way down)
An article in La Civita Cattolica, a Rome-based Jesuit publication, suggests that some priests are looking to virtual worlds as a way to save souls. Fr. Antonio Spadaro writes “At heart, the digital world may be mission territory“. Also in this article: IBM, known years ago for the white shirt & wingtip dress code, has issued an advisory for workers in virtual worlds to be “especially sensitive to the appropriateness of your avatar or persona’s appearance when you are meeting with IBM clients or conducting IBM business.” IBM has a large presence in Second Life, with CEO Palmisano famously conducting sessions in the virtual world. As Good Morning Silicon Valley writes: “In other words, it would be best not to come to meetings as a badger in a ball gown“.
Second Thoughts About Second Life
If the Jesuits show up, will there be any souls to save? While many articles on Second Life have trumpeted the fact that the virtual world has 8 million residents, at peak times only 30,000 to 40,000 users are logged on. From May to June, the population of active avatars declined 2.5%. The volume of U.S. dollars exchanged in Second Life fell from a high of $7.3 million in March to $6.8 million in June. The LA Times reports that during a recent visit, Best Buy Co.’s Geek Squad Island was devoid of visitors and virtual staff. The schedule of events on Sun Microsystems Inc.’s Island was blank, and Dell Island was also deserted. The Second Life American Apparel store closed shop (it was once the victim of an online bombing), and Starwood will be leaving as well, with one VP claiming “There’s not a compelling reason to stay“. Starwood’s venture into Second Life did bring some benefits. Feedback from Second Life gave the firm ideas for physical hotels including putting radios in showers and painting the lobbies in earth tones rather than primary colors. But now that the design initiative is over, there’s little value to the firm’s site. The Starwood Second Life space will be donated to a non-profit. TechCrunch offers a scathing analysis of the poor value garnered by even the strongest Second Life destinations, although it is important to note that many firms also benefited from free publicity garnered by their early moves.
Hollywood Pros Cash In on Video Craze
The viral-fueled reception of Will Ferrell video ‘The Landlord‘ (warning, foul-mouthed toddler), helped launch Ferrell’s Web site, ”FunnyorDie.com“, and demonstrating that mainstream artists are increasingly embracing Web-delivered entertainment. Now industry vets with cred are launching “My Damn Channel“, hoping the Net as Network has finally arrived. Backers include Harry Shearer, who provides the voices for several characters on ”The Simpsons”. Shearer will produce a weekly political and pop-culture satire show for the site. Music power-broker Don Was, who has produced records for Bob Dylan, The Rolling Stones and Bonnie Raitt, will host a music interview show with actor Paul Reiser. David Wain, writer and director of the upcoming film ‘The Ten’, starring Jessica Alba and Paul Rudd, will produce 10 comedy shorts.
God, Technology, and Platforms?
Fortune’s David Kirkpatrick offers a quick but worth-it read with tidbits from the magazine’s iMeme conference. Social networking was hot, with Facebook founder Mark Zuckerberg treated like a rock star. Catherine Cook, the 17-year-old co-founder of MyYearbook.com, explained why her service has become the third largest social network in the United States (Cook will likely be speaking at BC this year). And participants confirmed that China’s Internet is exploding. Just one effort, HerVillage.com, already has 40 million unique visitors per month, less than two years after its founding.
Building Onto Facebook’s Platform
Related to the piece above, MIT’s TechReview says the open Facebook platform is creating a new Silicon Valley Gold Rush to cash in on the openness. “Facebook is now a social operating system,” says Salil Deshpande, a partner at Bay Partners, which is funding Facebook application developers through its AppFactory program. Facebook, by it’s nature, is viral and very active. It’s 30 million members have frequent and meaningful interactions with one another and those that embrace a new app in the platform will directly or simply by their use, promote it to their peers. The apps are viral, but is there money in any of this?
Paradigm Shifts and Tequila Shots
Yelp still doesn’t make money, but in LA, San Francisco, and New York, it’s become the defacto Yellow Pages for the technoratti. Some firms have changed print ad copy to read ‘Read our reviews in Yelp!’. The service provides a way for users to offer customer opinions on anything with a zip code (think Facebook meets Zagats). Advice in any service like this is discounted by fraud possibilities (e.g. the competition slamming your firm), as well as wrong or inappropriate feedback (Fortune details a bogus roach sighting at a restaurant), but as a critical mass begins to use Yelp, review quality becomes more reliable with most users savvy enough to separate signals from noise. Many venues now have dozens of comments and geeks are referring to it as part of speech that can be either embracing (‘I Yelped that awesome crepe wagon’) or derogatory (‘That nasty waitress just got herself Yelped’). Buzz is created in many cities via hooch-soaked Yelp parties (Fortune refers users to Flickr for evidence). When an establishment gets multiple Yelps, a Yelp rep contacts the firm to sell them a Yelp window sticker and, of course, an ad package. With 1.8 million users a month, a firm with heavy infrastructure might fold major Yelps expenses (staff, servers, tech expertise, sales staff) into a great value add, say to enhance a mapping offering or to increase the local ad biz. Google, Yahoo, MSN are all possible buy-out candidates.
Microsoft buys AdECN
Also regarding Microsoft’s ad ambitions, the firm recently bought AdECN, an exchange similar to the stock market ECNs where networks representing Web sites buy and sell ad space, for an undisclosed amount. With the pending acquisition of aQuantive Inc., Microsoft gains an ability to sell ads across a network of Web sites. AdECN rounds this out by allowing Microsoft to sell unwanted ad space on aQuantive network sites and its own properties. The service may also increase what Microsoft can charge for high-demand ad space.
10 Automakers to Develop Operating System
If you didn’t know it, your car’s computer likely has an operating system. Electronic components and software are responsible for an estimated 20 percent of autombile production costs for autos and close to 50 percent for hybrids. OSEK by Bosch has about 70% of the current market, but the next generation car OS is still anyone’s game. According to the kind folks at Good Morning Silicon Valley, a standardized OS across the industry could have some big economic benefits, making it easier to bring new automotive technology into multiple models and bringing down costs. A consortium of 10 automakers and auto parts companies have announced a joint plan for an auto electronics OS. Participants include Toyota, Nissan, Honda, Denso and Toshiba. BMW, Mercedes and other EU automakers are working on a similar project. Expect a European prototype in ’08, the Japanese product in ’09.
Amazon Fresh – The New Milkman
In an invitation-only Seattle beta, Amazon.com will begin offering fresh grocery deliveries. The pre-dawn goods will be deilvered free in “temperature-controlled tote” as long as the minimum $25 purchase price is met. I’m surprised how few of the initial reports failed to make comparisons with FreshDirect in NYC. FreshDirect has long been a favorite teaching case of mine. For a primer, see the (crummy quality) podcast from about a year ago (scroll down to the first and second podcasts of the semester).
Turning Our Backs on Tech
Fortune’s Geoff Colvin laments the lack of IT grads in CS programs and at top business schools. At some schools enrollments have dropped 75%. Geoff talks with several faculty, but missed BC, where, after creative curricular and promotion efforts, our enrollment numbers for the first course in the IS sequence are up well over 100%. BC seems to have cracked the code on how to get majors interested in tech. This should be a much easier sell than others make it out to be. I’m happy to share our experience with press, recruiters, or other schools struggling to achieve success.
Last Laugh: I wonder which of “The Internets” he uses for “The Google”? (CNN Video: Ad will run first).