Nokia the iPod Killer? Bwaaaaaaaaaahahahahahahahahaha….

Somewhere on Jingshun Road
Enjoying the Africa-induced gridlock
1047 hrs.

An article by Alexander Dryer entitled “Apple Chomper: How Nokia can knock the iPod from its perch ” that was kindly forwarded by Neil Kothari has me wondering, once again, about what sorts of hallucinogenic substances they must put in the coffee over at Slate. Dryer, it seems, is convinced that Nokia’s N91 is the long-awaited iPod killer.

He cites all sorts of reasons: it has an 8gb hard drive, it’s sofware is usable, it is a “good” music player (only good, huh?) and a superb phone. Nokia has purchased Loudeye so it can build online stores for carriers. Also, Nokia sold 89 million phones last quarter vs a mere 8.7 million iPods. Oh, and it is opening sleek retail stores that copy Apple so slavishly that it has actually hired the same designer.

That’s why Nokia is the Apple killer?

Sorry, but I’m somehow not convinced.

I suppose it was inevitable that Nokia would try, given the long and distinguished list of firms that have gone before them. But the history of the consumer products industry over the last five years is replete with the corpses of companies that have tried to knock the iPod from its perch by a range of means and have returned from the fight mauled by wounds mostly self-inflicted. I’m afraid Nokia will be no more successful trying to kill the iPod with its candy-blob phones than it was when it tried to whomp Sony, Nintendo, and Microsoft in the portable game player business with the über-flop N-Gage.

Here are the reasons I would say this effort is a non-starter, in general but especially in Asia:

One Expensive Candy-Blob
Charging $599 retail for a “good” 8gb music player and a great phone will kill this. I can buy a great 80gb music player and a great phone for less money. I’m hardly a music aficionado, but after I loaded my 300-odd CDs and some podcasts onto my player, I was well into 20+ gigs, and that’s before adding video and any data files I want to carry. And I’m sorry, but I can’t be bothered with having to choose what songs go into my player and what songs stay on my drive, and if I wanted something that loaded only a playlist or two for jogging or commuting, I don’t need 8gb. I need 1gb.

The other problem with the device is storage. Dryer is quick to dismiss flash. He should slow down and think about what happens to battery life when you throw a winchester hard-drive drive into a phone. All those moving parts suck juice. I can live with 12 hours battery life – less – on my iPod. I cannot live with charging my mobile phone every 12 hours, or even every 24. You buy and N91, and you had better be ready for the music function to make your “great phone” less than adequate in use. “Yes, I’d like three batteries with that, please.”

Oh, and one more thing on price: competitors like Motorola and Samsung have already introduced phones in different parts of the world that do everything this product does, PLUS provide satellite TV, for the same or less money. So even on the basis of functions, the N91 is a loser.

Help Us North America – You’re Our Only Hope
Fighting Apple in North America is just plain bad strategy. It is Apple’s home market, the one where it is most deeply embedded, and where the total Apple ecosystem is strongest and, frankly, where Nokia’s brand name is weakest. Europe, Latin America, and Asia, on the other hand, are much less Apple country and are places where Nokia traditionally has stronger market presence. (Indeed, I’ve been involved in long, late-night debates over whether or not Apple really sees Asia (ex Japan) as a strategic market. Corporate structure and marketing efforts to date leave that in question.)

Further, they are parts of the world where the mobile music usage model is still in its formative stages. People aren’t used to carrying music players, but they ARE used to carrying mobile phones, and are already proving more amenable to using their phones as their primary music players.

Of course, Nokia is losing these battles as well, especially in Asia. Against the N91, over 75% of Motorola’s phones are music enabled. The second-generation ROKR – the E2 – has been doing brilliantly, as has, which is the largest legitimate music download service in greater China. Sony-Ericcson, Samsung, and LG have taken up large chunks of the mobile music market, and Nokia is showing up late at the party with a product too large for the Asian hand, pocket, or purse. So perhaps Nokia is putting so much focus on the U.S. because it hopes the lighter competition will help. Or maybe they think U.S. consumers will be less sophisticated than their counterparts in Japan, Korea, China, and Hong Kong.

It’s the Music, Stupid
The one thing I haven’t seen in all of this discussion of Nokia’s supposed ascendancy has been any relationships the company might be forging with record labels and artists. If you will recall, it is exactly those relationships – with the actual owners and creators of content – that gave iTunes its legitimacy among consumers and gave sales of downloads legitimacy with artists and labels. Unless Nokia lines up the backing of major labels – and the independent artists who are generating more and more of the world’s leading music – the ecosystem will not materialize, and the operators will go elsewhere.

This all assumes, of course, that Nokia is genuinely interested in making the legitimate discovery, purchase enjoyment and sharing of music part of its overall strategy. The other possibility – far more likely, IMHO – is that it could care less about whether the music is legitimate or not, as long as the phone sells. Short of a clear commitment to digital rights management and relationships with labels and artists at all levels, it would be hard for Nokia to claim that the N91 and its siblings do much more than provide pirates with a way to enjoy music.

It’s the Experience, Stupid
Mobile music is about much more than “stick it in the phone and listen.” The full experience includes discovering the music, purchasing it, storing it, playing it, and sharing it. From what I can tell, storing and playing seems to be covered, but as noted above actually discovering the music, purchasing it, and sharing it are missing.

Finding new music – or at least a song we’ve heard that we like – is an essential part of the entire experience. If it wasn’t HMV, Amoeba, Tower Records and the Virgin Megastore would have exited the business long ago. In countries like Asia where radio is basically a dying medium, other means of musical discovery are becoming ever more critical to the health of the music industry. The ability to conduct limited sharing of music, to provide an online alternative to radio, and to share information about music and artists with others of similar taste lies at the core of a successful system. I don’t see that coming from Nokia so far, and given that they’ve got music devices out there, it’s pretty clear that in Espoo Finland, the device comes first, and the experience is an afterthought – an unnecessary evil.

Clearly, Nokia have it backward.

This is the company that’s going to beat Apple? I think not.

The Voices Behind Standards – Appended

Back in the Hutong
Recovering from 5 Days in Tokyo
0913 hrs.
Appended a day later
0855 hrs.

Scott Kennedy at the National Bureau of Asian Research, a U.S. think-tank, has produced a compelling paper that underscores the importance of business coalitions in standards battles in China.

Scott uses different wording, but his point echoes one that Susan Tomsett and I have been making for a very long time – what moves regulators, policy-makers, administrators, and GONGOs in China is a chorus of voices of domestic entities all pushing in one direction, with foreign voices faint if present at all.

You can download his paper (a pdf) here.

Scott dropped me a note and pointed out (correctly) that his paper does not suggest that foreign firms have little input in the process, but that they are more successful when Chinese speak out on the same issue.

This is absolutely the case, and the record bears growing testament to support Scott’s point.

Where Scott and I perhaps diverge in our thinking is, I believe, a matter of focus. Looking at what has been successful to this point, Scott is spot-on: it has been a foreign entity taking a stand that is supported by local voices that has historically won the day. When I was working with Qualcomm in the late 1990s, that is essentially the tactic we used to help gain final approval for CDMA.

Looking ahead to what will be required in future efforts to move the regulatory needle in China, I frankly see the role of foreigners speaking for themselves as being in steep decline. The broader trend will be for local coalitions to assume a greater and greater role in the standards debate (and in most debates around IT policy) and for foreigners to gradually step behind the screen.

When you look at the policy direction toward independent innovation, away from foreign investment, and a process infused with a growing discomfort with foreign participation in regulatory issues, you can understand why local voices will become even more important in the process than foreign voices. Indeed, foreigners are probably best advised to step behind the screen and counsel the locals in the process, stepping forward to provide an independent voice only on when appropriate.

Bottom Line
Building coalitions of influential local entities is essential in the standards process – Scott Kennedy has documented that amply. Going forward, those local entities are going to become the primary drivers of policy, with foreigners playing an increasingly subordinate, supporting role – David Wolf contends this.


Green Guards

“Xi’an Marks the Spot: The state of China’s student activist movement” by Dongli Zhang and Nathan Myeth, Grist 17 October 2006

A fascinating article suggesting that the government is allowing – if not encouraging – the growth of a student-based environmental activist movement in China.

It makes sense for two reasons. First, it’s a relatively safe direction in which to channel the political discontent of China’s students. Second, it becomes a boogie-man the government can use to help bring to heel local officials whom, for reasons of self interest, refuse to strictly enforce environmental regulations.

All of which sounds good, and which promises to be interesting to watch. Best case scenario would be for these kids to do some real good in raising awareness, saving a few species, serving as hard-to-corrupt watchdogs, and perhaps even solving a serious problem or two. China could use it.

But political movements, no matter how benign their roots, can take unpredictable courses. I can’t help but be concerned that eventually a lot of these kids are either going to a) wind up in jail, b) wind up as tools of the government, c) wind up as pawns in a political struggle, or d) become a force of nationalism.

I hope not. I really hope this movement gets China thinking about cleaning up its environment the way the environmental activists in the U.S. managed to do during the late 1960s and the 1970s.

WSJ Picks Up the Pom-Poms and Drops the Ball

In the Hutong
Listening to trance
1217 hrs.

The editors of The Wall Street Journal ran a laudatory article about U.S. SecTreas Hank Paulson, whom they are crediting for singlehandedly preventing a US-China blowup.

Whether the Secretary deserves sole credit for that effort or not is a matter of debate.

What IS clear is that The Wall Street Journal is getting a little lax on checking its facts:

So has China “cheated” in the trade arena by holding the yuan artificially low relative to the dollar? The yuan has been pegged at 7.92 against the dollar since the mid-1990s, and Beijing has begun to allow a modest fluctuation in the last year or so.

Um, no. I think they’re confusing Hong Kong and China. Just to clarify: the Hong Kong dollar has been pegged at around 7.7 to the US dollar since the mid-1990s, and the Chinese Yuan spent most of the past decade somewhere in the general neighborhood of 8.3 to the U.S. dollar (officialy, of course. The last half of the 1990s saw a burgeoning black market in dollars that pushed the actual exchange rate to 9.5 to the dollar on the streets of Beijing.) The Renminbi has already been allowed to depreciate 5% against the dollar, and IMHO Paulson’s predecessor gets whatever credit goes to the U.S. Department of Treasury for that, not Hank.

Gotta watch it guys. This kind of thing can blow the credibility of an important Op/Ed.

Hutong Snark

In the Hutong
Dealing with airborne particulates
2142 hrs

The FT is reporting (from Geneva, mind you) that China has passed Germany in patent filings, becoming the world’s fifth largest source of patent filings, a 700% increase in 10 years. Factor out the patents filed by foreign companies, and you’re still left with a 350% increase. That’s a significant increase in patent activity by any measure.

It’s a positive sign in that it represents a growth in China’s intellectual property. That is bound to be a good thing for the future of IPR protection in China – one tends to be more enthusiastic about IPR protection when one has skin in the game.

Of course, these are filings. There is no discussion of the quality of those applications, or the patents actually granted, or how many of those applications are, um, highly derivative of innovations from elsewhere.

* * *

Andrew Lih, who is writing a book about Wikipedia, has done a superb article covering the quietly improving situation of Wikipedia access in China, a fact that has resulted in much rejoicing here in the Hutong.

I still wonder – how much of the blockage was content-related, and how much of it was a bald-faced attempt to give Baidupedia some traction in the market?

Protectionism comes in many guises, perhaps even wearing the fig-leaf of censorship.

* * *

And while we’re on the subject of access, a significant story of blockage that never gets covered is why I can’t access sites like (The U.S. Army), (The Pentagon), and www.d-n-i-net (Defense and the National Interest, a superb blog on national security.) They all work from Hong Kong and Singapore.

However, I have a sneaking suspicion that the problem is not The Great Firewall of China, but an indicator of a small, growing movement of websites that block Chinese IP addresses.

Care to comment, Mr. Rumsfield?

* * *

In one of those wonderful little coincidences, I had just read a series of articles by Dan Harris in The China Law Blog (if you don’t read it, why the hell not?) about the dangers of reliance on guanxi when doing business in China. Frankly, I find all of Dan’s points spot on.

So in one of those juicy moments of irony that only an RSS reader could make possible, five minutes later I was reading an interview by Sean Silverthorne on Harvard Business School’s Working Knowledge site. Sean was speaking to Harvard lecturer Dan Isenberg about a one week trip that nine Harvard faculty members made to China in June to learn about, among other things, entrepreneurship in China.

The article concluded with Sean asking Professor Isenberg about what advice he would give to readers thinking of creating new businesses in China. Isenberg’s response?

“Go there now. When there, listen, observe, learn. When you are ready to do business, form a network of trusted insiders to help you get things done there.” [emphasis added]

Loose translation – Harvard Business School says use guanxi.

After coming back all starry-eyed and breathless from a one-week trip, you can hardly blame them for reaching superficial conclusions. But I mean, really, is this what the cream of the world’s future business leaders is learning about business in China?

* * *

And while we’re on the subject of that esteemed institution of higher learning, it’s worthy noting a recent Richard Tomkins article (thanks, Fons) that Harvard labor economist Richard Freeman recently gave a paper at the Federal Reserve Bank of Boston noting how quickly China is moving up the technological ladder. As evidence, he cites the fact that over 750 multinational firms have set up R&D facilities in the PRC.

Yes, they have, and some of those facilities actually do meaningful R&D. But how many are just there for the government relations value, and how many are just localizing product versus doing basic research and genuine development? There are plenty of the latter, but nobody knows how much of the former is out there.

On the other hand, why ask about the value of the statistic when quoting it will do nicely?

Unfortunately it’s that kind of loose play with numbers that could lead to overestimating exactly how far China has come technologically, and coming from a credible source like Dr. Freeman and the Boston Fed, such an overestimation would have repercussions in board rooms and hearing rooms around the U.S.

On a day when China has just canned its own chief statistician, there has never been a greater need for rigor on statistics on the PRC.

Shanghai, the International City (Until 10:59pm)

In the Hutong
Watching the workers fit my old desk partitions into a Daihatsu microvan
0851 hrs

The Village Grouch (Hutong resident, author, raconteur, and Scuba pooh-bah) was in a foul mood when we spoke this morning. Seems The Grouch was on the 8:00 PM rocket from Beijing to Hongqiao airport in Shanghai, a miserable commute under most circumstances, but miraculously on-time last night.

Grouch lands on time at 10:05 PM, does that long slog from the gate to the street, gets to the taxi queue at 10:30 PM, and discovers that due to a “shift change,” there are no taxis to be had.

Now, let’s consider this for a moment. A major airport. China’s largest city. Before midnight. And NO taxis. Not because so many people are riding cabs, not because of awful weather. A shift change.

And Shanghai is an “International City?” Right.

Fly into JFK any time of the day or night, and there are plenty of cabs. Same for Heathrow, Narita, Chep Lap Kok, and Changi.

I know it sounds like picking nits, but it is indicative of the fact that China Hype has reached such a level that many of us wouldn’t even question the validity of Shanghai’s claim to be an International City a la New York, London, Tokyo, Hong Kong, and Singapore. But a municipality where the freeways are sinking, getting a business license takes MONTHS, and you have to time your arrivals for the taxi drivers is NOT an international city. It’s a cow-town with skyscrapers.

The skyline may be beautiful, and you may even be able to buy a decent meal on The Bund and buy a Starbucks. But Shanghai has a ways to go before it catches up with its own self-image.

And it’s an example of how many of us – myself included – need to fine-tune our B.S. detectors.

It’s YouTube, Jim, But Not as We Know It

On the Jing-Shun Highway
Enroute Hard Rock Beijing
1153 hrs.

Jonathan Landreth of The Hollywood Reporter just called me with a really good question: what does the YouTube deal mean for Google in China.

Frankly, I’d say nothing for at least six months. Apart from the fact that the deal needs to close, Kai-Fu Lee and the team over at Google China are wise enough in the ways of the Middle Kingdom to know that YouTube in the form that it operates in the U.S. would not fly with the Chinese authorities. A website that plays videos but is not a licensed broadcaster? That’s a no-go: we know that from the way the IPTV trials are being handled. A foreign website? Playing foreign videos? Or worse, self-produced videos from local Chinese? Even worse, owned by a foreign company with huge resources?

No, YouTube in its current form would set off way too many alarm bells around the capital for Google to even consider launching it in China.

Indeed, after the announcement of the past two days (the content licensing deals in Hollywood and the Google buy) there may well be regulators who will argue that YouTube is no longer an amusing little fringe site, that it has now become a serious online media player, and for that reason should be more closely monitored, if not blocked.

So I suspect Google is going to be very low-key in China about the YouTube purchase. “Yes, we’re very pleased. No, we have no plans in China at this time.” Nothing to see here, dear regulators. Move along. Move along.

Hey, Kaifu, does YouTube even translate?

At the same time, don’t think for a minute that the wheels aren’t turning at GooglePlex Beijing. YouTube is too a high-profile a purchase, and China too important a market, for Google to forego an opportunity to profitably put the two together. (This is the same logic that brought the tough and ambitious Mrs. Murdoch back home to try to set up MySpace China. But we digress.)

So what must Google do?

China is not the only place Google is likely to face challenges as it makes plans to take YouTube global. In Singapore and in other countries where Google does business, there will be authorities who take issue with the concept of a video sharing site, and Google will face a choice: don’t launch YouTube at all, or launch a localized version that operates in accordance with local laws and sensibilities. I’m betting on the YouTube Local approach, especially in non-English-speaking territories.

Could they do this in China? Probably – by working with a local partner who is a licensed broadcaster and lending the name YouTube to the enterprise. Google provides the brand, the technology, and the hardware. The broadcaster provides the premises, oversees the operation, and makes sure nothing gets through that might offend a senior Party official.

The bigger question, of course, is how bad Google in the U.S. feels like they were burned by the whole “kowtowing to the Chinese authorities” issue. The folks in Mountain View may not be ready to go through all of that again in order to launch YouTube in China. Make no mistake – Google will have to give up a lot of control in order to get YouTube off the ground in the PRC, and that will certainly not sit well with the legions of well-meaning but non-vested Self-Appointed Guardians of the Interests of the Chinese People in newsrooms and living rooms across America.

So Google’s real choice will be to either a) forget the whole thing and focus on YouTube in markets where it won’t face regulatory issues, or b) move forward with localized versions but suffer the slings and arrows of global Internet activists.

Not a terribly appealing choice.

But, in the words of The Jedi Master, there is another.


Mobile TV is coming to China – a standard has been selected, trials are underway, handset manufacturers are designing phones, and operators are trying to get their heads around how mobile television will make them wealthy. Meanwhile, the government is trying to figure out how to regulate mobile TV, who should regulate it, and what kind of content is permissible.

As with television elsewhere in China, though, the real challenge is going to be getting enough content into a service to make mobile TV appealing to consumers. Mobile content has its own particular requirements – small screens, short programming, and loads of choice. From that perspective, YouTube is brilliantly suited to mobile television: short duration videos, lots of low-definition stuff that people are used to seeing in small screens, and content that is mostly already formatted for wmv and RealPlayer. Launching YouTube in China as a video wireless value-added service provider (V-WVASP?), combined with some clever advertising techniques developed by YouTube and Chinese mobile TV pioneers like 21cms, could be the ticket.

There are a few advantages to this approach.

First, the nature of mobile video, going as it will from the content provider (YouTube) through a broadcaster (say, CCTV) then a carrier (China Mobile) runs the content through a range of filters. YouTube would not necessarily have to shoulder the burden of content controls, as submission and content guidelines would be enforced by the carrier and the broadcaster. This would take at least a chunk of heat off of Google from the activist crowd. After all, this is a very different business with a very different model than YouTube is now.

Second, over the long term the mobile TV market is going to be much larger than the website market. Initial uptake of mobile TV will be slow, but over time television functions will become increasingly common in handsets, especially once high-speed wireless networks are launched in China. Google has an opportunity with YouTube Mobile to become a player and a driver of mobile television, not to mention the advantages that come from getting in early and securing key content deals, building a branded service that could give it the kind of consumer affinity that has escaped other WVAS providers.

Finally, the YouTube Mobile direction is an opportunity to build trust with regulators and party ideologues that will be critical in the long term as Google figures out its strategy for online media. As of today, Google will no longer be seen by Chinese merely as a web search and advertising company that offers fun online toys like Google Earth. If it wasn’t before, Google is now seriously in the media business as far as the Chinese are concerned, and its approach to marketing, government relations, and the way it approaches its business decisions must change accordingly.

I’m A Search Programmer, But What I Really Want to Do is Direct

Which brings us to an important point – YouTube will probably do more to change Google than any other acquisition or strategic move it has made to date. Integrating YouTube is going to force Google to rethink its business globally. How that will play out will be interesting, but what will be even more interesting is how the competition will react. MSN has long wanted to be in the media business, and it has made halting steps in that direction. Yahoo China wants to be in any business that might make money, and is probably already thinking about how to disrupt the Google-YouTube hookup in China. And I’m sure I’m not the only person who can see BaidUTube on the horizon.

This all adds up to search going Hollywood in China. And what that means is that we can look forward to a flurry of deals to tie up content, outlets, and distribution channels over the next 18 months.

Don’t touch that dial.

Bain Almost Gets It

In the Hutong
Checking the Prevailing Winds and my home radiometer
1129 hrs.

Bain & Company is now telling Hollywood that if it doesn’t want to be crushed by digital piracy, it needs to build a strong electronic distribution system, and fast.

Great point, guys, but why stop there? Why not take the next, logical step, and suggest that the most important step Hollywood could take to end piracy in any form has less to do with lawyers and a lot more to do with distribution.

Warner Home Video gets it – they sell legitimate DVDs of Warner Brothers movies and TV shows for $1.50 – $2.75 in 8,000 stores all around China. And they’re making money as China’s increasingly affluent want higher quality DVDs to show on their plasma TVs.

Laws and law enforcement will not end the piracy problem. Giving consumers a better alternative, on the other hand, will close the gap faster than raids and regulations.

Now if only Disney, News Corporation, Viacom, Sony, and Universal would figure that out, instead of sending the MPA to come to Beijing, bang on the table, and make the whole industry look like a bunch of school kids.

Ubuntu 2006 is Red Hat 2000?

In the Hutong
Work Avoidance Detail
1335 hrs.

CNET has a decent article by Stephen Shankland about how Canonical, the company behind Ubuntu Linux, plans on building a global business by giving away its software and selling service. The article takes a rather dim view of the approach, questioning whether that’s going to make it for Mark Shuttleworth and his band of South African software revolutionaries.

Guffaw on, CNET, but in China I don’t think anyone would laugh. As the nice folks over at Microsoft and the Business Software Alliance will happily tell you, it’s proving exceptionally hard to talk people in China into paying for software that can be downloaded in a zip file or shrinkwrapped and sold at a counter. I’m not sure it’s going to get any easier.

It’s the Service, Stupid

When I look around China for companies who are managing to make money in the software business here (with the exception of those who use strong-arm tactics to get users to cough up licensing fees – and we all know who we’re talking about – or who have captive audiences), nearly all of them are doing so on the basis of delivering value that goes beyond the software itself.

You won’t find very many people knocking off SAP, Oracle, or IBM’s db2 (or Lotus Notes, for that matter). All of these have a built-in service component, and frankly, the reasons a Chinese enterprise would buy something from SAP would be a) the industry-specific nature of the product, and b) the implementation process compels a company to adopt international practices that are going to make it globally competitive. When you can sell something that carries a value that is built into the process of adoption, for which help is needed, then you have something to offer.

Salesmen of China’s local ERP software like UFSoft and Kingdee have been selling their software at cost, and making their profits on the service involved in customizing the software for a specific company. The value, UFSoft likes to point out, comes from the service. The software is a loss-leader. The product is sold as a part of an overall package that includes customization, implementation, and support. Indeed, UFSoft likes to say that while the rest of the world began in The Age of Hardware (IBM as leader), evolved to the Age of Software (Microsoft as leader), and is evolving into the age of service (ERP, ASPs, and the like, no leader yet), China is leapfrogging the software age, going directly from the Age of Hardware to The Age of Service.

In other words, if you plan on making money in software in China, chances are you’re going to spend a lot of money on lawyers and lobbyists on the road to profitability, and you may never make it into the black if you stay on that course.

Give Away the Razor. Sell the Blades.

This brings us back to Ubuntu. Will anyone make money on this? Absolutely. Look, just to play with Ubuntu on my Mac, I’ve laid out $15 for a copy of the software from Ubuntu, because I didn’t have the time or patience either to download it or go and chase somebody at the Beijing Linux User Group for a copy.

I then bought two books – Beginning Ubuntu Linux by Kier Thomas and Ubuntu Linux for Non-Geeks by Richard Grant. There was some overlap, but Thomas focuses more on getting Ubuntu configured for your computer and providing a step-ladder to more complex stuff, like command-line work, while Grant is much more focused on using Ubuntu to get stuff done. Altogether I’m out around $90, and I haven’t had any tech support (this also doesn’t take into account the $79 I spent on Parallels to allow me to run Ubuntu in a window on my Mac.

If I were running a business, would I pay $250 for 18 months of support per seat? Definitely. That would still give me a lower cost of ownership than Windows.

At the same time, I think Canonical has to take a little page out of Microsoft’s book if it’s going to do well in China. Apart from offering superb local language guidebooks, Canonical should also run Ubuntu courses for everyone from users to CIOs, offer certifications on each version for local consultants, and offer custom implementations of its other products, thin-client focused Xubuntu Linux, and primary-education focused Edubuntu.

Unfortunately, Canonical has yet to even open an office in Asia, much less begin to understand what it can do to drive itself forward in China.

Come on, Mark. Cough up some cash and get your feet on the ground over here.

Talk in the Hutong, Sunday, 8 October

In the Hutong
Nursing a Cold
1033 hrs.

The all-too-short “Golden Week” has come to an end, with many creeping back to work on a Sunday and facing a six day workweek. Appropriately, as the week came to a close, an occluded weather front rolled in, dropping rain and shoving temperatures down 10 degrees (celsius) overnight. Having gone to bed Friday night with our windows open for the cooling effect, many of us are now spending our days slamming OJ and reaching for the Kleenex box.

Against such a depressing background, the news, at least, everyone here in the Hutong arguing and gesticulating.

> The Sunday Times of London has a superb article that frames why Kim Jong Il is quickly turning into a liability for the Chinese.

> The Independent covers China’s efforts to clean up it leading Soccer league. It’s worth a read – Soccer in China makes the Italians look like paragons of propriety. Probably explains why none of my clients are interested in sponsoring the sport.

(Just as an aside, it strikes me as stunning that between The Times, The Independent, The Telegraph, and even The Guardian British newspapers continue to do a better job writing compelling stories on China on average than all the U.S. mainstream broadsheets, with the notable exceptions of The New York Times and The Washington Post.)

> The Sunday Times also proves that The Wall Street Journal is still the global butt-kicker for coverage of business in China by reprinting a superb WSJ article on China Netcom’s struggle to introduce corporate governance best-practices. You cannot beat The Financial Times for its breadth of coverage, but the editors too often seem to be holding the reins of brilliant journalists like Richard McGregor and Mure Dickie, keeping them from covering their stories in the depth they deserve. Let slip the dogs of war, FT. Turn your superb staff loose – use the wire services for breadth and let Mure and Richard deliver the true insight.

News from the BSA: Underneath the Bluster, China Feels Insecure

Perspective: What China thinks about China,” by Robert Holleyman, CNET, October 5, 2006

Robert Holleyman, president and CEO of the Business Software Alliance, appears to be trying to give his Global IPR Stormtroopers a kinder, gentler face by doing a survey about how Chinese people feel about China. The survey chose to go deep with a group of influential respondents rather than a wide survey of the nation’s sentiment (a wise approach – YOU try doing a statistically significant sampling of China’s heterogeneous population.)

I give Holleyman an “A” for effort – I know what surveys like this cost (anywhere from $500 to $1,000 per respondent, if done well) and it could not have been easy for Holleyman to talk his members out of that kind of wampum when all they want the BSA to do is work for stronger IPR regulation and vigorous rights enforcement.

But based on what the BSA is telling us, I have to give him a “B-” for insight and a “D” for actionable intelligence.

What did the BSA find?

• Chinese elites feel that the rest of the world misunderstands China. This is only a story to people who do not deal with China regularly, and I think most of us would fess up to being limited in our understanding of the Middle Kingdom – even those of us who live and work here. What would have been a far more interesting issue to probe is the extent to which these elites understand (or misunderstand) the rest of the world.

• China sees India as more of a competitor than the U.S. This needs to be probed – do they feel this way because they see the U.S. and Japan as being so far out ahead – or because they see the U.S. and Japan as declining in their global economic and political power? Or because they have a different perception of competition for inputs and markets?

• Chinese have a “sober appreciation” of the challenges that face them. That’s good. The bigger question is “what are they doing about those challenges, and what do they see are the barriers keeping them from addressing them?”

All interesting, none of it earth-shattering, and none of it likely to get the BSA pegged as a thought leader.

Now, I haven’t seen the report, only Holleyman’s op-ed on CNET. I checked the BSA website, and apparently the report is not public. That’s a shame, because I have to believe there is more to all of this than what the BSA has chosen to tell us. But I also suspect the juicy bits are being held back for the members. I also suspect that one of the real motivations for this survey was to have a pretext to engage opinion leaders in China on a topic that was less confrontational than the BSA’s normal desk-banging focus on getting China to enforce its IPR laws.

All pretty disappointing. Whatever BSA garnered for its members in this process, it has done little to advance the public debate about China’s rise and shed light on issues critical to those of us doing business here.

Debunking the White Tornado

When I was a kid, a large consumer products company ran a TV ad campaign for it’s line of detergents, likening the effect of the product to a white tornado, a great whirlwind that would sweep in and clean anything, erasing even the most embedded filth. Perhaps it is this kind of marketing that contributes to an apparent belief among foreigners, particularly Americans, that adding something clean to something filthy makes everything clean.

I call this belief The Great White Tornado Theory.

The Great White Tornado Theory is used most often in China by advocates of foreign participation in China’s financial industry. Listening to the tales of embezzlement, corruption, and malfeasance among China’s banks, securities brokerages, and other sectors, executives of international firms shake their heads, tut-tut sadly, and remind media, policymakers, and each other that if ethically managed (read “foreign”) companies were allowed to fully participate in the market, by competitive force and dint of example they would help eliminate unsavory practices.

It’s an attractive theory, and as an advocate of greater competitiveness in China, I want to agree. A lot of my friends do, as do many people whom I respect deeply.

But both the theory and those who expound it have some credibility problems with Chinese audiences and impartial observers.

What’re We Doing Here?

Let’s say for a moment China were to allow open foreign participation in, say, the securities brokerage sector. Once we get past the rhetoric and the high-minded ideals, foreign firms are not coming to China to clean the place up – they’re coming to make money. After making investments in staff, high-priced offices, and years of lobbying, headquarters in New York, London, or Tokyo are not going to be telling their China teams “okay, guys, go out there and help build an ethical market.” No, the word from HQ is going to be “get out there and start making us a mint, or we’ll fire you and find somebody who will.”

The pressure to perform will be intense, and the competition – intensified by the arrival of foreigners – will make performing extremely difficult. The pressure to engage in common but unsavory practices to get business and drive results will be intense. In such a cauldron, the question of making the ethical choice and the profitable one will not come down to the name on the door or the pedigree of the firm – it will come down to the character of the individuals making those choices, and to how willing firms will be to sacrifice profits for ethics.

If the situation in other industries and places is anything to go by, the prognosis is not good.

Doing Like the Romans

The experience of other industries in China suggests the path that foreign securities firms might take.

There are those who believe that only a very limited number of foreign firms engage in unethical practices in China, and there are others who have confided with me that they believe it impossible to make a profit in China without bending your morality a bit – the system is simply rigged against that. In reality, China can be extremely hard on ethical corporate practices. As Peter Goodman wrote in The Washington Post last August:

“American business leaders often describe their China operations idealistically, suggesting that their presence here will compel Chinese competitors to adopt more ethical business practices. But in one key regard, the dynamic operates in reverse, with U.S. companies adopting Chinese-style tactics to secure sales, as they compete in a market in which Communist Party officials routinely control businesses, and purchasing agents consider kickbacks part of their salary.

Managers of U.S. companies say they are caught in a dilemna: They are answerable to shareholders on Wall Street and home offices that demand a piece of an increasingly lucrative Chinese market. Yet they are also held to account at home by the Department of Justice and the SEC.”

In short, when in Rome, companies are not acting like the Greeks. Foreign firms in the telecommunications, medical equipment, airport security, software, and computer hardware industries have all been accused of, have admitted, and/or have been fined for practices that are not only unethical but are indeed illegal in the U.S.

For the finance industry, is there anything to suggest that the record would be different?

The Record Elsewhere

A scan over the checkered history of the financial industries in the U.S. over the past two decades does nothing to suggest that there is something about an international institution that inhibits impropriety. The savings-and-loan scandal from the late 1980s, the insider-trading convictions of people like Ivan Boesky, the tainting of research by investment bankers, the growing options pricing scandal, boiler rooms, pump-and-dump schemes…all evidence drawn from the front pages of America’s largest newspapers, all representing ethical lapses in finance, and all taking place under the aegis of the toughest regulatory system in the world.

Taking the show on the road hasn’t helped. Failures in ethics and systemic controls at places like Morgan Stanley Japan Securities and Goldman Sachs Japan make clear that financial firms are not above rolling around in the mud with the locals like Mitsubishi Securities and the Murakami Fund in the name of profits. Indeed, if Japan is any model, one could argue that it is not foreigners who will clean up a market, but local regulators with sufficient political air cover to do the right thing.

So again, I ask – if foreign financial firms can find themselves in hot water at home for not doing the right thing, what evidence is there that they will have a cleansing effect on China.

Right Impulse. Wrong Reason.

Foreign participation in China’s financial sectors will be a good thing for a lot of reasons – it will increase competition, diversify services, and force everyone to work harder for the customer’s business. The institutional capital and investment mentality the foreigners bring with them should do much to stabilize the punter-driven technically-based markets, and possibly even bring some accountability to bear on listed companies.

Creating a cleaner market, however, is not one of those reasons.

The government knows all of this – there is a growing understanding among regulators that a well managed market requires an independent third-party overseer with prosecutorial powers in addition to whatever self-regulation can be put into place. (That’s not radical, anti-free market thinking, by the way – that’s theSecurities Exchange Act of 1934.)

For that reason, anyone who suggests to a government official in China that foreign participation will have a cleansing effect on China’s financial industry is merely flushing his own credibility down the toilet. Drop the argument already – it weakens a case that is strong enough on its own merits.

Nota Bene

The fact that The Great White Tornado Theory is specious and a lousy argument for open financial markets does not release financial institutions from the implicit obligation to do well and do good. Do not come to Rome and do as the Romans – come to Beijing with the full cognizance that the ability to know right from wrong – and to act on that knowledge – is a long-term competitive advantage.

Chinese companies and individuals are not going to be comfortable with placing their financial futures in the hands of institutions who engage in nefarious practices. All a foreign firm can offer today that a Chinese firm cannot is trust, the comfort that a customer is putting his faith in a professional whose ethics are above question. Lose that, and the Chinese financial industry will be a rat race and the foreign firms will be the first targets when the regulators grow new teeth.