Digital Video and the Coming Showdown with Broadcast

The floor of the CASBAA Dome, West Kowloon, Hong Kong

All the TV people are dressed like bankers

1320 hrs.

Just finished my panel at CASBAA 2008 on “Strategies for a Post-Olympic China.” It’s humbling to be on a stage with people like Gehua Senior V-P Li Danyang, Terry Mak from Celestial Pictures, Peter Schloss from BroadWebAsia, Paul Wang of CSM, and to have Cosmedia Group CEO Tony Tse moderate. These may not be household names, but they should be, because each of them has helped lay the foundation for China’s media future by building companies that are testing the edge of what is politically acceptable and commercially viable.

But enough gushing.

We have seen the future, and it is Youku

We were all positive about the prospects for online video companies like Tudou and Youku in China, and not just because the issue of SARFT licenses has been so recently cleared up. What I said I though was exciting about online video is that the medium actually offers the first viable opening for foreign film and television into China on something other than constricted official channels or on pirated DVD. If the video site owners are smart, as their revenues begin to grow, they will cut deals with content owners. Content owners, for their part, will cut deals (probably revenue sharing) with the video sites.

Peter Shloss, whose company is actually deeply invested in one such site, told the audience “I’m ready to license now.”

The audience, clearly moved (or taken aback) by our passion and relative unanimity, used their wireless voting devices to confirm that they saw online video as the most interesting media opportunity in China in the coming three years.

All good stuff. Very exciting. A win for all. Mostly. Because all of this is predicated on three issues:

1. Perfecting the advertising model with better measurement and business models tweaked to prevent things like click fraud; or finding another approach;

2. Convincing the content owners that this is a wise thing for them to do with their expensive programming;

And the one I kicked in:

3. Managing the eventual showdown with traditional broadcasters. Because the reckoning is coming, and it is coming right soon.

Gunfight at the Tudou Corral

Up until now, neither the government nor the broadcasters have seen new media generally and online video in particular as a threat to the traditional TV business in China. Revenues have been small, television ad income has continued to grow, and the people watching those videos had little spending power. Let them have their little games, the broadcasters seemed to say, we have Real Business to do.

But there is another meme growing quietly in the wings of this conference, and Paul Wang hinted at it during our panel. The Annual CCTV advertising auction is coming in two weeks, and three people I have spoken to in the last 24 hours all agree that this auction will break CCTV’s winning streak. If this year’s take (for 2009) beats last year’s (for 2008), it won’t be by much. Whether it’s the post-Olympic hangover, a growing fear, uncertainty, and doubt spurting forth from the world’s financial markets, or something more fundamental and tectonic is the only question.

My bet is on the “fundamental and tectonic.” Which takes us to online video.

The most interesting part of the semi-annual CNNIC report is not the big headline number of how many Internet users China has, but the demographic profiles of those people. For a long time, the overwhelming majority of regular Internet users in the PRC have been of university age or younger, and they didn’t have much to spend. But recent reports from CNNIC make it clear that this is slowly starting to change. As those people who used the Internet growing up are graduating from college, getting jobs, and looking for ways to spend their loose change, the “Internet generation” is turning into a very interesting target audience for a lot of advertisers, and not just the ones selling computer gear.

This demographic shift is happening at a time when many advertisers – including but not limited to the multinational corporations – are starting to worry about what they are getting for their money. Add to this picture the curtain of fiscal conservatism that is descending on marketing officers as a result of the global financial crisis, and suddenly advertising on television no longer looks like the automatic slam-dunk it did at the height of the Olympics.

Here is my scenario: either this year, next year, or in 2010 the results of the CCTV advertising auction are bad – so bad that they cannot be hidden. We’re talking like a 10-15% decline, or maybe worse. Meantime, Youku, Tudou, et al are starting to rake it in. They’ve concluded content licensing deals, they’ve fixed (or kind of fixed) the measurement issues, and there are upwards of 300 million users online.

At that point, it is not going to take long for CCTV and its fellow broadcasters throughout China to add things up. They will turn to the State Administration for Radio, Film and Television and to the Publicity (propaganda) Committee of the Party, making the case that these private online companies are not only hurting their business, but, worse, doing damage to the ability of broadcasters to serve their propaganda/social administration function for the state.

At that point, the government’s options become fairly clear: restrict the online video sites, let the broadcasters run whatever content they want, or force some kind of accommodation between the two sides (i.e., compel each of the sites to take on a state broadcaster as a part or majority shareholder.)

Don’t Go Down that Dusty Street

China’s broadcasters wield tremendous political power, (for all the expected reasons and for many others that we won’t go into here,) and they will not go gently into a future where they cater primarily to people who cannot afford an Internet connection. There is just not enough money in it.

The wise thing to do for the online video companies is to recognize – right now – the danger implicit in their own success, and start working to prevent that showdown. But I’m not optimistic. These companies are so focused on the plentiful immediate challenges to their prosperity and existence that they can’t worry about an over-the-horizon threat.

On the other hand, that’s exactly what Boards of Directors are supposed to be for. Once they get done lecturing their management about how important it is to make money, the next topic on the list should be about how to avoid getting sat on.

CASBAA is Proving that Asia is Not a Place

In the VIP Room, CASBAA Dome, Hong Kong

I knew I should have had lunch…or even breakfast

1445 hrs.

Much of the discussion in the opening panel this morning was a focus on how Asia is such a superb market in the face of the changes happening around the world today. I agree with that halfway, but I was amazed at the number of longtime residents of Hong Kong, Singapore, China, India, and other territories in this region who still consider Asia to be a single market.

I’m note sure we can consider China a single market, much less all of Asia.

I’m not just being pedantic

The danger implicit in thinking about Asia as a single market is not that we here in the region might start believing it, but that people sitting in New York, London, or Los Angeles might start believing it, and may start acting on that assumption. It is wrong on the same level that thinking of The Americas – from the Yukon to Tierra del Fuego – is all one market. And I would argue there is more cultural commonality between North America and Latin America than there is among Asian nations.

The problem with this thinking becomes evident when you have a satellite broadcaster trying to run a channel around Asia. There are so many different sets of political and cultural sensitivities around the region that if you want to sell your channel around the region, you need to edit your channel using the standards of the most conservative culture in the region (or what the assembled broadcasters here call “the lowest common denominator.”)

Imagine, for example, having to broadcast The Sopranos, or the movie “The Big Lebowski” across the region. In several markets in Asia, the f-word is verboten, even on pay-TV and late at night. If you strip the F-word from those works, you may clean them up, but you remove a level of authenticity from the material that is going to anger viewers elsewhere in the region.

But if you frame Asia as a region, you have a hard time caring. What’s important is that you are in as much of Asia as possible, not that you are creating a localized experience for everyone you reach. It obscures the real challenges and the most rewarding opportunities.

Brands are Global, Content is Local

Alex Arena from PCCW had the quote of the day this morning when he said that “all content is local.” Heads nodded around the room. Which mystified me. Because if we all agree that all content is local, why do continue to frame our businesses in terms of supra-local entities that are driven by global imperatives (cover Asia) rather than local opportunities (what is happening in India?)

The record speaks for itself. The successful global broadcasters (and online companies) in Asia approach the region as a convenient geographical cluster of diverse markets. This keeps the focus on using the regional organization to support local marketing efforts, rather than trying to push a generic Asian service on 2.5 billion very non-generic Asians.

Stat of the Week: China Internet User Update

The floor of the CASBAA Dome, West Kowloon, Hong Kong

Waiting for the Asian Pay-TV Panel

1426 hrs.

The statistic of the week came out of my panel this morning at CASBAA. According to Li Danyang, senior Vice President of Beijing Gehua Cultural Development Group, China’s Internet has now surpassed 280 million users.

The country loves numbers, so I’m betting that the CNNIC January report puts us right around 300 million users.

So update your fact sheets, and prepare to update them again in two months.

By the way, If I hear the word “monetize” one more time, I am going to have a myocardial infarction.

Another Reason the Long Tail Doesn’t Exist in Chinese Music

Beneath Kerry Center Beijing

I love the smell of fresh paint in the evening

1625 hrs.

Beijing music promoter Ed Peto posted a superb article on OUTdustry a few days ago that dissected the way the Chinese music business develops hot new artists.

They don’t.

A&R, Chinese Style

They use homemade monitoring systems to identify the songs that are getting the most play and illegal downloads on the Internet. When they see that they already have a hit on their hands, they swoop in, sign the artist, and promote the hell out of the ringtones.

Ed believes, with some justification, that this has led to the homogenization of music in China. We don’t have a host of genres, sub-genres, and the like. What we have is millions of people all listening to the same straight-up-the-middle stuff. Ed sees a bad moon rising:

“What has resulted is a kind of echo-chamber effect, in which only the low common denominator, crowd-approved pop music is fed back into the network through these curated bottlenecks. The priority of the Chinese labels is to please the network and make it into these bottlenecks, not push musical boundaries forward, as failure to make it into these top strata of recognition brings with it a hefty price. As one of the only other major sources of industry income, brands focus the bulk of their sponsorship monies on the highly viable hit artists, compounding the relatively anonymous non-chartees to further suffering.”

Ed makes a convincing case, and no doubt this “echo-chamber” has a lot to do with the vast differences between the Chinese and foreign music industries. And the part of me that believes that a healthy diversity of acts and a great talent scout (known in the biz as an artists and repertoire, or A&R guy) is the key to success in the music business wants to believe he is right.

I’m not gonna try it…

But the not-so-hidden hand of opportunistic moguls is not the only factor at work in China. First, it is essential to step back and understand the consumer behavior on a wider stage. China is an insanely referential culture, which means that people – especially young people – make consumer choices of all types in large part because of the social implications of those choices. You pick your music, your phones, your clothes, your shoes, your hairstyle, and make dozens of other choices in an effort to be a part of a group.

Making choices outside of the set “norm” in your peer group is risky behavior. At best, you will be the recipient of some serious ribbing, and at worst you will be shunned for making an errant choice.

Not too long ago, I asked my nephew why he used a certain brand of mobile phone. He told me “sure, I hate the way it looks. The quality sucks. But everyone else in my dorm owns the same phone, and if I go and buy another brand, people will give me a hard time. Worse, if it doesn’t work, I look like an idiot in front of everyone.”

Thus it is with music. Young people – insecure beasts in any culture – are in China constrained more by fear of being wrong than by discomfort with conformity.

Too young to know

Second, some historical perspective is in order. If you have seen the movie School of Rock with Jack Black, you might remember a blackboard diagram his character drew laying out the evolution of rock music. If you don’t remember, click this for a fast look.

Done? Good. I’ll continue.

What you will notice is that the diverse, multi-genred and sub-genred American music scene was by no means always thus. In fact, if you go back as recently as the 1940s, popular American music was a pretty monotone place. Classical, jazz, ragtime, big band (swing), and country was about as diverse as it got. Any given city had maybe half a dozen radio stations, and there was a lot of sameness in the programming.

Sounds like China today, huh?

Back to the U.S. in mid-century. Pop music grew up in the 1950s, folk came to the fore, country began to diversify, and rock-and-roll hip-thrusted onto the scene. Sometime between 1955 and 1963, an explosion in diversity and variety took place, both feeding and being fed by a generational shift and political and social change. Nearly a half century later, we have as many types of music as there were popular acts when my parents were kids.

A little perspective is in order. China’s music business is young, China’s youth culture is just beginning to evolve into the socially sanctioned “rebellious period” we know of in the west.

And remember – China is but three decades removed from the largest spasm of enforced social conformity in the history of the human race, the Great Proletarian Cultural Revolution. For centuries, if not millennia, you excelled in Chinese society by being redder than red or more Confucian than Confucius. The rebellion, the urge to non-conformity, thinking in a way that deviates from the norm has not been beaten or bred out of the Chinese, but it is going to be a while before young people allow those urges to bloom enough that being different will be cool. And it is the coolness of difference that nurtures diversity of tastes and behavior.

It is against such a background that true musical diversity will bloom. And when that happens – just as it happened in the west – the suits in the music business will have no choice but to follow.

The Dragon’s Longer Tail

The change could start literally at any time. The early signs of it are there – not least of which was 25,000 young Chinese singing along with Linkin Park at the top of their lungs in Shanghai last year, plus a growing club scene, and the falling cost of composing, producing, and uploading your own music.

What China needs more of is Ed Peto. I’m not calling on the nation to clone one passionate Englishman. Rather, I think the time is quite near when a small but passionate group of young Chinese and foreigners are going to kick the Chinese music scene into serious overdrive.

China’s rich music heritage meets the world’s music meets a quarter of a billion kids who just wanna have fun.

The mind reels.

IPR Protection: Beyond Law and Enforcement

In the Hutong

Sore from power-walking

1635 hrs.

In conducting my technology and intellectual property rights (IPR) panel with the Notre Dame Medoza b-school students last week, I realized in the midst of Eric Priest’s comments that the problem of IPR protection in China was too often painted as a two-dimensional issue.

Laws, cops, and jails

The first dimension is law, or the extent that China has on its books the statutes, treaties, regulations, and administrative procedures to protect patents, trademarks, and copyrights. I’m no lawyer, but I defer to the three attorneys on my panel (two of whom were Ph.Ds) who seemed to agree that the legal structure to protect intellectual property rights is in place in China.

The second dimension (and the one that gets all of the attention) is enforcement. Okay, China, the world seems to say, you have all of these wonderful laws to protect intellectual property of all kinds. So why are companies, individuals, and institutions violating these laws everywhere in China with seeming impunity?

And here we have the problem. The lawyers, organizations, and government negotiators fighting to protect intellectual property rights in China are focused on getting more cops to shut down more factories, arrest more people, jail them longer, fine them more, and prove to the rest of the population that messing with intellectual property law is a ticket to jail. They use that old logic “kill one to save a hundred.”

As much as it might enrage some of those defenders of intellectual property rights to say this, there are not enough cops, jails, or judges in China to end the problem purely by judicial means. (In fact, I’d suggest that even in the most developed societies, the tools of enforcement were only ever meant to be used in the relatively rare cases of overt, commercial violation of patent, copyright, and trademark laws.) And there never will be.

The Law is Not Enough

Eric Priest, one of my co-panelists at the Notre Dame seminar, is a trained lawyer with two law degrees, and even he is impatient with those who leave the IPR to their attorneys:

“Both domestic and international entertainment companies have tried the litigation path in China with little success. Major Chinese search engines like and have deep pockets and are far and away the most popular channel for accessing free music files online in China, so they were natural targets for contributory infringement suits. But murky legal issues (Baidu won on appeal because the court found it only aggregated links to content but did not in fact serve the content itself, while was found iable for infringement under similar circumstances) and notoriously low damages for infringement available under Chinese law have left copyright owners with little recourse, and emboldened internet companies to continue to conspicuously serve up free, unlicensed content.”

Eric suggests that the better approach is to create business models that ensure compensation for the artists and labels as well as the company profiting from their distribution. In the paper he lays out three potential business models that could be used in China. Without doubt, new models need to be created, tested, revised, and perfected, and therein lies a major part of the opportunity.

The problem with the model approach is that any new model hoping for adoption must deliver a experience that is superior for the consumer to the model it is replacing. A painful number of models fall short of that promise. Some of the largest companies in the world have failed to deliver a superior book-reading experience on a mobile device, and the jury is still out on Amazon’s geographically limited (and still expensive) Kindle. Conversely, home video has taken off because it offers an experience that is in many ways superior to the cinema. And iTunes turned music downloads into a mainstream experience.

In China, technologists cannot stop at creating business models that satisfy the music supply chain: they have to offer something that is so much superior to free music that people will be willing to pay for it. And then the people will need to be sold. Ask Steve Jobs: even the best experiences in the world don’t sell themselves. For all of its virtues, Apple had to market the hell out of the iTunes experience to drive uptake beyond an initial core of users. Success for any business model will require a greater effort still.

Win their hearts and minds and their wallets will follow

Which brings us to my point. As much as lawyers may wish us to believe that law and enforcement should be adequate, as much as engineers may wish us to believe that technology offers a silver bullet, as much as entrepreneurs believe that smart models are the solution, they are all ignoring one more important piece:

Compliance. Voluntary compliance.

I’ll put that in short words: people have to want to do the right thing. Then you have to give them an opportunity (business model.) Then you have to make non-compliance inconvenient (DRM, or something better that replaces it). Then you have to make breaking the law downright costly (laws/cops/courts/jails/fines). You need every element in that chain if IPR is ever to have any value. Because you can put all of the technical and legal solutions in place that you want, but until you have convinced the consumer that compliance is in his best interest, too, he or she will find ways around it.

You make it personal. You make it meaningful. You make a civic and more importantly a social virtue out of compliance. You make that individual feel like he or she is doing something important every time they lay cash down for something they could get for free. No. I will not do that. It’s not right.

Is doing that going to be easy? Absolutely not. This is what management texts refer to as “a big, hairy-assed goal.” But the industry uses the size of the task to justify not undertaking it. They tell themselves “it is too hard. You cannot change Chinese culture, and anyway it is easier and cheaper to hire more lawyers and get our industry associations to talk smack about the Chinese government in congressional hearings.”

Yes, it will be a long, difficult, and costly process, but so is the current effort to push for enforcement. The industry has spent millions pushing for better laws in China. It is spending tens of millions on enforcement and litigation. How much is it spending on getting people to want to pay for something they are used to getting for free?

It may take a generation or more to change the way people behave. But it can be done, and it must be done if artists – songwriters, composers, and performers – are ever to have a trade in China, and if the music business as a whole is ever to thrive.

And the time to get started is now, if not sooner.


Starbucks Pinnacle Plaza

Sucking Indian Summerbreeze

1354 hrs.

Last week I had the opportunity to moderating a panel on technology and intellectual property rights in China for a group of MBA students from the University of Notre Dame‘s Medoza College of Business.

Lawyer, Lawyer, Lawyer, Me

The panel was made up of myself and three speakers, all of whom were accomplished attorneys. I have to admit to being worried about that before getting there, but it turned into probably the most dynamic public discussion I’ve heard on the topic in ages. We never got sucked into a China-bash, but kept things focused on how you protect your IPR in the face of “what it is” in China.

All three speakers acknowledged that after three decades and an China’s IPR laws are in place, so James Luo from Bird & Bird dove into why enforcement in China is possible but not easy. James is a great speaker, and a nimble opponent when questioned. I tried to corner him with a question about how collusion between local IPR violators and enforcement authorities undermines efforts, and he dodged the bullet with grace and humor.

The other full-time attorney on the panel, Ray Moroney of Rouse & Co., focused on prevention as the best cure, underscoring that IPR protection begins long before your business arrives in China. Of all of the foreign IPR attorneys I’ve met, Ray is perhaps the most commercially-minded of the bunch. He told the group that you cannot come to China with a fixed business model around your IPR – you have to think creatively. I’d rate him as more than just an attorney, but a true counselor on the subject.

The third speaker was Eric Priest who, while an attorney by training, has given up on the practice of law to actually dive into business. He is involved in a couple of ventures, notably Noank Media, a global music licensing concern. Eric is one of a growing breed of what I would call merchant-scholars, people who combine serious intellectual pursuits with entrepreneurial tendencies. Eric actually put the whole discussion in a broad business context, explaining that China does not have just one intellectual property problem, but several.

The Takeaways

The underlying messages that the students took from the hourlong program (just before they jumped on buses to go look at the problem firsthand in Zhonguancun and the Silk Market) confounded the impressions they had taken from the media at home, to wit:

  • The IPR problem in China is much more complex – and nuanced – than it is often presented by western media and the various industry players and lobbyists for whom this is the issue;
  • You have to think creatively about solving your IPR issues: lobbying, factory raids, and lawsuits alone do not an IPR strategy make. You have to rethink your business models, your business structure, and your entire regime for protecting proprietary information when coming to China;
  • Intellectual property protection in China will make only limited progress until local enterprises and institutions are suffering from counterfeits and piracy at least as much as foreigners are. In the meantime, Hu Jintao probably does not wake up every morning worried about IPR issues.

No surprises for the initiated, to be sure, but one more indicator that much of the problem in the fight over intellectual property comes from the way executives, pundits, and policy-makers abroad perceive and frame the problem.

I walked away with a few other conclusions, but that’s the subject of another post.

The Students

The 46-odd students in the group were primarily executives working with some of the largest firms in the U.S. After a few days in China it was pretty clear that they were reaching that stage of sensory and mental overload as they tried to absorb it all. At the same time, I didn’t see the distant stares that usually accompany such whirlwind immersions. These students were all really jazzed about China and wanted more.

If I were a cynical person, I would suggest that any MBA student looking at the prospects for a robust US job market after graduation would be wise to be interested and enthusiastic about opportunities overseas. But it was not like that. It was more like they sensed something in the air – opportunity, maybe, or post-Olympic optimism, or perhaps that hum that you feel more than you hear when you land in China.

I suspect most of them will be back, and soon.

*(I will resist the temptation to create an acronym around “free and open culture movement” for fear of pronunciation issues)

Searching for China’s Soul of Innovation

In the Hutong

Peace through superior keyboards

1702 hrs.

In the wake of the global financial crisis, thoughtful people are starting to think about what the U.S. is going to use as a growth engine, now that housing, stock markets, and arcane financial instruments are out as alternatives. It did not take long in these discussions for some bright people to suggest that America needs to innovate its way back to greatness.

Yankee Ingenuity, Jia You!

Leaving aside for a moment that innovation and creativity in finance got the United States – and the world – into this problem in the first place, betting the future of any nation on its collective ability to come up with a whole lot of “new and useful” things in the space of an economic cycle seems to be a bit of a Hail Mary play. Industrial policy, regardless of how light or heavy the hand that applies it, has never been all that useful as a driver of innovation. Even corporations that spend billions on research and development wind up with very few useful innovations (look at the pharmaceutical industry), and many companies fail to capitalize on those they get as a result, for a myriad of reasons. (The case of Xerox Palo Alto Research Center and the graphical computer user interface is one notable example.)

There is simply too much serendipity in the innovative process to foment it efficiently. Even when you put really smart and creative people together with the facilities they need to innovate, the entire effort devolves into a numbers game. Throw enough brains together for long enough, the thinking goes, and something good is bound to come out of it all.

What America has going for it, of course, is momentum. Coming off of a national tradition for invention that began with Benjamin Franklin and Eli Whitney, somewhere just before World War II American inventiveness reached critical mass – literally and figuratively. Simultaneous discoveries and inventions across fields like physics, chemistry, aerospace, and electronics met mass production, marketing, mass prosperity and Keynesian economics. The resulting boom has carried the U.S. for seven decades – why should it not continue?

Sure, the government may be dysfunctional, Wall Street shell-shocked, and consumers in hock to their hairlines, but by gum, Americans still know how to come up with new stuff, make it cheap, and market the heck out of it. There’s hope for the Yanks yet.

Waiting for China to Start Innovating Again

The unspoken assumption here is that nobody else is anywhere near as good at that stuff than the Americans. Which is part of the reason the words “Chinese innovation” scares Americans.

It would be unfair to forget that a lot of companies hear those very words and think “in China, innovation is really imitation.” There is plenty of truth in that, and that thinking keeps a lot of intellectual property attorneys and trade negotiators well fed, clothed, and housed.

But the real pachyderm on the porch, the question that so many in the innovative industries will not allow themselves to ask, is “what if Chinese companies got it together and started to innovate? Then what?”

Questions like this are part of what is driving a wider audience to learn more about the life and work of Dr. Joseph Needham. A Cambridge master and biochemist, Needham spent much of his life and career compiling a history of Chinese science. He was an avowed sinophile, and as such much of his effort centered around an effort to prove that China before the Qing dynasty was the cradle of many of the world’s major innovations up to that time.

The underlying theme of his work was to disprove the chauvinistic hypothesis that Chinese as a race were capable of imitation but not innovation. In the main, he documented and catalogued Chinese innovations in an effort to demonstrate that the West – and the Industrial Revolution it birthed in the 19th Century – owed a massive debt to Chinese innovations.

(The Chinese innovation I heard about all the time when growing up was a metallurgical technique called the Lost Wax process of investment casting. My father’s foundry in California used that process in the 1960s and 1970s to make parts for turbochargers, airliners, golf clubs and medical implants. He was as proud of the heritage of the system as he was of its results. “Gee, Dave how do you make such amazing products?” “Ancient Chinese secret,” he said with an enigmatic smile. But we digress.)

The real pity about Needham’s work is that he spent so much time focused on what the Chinese invented and when they invented it that he had no time to figure out why the Chinese were such prolific innovators when they were, and how things changed to make that stop. This may have been because Needham was a monomaniac, or simply because he wasn’t a trained historian. Either way, it leaves us with proof that the Chinese can be great inventors, but without the historic perspective on what it will take to revive that latent spirit.

Innovation with Chinese Characteristics

Yet he points us in a compelling direction. So much of what is written about China and innovation today, whether by foreign or Chinese observers, is patronizingly prescriptive. If China wants to innovate, it must imitate – it must recreate the conditions that exist in high-tech hothouses of Silicon Valley, Boston’s Route 128 corridor, Austin, and Seattle. There is some truth in that, but there seems something unnatural about trying to graft San Jose onto Shanghai, or Federal Way onto Tianjin.

Needham’s work, on the other hand, hints at another road to an innovative future, one that is Chinese in origin, not Western. Perhaps the answer for China is to search for an answer to the independent innovation challenge in its own history, applying foreign lessons where appropriate.

What was it about those times that fostered innovation? Was it cultural? Was it economic? Was it political? Was it invasion or civil war that fed China’s inventiveness, or was it the luxury of peace and prosperity? Was the assimilation of some foreign culture the spark that set off periods of creative flowering, or did cultural homogeneity drive it?

These questions, and others like them, are the markers that will take us the next mile down the road that Joseph Needham walked, and will likely give us a better idea of when and how China will challenge America for innovation leadership.

In the meantime, I’m betting on Silicon Valley for green technology innovations, not China. But that’s another post.

No Mas Kapital

In the Hutong

Listening to the dulcet tones of the jackhammer

1554 hrs.

Rocker-writer-marketer Kaiser Kuo quotes me generously in Ogilvy China Digital Watch on the prospects for venture-funded Chinese Web 2.0 startups who are staring down the gullet of the Global Financial Kraken. What prompted Kaiser’s article was Sequoia Capital General Partner Michael Mortiz’ come-to-Yeshua talk with the CEOs of his portfolio companies last week, letting them know that it is time to get religious about revenues and profits.

(Nota bene, I expect that this is not the first time said entrepreneurs have heard this refrain from Moritz. Indeed, I wonder how much Moritz and his Menlo Park neighbors really see capital to be a problem, and how much they are taking a singular opportunity to use the FUD-whip to great effect. I figure it is a bit of both.)

Mortiz’ comments and those of his partners at the meeting are here. I suspect – as, I believe, does Kaiser – that there are a lot of similar conversations taking place in cold-sweat enfragranced boardrooms in the world’s financial capitals.

The dragon in the outhouse is how much this all applies to companies in China. Or, more accurately, whether investors will see China as an exception to the thick cloud cover over the world’s financial markets, and thus keep the cash flowing into China.

Kaiser and I agree that things are going to get tight for the time being. While the Hutong is far removed from both Silicon Valley and Wall Street, the picture we are getting is that Wall Street is still trying to keep liquid, unwind some arcane financial instruments, clean up the subprime mess, and lobby Washington for more help as the water rises. Everyone else is either hunting for carrion in the wreckage or hunkering down for the next round of bad news. “Flight to safety” seems to be the order of the day, not “what the hell, Frank, let’s pump another couple hundred million of our cash into some cool stuff in China.”

The key question is how long this will all last.

My bet is that the longer the downturn goes – and the longer that U.S. and European investors stick with conservative investments – the louder the capital sucking sound from China’s online and technology ventures. With less offshore venture capital chasing Chinese investments, valuations will come down, and at some point those valuations will reach a point where local capital will start to get interested. The business cycles in China are fast, but I figure if local ventures face an extended capital drought – say, 18 months or more – we are going to see a flowering of China’s domestic venture capital business.

RMB funds will come from a variety of sources, including large investment houses, state-owned banks, and possibly even purpose-built policy banks created by the government to funnel a modest chunk of China’s US$2 trillion capital reserves to local ventures. All of this would dovetail nicely with China’s commitment to independent innovation, and with what Paul Denlinger expects will be a tsunami of government cash into neo-Keynesian infrastructure spending across the countryside.

This is a golden opportunity for China to build a robust venture capital industry with Chinese characteristics.

Tremble, You Giants from Above The Line

In the Hutong

Sneaking looks at CNBC

2148 hrs.

Sam Flemming at See-I-See hosts an Alex Geertz post on the New Media panel at the Fifth Economist China Branding Roundtable, the annual marketing confab held this year in Beijing.

Before we get going, a side note. The question posed to the panel and that served as the session’s title, “New Media: Can Brands Afford to Stay Out?” was, to me at least, so painfully obvious as to be rhetorical. Are there actually companies and communications craftspeople in China who do not see new media making up at least part of their marketing mix?

No surprise, the panel was unanimous in the affirmative, the sole qualification being that you need to do it well. I don’t blame the panelists for this, just the organizers, who could have come up with a more imaginative question/title like “How much of your mix should be new media?” or “How do you do new media well?” or “New Media: Shouldn’t we just stop buying television time altogether?”

But we digress.

The panel included Vinay Dixit from McKinsey presenting their recent research that suggests word-of-mouth and Internet word-of-mouth are the two most credible communications media in China. Granting that for a lot of us these conclusions are old news, it is always nice to have them confirmed by McKinsey, or Bain, Accenture, or Boston Consulting Group.

What make both Vinay and Sam credible is that they stopped short of making specific recommendations on how to go about engaging in word-of-mouth marketing. Strategies, tactics, and the campaigns that link the two have to be company- and situation-specific. As is the case with most below-the-line communications channels, the further you get away from set formulas, the more successful you’re likely to be.

Somewhat less credible – at least as far as I can read into the post – is Dan Wong from Nokia explaining how the company has acquired the tools to adapt to social media, and suggesting how Nokia’s move into software is somehow an adaptation. Those are all good starts.

But Nokia is a long way from figuring out how to elegantly integrate mobile handsets with social media – one reason that Apple, Garmin, Google, Samsung, and Motorola all see social media integration as an opportunity. In fact, it is one of several areas (along with entertainment, location-based services, and Nokia’s belief that it is the handheld computer business) where Nokia is more vulnerable than it wants to let on – or even knows.

Hint to Nokians: integration is not about buying everything you see. It’s about creating an experience that lets us integrate what we want the way we want it into our phones, whether you own it or not.