China’s Mobile OS Wars: Insanity or Calculation?

Peter’s Tex-Mex, Beijing
Country Music and Alka-Seltzer
1317 hrs.

Last week Baidu confirmed that it has begun developing an operating system for smart phones. There was a lot to the announcement that invites comment, not least of which was Baidu CEO Robin Li’s remark that he wants to create a universal interface for all computing applications, and that the goal was “to let people become increasingly dependent on the Baidu box.”

I know. If such words were to emerge from the mouth of an American CEO, they would invite either ridicule or an anti-trust investigation, depending on the company. But coming from Baidu’s Li, they simply bumped the stock price.

Leaving to the Twitterverse the debate over whether Li is being realistic, megalomaniacal, or both, the matter that concerns many of us who are involved with China’s mobile communications business is whether China – or the world – needs yet another operating system for smart phones.

Hang On, Here Comes Another One

The quick-draw answer would seem to be “no.” The mature and developed personal computer universe gets away with three operating system families: Microsoft Windows, Apple OS X, and the various flavors of Linux. Indeed, the mobile phone industry already has seven smart phone operating systems: Apple’s iOS, Google’s Android, Palm’s webOS, RIMM‘s BlackBerry OS, Microsoft’s Windows Phone 7, the mature Symbian, and the infant Meego.

In China, the list gets even longer, with at least three parallel development efforts underway in addition to Baidu’s. China Mobile introduced its OPhone OS in late 2009. Not to be outdone by its larger competitor, in late February China Unicom launched the Wophone operating system, and Kai-fu Lee’s Innovation Works is known to be supporting its own Android-based smart phone OS, Tapas.

Not only is this OS cornicopia confusing for consumers, it is frustrating for developers. While many of the operating systems are based on a common Linux core, or “kernel,” there is palpable angst about the potential for significant differences to emerge among the Linux-based systems (an event colorfully termed “forking”). Having to write an app and then either port or re-write it for iPhone, Android, BlackBerry and Windows raises development costs an pushes profitability (and uptake) further into the distance.

This is not an idle concern: as Baidu’s Li was all-too-willing to point out, the value of operating system ownership is the potential to lock people into using your service. Apple gets that, and so do China Mobile and China Unicom. The mere prospect of consumer lock-in is enough to make technology executives and their investors embarrassingly emotional. Robin Li is one of a very few CEOs with enough honesty/confidence/hubris to come right out and admit that owning the consumer is at the heart of his plan.

The Hidden Hand

Be assured that the tech companies are not the only ones with ulterior motives in this battle. Throughout its recent history, the central government has been openly uncomfortable with allowing China to serve as the battleground for rival foreign technologies and standards, especially those that are critical to the nation’s physical or virtual infrastructure. China continues to try, with varying degrees of success, to displace foreign-developed technologies with its own, in wireless (WCDMA, CDMA-1X with TD-SCDMA), local-area networks (WiFi with WAPI), microprocessors (Intel X86 with Longson), computer operating systems (Windows with Red Flag Linux), and commercial aircraft (Boeing 737 and Airbus A320 with the COMAC C919), among others.

So whether or not they have incited the disparate efforts to create Chinese mobile operating systems, the nation’s regulators cannot be unhappy with them. Displacing iOS and Android with domestically-created alternatives fits nicely into the government’s modus operandi, and with the Party’s stated goal to incite “indigenous innovation” as a means to counter foreign dominance of key technologies.

Of course, lest we forget, more than China’s domestic market is on the table: at stake is also the opportunity to capture overseas markets, especially in developing and emerging economies, with Chinese-made handsets running Chinese-made operating systems. This outcome would mesh elegantly with the government’s desire to offer competitive products that carry the added value that comes with having been designed and invented in China, not just assembled here.

The End of the Beginning

It is tempting to condemn the China Mobile OS Wars as an ill-advised, self-interested collusion between the Chinese government and local enterprises. Yet there is evidence to suggest that China’s expanding mobile OS wars are a response to a genuine market need, not just cynical corporate bids to lock in subscribers or a national effort to squeeze out the foreigners.

As of this writing, less than 7% of China’s mobile subscribers yet uses a smart phone based on one of the currently-available operating systems. The iPhone has been officially available in China for sixteen months, and unofficially much longer; Android devices have been available for over a year. When you consider that the average mobile phone user in China changes devices every 15 months, we logically should have seen much higher penetration rates by now.

Yet after nearly a year and a half, advanced smart phones are still in the “early adopter” phase in China, with some 93% of current subscribers still uncommitted to an operating system. To companies like China Mobile, China Unicom, Baidu, and Innovation Works, this suggests that there is still an opportunity to create a new and perhaps better, more Chinese mobile operating system. The fields, indeed, are still green. Why not give it a go?

The Real Challenge: Making “More” Mean “Better”

A final but more fundamental factor to consider is that despite seeming parallels between the two worlds, we may see mobile ecosystems developing in a manner far different than those for personal computers. What is likely to happen – especially in the near- to medium-term – is that multiple mobile operating systems will evolve in parallel to deliver different kinds of experiences to different users.

The market is easily large enough globally to support a range of operating systems, each offering an experience designed around a certain type of user, and it is growing daily. I would argue that we see the early signs of that already, with Android, iOS, Windows Phone and BlackBerry all appealing to certain types of users, with less percieved substitutability than others might think. If you disagree, try using each of the different operating systems for a time. You will quickly discover that the philosophies underpinning their designs are so different as to create significantly different experiences.

In fact, I would argue that the survivability of a mobile operating system will be determined by whether it offers an experience that appeals to a distinct subset of the world’s (or China’s) subscribers. If a mobile OS is not noticably different from its competition and perceived as qualitatively better for that group, it will succeed.

We should, then, expect to see more entrants into the mobile operating system race before we see less. Whether any or all of those survive will depend, in the end, on whether the goal behind their creation is to try to create the mobile operating system for all the people (doomed to fail), or to create an experience for a certain kind of people.

Baidu Understands The Most Important Thing

One implicit aspect of Baidu’s vision that strikes a true chord is the idea that we shouldn’t need to distinguish between a “mobile operating system,” and OS environments on other devices. Operating systems should be device-neutral, with user interfaces crafted to match the device or environment.

Hardware developments already anticipate this evolution. The processing power available to mobile devices is growing at a higher rate than that on computers. We are already seeing devices in the market – the iPhone, the iPad, the Motorola XOOM and Atrix, the Samsung Galaxy – that have power that is comparable to computers. When you carry as much processing power in your pocket or tablet as you do in your gaming desktop, why bother to use different operating systems?

Apple took the first step in meshing operating systems when it scaled down Mac OS X for the iPhone, and it will move one step further later this year when it introduces OS X 10.7 Lion (and, as I anticipated in 2007, starts adding touchscreens to its laptops and all-in-one desktops.) Longer term, we’re going to see the barriers between computer software and mobile software blur, and then dissolve completely.

I expect Linux to lead the way in this evolution, but it will not be alone. If we take anything away from what Baidu announced, it should not be that the company is trying to create a mobile operating system. It should be that Robin Li has seen the future of the computing software, and he wants Baidu to take the first step toward becoming a player in that game.

Hutong Reads 03/22/2011

  • Russell Leigh Moses has the money quote: “The hard-liners have won the field, and now we are seeing exactly how they want to run the place,” said Russell Leigh Moses, a Beijing analyst of China’s leadership. “I think the gloves are coming off.”

    tags: china online regulation

  • Interesting report provided the viewpoint you want is that of Fortune 500 companies doing business in China. Most of my clients are in that category, but I’ve also discovered that viewing the China operating environment through that filter does not offer many forward-looking insights.

    By contrast, the challenges that face SMBs and foreign entrepreneurs in China are massive, arguably more indicative of the regulatory climate as a whole, and are largely ignored by groups like AmCham and the U.S. China Business Council. The next time somebody wants to do some research on business attitudes in China, ask the little guys. You would be amazed how different the picture is.

    tags: china regulation foreign business fdi

  • Provoking article, and I have a soft spot for R3, but I’m not sure what it all means. In the end, what is engagement worth, and does the survey really work in the Chinese cultural context?

    tags: china brands research

  • Worthy take on the new five year plan. Why do I think Accenture is moving into the corporate communications business? Read the last section.

    tags: china plan economy communications

Posted from Diigo. The rest of my favorite links are here.

Hutong Reads 03/21/2011

Posted from Diigo. The rest of my favorite links are here.

Dissecting China’s High-Speed Rail Fail

China Railways CRH5
Image via Wikipedia

In the Hutong
Trying to translate “Casey Jr.”
1238 hrs.

In the face of recent revelations around irregularities at the top China’s Rail ministry there is a growing meme afoot suggesting that we have been too quick to praise China’s high-speed rail system. In reality, we are told, the PRC’s high-speed rail system is a corruption-ridden white elephant that the people cannot afford to ride.

Reading from his copy of the South China Morning Post, Tim Ferguson of Forbes.com writes:

The larger issue with the vast (16,000 kilometers planned by 2020) endeavor is that it isn’t, in fact, so appropriate to China’s needs. Rather, it may be another symptom of a bubble economy in which vast sums are misspent on underutilized assets.

Not So White An Elephant

My father always taught me to be skeptical of blanket condemnations of this flavor, as they reek of demagoguery and are often wrong. In fairness, let us grant to Mr. Ferguson and like-minded folks like Joel Kotkin two points: first, that there has been waste, possibly massive, in the development of China’s high speed rail system. Second, until we run out of ways to economically fuel passenger aircraft,  or until the US population quadruples, that high-speed rail is probably not an panacea for North American intercity travel. Still, neither of these factors militate against the viability of–and the long-term need for–high-speed passenger rail in China.

China has had for some time examples of high-speed intercity rail lines that are both successful and popular. Indeed, one could argue that it was the success of the Hong Kong–Guangzhou, Beijing–Tianjian, and Shanghai–Hangzhou lines that provided proof-points for the expansion of China’s own bullet trains. So let us dispense quickly of the question of whether high-speed rail is workable in China: it is, and it forms an essential part of the nation’s intercity infrastructure.

Note, however, that the lines mentioned above are limited examples of routes with extraordinary situations. The distances between the city pairs is too great or too traffic-laden for taxi, bus, or personal automobile, and are too near to justify air travel. There is also already a great deal of traffic between the two cities, with one sometimes serving as a satellite to the other. Other city pairs like this would include  Chongqing–Chengdu, Shanghai–Nanjing, Wuhan–Changsha, Jinan–Qingdao, and Shenyang–Dalian. There is an argument to be made that China should have limited its high-speed intercity rail to just such city pairs, and if China were a developed country, I would be making that very point.

Driving High Speed Rail

Of course, China is not a developed country, and indeed its rapid growth compels the nation’s leaders to project two decades or more into the future when making infrastructure investment decisions. A series of factors that argue in favor of wider rollout of high-speed passenger rail complicate such decisions.

Urbanization – China’s population is leaving the countryside and becoming increasingly urban. As Richard Hobbs noted in a recent article in Foreign Policy, by 2030 China will have 44 cities boasting populations in excess of 4 million souls, and 221 cities with over 1 million in population. Let’s put that into perspective: in 2009 the United States had two cities in excess of 4 million souls, New York and Los Angeles, and only 10 with a population over 1 million. Here is what this means: in 20 years, China will have 44 cities the size of Los Angeles or larger. It also means viable high-speed rail city pairs will grow in number as well.

Density – China’s urban population density is high, and it is growing, in particular along nation’s seaboard. Even as of 2006, China’s urban population density – the average number of people living in a square mile of a city – was 27,300, three times the global average and nine times the U.S. average, even excluding Macao and Hong Kong in China’s figures.

Megacities – China is planning the creation of at least two and possibly more mega-cities, one clustered around Guangzhou in the Pearl River Delta, and one around Beijing and the North China plain. These cities will be so large as to require a re-thinking of intracity transportation. High-speed passenger rail is likely to form the core of the mega-city rapid transit system, linking thence to subways, taxis, and bus lines.

Energy – Built around gasoline-powered automobiles, diesel-powered buses, and kerosene-powered aircraft, China’s transportation network is dependent on supplies of imported petroleum, and that dependence is growing as China grows. Policy-makers seeking viable transportation options that are not beholden to the petroleum supply are naturally drawn to rail, and would like to see high speed rail as a substitute for air travel on shorter routes.

Environment – China’s leaders breathe the same air the rest of us do, and it would take a theatrical degree of paranoia to think that they delight in modern cities with sludge-enshrouded skylines. High-speed rail, if fueled by dirty-coal generated electricity, is not going to make China’s air any cleaner, but the ability to drive it based on nuclear, wind, solar, wave and other forms of cleanly-generated electricity make it a potentially greener means of intercity travel than buses and aircraft.

Expertise – The other development motive behind high-speed rail is the belief that if China can build tens of thousands of kilometers of high-speed railways, along with the equipment, locomotives, rolling stock, and software to make it all run, the nation can become a global player in the construction and management of such railroads. The effort is already underway, most notably in California’s on-again, off-again high speed rail project, where CSR is partnering with GE on one bid for the trains themselves, China Rail Construction Corporation is partnering with Fresno County to bid on a maintenance and repair facility, and China itself has dropped hints about financing the whole venture.

Execution, Execution, Execution

The case for high-speed passenger rail in China is, thus, compelling, far more so than in the United States. The danger is in applying high-speed rail as the answer for all of China’s transportation needs. What critics should be focused on, therefore, is less Chinese high-speed rail qua high speed rail, but on factors that threaten the success and viability of the system.

As cool as the upcoming Beijing-Shanghai high-speed railway sounds, the route between the two cities probably stretches the distance limit of a viable high-speed rail system. For me, on most days, it would make more sense to take a 350 km/hr train to Shanghai than a plane, but only because of the spectre of weather and air traffic delays. A high-speed train to Hong Kong, on the other hand, would need to be very fast indeed, even though I am over seven hours from my front door in Beijing to my office in Central when I fly.

What the government needs is some systemic sobriety to counter the early intoxication with high-speed rail. Because of the fixed, inflexible nature of high-speed rail’s assets (as opposed to, say, those of an airline,) a good start would be creating a framework against which the National Development and Reform Commission can evaluate the economics of a given line over the long term. Clearly the success of the early lines suggest the beginnings of such a template: Beijing to Shenyang, yes, Beijing to Urumqi, probably not.

Time-in-motion studies and other engineering homework would be worthwhile, as would be getting outside agencies to double-check the arithmetic of the Railroad-Industrial Complex to make sure each line is worth building. With the national budgets at stake, and given the mess at the top of the Railways ministry, I would not be surprised if these sorts of controls were not already in the offing.

The Wrong Solution

The issue, however, is not what Ferguson thinks it is. He suggests that the problem in China is that the market mechanism is missing, and that all of this money spent on high-speed rail is a “massive misallocation of resources that is a hallmark of top-down systems such as in Communist China.”

Taking the time to rebut Mr. Ferguson with a catalogue of the massive misallocations of resources that take place in America, Britain, Japan, and the E.U. would be both pedantic and off-topic. Suffice to say that the historical record gives ample proof that “top-down systems” like those in China enjoy no monopoly over expensive government boondoggles.

It is worth pointing out, however, that one of the few downsides of market mechanisms is that they occasionally stand in the way of solutions that make more sense when the full costs of implementation are considered. I grew up in a Los Angeles choked by its forced dependence on the automobile, the results of a local government abetted by automotive interests that abandoned a viable interurban rapid transit system because it didn’t want to pay for upgrades. Half a century later, a new generation of southern Californians confronting the limitations of automotive transport is footing the bill to rebuild it completely. This kind of market mechanism China can afford far less than America could.

Do we need to be careful about building costly high-speed rail systems in the U.S.? Definitely. Are there problems in the way China is laying high-speed rail lines? Almost certainly. But even despite all of this, is China going to need more high-speed passenger rail networks? Count on it. Let us focus on helping them build wisely and well.

A China Internet Bubble? Maybe…How Much Do You Know?

Chinese internet café in Lijiang, Yunnan, PR C...
Image via Wikipedia

In the Hutong
Healing
1731 hrs.

The Wall Street Journal‘s Loretta Chao wrote a thoughtful article about Youku’s financial prospects in advance of its first quarterly results announcement earlier this week. She quotes me liberally, but allow me to embellish.

First to Youku…

It is not unreasonable to suggest that what we are seeing in the share prices of China’s Internet stocks reflects some of the dynamics of the U.S. Internet bubble. Youku’s share price represents, I believe, investors’ implicit belief that what Victor Koo and his colleagues are building is not a web site, but an integrated video entertainment company built around the internet, in essence the 21st century equivalent of what broadcasters were eight decades ago. For that reason, some investors are willing to forgive Youku its cost structure for the same reason they forgave that of Amazon in the uber-bookstore’s post-IPO years: to create the company that could capture the opportunity, you have to be ready to endure a price/profit disconnect as the company builds its capabilities and scale.

Is such thinking correct? Judging the long-term growth prospects for online video in China is a bit like practicing economics: you have to make some debatable assumptions before you can make a call either way. Assuming the online video companies find a scale at which they can sustain profitablity, assuming they are able to continue to grow revenues faster than expenses, and assuming the government will be content to allow private companies to control a medium of growing importance, the online video companies will reward the confidence of their investors. I am hopeful, but it would be unwise to misjudge the risks implicit in those three assumptions.

But Are Prices Right?

As I told Loretta in the article:

“I think there is a reasonable premium you can apply to any company that is in the nexus of both a rapidly-growing industry and a rapidly growing market.”

What that premium is depends on whether you are an investor or a speculator, and that in turn depends on how well you understand the risks. How many investors actually understand the risks? Think of it this way: armed with the best information money can buy (or, actually, armed with the ability to buy that information), executives who run companies with operations in China underestimate or misunderstand the risks here with astonishing regularity, often with disastrous results.

Investors, lacking those information resources and who operate one or more degrees further removed from the realities of the market than executives, are even more likely to do so. Worse, as I said to Loretta,

“…too many people, particularly institutional investors, are worried about missing “the next Baidu.” All of this creates a situation where risks are acknowledged and then forgotten, and that may well be at work in the case of the Internet sector.”

Obviously, none of this is to say that there are not some worthy investments among Chinese internet companies. But if you are going to invest in a stock in China, recognize you are out of your depth and spend a few weeks doing some basic research, understanding the depth and breadth of the risks as well as the ostensible opportunity.  To skip the homework and rely on the “China + Internet” formula invites disappointment, if not disaster.