The business of mobile telecommunications: hardware, software, services, and content

The LeEco Problem

Source: Outspoken Billionaire Works to Salvage His Tech Empire in China – Bloomberg

Even if LeEco and the rest of Jia Yueting‘s business holdings implode over the next few weeks, those of us who will pick through the wreckage looking for the lessons will surely learn two things very quickly.

The first thing that we will discover will be that anyone who dismisses Jia as a “fool” or an “idiot” will be wrong. Under the bluster, we will find that Jia is an exceptionally smart guy who had a fantastic vision for his company.

The second thing we will find is that the reason for Jia’s failure was not his overall strategy. Let me explain that a bit.

Jia is an implicit subscriber to an ethos that is common among entrepreneurs that I call “conglomeration mystique.” Seeing himself as cut from the same cloth as Elon Musk, Steve Jobs, and Jeff Bezos, Jia sees no reason why he cannot do what they did.

All things being equal, he’s right. Other entrepreneurs, supported by a war chest from a core cash-cow business, have leapt into unrelated fields and surprised their critics. I know of no gift possessed by those people that Mr. Jia might have lacked. So the vision was not wrong.

Jia’s mistake is one that has plagued so many Chinese entrepreneurs: operating in a market that rewards speed and short-termism, he became convinced that he had to do everything right now, or the opportunity would be lost to him.

As the Bloomberg article hints, Jia’s pace of execution outstripped his ability to build the capital to support it. At several points, he likely had the choice to slow down and let the capital catch up. Instead, he chose to risk overextension, to gamble on things working out just right, and in so doing proved Gordon Sullivan’s maxim that “hope is not a method.”

The question this leaves is thus: how do you get an entrepreneur, forged in China’s Make-It-Today-For-Tomorrow-The-Government-Will-Change-the-Rules business environment, to eschew the very thinking that made him money in the first place? I don’t think you can, which means that the kind of grand-scale Hail Mary approach that has tripped LeEco is likely to become a fixture on the China business scene in the coming years.

For some, it will work. And LeEco is down, but it is not out, yet.

 

Nokia Problem #342: We Ignored Journalists

In the Hutong
Watching the tourists shuffle through the Forbidden City
1055 hrs. 

Working on a long paper about China and the demise of Nokia, I came across this interesting little anecdote from a journalist friend from 2011.

“So if you want to leak something, especially since you’re such a big fan of NOK, you can let the world know that a certain journalist found out today that despite having submitted questions for an interview in late July, was informed today, 17 days after the initial deadline, and 10 days after an extended deadline, that the interview would not be available.”

Nokia did not melt down because of the way it handled its media relations. Nonetheless, I contend that the problems that led to the end of Nokia were visible in a hundred facets of the organization long before the high flying handset maker found itself a rump division of a rudderless software company.

Setting the Stage for Chinese Innovation

Near People’s Square, Shanghai
Skyline in Silhouette 
0700 hrs. 

Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.

One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.

But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.

From Buy to Make

Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.

The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.

China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.

Fast Followers

By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”

By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.

Innovation, however, remained a challenge. While a handful of local tech companies –  notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.

Enter the Innovation Platforms

And there it remains today.

This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.

Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:

Significant – The core innovation is a genuine advance that is both useful and relevant;

Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;

Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;

Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.

Supported – Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.

Early Innovation Platforms

Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.

But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:

The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;

The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;

Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.

Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.

Platforms for the Future

In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.

But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.

For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.

But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.

The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?

I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.

Rethinking Mobile Advertising in China

Mobile Advertising Lags China’s Smartphone Explosion
Angela Doland
Advertising Age
January 24, 2014

Reporting from Shanghai, AdAge‘s Angela Doland writes a thought-provoking piece on how mobile e-commerce continues to outpace the growth of mobile advertising in the world’s largest smartphone market. As a percentage of all e-commerce, mobile is creeping into the double-digits, reaching as much as 21% during major holiday promotions.

At the same time, after years of effort, the most optimistic projections would have mobile advertising reach 3% of total ad spend in China this year. Given that Chinese users spend some 40% of their media consumption time staring at their mobile screens, you can understand the frustration of the advertisers.

Mobile Advertising Done Right

On the one hand, this trend should not surprise us. History teaches that effective advertising techniques for any new medium emerge only after an often extended period of trial and error. E-commerce initially grew much more quickly as a percentage of Internet-based revenues than advertising, and advertising was slow to find purchase in print news, radio, and television.

What this suggests is that the problem is not whether advertising can be adapted to mobile. The problem, rather, is that advertisers have yet to find an approach that makes the channel compelling.

Mobile Ad 1.0

There are three ways to approach mobile advertising. The first is to approach it as another channel for online advertising. This is where you talk about text-based advertising, display banners sized for the mobile screen, mobile search-based advertising, and ways to insert clever ads into music, videos, books and games consumed on a phone or tablet. Let’s call this “Mobile Advertising 1.0.”

My experience is that this has been the common approach in China, but that the challenges involved in making it work across three carriers, a half-dozen operating systems, hundreds of devices, and thousands of apps have made it difficult to get economies of scale. This alone might, in fact, explain why we are yet at such low numbers. Would it be easier with one carrier, one phone, and one operating system? Indeed. But I suspect that is not the real problem.

Perhaps, instead, we are misunderstanding the channel, and need to rethink how we do things. Back in 2006, I was in the room when my friend and former client Ian Chapman-Banks explained to a Japanese reporter that the reason that mobile advertising was having so much trouble was that we had failed to understand the value proposition.

Mobile Ad 2.0

Ian’s point (and I am paraphrasing heavily here) was that advetising as we know it was based on reaching out to chunks of people with similar characteristics at a given point in time. Mobile, Ian noted, had the ability to enable us to deliver a specific message to a specific person at a specific location and specific time.

In other words, what was keeping mobile advertising from being effective was that we were not using what made it fundamentally better than mass media advertising. This is the first time in history that advertisers could reach a person of their choosing at the time and place of their choosing, and all advertisers seemed to worry about was where to stick the banner on a small mobile screen.

Mobile advertising would be effective, Ian implied, when we figured out a way to make these capabilities work for the advertiser. Clearly, we are still looking for that combination, yet given the speed with which mobile is evolving and the innate conservatism of the advertising industry, this should come as no surprise. The key was to experiment and to keep experimenting.

The Mobile Ad 2.0 argument, then, is that if we want to figure out how to make mobile work for the nearly 1 billion mobile users in China (not to mention the rest of the world,) we have to experiment. Ian, who at the time had a generous marketing budget at his disposal, had allocated 10% of it to what he called “R&D:” money to try new channels of advertising and marketing that would not be evaluated alongside traditional channels, but that were just there to make sure that when something new worked, the company would be ready to exploit it.

So we aren’t at Mobile Ad 2.0 yet, but if we stick with it, we will get there eventually.

Is there a Mobile Ad 3.0?

Late last year I wrote a post that summarized why there are a number of ways to approach social media, each of which is guided by the marketing or technology silo from which one has emerged: practitioners who come out of advertising see social media as an advertising medium; people who come out of direct marketing see it as a direct marketing channel; PR people see it as a means of delivering messages; and so on.

What is different with mobile is that, in part because the challenge in putting mobile to work is, at the moment, much more technically intensive, the companies, departments, and agencies playing in that field have been those with lots of money. In short, it has been the advertising people. For that reason, we tend to talk about mobile as an advertising platform.

That exposes an assumption that is not necessarily supported by the facts. Zooming out of our ad-focused myopia one step further, then, we have to ask this: does mobile marketing need to be advertising-based, or are we missing something?

It’s Mobile Marketing, Jim, But Not As We Know It

In addition to allowing us to target an individual based on habits, time, and location, mobile also allows us to engage that individual in a conversation at a specific time and place. Mobile market research is based on that premise, and some of the early results hae been promising. As long as market researchers do not bombard us to the point of insensitivity with intrusive polls, and provided that we make it worth someone’s while to respond (good information is never free), this is likely to be a fruitful channel for some time to come.

Mobile has great value for point-of-sale applications based on near-field technology that go beyond completion of a sale. I walk into a hotel, and I am already getting notes on Foursquare about specials in the coffee shop. That’s a good start: it would be better if those specials were relevant to my dietary needs (e.g., “hi, David! We have great vegetarian options for you today!”)

Or how about direct-response on demand? When driving from city to city, I could tell Google’s Waze app on my phone that I needed a Sinopec station, and it would tell me distance, directions, prices, and offer me a coupon for stopping in.

I could go on, but you get the point. If there is a Mobile 3.0, and I think there should be, the opportunity is to start from the targeted user’s wants, needs, location, situation, and time, and work backward to the advertiser. This demands an intermediary who can make the match, of course. That’s why I think services like Criteo are going to translate well into the mobile space, and, in the long run, so will Baidu and possibly Tencent. The real gold rush will be for those companies who have the mass of advertisers on the one hand and the mass of users on the other.

Hence, Baidu’s ongoing interest in mobile. IF there is a single Chinese company that should make mobile advertising 2.0 or 3.0 happen, Baidu is it.

No PR Playground

What I am still trying to figure out, though, is where public relations has room to play in mobile. I have heard a few ideas, but I don’t see anything compelling so far. Classic advertising and classic PR don’t yet have roles to play in mobile to the degree that advertising does with online and PR does with social.

Yet every time I sit down and watch another compelling mobile technology demonstration, I am reminded that the tools we are creating today will be hopelessly antiquated, irrelevant, or both in five years. At some point, we are going to figure out how to make a connection between a company and a mobile user work out well for everyone. But we aren’t there yet.

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Is Apple Going (China) Mobile?

Hutong West
Two hours sleep, three cups coffee
1039 hrs. 

 

China Mobile
China Mobile (Photo credit: Wikipedia)

The Wall Street Journal has lit up the net with an article proclaiming that the ink is drying on a deal between Apple and China Mobile for the carrier to (finally) (officially) offer iPhones on its network. Nothing has been confirmed by either Apple or China Mobile, but that has not stopped the speculation.

My take on the deal has not changed from when I wrote this piece in September: the value of this deal is far from clear. As such, it might be time to add a few more points to the debate to provide some perspective:

1. There have been 89 million iPhone 5 handsets sold thus far.

2. There are already 42 million iPhones using the China Mobile network. These are people with iPhones and a China Mobile account.

3. Optimistic analysts expect another 20 million iPhones will be sold next year in the event of an China Mobile deal, around 1.5 million phones a month.

4. Said analysis suggests that just under 3% of China Mobile’s subscribers will buy iPhones in the first year, and presumably a percentage of those will be replacements, given that your average Chinese smartphone user replaces his/her device every 15-18 months.

5. If Apple did sell an additional 20 million iPhones in the first year of its business with China Mobile, at, say, $400 revenue per unit, that would be $8 billion. A very nice chunk of change, and it would deliver a respectable jump in iPhone sales worldwide.

6. Putting that in perspective, Apple’s revenues for the 52 weeks prior the end of last quarter were over $170 billion. Therefore, even a very successful debut with China Mobile would give Apple a 5% revenue bump.

None of this is to say that this will be a bad deal for Apple. Even if Apple sold only an additional 10 million units, selling 10 million units of anything in the mobile business counts as a win, even for Apple. At the same time, it is important to keep in perspective exactly what a China Mobile deal would mean – and, more important, what it would not mean – for the company.

Is it Too Soon for Xiaomi to Go Global?

Aluminum protective metal bumper case cover fo...
XIAOMI MI2S (Photo credit: dayjoybuy.com)

Hutong West
Wiping the floor
2117 hrs.

I had a long talk with Michael Kan at IDG recently about China mobile phone maker Xiaomi and its high-profile hire of Google refugee Hugo Barra to head up the company’s international expansion. The core of our discussion was around whether it would make a difference. Michael was circumspect about his opinion, but I wasn’t: Hugo is a great hire, but he will not easily solve the challenges to Xiaomi’s global ambitions.

Xiaomi has a strong market in China, built on powerful devices that sell at very modest prices, on a slightly patriotic appeal (buy Chinese!), and on some deft PR by founder and CEO Lei Jun. Where the company differs from other Chinese manufacturers of inexpensive Android phones is that it is attempting to build an ecosystem of its own that is meant lock in users and draw revenue on content and services in the same way that Apple has done.

Now that Barra is aboard, the bet in some quarters is that a major international push is in the offing. If it is, I wish Lei, Barra, & Co. best of luck. They are going to need it, because the minute they step outside of their China cocoon, things are going to get different for them very quickly. The three biggest challenges I see aren’t even marketing related. They boil down to distribution, strategy, and resources.

They Can’t Buy What They Don’t See

China is a retail-based mobile device market. This means that any mobile phone manufacturer can get counter space in a retail store and sell an unlocked phone to the public. The only challenge is to get people’s attention so they look for you. Lei has figured that out, which is what draws people into the stores.

Markets like the US, though, are carrier-based. This means that in order to be sold to the public, you must first win over one or more of the mobile network operators, who will then sell your device (locked) for their network both directly and through authorized retailers. As a result, there is a relatively modest number of devices available in the US, and breaking in is tough. Most carriers start out with new manufacturers (think LG and ZTE) in an arrangement where the manufacturer’s brand never shows up on the device: it is branded by the carrier. Over several years, that can change, but it will take time, and there are unlikely to be shortcuts for Xiaomi.

Cheap May Not Be Enough

Xiaomi is no stranger to competition: China’s mobile market probably has 70 handset manufacturers offering 800 devices on sale at any given time. In the US, however, it will face competitors who have the home-court advantage that Xiaomi is used to having. Apple, Samsung, HTC, LG, Google, Microsoft, Huawei, and ZTE bring more cash, technical muscle, marketing prowess, and corporate attention to the global markets than Xiaomi can afford.

Certainly there have been David-Goliath stories before: every company in the US mobile phone business with the exception of Motorola started out as an underdog. But against a particularly brutal array of competition – including Chinese rivals who can match and beat any cost advantage Xiaomi can bring to the table – Xiaomi is going to have to figure out what it can offer to non-Chinese users that its well-funded, technological-powerhouse rivals cannot. Will it be innovative, and how? Can it find a neglected niche? Will it grab onto a powerful partner, and if so, whom?

Or will the company try to duplicate its software and services ecosystem overseas?

To his credit, I get the feeling Lei understands that “cheap and cheerful” is not an option.

Going Too Many Places At Once?  

China’s entrepreneurs face great temptation. Once they are successful in one business, many of them begin to think they can be successful in other, unrelated lines. There are so many green fields and blue oceans in China that the urge to move into those new areas is almost irresistible. That siren song is too-often fatal. I have watched from the inside of two giant Chinese companies as these sideline businesses sucked capital and attention from the company, allowing more focused rivals (often foreign) to leap ahead.

Xiaomi is showing early signs of entrepreneurial attention-deficit disorder. The company is already in software and services in order to secure profits that it would be hard-pressed to make on its inexpensive devices. Now Lei wants to move into internet-ready televisions, a product line that has become much easier to make but no less difficult to sell to the public, and dozens of local brands already crank them out, undercutting prices. This means that Lei will need to get into a services and content business in order to make profits from any TVs he sells.

Then comes the globalization. Lei has said that he will turn to Barra to run international markets. That would be ideal if it would work. Chances are, though, that it won’t. The fundamental business decisions that will need to be made in order to turn Xiaomi from a Chinese company to a global one are going to draw on the valuable time of Lei and his lieutenants.

All of that distraction will take place at a time where Lei will need to shore up Xiaomi’s position and defend it against the onslaught of competitors keen to rip his market out from under him. The company is number six in China in smartphone sales according to some analysts, but that position is far from secure. One misstep in its core business and it could go very wrong.

Oh, and About that Name…

This is normally the point where I would bring up the fact that non-Chinese outside of China would be able to pronounce “Xiaomi.” The real issue, though, is not getting people to pronounce the name, but getting people to care enough to even try. Consumers around the world have no idea who Xiaomi is, or whether it is a creation of the Ministry of State Security in a plot to listen in on the world’s conversations. Beyond the technical, beyond the strategic, there is the simple issue of getting people to know and care about you. Chinese companies are notoriously bad at this, and as adept as Xiaomi has proven itself in China, it is a long leap to build that faith across the Pacific.

The good news for Xiaomi is that Barra gets all of this. When I saw him at the China 2.0 conference at Stanford earlier this month, he had no illusions. In his offhand remarks you could hear him honing his messages as much for external audiences as internal ones: this is going to be a long slog, and Xiaomi needs to be ready for it.  At the moment, though, it is unclear whether Lei Jun has the stomach or the war chest for a long battle against the established names.

The hard decision that the company will face soon is this: are we better off focusing that effort today on winning in China, engaging in a token overseas effort to seed long-term awareness and eventual trust; or do we go whole hog in both directions, aiming for the top spot in China and a dozen international markets at the same time?

If Lei Jun has is way, watch for Xiaomi to try to score some quick, modest wins overseas to generate buzz. The wise move at that point would be for Lei and Barra to start raising serious money to enable them to take on Samsung, Google, Apple, HTC, and Microsoft.

Either way, this is going to be both fun and educational to watch.

Bill Bishop on Apple: We Need More Mojo

Temporary Hutong, Wangjing
K-Pop O.D.
1307 hrs. 

Sinocism editor Bill Bishop wrote a thoughtful piece about Apple (“Apple Needs China Mobile Deal to Regain Smartphone Mojo”)  that ran in USAToday late last week. Reading between the lines, Bill’s motive for writing the article is to give context to the excitement that rumors of a China Mobile deal are stoking among Apple shareholders. Since even before the iPhone was officially introduced in China in late 2008, speculation has been rife about whether, when, and how China Mobile (CMMC), the nation’s largest carrier in number of subscribers, would offer the phone to its users.

Five years later, the speculation continues. Yet while Apple fans talk up the company’s stock with visions of a Yangtze-sized cataract of money that flow into Cupertino’s coffers, questions persist about exactly how big of a win it would be for the company.

Tim’s Empty Quiver

First, as Bishop points out, Apple lacks leverage with China Mobile. At this point, Tim Cook’s company needs CMMC more than the carrier needs Apple. The iPhone has a shrinking share of an increasingly competitive market, and the company has made no secret of the extent to which its profits depend on China. China Mobile would almost certainly have used those facts as leverage in negotiations.

Arguably, China Mobile does suffer for not having the iPhone in its display cases, but the company has managed to do quite well without Apple, especially as the selection of devices that run on its unique TD-SCDMA 3G network and its new TD-LTE fourth-generation network. For this reason, it is possible, if not likely, that Apple made commercial concessions to get China Mobile to offer the phone. China Mobile is unlikely to be prepared to subsidize sales of the phone, especially given its keen watch on cost management over the past years. Apple may not be able to expect the high returns it once enjoyed on the device, especially if China Mobile agrees to put a bunch of advertising dollars behind the introduction.

More Users, or Same Old Users?

Second, and more important, we do not know the extent to which China Unicom and China Telecom have slurped up everyone in China who wanted an iPhone. Because a phone number change is mandatory when upgrading to a smartphone, many people took the leap with China Unicom, whose once anemic network has improved radically in recent years. As such, most of those who really wanted an iPhone may well have gone ahead and jumped to China Unicom or China Telecom.

Granted, China Mobile does have 130 million 3G users who don’t have an iPhone, and you can bet if China Mobile cuts a deal with Apple both companies will put big marketing dollars behind the device. But most of those users were added to CMMC’s 3G rolls after China Unicom introduced the iPhone, so you have to wonder whether those users are really going to care.

Finally, while a deal with China Mobile is a necessary step for the iPhone to regain its market share and “mojo” in China, it is not likely to be sufficient. As even Bishop admits, the iPhone is not “cool” anymore. Making it available to a whole lot more people is not going to help the cool factor much, and is likely to sandblast off whatever remains of the iPhone’s snob appeal. It will become, in the words of a good friend of mine, like “wallpaper:” ubiquitous and unremarkable. And that, for Apple investors, means that the premium will be eroded.

More than just Distribution

Facing a steroidal Samsung, plucky HTC, and local favorites Xiaomi, Huawei, ZTE, and Lenovo, all running some form of the increasingly impressive Android operating system, the iPhone needs more than a larger addressable market: it needs to get sexy again.

That’s a tall order. Chinese mobile users swarm to and discard phone manufacturers periodically, never to return in the same masses again. This happened to Ericsson and Nokia in China. Within three years of getting dumped by Chinese users, Ericsson was groping for a partner to save its bacon in the devices business. Nokia lost its luster three years ago, and today its mobile phone business on its way to becoming part of Microsoft.

I’m not ready to suggest that Apple is entering a similar tailspin. But what it does over the next six months will determine whether it regains its seat at the head of China’s mobile phone table, or whether it gets shoved further and further down the ranks in a very robust market.

A Small Crack in Apple’s Asia Tablet Story

Image representing iPad as depicted in CrunchBase
Image via CrunchBase

IDG Connect – Kathryn Cave (Asia) – The Tablet Security Conundrum.

Hutong West
Here a week and not a second on my porch
1947 hrs.  

Kathryn Cave at IDG Connect offers a snapshot of her company’s research on how and why Asians are using tablet computers like the Apple iPad, the Samsung Galaxy, and the Motorola XOOM. While Asians trail the world average in tablet use, they are more likely to buy a tablet in the coming three months and are more likely to use the tablet daily for work.

While iPad dominates the market, more Asians than anywhere else in the world believe that Apple’s leadership is unsustainable. 51% believe Android will become the global market leader in tablets within 12 months.

This is important because it offers more evidence that Asians view Apple rather differently than their U.S. and European counterparts. IDG does not delve into why that is the case. My theory has been that Apple has long treated Asia beyond Japan with a degree of benign neglect. By contrast, Apple invested in evangelists, user groups, and a legion of specialized resellers in North America, Europe, Australia, and Japan, who together sustained enthusiasm for the company and its products even in the wilderness years of the mid-1990s.

Tablets have been the category that Apple has ruled most strongly over the past 30 months. What is more, Asia is regarded by punters and competitors alike as the company’s largest font for growth in the coming years. Research suggesting that Asians are less enthusiastic about the future of Apple tablets should send up red flags in Cupertino, and green ones at Samsung and the Googleplex. This is the closest thing we have seen to a strategic vulnerability for Apple.

While the company focuses its efforts in Asia on production and distribution, treating marketing and customer relationship-building as an afterthought, the competition is getting wise. Bet on Samsung and Google targeting this rip in Apple’s chain mail armor. Asia has been Apple’s escalator, but unless it is handled with more than a backhanded marketing effort, it could become the company’s downfall.

Apple’s China Strategy: Venturing to the Edge of Coolness

 

Apple Inc.
Apple Inc. (Photo credit: marcopako )

IPhone Scarcity During Chinese New Year May Give Samsung a Happy Holiday – Bloomberg.

 

Right before Chinese New Year, Bloomberg’s Ed Lococo interviewed me for this story, asking me how much I thought iPhone sales would be affected by the company’s decision to sell the newest version of its handset via online channels only. The quote in the story is a good one, but there is more to what I told Ed.

First, I do not expect Apple unit sales to suffer severely from this shift in distribution. When the Chinese people want a product that is difficult to get, they tend to find ways to get it, as evinced by the huge gray market in iPhones that existed long before they were introduced in China. The Chinese consumers who can afford these devices are net-savvy, and the online store will not present a major obstacle, and they should continue to be available through China Unicom’s retail outlets.

I also expect Apple will see a jump in iPhone sales through Apple’s channels in Hong Kong and other major Chinese New Year travel destinations for outbound PRC tourists. However, I noted:

A large portion of Chinese New Year sales are about having the gifts in hand right now, so I expect that Motorola, HTC, and Samsung, all of whom offer Android devices competitive with the iPhone, will benefit among buyers who are ambivalent about the brand of their device or who were on the fence about Android.

Ed also asked me whether I thought Apple would use this as a justification to expand its distribution in China, adding carriers or retail outlets. I imagine Apple will continue to expand its stores, albeit slowly, but I also think they walk a fine line between stoking demand and burning its mojo.

Apple owes much of its profitability in China to the perception that its devices are highly desirable yet difficult to obtain. The company is likely loath to tamper with that aura by significantly broadening its distribution, and that doesn’t even address the engineering challenges of creating an iPhone that will work on China Mobile’s TD-SCDMA network. Apple’s problem is that once two or more carriers offer the device and the phone seems to become ubiquitous, the mystique falls away and Chinese consumers will look elsewhere for their desirable device.

Make no mistake: most of Apple’s recent converts in China are much less emotionally vested in the Apple ecosystem than their counterparts in Japan or the United States. Apple is making a valiant effort to change that, but it needs more time, perhaps years, to develop in China the devoted following it enjoys elsewhere. Until then, it needs to remain in the business of making pretty, hard-to-get devices for prosperous people.

Hello, Alicloud

Hutong West
Last moments before Sundown
1950 hrs.

Rushing to finish up before I am obliged to go offline for my weekly sabbatical, the news from Alibaba about Aliyun, its new mobile operating system, is out. It is too early for a detailed evaluation of the operating system, but three articles you might find interesting include: my post from May 3rd about the rationale behind an Alibaba mobile OS; this pithy PDF analysis from Deutsche Bank laying out the challenges it will face; and my take on the coming mobile OS battle in China.

 

Alibaba’s Upcoming Mobile Operating System?

Jack Ma, Founder of Alibaba Group
Image via Wikipedia

In the Hutong
Sifting through the intel
1656 hrs.

Going through my notes while writing my report on last week’s Global Mobile Internet Conference for Warc.com, I am starting to realize that GMIC was one of those conferences where I wish I could have cloned myself. I’ve just fired a request for more materials to Edelman, the PR agency for the show, and I’m hoping they come through.

One of the better tidbits of the show was a speech by Wang Jian, Alibaba‘s Chief Architect and the CEO of its Cloud Computing group. Originally billed as a “Keynote and Product Launch,” the presentation was just a speech. Or, as I noted to myself at the time, a launch without the product.

All Foreplay, No Payoff

In his speech, Wang acknowledged the power and advantages of the app-based mobile phone operating systems, Apples iOS and Google’s Android, but he noted that even these most modern of mobile platforms had a failing. Apps, he noted, cannot replace the web, and a mobile browser does not adequately deliver a web experience on the mobile phone. More important (to Alibaba, especially), the web economy on the Internet has yet to be delivered onto the mobile phone.

Wang called for an open mobile platform designed and optimized to help people run their businesses on the web, and told the assembled 3,000 delegates that the web economy (not the app economy) is the future of the mobile internet.

This raised all kinds of red flags. The rhetoric and the way the speech built sounded like he was going to announce just such a product, and then he ended abruptly just as the speech reached a high point: “Think about a platform OS that allows you to make your web business bigger by definition.”

I could almost hear the music and see the scantily clad girls walk out with mobile devices running just such a platform.

And then Wang thanked the audience and walked off.

Waiting for the Genie

You don’t write a speech like that just to put a flag in the ground and issue a clarion call for the industry to do something. You write a speech like that when you are ready to launch the very product for which you are calling. The conclusion I’ve reached, sitting here in the Hutong after the intervening long weekend, is that Alibaba has something in the works, but either could not or would not announce it last week.

Apart from the launchus interruptus keynote speech, here are the five most important reasons why I think Alibaba has something in its lamp.

1. Baidu did it. The degree of rivalry and one-upsmanship between Baidu and Alibaba should not be underestimated, a rivalry that dates at least as far back as Alibaba’s partnership with Yahoo! in China, if not further. Baidu has announced a mobile operating system, albeit one based on Android. Alibaba would be compelled to respond, if for no other reason than to keep from being locked out of mobile commerce by a Baidu operating system that pushes users to Baidu’s chosen commerce site (instead of Taobao) and payment site (instead of Alipay).

2. Alipay. Creating their own mobile operating system would allow Alibaba to integrate Alipay, their popular electronic payments system, into the phone. An Alipay-based electronic wallet could be integrated into the device, at the very least allowing encrypted transmission of payment information for anything purchased on the Internet, from e-books to stuff ordered on Taobao.

But that would only be the beginning. Alipay could also integrate near-field communications so that you could use Alipay to pay for a taxi ride, for your lunch at McDonald’s, for your movie tickets, and for that cute pair of shoes you saw in the store downstairs from your office. You could pass money to a friend or relative by an SMS (or an MMM –  mobile money message.) With an Alibaba system, Alipay would become the default means of making every payment with your phone, regardless of what you were doing. No need to even open an app.

This could substantially expand the volume of business Alipay is doing in China, and even secure its leadership as the payment method of choice for consumers in the PRC, making it the VISA of the 21st Century in a way PayPal still dreams about.

3. The Enterprise Hole in Mobile. While it is interesting to think of running a large e-commerce enterprise on a mobile phone, concerns about security and logistical challenges seem to inveigh against it. On the other hand, using a mobile device to help conduct a physical inventory, tie into a complex enterprise management system for order entry, CRM, or other enterprise functions would extend enterprise IT to mobile in a way that iOS and Android are only starting to address.

And of course, there would be an Alibaba enterprise e-commerce system integrated into the device, making it a simple matter to log onto your Alibaba page and buy, sell, update inventory, etc.

4. Taobao. This is even more compelling in the near term than the enterprise. Selling what would essentially be a Taobao phone would allow you to buy a mobile device, sign it into your Taobao account, then use the built in camera to take a picture or video (with voice-over description) of what you want to sell, add in pricing and details, and with the push of a button upload that to your Taobao store.

You could monitor your store in real time, make purchases, and handle all of your payments via your phone. In effect, your phone becomes your store.

This would be a convenience to those already selling or buying on Taobao. And for those who aren’t, it would make doing so much easier and much more accessible, possibly tripling the addressable market for the company. And that’s in China alone.

5. Global. If Alibaba succeeds at crafting an alternate web-based mobile phone operating platform, this would be an important opportunity for the company to take its platform – and itself – global. Despite the company’s phenomenal success in China, it has limited recognition among consumers abroad, and this could change the equation radically. At that point, all Alibaba properties could be taken global, or at least to those markets without strong online platforms for small business and consumers and mobile payment systems. That would cover something like 3/4 of the planet. A tempting opportunity.

6. The Time is Right: As I noted in my earlier post about Baidu’s bid to become a mobile OS provider, it is still early days for the mobile internet, especially here in China. Conservatively, some 3/4 of the nation’s mobile users have yet to upgrade to a phone that offers much more than a bare-bones online experience. That is set to change, but it won’t change overnight. Timing is still good for Alibaba to get in on the game.

All of the foregoing is, of course, little more than thoughtful speculation. I would not be basing any stock purchases or investment decisions on the basis of the above. But it does suggest reasons why a bid by Alibaba to enter the mobile platform race should not be taken as a prima facie bad thing.

If Alibaba does decide to jump into the fray, they will gain little by doing so before they design a superb experience. In that sense, the company’s failure to launch anything at GMIC is heartening. It suggests that Jack Ma understands the challenges Alibaba faces in offering a whole new way for people to use the mobile internet.

Watch this space.

A Hint of How Bad Things Are at Nokia Product Development

In the Hutong
Re-wired
1904 hrs.

In the January edition of WIRED magazine, in an article entitled “Shanzhai,” Frog Design‘s Jan Chipcase takes writer Bobbie Johnson on a tour of Shanghai’s electronics markets. If Chipcase’s name does not ring a bell right away, you may have encountered one of the articles that were written about him when he was Nokia‘s leading human interface designer and wandering cultural anthropologist.

The Invisible Competition

Chipcase makes great copy. In the course of perusing the fetid underbelly of China’s mobile phone industry, he offers entertaining pearls of insight. Of particular interest was this little chestnut:

Although some shanzhai phones are obvious imitations, others are harder to spot as fakes. Pausing by a stall, Chipchase rolls one example around in his palm, feeling its weight and examining it. Counterfeit phones usually have surprising features: unexpected video cameras, extra ports or unusual connectors. He notes that it’s worth checking for a spare SIM-card slot: many pirate handsets are targeted at consumers who run a second line to get cheap calls by switching between telecom providers.

“Dual SIM is probably the most easy to spot,” he says, pointing to the extra slot. Whereas legitimate mobile companies have shied away from second slots, shanzhai manufacturers were quick to spot consumer demand. “They met it, while the incumbents had trouble meeting it because of their existing relationships.” (emphasis mine)

Indeed?

Motorola, whom I think could be classified as a “legitimate” mobile company, began offering dual SIM phones, MING A1800 and the VE-75, three years ago, and has been selling dual SIM devices in China ever since. One example: Motorola’s XT 800, launched in December 2009, is a dual SIM Android device. (Full disclosure: Motorola is a client.)

We could chalk this up to the reporter not fully understanding what Chipcase meant, or to Chipcase not knowing what the competition was up to (he is, after all, an interface designer, not a sales, marketing, or strategy guy.) Until we read this, anyway:

Shanzhai has shown that there is consumer demand for more than one SIM-card slot. So last summer Nokia announced the introduction of two dual-SIM phones, the C1 and C2. The launch tallied with Chipchase’s vision: manufacturers borrow from each other and quickly iterate, responding to local tastes, while also improving products. Rather than cheap knock-offs, shanzhai represents a radical new model of business innovation.

Whoops.

Out of Touch, or Just Broken?

So, here is the score: either we are to believe that both Nokia and one of its most important, globally plugged-in designers were ignorant of the fact that a global competitor had beaten them to a major design feature by over two years in the world’s largest mobile device market, or that they are being willfully ignorant of the facts.

If the former, the most benign way to read these quotes, this serves as prima facie evidence that Nokia was, as of nine months ago, seriously out of touch with its markets, and it had been for at least two years. The implications are alarming: the people hired to bring essential market intelligence of this nature back to the designers and executives in Espoo were unaware that the competition had already gazumped them on a critical feature.

But even if Nokia and Chipcase knew they had been beaten by a competitor and tried to hide it behind PR spin (apparently effective as far as WIRED was concerned), the dual SIM matter suggests that Nokia’s product development problems go deeper than a smartphone operating system. Even when Nokia is copying innovations from others, it is unforgivably slow in doing so. Think of it: Nokia was two years behind Motorola, whose mobile phone division was distracted at the time by its most tumultuous  upheaval in at least a quarter century.

The Platform Isn’t Just Burning: It’s Structurally Unsound

It is possible that Nokia CEO Stephen Elop understands how deep his product development problems go, and that he is already trying to fix the problem. He may realize that Nokia needs to create an entirely new approach to – and infrastructure for – more market-centric product development, and to stop assuming that simply doing business somewhere and occasionally sending your designers there to take pictures puts you in touch with the market.

Sometime this fall, Nokia will launch a new generation of smart phones to answer the four year old challenge of iPhone and the three year old challenge of Android. The success or failure of those devices, based on Microsoft’s Windows Phone 7, will determine Elop’s future, and possibly Nokia’s. Elop knows this, so we can expect Nokia to unleash an expensive global sales and marketing blitz to support the launch (as will Microsoft.) No doubt, the sheer volume of noise will help initial sales figures.

So if nothing else, Nokia is buying itself some time. The company’s true test will come later, probably in late 2012, after the market has taken the measure of Nokia’s partnership with Microsoft, and, critically, whether Elop will have built a product development team that can get the company back up to the front of the industry. Or, at least, not 2-4 years behind it.

But it won’t be easy. Apple, Samsung, RIMM, LG, Motorola and the shanzhai guys all have a running start.

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.

Sony-Ericsson Will Not Do Cheap

In the Hutong
Recovering
1408 hrs.

One more case to prove volume and share leadership is overrated in the mobile device business: Sony-Ericsson CEO Bert Nordburg explained to The Wall Street Journal why the company doesn’t make cheap handsets. From the WSJ:

After several fiscal quarters of net losses, Sony Ericsson became profitable earlier this year, thanks to a restructuring and successful releases of Android-based smartphones.

Mr. Nordberg said analysts have been too focused on sales-volume declines in the July-September period. Sony Ericsson could easily increase sales volume by offering more inexpensive phones, but profitability is more important, he said. “We do no phones under €50 ($68.43), because we won’t make money,” he added.

You need scale to make money in that business, and SNE does not have that scale. Nor, apparently, does it want it.

I wonder if Nokia is at all worried that the rest of the industry is prepared to cede the low end to the Finns and a growing host of low-cost Chinese manufacturers?

Probably not: I think we are still a year or two away from Nokia realizing they really don’t want to be the cheap phone provider to the world. That will only happen when one or two large Chinese (or Indian) volume handset producers start beating Nokia with The China Price.

Market-Share is Bunk: Why Apple is Leaving Room for Android in China

In the Hutong
Minding my own Business
1011 hrs.

In the October Vanity Fair, the magazine offers us its list of “New Establishment” leaders. In the entry on Steve Ballmer, the magazine whacked the Microsoft CEO for what it felt was a bad call:

BROKEN CRYSTAL BALL: Three years ago Ballmer proclaimed, “There’s no chance that the iPhone is going to get any significant market share. No chance.” (The iPhone is now the No. 2 smartphone, with a 28 percent market share.)

Meanwhile, Outside the Manhattan Vortex…

Not defending Ballmer, but the editors at Vanity Fair would have done well to ask “market share of what, exactly” before taking the Head Microsoftie to task. Assuming Mr. Ballmer was talking about global handset market share, Vanity Fair‘s editors are wrong to spank the Monkeyboy. For if said editors would teleport themselves ever-so-briefly off of the island of Manhattan, they would find that the world is not made up of iPhone-toting fashionistas.

Take a single, very large example. In China, the largest mobile phone market on the planet, a mere 400% larger than the U.S., smartphones make up well under 10% of the market, and as of Summer Apple’s share in China was less than one half of 1% of the total installed base even after three years of grey-market and nine months of “legitimate” iPhone sales. In China, at least, Ballmer is right.

But does Apple really care about market share? What Vanity Fair and Steve Ballmer both missed is that even if Apple owned only 5% of the global mobile handset market, at a retail price of $300 per phone that’s something like $15 billion per year.

They are not alone. What many people miss in the growing battle between Android and Apple is that Apple, as it did when it introduced the Macintosh in 1984, as made an implicit decision to capture and hold the high end of the mobile devices market, and ignore everything else. (Before we go any further, for the sake of full transparency, Motorola is one of my clients.)

Leadership is Overrated

In light of the evidence, one can hardly blame them. Ericsson watched its onetime market leadership wither as it failed to pace consumer tastes, leaving the company a shriveled rump of a joint venture with Sony. Motorola, once the leader of the market it created, watched its mid-decade quest to build market share on the foundation of a halo product founder as the halo (the RAZR) slowly tarnished.

And today, Nokia is finding that the demands of sustaining global share leadership are incompatible with the challenges posed by a changed industry. Nokia may sell more phones than any other company, but it has found the rewards of that title increasingly ephemeral.

And so Apple has decided not to try to be the largest mobile device company in the world, but the most profitable. We should not expect from Apple a line of iPhones so much as we should expect successive generations of innovative devices.

These Are the Droids You’re Looking For…

As a part of that decision, Apple has chosen to be a company that plays to developed, wealthy markets and wealthy niches within developing markets. The iPhone is not The People’s Phone. Never would the company consider the bottom or middle of the world’s income pyramids to be a market for anything it produces. Apple makes powerful, pretty devices for the prosperous. Full stop. (And there is nothing wrong with that: just ask an AAPL shareholder.)

For that reason, Apple’s “leftovers” constitute a growing market: legions of users who want access to highly portable, customizeable, low power devices that provide easy-to-use wireless access to the Internet, services, and entertainment, and yet cannot afford the cost of entry into the Apple ecosystem.

And I would argue that this market needs the power of an iPhone-type device more than the global Beautiful People who can afford one.

Enter the Androids.

Over the past year, Motorola, Samsung, LG, and HTC have already introduced Android devices that retail below RMB3,000, and once local manufacturers have access to capable yet inexpensive components, that price will fall quickly. Kaifu Lee, CEO of tech investment house InnovationWorks, predicts that Android devices will be available for RMB1,500 in 2010, and for RMB750 in 2011.

These are tipping-point prices that will begin to push mobile Internet-enabled devices into the hands of a far wider part of China’s population. They are not price points that Apple looks prepared to play in. In all likelihood that means that there will be many more Android devices in the market than Apple devices. That is going to be fantastic for the Android device makers, a life changer for China’s consumers, and it is going to be very, very good for Apple.

Amateurs talk about Share, but Professionals talk about Margin

So the argument over market share is banal and irrelevant, and predictions of Apple owning a share of the China mobile market comparable to its position in the U.S. is so much sky pie: through pricing and positioning Apple has strategically ceded a massive chunk of the market that it helped create, and is indeed seeding demand for Android products across a wider market.

For these reasons, the determinant of success for Apple or any of its competitors in the China smart phone market is not share, but rising profits, growing sales, and happy consumers. Those things are a lot harder to call and cannot be reduced to a single hard figure, but they are much more relevant, especially when the rate of market growth for smartphones continues to grow itself.

Remember that, Mr. Ballmer. And you, too, Vanity Fair.