The Map is Not the Territory

In a previous column, I have talked about “the myths of innovation”, including the “lone inventor”, the “wiz kid” and the fact that the successes we see today have often evolved and changed since the initial idea. In another, I talked about the “5C’s of innovation”: Copy, Combination, Competition, Constraints and Country, which influence how services and products evolve and diverge from an initial idea due to the influence of their environment.

You might have heard this expression “the map is not the territory” – certainly valid when the Chinese explorer Zheng He possibly sailed up to America in the 15th Century. The meaning is that the name of an object, the word for an idea or the opinion about someone is not the same as the object, the idea or the person itself.

I found that deciding to call something “innovation” or someone “entrepreneur” has a lot to do with:
(1) who is talking (the speaker’s personal knowledge and bias)
(2) who else is saying that (this is also called “social proof”)

Now the questions to tackle are: When can you call something an “innovation”? When can you call someone an “entrepreneur”?

What is innovation?

1. First issue: Finding signal

I am in the business of selling ideas from Asia and I keep hearing that “China is not innovating”. Am I in the wrong business? In fact, we continually identify interesting service concepts, business models, marketing strategies in China, and explain them to our clients. We consider them to be “innovations”, so why is China’s image still so much about “copy”? The short answer is that the “signal” is hard to find when there is a lot of “noise”.

2. Second issue: unknown prior art and dual citizenship

Innovation does not have a nationality, and it is very possible for something to be invented more than once. I was told at school that Gutenberg invented the printing press in the 15th century, but I found out later that it had been around in China since the 11th. Didn’t Gutemberg invent it? I think he did, but he did not know somebody else did it too, earlier. Is the printing press “Chinese”? I am not sure about the nationality but I do hope that possible patents – there was none at the time – have expired!

3. Third issue: incremental innovations

Another issue with innovation is that if you make a tiny change to something, most people would not call it an innovation. But if you make one tiny change every day, then over a few years the result will be radically different from where you started. When did “innovation” happen then? The answer is probably: every day.

I believe this incremental aspect of innovation is what makes it difficult to understand what is innovative in China. If you use Western references to describe local services you will simply miss out on what is different, original and really important.

Call Taobao “China’s eBay” and you will fail to recognize that Taobao implemented many services that eBay doesn’t have (IM, ad exchange, service platform, micro-retail service) and a business model that destroyed eBay in China.

Call Tencent “China’s Facebook” and you will not see that not only Tencent is making about 3 times more revenue than Facebook, but that it is far more profitable and has a very different service offering. Also, Tencent’s customers are its users, while Facebook’s customers are still for 90% its advertisers. If Tencent started as a “ICQ of China” and Taobao as “eBay of China”, they are certainly very different now.

Did they innovate? They would probably not be where they are if they did not.

4. Fourth issue: innovation does not always turn into a business

Of course, not all innovations end up becoming billion dollar companies. Most innovations never turn into profitable businesses. Even great ideas can take years to find a suitable environment to prosper: group buying is becoming hot in the US with a site named Groupon. “Tuangou” group buying in China has been very popular for years, combining online gathering and online/offline purchases, even for large things like cars!

So if you want to find innovation: put aside what you think innovation “should be” and focus on understanding the differences and paying attention to emerging signs. Innovation is right there, every time something is done a bit differently that it used to.

What is an entrepreneur?

Earlier this month I came across another instance of s never-ending debate about entrepreneurs: do you have to be born an entrepreneur to become one? I will try and show that first, this question has a massive logic flaw and second, that just like innovation, entrepreneurs are everywhere. It is all a point of view.

So are you born an entrepreneur? Well the problem with this idea is it is too easy to self-prove: his/her grandfather was an entrepreneur / he has friends who are / he had the drive because he was bored with his previous job, etc. Basically, there is always something I can find to justify this. Convenient, isn’t it?

If even the most socially awkward can be trained…

To show how this idea makes little sense let me make a parallel with a TV show I watched recently. It is a reality TV series named “The Pickup Artist” where a group of men who have extreme difficulties finding a girlfriend – they can be shy, unfashionable, awkward – enroll on a training that will equip them with the skills to approach women confidently.

Some people are “naturals” – born with high social skills, while others are not and might want to do something about it. The instructors in the show are experts who, for some, make a living teaching those skills, and were initially awkward and shy themselves. Along the episodes, participants receiving instruction and techniques and are faced with increasingly difficult challenges (the winner walks away with the title of “Master Pickup Artist” and 50,000 USD).

…then why not entrepreneurs?

The show demonstrates quite effectively that you can take pretty much anyone who is willing to change and help him do that. I would say that the same applies to entrepreneurs. The media only remembers big successes and dramatic failures (see “people love heroes” in my previous column), but most entrepreneurs are not there for the big media splash.

They are in it because they want something to change.

They are not satisfied with the present; they see an opportunity (they often overestimate it) and decide to do something about it. There is something glamorous about being called an entrepreneur – maybe something like being an adventurer of the 21st century. Would “Social Entrepreneurs” be the equivalent of “enlightened philosophers” of the 18th century? Being called an entrepreneur is also a convenient “license to fail” – and at least it was romantic to try. This actually leads us to another important point: what is failure? And what is success?

Failure and Success

Again it is largely a matter of perception. Each culture has its “models” and each person has its own set of values. While success is often described with a dollar value, many creators are more interested in creation and change than in fame and wealth, which come as pleasant side effects, at least while they last.

In a sense, Western companies have both succeeded and failed in China: Facebook has no presence but local evolutions are doing well. MSN and eBay failed but Tencent and Alibaba took their concept and changed it to succeed. I know of numerous small startups with creative approaches, concepts and sometimes technologies, but most of them lack the market-building capabilities, and almost all have little interest in getting known outside of China. Some are doing very well and keeping under the radar intentionally. Some have failed but have had the ride of their life. All have earned experience.

So which ones think of themselves as successes, which ones think of themselves as failures? Their peers and society at large might have an opinion, but eventually, it’s up to them to decide what they make of it. And as the song goes “You come from nothing – you’re going back to nothing. What have you lost? Nothing!”

Note: This is a guest column written for the Chinese business magazine “China Electronic Business”, invested by Jack Ma of Alibaba, and IT news site Interfax. Syndication inquiries are welcome!

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Pony Ma, CEO of Tencent, says in their latest release that:

“For our community value-added services, Qzone registered robust growth during the year and further consolidated its position as the largest SNS platform in China, with active user accounts increasing by 158.4% YoY to 387.8 million at the end of 2009. The key drivers of the strong growth were the popularity of SNS applications, especially social games, as well as the continued improvements in user experience and features. Xiaoyou, a real-name SNS launched in January 2009, gained considerable traction during the year and has become a popular service among university students and young alumni.”

Topics: Blogger Insight
Commentary: +8*

#1 Squandered Opportunity
Chinese internet giant Tencent was enviously positioned to dominate social networking, but blew its chance. Qzone does not reach any new demographics.

+8* | Considering Tencent is already reaching everybody with its IM service and Qzone started off as a blogging service, its revamping into a social network does not seem that bad – and they claim 305 million accounts if I remember. I am not sure what you would measure Qzone’s success or failure against but in terms of reach it seems fine to me. The business side of things is a bit more tricky: the revenue model with Qzone is avatar (QQ Show), social games and ads – they drive a huge number of pageviews in a way that advertisers are used to count (it’s harder with IM) but their huge inventory also devaluates the potential in CPM. The split of their SNS targeting different demographics is to focus the value and address market betters – similar to what RenRen does within its service at signup.

#2 The Site’s Design and Features are Lousy
The Qzone website is an unintuitive eyesore. Its applications are of poor quality and frequently inaccessible.

+8* | Agreed. I think this comes from the blog legacy and the “MySpace” style that has been prevalent – offering lots of customization opportunities. If you think of it, what about your Facebook page if you don’t like blue? You can’t change anything.

On Tencent’s SNS, applications are all copies or licenses or bought from social gaming companies, generally with terrible revenue share or poor valuation. Why? Because Tencent is a closed network and because they can. Problem is: operating social games is not the same as IM or MMOs and there is a learning curve – even for Tencent.

#3 Is Qzone Really No. 1?
Tencent’s claim of 305 million active users is highly suspect; even its classification as an SNS is questionable. Its competitors are encroaching upon its core user base of young teens.

+8* | Tencent’s number are no more suspect than others – at least Tencent is a market-listed company and they’d better not throw out too much exaggerations. What I suspect however is that many users might not even know they have a Qzone page, that would come with their IM account – or that any abandoned page is counted. We’re not talking about active users here since all SNS want to show off their highest number to claim to be #1.

As for classification, it is hard to say what is SNS and what is not. “Facebook” does not define SNS and I would count QQ IM as SNS depending on the context.

Does this mean Tencent soon collapse? Absolutely not. Tencent with Qzone is like Microsoft with Windows Vista: a near-monopolist that thrives despite a terrible product and lack of vision.

+8* | Tencent is definitely not the best in terms of products or innovation – similar to Zynga in that sense – but their ability to deliver a “good enough” mass market service and integrating it within their ecosystem is impressive. I guess those are two sides of the same coin.

For 2010, Tencent’s plans are:

“In 2010, we will focus on offering more SNS applications, including third-party applications, to enhance user value and better address the needs of different user groups in the market. We will also enhance the integration of our SNS with other platforms of Tencent to further extend our leadership.”

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+8* | Plus Eight Star gives its own take on digital things in Asia to make it relevant to you. BTW, we’re on Twitter too.

[A] Why is that not a surprise?

1. This result adds only the 4th quarter, and Tencent was already healthily above US$1B in the first three.
2. Net margin has been consistent over several quarters

[B] Now what is interesting to notice this time again?

1. Tencent’s revenue is over 3 times Facebook’s. Tencent made US$540M in the 4th quarter, more than Facebook for the whole year. While Tencent’s service is centered on IM, it extends into SNS and games, carrying over the same digital identity and can easily be counted as a “social networking service”.
2. Net profit is an order of magnitude superior
3. Tencent could buy one “MySpace” based on net profit (if acquisition price is same as News Corp.). And no, they won’t do it.
4. Ad revenue were only 7.7% of total. An Internet company making over a billion without ads?! Thanks to virtual goods, in a variety of forms (avatars, games, page decorations, background music, etc.)
5. Tencent’s IM PCU passed 100 million in March 2010. There are 20 million on Skype at peak time. MSN has 330 million active accounts (called “users”) a month. Tencent had 523 million active user accounts in 2009.
6. China’s Internet users are not as rich as their Western counterparts, which makes Tencent’s achievements all the more impressive! (average income of Chinese Internet users is around US$400 per month)

[C] Some more comments

1. Tencent is not China’s Facebook. Based on the above figures, we would rather recommend to someone in the US to become America’s Tencent.
2. Tencent has over US$1B in the bank as retained earnings. If only there was something good to buy! (maybe there is?)
3. Tencent is the third largest Internet company in the world by market cap. At the time of writing we had:
- Google | $179.8B (links and keywords advertiser)
- Amazon | $58.4B (selling low-margin commodities along with digital goods and services)
- Tencent | $36.8B (local Chinese hero)
- Time-Warner | $35.9B (the total group, owns AOL)
- eBay | $35.1B (sadly, without Skype)
- AOL | $2.8B (mentioned as AOL owns ICQ, the initial inspiration for Tencent’s QQ IM)

Tencent’s stock price quadrupled from a year ago. Recession is tough!

[C] Tencent shares are falling! Google is leaving! The ship is going to sink!

Right. Maybe. 3% temporary decrease on a Google China scare or lower expectation is not much impact for a stock that quadrupled in 12 month.
On the sunny side, the Chinese Internet is just entering the “acceleration phase” of the “S curve” in terms of adoption. Still about 25% of Chinese are connected and Internet entertainment is cheaper than 1984’s Victory Gin. How could revenue god down when adding another 100 million or so Internet users in the next 12 to 18 months?

In addition, Tencent provides extreme social value as it is not just “a social network” but real “communication infrastructure”. More people use IM than email in China. And with Tencent, everything is right there! Access search, news, SNS, games right from the IM. Upgrade your online persona, be efficient or entertain yourself. With such power, Tencent does not even have to be the most innovative, just picking the right things and making it suitable for mass-market usage.

In addition, mobile is not played out yet. Three SNS in Japan make hundreds of millions from it, this is yet to come in China (and the US).

Oh, and Tencent is unlikely to leave China this year.

How do they do it?!

We won’t explain here what Tencent does – from IM to SNS, MMO, social games, mobile services, portal – if you wish to know more, our “Inside Tencent” report is waiting for you! | http://www.plus8star.com/reports/ (Previous clients include Microsoft, Harvard Business School, Nokia Growth Partners and more!)

Disclosure: MIH, Tencent’s largest shareholder, is a client of ours on the media side (MIH is a top media company in South Africa). We are not involved with Tencent in any business manner.

Enjoy the read!
@benjaminjoffe – in the Bay Area for a month to recover from #SXSW.

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Tencent creates $35B of wealth in 11 years

Our work is quoted on Tencent’s revenue models and our estimates on the virtual goods market. Of course, Morgan Stanley cannot cover Tencent in details (as we do in our “Inside Tencent” report) as their report tries to cover global trends with some local focus, such as China/Tencent for virtual goods and Japan for mobile commerce. Among interesting factoids, Tencent is recognized as having created $35B worth of wealth over the past 11 years – to compare to Amazon’s $58B over 15 years and Google’s $186B over 11 years. Tencent’s profit margin is 49% vs. Amazon’s 6% – guess digital goods have better margins than analog ones.

Five companies out of “Desktop Internet Winners of the 90’s” are no less than 5 Asian companies

Here is the list compiled by Morgan Stanley:

• Google
• AOL
• eBay
• Yahoo!
• Yahoo! Japan
• Amazon.com
• Tencent
• Alibaba
• Baidu
• Rakuten

If we categorize a bit:

• Search: Google (US), Yahoo Japan (JP – operated by Softbank) Baidu (CN)
• Portal: Yahoo (US), Yahoo Japan (JP)
• E-commmerce i.e. B2B, B2C, C2C and payment: eBay (US), Yahoo Japan (JP), Amazon (US), Alibaba (CN), Rakuten (JP)
• IM/Other: AOL (US), Tencent (CN)

Not bad for Asia. Ever wondered why we focus on China, Japan and South Korea? Strangely, NHN/Naver, Korea’s largest portal and search engine is not included in the list though it passed the $1B revenue mark this year. Naver is totally dominant in its market and pretty innovative: ever heard of “Knowledge Shopping”? It is the combination of “Knowledge Search” i.e. Yahoo Answers, copied from Naver in 2005, and online shopping mall).

Oh, did I mention Yahoo’s hidden treasures were in Asia? It owns large shares in both Yahoo Japan and Alibaba.

Enjoy the read!
@benjaminjoffe

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As mentioned in our quote on today’s Forbes’ column on VinaGame, Vietnam’s largest online gaming company, I believe some are already on their way.

Are there any clues? Here are three reasons to believe so:

• VinaGame already operates IM, portal, SNS and music services
• VinaGame has operational ties with Tencent
• Last, VinaGame purchased our researches on both Tencent and Cyworld from the first edition!

Surely, I am not the first one to suggest that – one commenter on this blog did that in October 2007. There are other companies on this track outside Asia: Mail.ru, the largest Internet portal in Russia, is also studying Tencent closely (and also bought our research). Mail.ru also has MIH as a major investor. If you don’t know MIH, it is a large South-African media group also known as NASPERS. It is the single largest investor in Tencent – they control 35.5% of Tencent, a share worth about 13.5 billion USD.

Another question ask by Rebecca Fannin, author of Silicon Dragon who wrote the column for Forbes, was the evaluation of the Vietnamese online gaming market. I did not have figures at hand but taking hints from an old interview exercise (a Google or Microsoft one I think) that was asking “How many gas stations are there in the US?” with no other information available (I heard another version about dentists), there is always a way to find an rough estimate based on a macroscopic view rather than go with a bottom-up measurement. If you ever wondered how research firms come up with estimates, this is as good a guess as many – and at least there is a methodology to it.

Here is how it goes:

Instead of looking at companies, you can look at market structure:

• Vietnam has similar structure as China in terms of income, GDP/capita, rich/poor (developing market).
• Around 20 million Internet users, so about 25% of the population (similar ratio to China).
• Several years behind China in terms of market maturity (2 or 3? IDG says 10 in the interview but that sounds exaggerated according to some conversations I had with various execs).

So doing just a very rough estimate:

• The China market was ~2 billion 2 years ago
• Vietnam has about 20 times less Internet users

Hence, I would say that Vietnam’s market is probably around $100 million, but has the potential to double or triple within 3 years as Internet spreads (note: this is confirmed by Vinagame’ growth rate of 50%). This number is surprisingly close to VinaGame’s own market estimate (since nobody seem to have a solid figure). The difference is: I know very little about the market and assumed nothing about VinaGame’s revenue. Is that cold reading?

Also, the market is heavily reliant on licenses from China and Korea, which cost quite a bit (also confirmed in the interview that only 5% of VinaGame revenue are from local games), so companies should be able to grow the capability to develop their own titles and potentially generate higher margins (cutting down on licensing + better cultural fit).

You can apply this method to any other developing market, then correct by a few factors like geographical barriers (Internet users don’t grow as fast in countries without densely populated areas), political instability (which harm business), etc.

So… is there a Tencent in your country? What is your market’s potential?

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