2013-03-06

Co.Labs

What American Startups Can Learn From The Cutthroat Chinese Software Industry



The Los Angeles-based social network Pheed has garnered more celebrity users than a luxury rehab joint, in part by coaxing users to pay anywhere between $2 and $35 a month to read news feeds of people whose content is just that good. (See the sidebar for celebrity users already on the platform.) As of mid-February, Pheed was the #1 app in Apple's Top Charts in the social category, with iPhone users spending a whopping average 1.04 hours per day using the app.

For American startups, monetization is often synonymous with procrastination, and too many products die in the valley between traction and true business. From launch, Pheed anticipated this problem by allowing anyone on the platform to charge their followers money for the privilege of reading. The scheme doesn't seem to be stalling growth; in fact, Pheed’s metrics show its iOS users spend about 15 times as much time on Pheed as on average iOS apps, according to Flurry. When the app hit the App Store on November 10th, downloads poured in, and by December it was in Apple’s domestic Top 10 list. After tearing across Western Europe, Pheed has reached the Top 100 in 33 countries, making it the number-one gainer in December according to AppData. (It also has a web interface, and an Android version is in the final QA stage, slated for March.)

Around the New Year, Pheed closed to new users to concentrate on building in new features, including photo filters and live audio/video broadcasting through the iOS app. When the team put up a waiting list for new users, it hit 500,000 email addresses in just two weeks.

Though he humbly insists he's no expert on China, a look at the American startup culture through Kobo's eyes can be sobering for startups who've always believed that monetization makes users flee.

Profit can be part of the product

Companies like eBay and Airbnb quickly balloon in valuation, but still American web startups are loath to fork over money to the people actually creating the content—a model that Kobo says is backwards. “We thought, how do we incentivize people to create better content? Why isn’t anybody doing that?” The idea to make feeds profitable came from Chinese businesses that deliver content over SMS. “You’d have a pop star that put out an SMS blast, and to accept it, the fans would pay $0.25," says Kobo. "It was sleazy way to make money, and the content was cheesy, but the initial birth of the concept was there: The artist who makes the content is actually making money.”

Kobo says American startups like to develop products without the "impure" influence of monetization, "but [in China] the development of a good product isn’t even thought of in the beginning," he says. "Chinese web companies have a totally nonchalant attitude towards creating the actual products. They are just a lot more focused on ways to make money from the outset.” 

The benefit of considering monetization early is that you never have to alienate your users the way Instagram did when it added this little gem to its terms of service on December 17:

"To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your user name, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you..."

For those who were under a rock last quarter: Instagram users were outraged at this alteration, and even though the company reversed the policy, it may have permanently cost the photo service as much as 25% of its daily users. Kobo says he saw such a big surge or users jumping from Instagram to Pheed around the December 17 snafu that Pheed had to temporarily shut down to keep their servers up.

Choose partners wisely

When I first interviewed Kobo from Pheed’s Los Angeles headquarters, he was musing at a bit of Twitter melodrama: Instagram had turned off the ability for photos to display inside Tweets. “In China, it’s like this from day one,” he says. “Companies don’t wait until later to figure out who their competitors are, since they have a business model from the start.” The benefit is never having to burn a bridge with a partner which has somehow morphed into a competitor, short-changing your users in the process.

“The Chinese don’t promote cross-platform sharing nearly as freely as publishers here in the U.S. You can share an article on FastCompany.com to your Facebook or Twitter feeds because we live in a social web environment here—but the Chinese don’t,” says Kobo.

It follows that the idea of "viral" or "organic" growth doesn’t exist in China. “User acquisition is all about media buys. Platform-to-platform in China is war, and it is fought viciously and bitterly. If you have a Gmail account and send an email to, for example, NetEase163.com, which is the local web dominant player, it will most likely go to spam or junk folders regardless of your settings. Just to get an email to go through to your inbox, the company sending the email needs to have a special partnership.” (At right, the interior of Kobo’s Chinese office, complete with a telling graphic of a Great White shark. Click to enlarge.)



Execution is more important than differentiation

“The Chinese mentality is: If they built this, I can build it too,” says Kobo. American companies like to aim where competitors aren’t, but go East and you’ll find web products competing with virtual simulacra of one another.

“The question Chinese Internet companies are always asking is: How do I do what they’re doing, but better? That’s the Chinese school in us,” says Kobo.

For Pheed, Kobo and his team took features from elsewhere and mashed them up into a social network that stands on its own. “We said: Why can’t you 'like' a Tweet? Or, I love on Instagram photos, why can’t I ‘retweet’ them in my feed? We said, let’s pick out what we love from Tumblr, YouTube, Facebook, and Twitter, and we dissected the best features to duplicate whatever was working. My attitude with Pheed is: I can make my product look better and fuller than the other networks, because we have video and broadcast potential, which those other networks don’t. With those features, we can have 10x as much content as they do.”

Calculate profitability or go home


Kobo says he crunched hypothetical numbers on profitability before his team began building anything. He estimated that a peak size of 20 million users could conservatively get them 200,000 that would upgrade to premium.



“A lot of people build platforms that don't make money,” says Kobo. “Sure, the product has to be accepted by people. But how are you going to scale it financially?” (At right, Kobo’s former office headquarters in Hong Kong.)

For launch, Kobo says his team estimated their necessary cash runway by imagining a pool of about 7 million free users and estimating what they thought would be a “base” number of uploads per month. “We played around with the numbers: If people upload X amount of videos, then a runway of $2.5 million could get us just so far,” he says. With monetization offsetting some of the cost, the team estimated they could bootstrap their way through the first year. “We read about all of these cool apps raising huge amounts of money, but that's a ball and chain—so we all pitched in ourselves.” He mentions the infamous case of the over-funded, now defunct Color app for iOS. “If you gave me $40 million right now, I’d have no idea what the hell to do with it.”

Don't celebrate growth until the bills are paid

“In the U.S., people think traffic will get them money,” says Kobo, “but I challenge anyone with 10 million users to show me how they’re going to profit. If Google can't do it with some of their products, then what are you gonna do?”

In China, Kobo fell victim to this mentality earlier in his career. His companies had begun winning awards in China, and he had built on more than 30 platforms, portals, directories, social networks, and browsers for China’s massive 320 million person user base.




“Man, it was a nightmare,” he says. “We saw MySpace getting bought, then YouTube, then Bebo, so we said, let’s get as much traffic as we can. We followed all those rules, and our company was up to 300 people at one point, but I was sitting there thinking: I can’t support this business. We're going to run out of money in two months.” (Pictured at right, Founder O.D. Kobo.)

His company stayed afloat by leaning on its outsourcing business to pay the bills, and his team kept experimenting with web products. In 2008, Kobo’s company was supposed to list publicly on the Hang Seng HKSE, putting his projected personal worth around $300 million—just before the bottom dropped out of the global economy, leaving him in the lurch. Because the advertising business in China doesn't make money, Kobo’s team was out of options when their outsource business dried up. “We didn't know what to do. We became partners with the Prime Minister of Qatar, which got us large round of funding and gave us a breather,” he says. The team left China in 2009, strong-armed by investors.

“Before that happened, everyone was telling me I was a rich guy. Eventually you start believing your own hype. At that point, I didn't know what the hell to do. We had upwards of 75 million users at one point, and we were growing by every metric. We followed all the rules you read about in business magazines. But we weren’t lucky enough to get Accel or Kleiner-Perkins to come to China and knock on our door. Now I look back and think: If you’re not building a business, then what are you doing?”




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10 Comments

  • Iamduncan

    "For American startups, monetization is often synonymous with
    procrastination, and too many products die in the valley between
    traction and true business."

    It'd be great if that sentence was in plain English as opposed to business lingo BS. Or, y'know, made any sense whatsoever.

  • Ria Fernandez

    This is a great article Chris! I work for social media analytics firm Fashionbi, and have been researching on various platforms. Anyway, I particularly found the part about 'choosing partners wisely' very interesting. I have had some experience working with the Chinese, and it really does sound like a chinese trait. While some people find this working culture to be harsh, it is simply a difference in culture, and is just something to get used to. This is the reason why a lot of China's industries are on top! 

  • DR

    The mentality shown here perfectly illustrates why environmental pollution is so bad in China.
    I dont think we have much to learn from these people.

  • Sparky M

    Wow, the only thing that article reinforced for me is that the species is doomed, sooner rather than later. Good lord, reproduction needs to be a state sanctioned event. Far too many mouth-breathers breeding out there. It's like watching Idiocracy unfold in real time.

  • Jack Jones

    It's fairly clear from this article that the chinese have nothing to teach us, except how to be ruthless isolationist mercantilists.
    You can't even send email between web-mail providers?  Next, you'll be telling me that in China you can't travel freely, have children as and when you choose, write about events that you've witnessed, speak truth to power, etc, etc.

  • Somebody

    Actually you are right, in China you can't travel freely. Whenever travelling domestically you need to pass through what might be equivalent to immigration control. Both when leaving a city and arriving at a new city, within China. Even some visas are only good for certain regions, such as the Shenzhen area day visa.

  • gbacoder

    Get what the Americans have been doing to the Brits for ages. We invent things - jet planes, steam engines, light bulbs, and you guys take over most of the income by creating brands based around them and being very good at marketing. You still invent the off things yourself, but you may be surprised how many of even what you think you invented originated in the UK. 

  • @Daman

    Good article, but kind of confusing at the beginning as Kobo is not introduced with any context, like "Kobo, the founder of xyx".