Last week I gave a short talk at the ChinICT conference about my observations as a Western net entrepreneur in Beijing. I won’t bore you with the details, but I am interested to find out what you think about something I said:
I think that it’s clear that within the world of Chinese internet companies, lying limits growth, but stealing intellectual property doesn’t.
Here’s what I mean.
Most savvy players within the Chinese internet sphere know that almost every website lies about its traffic and user stats. The lying is endemic, and at times quite artful. I’m actually thinking of cataloguing all of the ways I’ve seen it done, since just when I think I’ve seen it all, some more-clever ruse comes to light.
I suppose Chinese net entrepreneurs are lying in order to impress VCs and lure advertisers. Based on many examples, it appears that this strategy works with many VCs. However, it’s backfiring with the big advertisers. Whenever I talk with a major advertiser or agency about their online spending plans in China, this “lack of transparency” is always the top issue (they are more diplomatic than I am). These companies are already big online advertisers in other markets, and they know that China’s high-spending youth are online (not watching TV or reading newspapers). But they’re holding back spending because they just don’t trust the online numbers. That’s what I mean by “lying limits growth”.
I remember that this same dynamic occurred in the US, around 1997/98. Since there were no clear standards, metrics for the “popularity” of a website were all over the map. Some sites used “hits”, others used “page views”. Some counted “all visits” and some counted “unique visits.” Et cetera. This confusion was scaring advertisers, so the nascent web industry formed the Internet Advertising Bureau (IAB) to impose standards. At the same time, third-parties such as Doubleclick came in to take ad serving away from the web publishers, which further increased comfort levels.
I think China needs to do the same thing. The industry needs clear standards, enforced by credible third parties. Until and unless that happens, I doubt we’ll see big-number ad spending online.
Now, on to intellectual property. I’m not an expert on the law (either in China or the US). I’m also often confused about who is “right” about whether and how intellectual property should be protected. In any case, however, one thing is clear: if you’re an internet entrepreneur in China, you will be rewarded handsomely for stealing intellectual property.
What do I mean?
Two of China’s biggest video sharing sites just raised lots of money from prominent American VCs. Yet these sites publicly admit that almost all of their traffic is due to pirated video. The same is true for similar websites in the music vertical. Yet these companies keep getting funded, at amazing valuations.
I find this fascinating.
If these companies were in the US, they would have a hard time getting funded. And if they did attract money, they would immediately move to get in compliance. But in China, widespread piracy seems to be accepted as a “cost of doing business.” Even though it’s very clear under Chinese law that stealing intellectual property is illegal.
Which makes me wonder: if I worked for the RIAA, IFPI or the MPAA, why would I waste my time meeting with Chinese officials and filing suits in Beijing? Why wouldn’t I call a press conference in LA to announce a major lawsuit against the name-brand American VCs who are funding Chinese start-ups who steal? And a parallel lawsuit against the American investment banks who take them public?
Even if my case was weak legally, perhaps the resulting publicity would cause some VCs and bankers to conclude that they would be better off looking elsewhere. And my bet is that if the funding dried up, Chinese entrepreneurs would quickly get the point.
Thoughts?
10 responses so far ↓
1 James Chan // May 29, 2008 at 3:52 am
Thank you for wrting and posting your report based on your firsthand observations. I have two immediate reactions.
About the “lying,” if you were born there and were a young Chinese net entrepreneur, you’d behave in the same manner like the people you are critiquing. Conversely, if your Chinese friends were to come to the U.S. tomorrow, they would quickly learn to do it “our” way. Don’t forget that you are now in China.
Second, about the U.S. VCs who are allegedly funding the Chinese entrepreneurial “pirates,” have you heard of something in human nature called duplicity?
Your report reminds me of the wonderful lines from “The Walrus and the Carpenter” in Lewis Carroll’s book, Through the Look Glass:
“I weep for you,” the Walrus said:
“I deeply sympathize.”
With sobs and tears he sorted out
Those of the largest size.
It is great for you to help Change China. Just make sure that you don’t play the Clay Buddha crossing the river.
2 tmelcher // May 29, 2008 at 6:23 am
Dear James,
Thanks for your post, as it makes it clear that I wasn’t being articulate enough.
I share your frustration about people who apply American morals to China. The societies are completely different. As a result, I also don’t like reading comments from foreigners who always jump to criticize China.
So let me try again.
I’m not trying to make a moral argument against lying. I’ve been involved with China since 1981, which gives me some inkling for where the desire to get ahead comes from.
Also, there are businesspeople in every country who “fudge the numbers” (also known as lying). This practice is certainly not unique to China, nor to entrepreneurs, nor to the online industry.
I’m simply trying to point out that the “lying” strategy is back-firing. In their effort to “get ahead”, these entrepreneurs are actually hurting themselves, since the big advertisers don’t want to spend big money online.
I have a great deal of faith in the intelligence and adaptability of Chinese entrepreneurs. That’s why I bet that the industry will soon impose a set of standards that are designed to unlock the real flow of ad dollars.
In fact, I’ve recently heard that the large, publicly-traded online companies in China are pulling together on this topic. Because they are public, they have greater pressures to be honest about their key metrics. I’ve heard that they are getting tired of haivng to explain why their private, smaller competitors don’t really have the traffic statistics they are claiming.
I hope this helps clarify what I’m trying to say. Thanks again for the critique!
3 What do we know about 51.com’s open API and funding plans? // May 29, 2008 at 1:03 pm
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4 John Stadler // May 29, 2008 at 3:42 pm
Tom–
A couple of points:
First, I agree that the public good of metrics is something that would benefit the websites selling ads in China. Seems like someone should do Doubleclick in China, to jumpstart this initiative.
Second–the lawsuit idea. On a practical level, going after American VCs will not likely have much effect on intellectual property protection in China. There is plenty of domestic money willing to fund these content pirates. Going after the US VCs is simply trying to get them to behave when no one else does.
Still, I like the idea — where should IP protection start? It is a public good, as well — without it, Chinese software and entertainment are condemned to very limited upside. It is also a “tragedy of the commons” — no one likes to be the only one paying for intellectual property, especially when you might go out of business if your competitors are getting expensive software for free.
I wish there were simple fixes like suing American VCs who make money on Chinese pirates. Unfortunately, this particular failure of governance (or ethics or whatever. . .) is hard to remedy incrementally. I think that global institutions — GATT, the World Court, international civil law suits, and the like — and local compliance by member states will be necessary. Even with governance, the technical ease of stealing content is nearly impossible to overcome. But at least, then, companies can’t make millions off of other people’s property.
5 John Gorman // May 29, 2008 at 4:30 pm
So where then are all the smart entrepreneurs to fill this “trusted data” gap? Where are the Quantcasts, Alexas (cant say Im a fan of them), and M Metrics of China… Are there access to data issues, unwillingness of publishers to participate per what you are saying…
Its clearly needed and I’m not sure waiting for a China IAB is wise, especially as you and other smart bloggers continue to point out this growing “eyeball to spend” gap. As an angel investor, if anyone knows of any of these types or startups or industry people capable and willing to do them. Please let me know..
6 Richard Ford // May 29, 2008 at 7:32 pm
John, one of my clients, SinoTech Media is like a double click for China. They have independent ad serving and metric reports. I built all the large clusters for them and they provide many ads for baidu, sohu, 163, 56.com, tom.com and CIIC.
You can’t lie about your page views when your pages include IFRAME templates that are served from another company’s servers in every page.
Needless to say, our IDC is busy!
Also for another client of ours - they put in site meter on their page for proof to clients that did not trust their internal log analysis. At one time I even suggested that they look to PWC or some other accounting group to see if they would do audits and verification reports, in a “Trusted Third Party” style for web content providers
Tom, as to the pircacy issue… http://www.verycd.com. It amazes me that they can get an ICP certificate and yet the govt is on our arse about every HTML page online - for an ICP - even when some of those (most) are private admin pages for systems and the like - IE: not content, let alone public content.
So how can VeryCD.com get an ICP licence with no questions asked, yet I have to prove ad nauseam why http://support.candishosting.com.cn is not a web page but an internal client portal!
:-s
7 Richard Ford // May 29, 2008 at 7:41 pm
John, one of my clients, http://www.sinotecmedia.com.cn is like this. They serve ads alogn with the details page views and usage stats. We built and run the large clusters for them and they serve baidu.com, soho, sina, 163, tom, 56 and CIIC (china.com.cn).
It is very hard to lie about page views when your pages contain embedded iframe fragments that are loaded from another company’s servers. Needless to say - a lot of pages are being viewed on those sites daily - our IDC is busy!
Tom, as to the piracy. I look at sites like http://www.verycd.com and wonder why they are still in business (or what business they in actually).
What is amazing is that they have ICP certificates!
I am currently in a stoush with powers that be because they seem to think that ANY page on the net in China has to have an ICP. Even those pages that are admin pages/front ends to internal extranets or management systems. I am trying to explain why support.candishosting.com.cn is not a web page - is not a content page and is a private site used by our company. So much attention given to that and I wonder how much was given to verycd.com?
8 Cestmoi // Jun 2, 2008 at 4:05 pm
Nothing new under the sun …young friends, just look at the mess in the PRC with the older and still possibly (?) larger business of advertising in magazines (don’t you remember, these rectangular objects with shiny covers, still published on paper and which you may find in these little messy kiosks down in the street). Here is a minuscule abstract of a study which I wrote about publishing on paper in the PRC (I also wrote one about the subject of magazines and advertising for a few rich clients)… (quote) [...] In fact in the PRC producing and/or selling consumer products to Chinese consumers is often a very costly, unprofitable and complex endeavors, especially when the products are “difficult” products, in fact rather basic and cheap products, with very low margins, intense competition, costly and immature physical distribution and marketing channels, piracy… just like books as well as magazines (the same could be said of food, drinks, clothing, etc.). But foreign magazine publishers can benefit in the PRC of the booming advertising market and above all of the absence of the usual Press audits, mandatory in most Western countries, by the well known specialized third-party auditors BPA, ABC, OJD… So publishers in the PRC can present high rate cards (advertising prices, with for example pages going up to USD 20,000 per page, in Cosmopolitan or Elle -with up to 200 advertising pages per issue-) to their usual large and trustful advertising clients. These rates are “justified” by unaudited claimed sales figures …which are often 5-10 times higher than the usual true circulation figures.(unquote)
Trust these figures, coming from an insider; … besides a key deterrent, never mentioned, concerning any fast change in the PRC in the field circulation audits (of the Press on paper), even within giant media buying agencies, is the ubiquitous corruption in all advertising sales in the PRC; scandals are frequent (see in the Press the scandal following the IPO of Beijing Media in HK in 12/2004); small guys selling and buying ads (both sides) share rather systematically kickbacks, and don’t want any external pressure on / measure of their high prices and personal dealings. (quote, McGregor -not me-) “Finally the ugly. When you are working at the grassroots level in China, direct bribery is all too often the path to success. …In a similar fashion, with China’s newspapers, magazines and television stations all under government control, local advertising agencies engage in a carnival of kickbacks to China’s media managers. (unquote) Source: “One Billion Customers”, James McGregor, Wall Street Journal Books FreePress 2005 ISBN 0-7432-8862-9. James McGregor is an old China hand, who was for 20 years in China, in particular as a journalist, and then the head of DowJones. http://www.jlmcgregor.com/
9 Joe Thong // Jun 2, 2008 at 9:17 pm
Very well written, certainly struck a chord with me but I have to agree with John that if foreign VCs do not fund pirated websites, they will be tons of local money doing it anyway. In China, I think the huge contrast when compared to the west is adult contents are outlawed but pirated IP are able to run loose across the internet backbone without any interference from the government. Sadly, I don’t think this is going to change in the forseeable future.
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