"Kao-Ya" Innovation and Chinese VAS Market - Insider's View

"Kao-Ya", as they say it in Chinese, or "Peking Duck", is a beautiful and delicious dish, a roasted duck with especially tender and crispy skin. The legends trace its history to the Qing Dynasty in China. To prepare "Kao-Ya" you need a full duck with its head attached. Then, if you are strong enough, you need to inflate it through a straw (that's how they did it centuries ago) or use a pump to separate the duck skin from the body. After that you have to pour some boiled water and brush it on with some sweet substance, like molasses, honey, or plum syrup depending on your preferences. That allows the duck skin to acquire the light caramel taste. After drying it for about 12 hours, place it in a large oven to roast it over apple wood charcoal (the best choice!) for a couple of hours, and finally you will have a crispy and tasty Chinese delicacy. (Now don't try to do it in your home oven, you will need to build a special traditional oven for that!)

While wrapping finely sliced duck pieces into pancake, and mixing them with a plum sauce, I want to introduce you to Ben Joffe, CEO of Plus Eight Star Ltd. (www.plus8star.com), who invited me to the "Kao-Ya" feast in one of the central Beijing restaurants. This French guy with a shy smile created a very interesting company that in his words is "engaged in helping Western companies to understand the technology innovation process in Asia, and how these innovations can be applied in their home countries". In other words he will even make "kao-ya" work in your steak recipe, just watch!

With seven years of Asian experience and fluent in Mandarin and Japanese, Ben is very confident about his company's future. When I asked him if he was interested in new clients, he quickly said "sorry, not for a few months, we are completely booked with a number of projects". Nevertheless, he still finds time in his busy schedule to organize highly popular "Mobile Monday" (www.mobilemonday.cn) events in Beijing, which gather enormous crowds of "mo-co" people, operators, software developers, journalists and bloggers. If you are in Beijing, don't miss the next "Mobile Monday" as you might well meet your future business partner there!

Over the dinner we discussed some peculiarities of doing business in the mobile content sector in China, the secret life of Chinese content providers and many fruitless attempts to enter this market by some Western companies. My "whys" and "hows" were answered with patience and good humor, while "Kao-Ya" quickly disappeared just to be replaced by a nice Chinese ice cream. Finally I asked Ben to respond to some of my questions regarding the VAS market in China, and you can find his answers below. In short, his recipe for success is working with a local partner and tuning in to the local culture and preferences.

Current state of the VAS market in China. What are the hottest trends?

AG: Ben, what are some innovative technologies that Chinese CPs use to engage new subscribers?

Ben: The current state of the VAS market in China is both great and terrible: Great because it's growing overall at a fast pace: 20% of China Mobile's ARPU comes from data, also the mobile content market was estimated close to 1 billion USD in 2006 and keeps growing.

Now, it's terrible because the market is very opaque: operators' regulations keep changing and rocking the life of the thousands of VAS service providers in China. Also, most of the offer is rather commoditized (ringtones, screensavers, ringback tones, SMS jokes) so it is very hard for them to differentiate. Also, operators tend to develop their own service every time they see a service is picking up: mobile music, mobile IM, etc. So life for local mobile entrepreneurs can be fairly depressing as China Mobile reaps the rewards of SP's market building efforts. Very few foreign companies dared to enter the market (only 6 officially have a VAS license) and apart from major record companies, none is really making money in China.

All hope is not lost, as many companies now concentrate on the off-portal market, with advertising models or cross-media cooperation. In China, technology is not the key. Smart combination of ideas and proper execution are way more critical.

AG: What are the top Chinese CPs? What are their strengths?

Ben: Top 8 ones are easy to list as they are also listed on NASDAQ or HKSE:

- Tom Online: leading VAS SP, they entered JVs with Skype and eBay. None is really delivering much, though.

- KongZhong: top WAP provider. Trying hard to push its independent mobile portal, Kong.net via offline advertising (on bus, billboards, etc.). Not much result yet.

- Linktone: partners with record labels and brands. Had a lot of changes in top management and no clear direction at the moment.

- Hurray: moving up the music value chain by purchasing record labels. Its strategy might pay off if they don't damage those companies and integrate with mobile VAS for monetization.

- Sina: leading Internet portal. Makes money also through mobile services.

-Sohu: #2 Internet portal. Official partner for Beijing Olympics 2008. Not clear yet what kind of results it will bring.

- Tencent: leading IM service in China called QQ. Hundreds of millions of registered users. Monetizes through a healthy personalization model and casual games. A very good and healthy company that is almost a new media by itself.

- Netease: dropped most of its VAS activities to concentrate on online RPG and casual games. Doing pretty well since then and its top management probably sleeps much better. Most VAS companies do not manage to differentiate or monetize properly yet.

AG: China Mobile and VAS: what are some examples of interesting VAS campaigns?

Ben: China Mobile do not really focus much of its marketing on VAS. We are still in a fairly unsophisticated market where people buy hardware...

AG: China Unicom: how does it BREW its stuff?

Ben: China Unicom has difficulties getting traction with BREW. Also, the future of CDMA as a whole is a bit unclear in China. SK Telecom (Korea's leading operator) invested 1 billion USD in bonds and is building some cooperation, but overall the market creation effort around mobile services is insufficient.

AG: Internet market in China: major trends

Ben: Internet in China is still a lot about page views and number of subscribers. Most of the US-based services have been adapted to China ('Copy-to-China' or C2C) but very few actually deliver the same results as the online advertising market is still small.

There is a web 2.0 and online communities fever, and a lot of venture capital fueling it, but I don't see so many profitable companies around. Some interesting sectors such as online travel or online real estate are doing well, though.

Online video you-tube-like services are still largely a money-wasting area. Last, the user-generated content trend is definitely here to stay: from online karaoke to video creations, a few artists actually came out from the Internet in the past 2 years.

AG: What is so unique about your company? How can you help Russian CPs or techno companies in China and Asia?

Ben: We do 'Innovation arbitrage', meaning we help companies operating in foreign markets to understand why and how leaders in Japan, Korea and China became successful. Especially, we go beyond the cultural layer to highlight fundamentally good ideas and the way to implement them in other markets. As of today, there is little room for foreign CPs in China and Korea, but top-notch technology companies might stand a chance. In Japan, high quality content also has opportunities and the market is much more transparent.

Unfortunately, starting cost is much higher. I believe however we bring a lot of value to our customers when we bring them ideas that work from Japan, Korea or China, to improve their business in their home market.

AG: What is the secret of your success?

Ben: I spent over 7 years in Asia. First in Japan, then Korea and now China.

What I noticed is that:

(1) Very little of what happens in those countries, including their most incredible successes, is known outside;

(2) Most reporting about those countries will tell you maybe the result but not the process and will often explain them with cultural reasons. The problem is that if you say "it works because they are [whatever country]" you stop thinking and will likely fail to see how a good idea could be adapted to your own market.

This has happened repeatedly over time: from text messaging to camera phones, to flip-phones, to ringtones, etc. The West eventually 'rediscovers' those ideas much later and then forgets the whole cultural debate. Such attitude cost Nokia a lot of market share as they could not see the good idea behind flip-phone design and stuck to their 'candybar' for too long.

Eventually, I think the key of our work - aside from our talented multicultural team - is our cross-cultural and cross-market expertise. Something that takes quite a bit of time to develop.