Understanding the iOS and Android Market in China

China is fast-becoming the second-largest market in terms of downloads for many developers including companies like Rovio, but it lags behind in terms of monetization. The country came in just behind the U.S. in page views on Google's AdMob advertising network in July, according to statistics the network shared at an iOS developer conference in China this past weekend. The promise is there, but how do mobile developers take advantage of it? Over the past two weeks in Beijing and Shanghai, I've had the chance to talk with several mobile developers like High Noon-maker Happylatte, PapayaMobile, PopCap Games and other companies being incubated in former Google China head Kai-Fu Lee's incubator Innovation Works. It's an incredibly complex and different market from the U.S., but here are a few insights into developing and marketing iOS and Android apps there: 1) Android may be the long-term bet, but iOS is showing surprising resilience in spite of lower incomes here: iOS has leapt up the ranks of mobile search referrals to Baidu in recent months and sends more queries to the Chinese search engine than Android does, according to a source at the search company familiar with the data. Google's AdMob also said that close to three-fourths of the pageviews on its network in China are from iOS as compared to Android during the same presentation that the picture at the top is from. Nokia is still the biggest platform in China though. There aren't good public estimates available on the actual number of consumers carrying Android and iOS devices considering that there are many "Shanzhai" or knock-off phones that are based on Android but are incompatible with the platform. Plus, many people bring phones into the country through relatives and friends abroad. The country's largest carrier China Mobile -- which doesn't even sell the iPhone -- said it had 7.44 million iPhones on its network in its last quarterly earnings call. Dianxin, one of the makers of a local variant of Android known as Tapas, estimates there are 12 to 15 million Android devices currently circulating in the country. Many other local mobile-focused companies like PapayaMobile say they're building products assuming there are at least 10 million iOS and 10 million Android phones circulating in the country. An unlocked iPhone 4 costs 4,999 renminbi here, or roughly $780, well above its American price and even farther above the discounted price with a two-year plan that most U.S. consumers choose. That is about twice what the average new Android phone from Samsung, Motorola or HTC retails for at 2300 to 2600 renminbi or $360 to $410, according to China-focused research firm ZDC. Most people buy their phones unlocked -- and often at full retail price -- then pick a carrier afterward. Apple is an incredibly revered brand in China. Based on observation, it's hard to say there is a more potent and accessible status symbol for Chinese consumers with newfound discretionary income than the iPhone. There is a reason there are fake Apple stores here. There is a reason why Apple's newly appointed chief executive Tim Cook said in the company's last earnings call that China brought in $3.8 billion in revenue in the most recent quarter and $8.8 billion in revenue in the fiscal year to date. Apple has also gotten away with a lot more than many other Western consumer technology companies which have come here only to fall flat on their faces. Unlike Google, Apple maintains a favorable relationship with the Chinese government. It likely censors sensitive content from the local version of the app store to comply with the Chinese government's restrictions. Google doesn't support paid apps in Android Market in China and unless it censors its store (which would require substantial changes to the store's current review process), it would be hard for it to gain mass adoption here. In that case, alternative Android app stores may thrive. 2) There are many local variants of Android, but none of them are really that big -- yet. Unlike many other Western markets, there are several custom versions of Android here that are tailored to the needs of Chinese consumers (or in less promising cases, the needs of Chinese carriers and OEMs). Because the Android market here is still so new, most Android users still have the standard version of Google's OS. "None of them are really big right now," said Si Shen, the chief executive of Android mobile-social gaming network PapayaMobile. Don't worry about them for now. But if you are interested, the handful that come up most often in conversation are: Xiao Mi (MIUI): A respected team of Google China and Microsoft alums led by serial entrepreneur Lei Jun is trying to move China up the value chain. Instead of being a commoditized mass manufacturer of Android devices, Xiao Mi is trying to be an integrated hardware and software company that creates high-quality phones with a polished user experience. It offers a popular modified version of Android called MIUI, that has a widely-praised user interface and can be downloaded for free. Using the buzz around this, it recently announced its first handset. (See the video embedded above. And more on this below.) Dianxin (Tapas): Incubated out of former Google China head Kai Fu Lee's Innovation Works, Dianxin is creating a version of Android that's tailored for Chinese consumers. It's partnering with manufacturers like Acer and Sharp to bring phones with the Tapas OS to market. Baidu's New Mobile Platform Baidu Yi: The Chinese search giant just unveiled Baidu Yi today, a mobile platform modeled on Android that will allow developers to distribute games and applications. The company didn't confirm whether it was actually based on Android though. Game developers like PopCap Games have already partnered with the search company so that their games actually show up embedded in search results when Baidu users look for their titles. Lenovo's LePhone: LePhone is a variant of Android that Chinese PC maker Lenovo introduced to help its smartphones stand out from the competition and fuel growth in its nascent mobile business. But it's been more than a year since launch and Lenovo said in its most recent quarterly earnings call that it shipped 81,000 LePads. It also said that it shipped 500,000 LePhone devices through the quarter finishing in March. These numbers are pretty low. China Mobile's OPhone: This is another flavor of Android driven by a powerful player in the ecosystem, China's largest carrier China Mobile, which has 622 million subscribers. Unfortunately, its future is uncertain as there have been reports that the operator may cancel the project in favor of a standard version of Android. These modified versions of Android should be backward compatible. If you build apps for Android, they should work on Xiao Mi and Dianxin. The issue is not whether the apps will function on these devices. The issue is that when these phones arrive en masse, they probably won't ship with Android Market pre-loaded on the phone. They'll probably all ship with different app stores, meaning users will not be able to find your app unless you submit them to the stores that they know or that are already pre-loaded on the devices. 3) Two Android flavors that will be interesting to watch next year are Xiao Mi (MIUI) and Dianxin (Tapas): Wang Ye, a Google China alum who founded Chinese Android game developer Doodle Mobile, gave me an interesting metaphor for these two companies. Xiao Mi is like the iOS of Android and Dianxin, which he also helped put the team together for, is like the Android of Android. Xiao Mi: The "Apple of Android" Led by one of the most buzzed-about teams in China today, Xiao Mi is taking an Apple-like approach in designing hardware and Android-based software together in a fully integrated device. It launched its flagship Android phone, the M1, two weeks ago in Beijing at a surprisingly affordable price of 1,999 renminbi, or $313. Xiao Mi reflects the aspirations of Chinese technology entrepreneurs to rise above the country's recent history as low-cost manufacturer and move up the value chain into designing consumer products with global appeal. Lei Jun's Xiao Mi M1 launch last month was a homage of sorts to Steve Jobs' keynotes although he made some very controversial comments about the Apple founder this week. The company also raised at least $35 million from Qiming Ventures and Morningside Asia. The company seems to expect that consumers will buy its phone online without any major retail partnerships announced yet. The hope is that the company's fervent fanbase, which has already made hundreds of custom skins for MIUI, will carry initial device sales by word-of-mouth. After that, demand will trickle down from these early adopters and tastemakers. It's a more feasible strategy in China than in the U.S. because consumers tend to buy their phones unlocked and sign with a carrier later. But it's too early to tell if it will work. Dianxin: The "Android of Android" Dianxin, also known as Tapas, is taking the opposite approach of Xiao Mi. It has a version of OS that it is licensing out to local device makers and carriers like Acer and Sharp. It has a number of modifications like the address book allows for people to have both Chinese and English names. It also has some unusual animations in the user interface and can be deeply integrated with local social networks like Sina Weibo and RenRen. Dianxin tells us that the number of shipments is still small at less than 1 million, as the company only just raised its $10 million first round of funding in March from GSR Ventures. It currently has seven models out with the modified OS on it, but has an ambitious goal of taking 30 percent of Android shipments in China next year. Its devices are priced anywhere from 1,700 to 3,500 renminbi or $266 to $548. 4) There are dozens of Android app stores and it's too early to tell who will win. Get pre-install deals with carriers and device makers if you can: Like we said before, unless Google makes significant changes to Android Market's review process, it will be harder for it to gain mass adoption in China. Unlike Apple, which exhaustively reviews every app before it goes up for sale, Google only takes down apps after they're available on the store. This is incompatible with the Chinese market as many of the local app platforms like Tencent review every app before sale to comply with local censorship rules. Google would probably have to institute prior review for Android Market to become mainstream here. In Android Market's place, a handful of unofficial app stores have blossomed. Many of them may not survive though since many Chinese consumers don't generally pay for apps, making their revenue models unviable. App store fragmentation here is so complex that even the biggest Western mobile developers with established offices in China have a hard time wrapping their heads around how to distribute their work. Developers like PopCap Games and Rovio are bypassing this headache and going directly to the big carriers and device makers for pre-install deals. If you're well-known enough, the big players and app stores will come to you and offer favorable terms. For smaller developers, there are companies like PapayaMobile which can help with navigating these complex distribution issues. The stores that they mentioned considering are: HiAPK: This app store is backed by NetDragon, an online gaming developer which pulled in 341 million renminbi ($53.5 million) in revenue in the first half of this year. The company also made about 9.4 million renminbi ($1.5 million) from its mobile business in the last quarter. GoAPK: This one raised $1 million in funding at a reported $10 million valuation from Shanda, another big Chinese game developer. AppChina: This app store is from another Innovation Works-incubated company and will probably come pre-loaded on most of the Dianxin devices. Gfan: This is apparently another one of the largest stores. Nduoa: This one is run by an early Android developer in China. Then there are the carrier stores like China Unicom's WoStore, China Mobile's MMStore and China Telecom's 189Store, plus a bunch of other smaller players like Yingyonghui, EOEMarket, Mumayi and Aimi8. Chinese mobile advertising networks that we were recommended to check out include AirAD, AdTOUCH, domob, casee and SmartMad. Also consider advertising with the major social networks like Sina Weibo, which is like a combination of Twitter and Facebook that has emerged in the last 18 months as a major platform, RenRen, Tencent and Douban. There is a fairly sophisticated ecosystem of social media and viral marketing companies around these platforms just like there is in the U.S. around Facebook. 5) Find partners or rely on a platform that covers the four major methods of payment here: The four ways Chinese consumers generally pay for virtual goods in games here are through pre-paid cards, credit cards, buying time or data for their mobile phones or bank transfers. iOS obviously relies on credit cards, but credit penetration is lower in China than it is in the U.S. or Europe. So some users will buy pre-paid iTunes cards off Taobao, which is kind of like eBay. Many consumers also jailbreak their devices to get pirated copies of apps, so Lesson #1 is: avoid the paid app model. One local Beijing developer Vision Hacker told us that three-fourths of their iOS users had circumvented paying for their game Crows Coming by using jailbroken devices. PopCap Games says there are about five to seven pirated copies of its hit Plants Vs. Zombies for every legitimate copy it sells in the iOS store in China. As a result, PopCap will eventually transition its Chinese mobile titles to the freemium model. As for the payments issues, if Apple is serious about this market -- and they are -- they will presumably add other payment methods in the future. Regarding Android, this is fairly complicated with multiple stores. Either Google will improve its relationship with the Chinese government, local carriers and handset makers to get more compliant phones with Android Market pre-installed along with better payment methods, or you'll have to wait for the various local Android app stores to duke it out until a winner emerges. You can also partner with companies like PapayaMobile to find an appropriate distribution method here. Or you can do a pre-install deal with a local carrier and avoid this stress altogether if they pay you upfront for copies embedded in their devices. All of this makes mobile advertising a relatively more appealing monetization alternative here. 6) Be conscientious about censorship in China: Mafia-themed and gambling games will be a tough sell here. Even zombies -- as in Plants Vs. Zombies -- are somewhat verboten, because the Chinese government doesn't want content that is too scary. In a big public ad campaign for Plants Vs. Zombies, PopCap chose to feature zombies wearing football uniforms over other characters because their skin was covered up by more clothing and they looked less ... zombie-like. Chinese censors are capricious (they recently banned time travel on television), but many rules can be bent through good relationships or partnerships with locally powerful players. So go with what's worked on mobile games so far. Think cute animals. Birds. Happy and peaceful games. 7) Because of the smaller market size, distribution and payment issues, Chinese mobile game developers seem more keen on reaching consumers abroad than local ones for now. The local market is still very small and fragmented and the ARPU figures for consumers here are low compared to what can be found abroad. Understandably, many talented developers I've talked to in China want to establish themselves outside of the U.S. first, set up a healthy revenue stream and then use their local understanding and capital to dominate the Chinese market later once it matures. The Western developers that have been successful here so far like Rovio and Plants Vs. Zombies-maker PopCap Games also have significant merchandising opportunities outside of the games themselves. All these things said, China will obviously be a very big market for game developers, but it will just take a lot of time, patience and local know-how.

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Understanding the iOS and Android Market in China

Kim-Mai Cutler

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Kim-Mai Cutler