How Will Android Play Out in Asia? A Conversation With A-Fund’s David Chao

With a veritable “Cambrian explosion” of low- and high-end Android devices in Asia, venture firm DCM recently made a big bet that there will be some winning startups in the next few years by launching a $100 million early-stage Android fund with Japan’s GREE and mobile operator KDDI.

We talked with DCM’s David Chao to see how the firm’s thinking about its opportunities across the Pacific. The fund, focused on early-stage investments (think between $250,000 and $5 million) has already participated in a few undisclosed rounds.

“We all recognize that Android is going to really take off in China and Japan over the next 12 months and we wanted to make sure we intersected with the best and brightest whether it’s apps guys or people working with chips,” he said.

Chao says he sees Android as the fourth wave in a series of shifts affecting the gaming industry in Asia over the last several years. While there aren’t any truly reliable statistics, Chao says there might be about 15 million Android devices shipped in China by the end of this year. Higher-end Android devices like Sony Ericsson’s Xperia line of phones are starting to find a foothold in Japan.

“All of the majors are jumping on the bandwagon and the Android smartphones tend to do really well in Japan,” he said. “They’ll have traditional Japanese phone functions like FeliCA, which is a local payment method, and the ability to play GREE games.”

But both the Chinese and Japanese markets have evolved in fundamentally different ways and have somewhat self-contained ecosystems. In China, there are naturally the large social networking services like QQ or Renren (another DCM investment that went public earlier this month) where developers can publish their games. There is also an emerging group of web MMOs (massive multiplayer online games) that aren’t really dependent on any platform.

Japan’s market in contrast has taken an unusual trajectory with companies like DeNA and GREE, Chao says. Often misunderstood in the West, these companies have a blended model where they create their own games in addition to operating a platform for third-party developers. That’s different from the U.S. market, where the biggest social networking sites here have tried to stay neutral and don’t tend to create their own IP. With some mobile-social gaming platforms like PapayaMobile and recently acquired OpenFeint gaining some momentum, it’s possible that model may start to take root in the West too.

Like in the U.S., the iPhone changed everything for Asian mobile developers. Developers that were once confined by carrier demands could create a single game for the iPhone and sell it anywhere in the world.

Android, Chao says, is the natural next step. Unlike iOS, it’s open and developers aren’t subject to the limitations that Apple has put upon iPhone developers. Chao says there might be more possibilities for certain kinds of content and viral marketing. On top of that, Android is not as restrictive around payments as iOS is and there are a multitude of alternative app stores in Asia that might have more favorable payment splits for developers.

On top of that, there is also Android’s sheer momentum with 400,000 device activations a day. Despite that pace, Android is still far from overtaking iOS with 100 million device activations to Apple’s estimated 200 million. (They had shipped 189 million iOS devices by the end of last quarter.) Android tablets, while still sorely lacking in terms of apps, are gradually catching up with the iPad the way Android phones did over the course of 2010.

Monetization will obviously be easier in Japan, which boasts the highest ARPU figures in the world. China will also have more formidable fragmentation issues with a number of “gray market” phones or devices that have Android-based software but aren’t certified by Google as compatible. Devices that aren’t compatible don’t get access to Android Market or Google apps.

“China, on the other hand, will be a little bit slower only because the market is more immature at least on the smartphone side,” he said. “But we can’t forget that China created a whole incredibly profitable ecosystem based on SMS.”

Chao said DCM is also looking at a few Chinese mobile advertising networks (although he declined to say which ones to avoid tipping off competitors). While there are more than 600 million phones floating around in the Chinese market, it will still take three to five years for the mobile advertising market to catch up with the U.S.

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