The Global Mobile Revolution - GGV Capital

The Global Mobile RevolutionDelivering Apps to Global Markets

@GGVCapital#globalmobile

• The Global Mobile Revolution• The Chinese Market• The European Market• Key Takeaways

Contents

The Global Mobile Revolution

4

More people on the planet use a mobile phone than use a toothbrush.

Source: 60SecondMarketer.com

5

Smartphone usage is growing worldwide

2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 80.0 B

0.5 B

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20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

10 0%

1.06B

1.40B

1.76B2.04B

2.29B2.52B

2.73B

26%32%

38% 42% 45% 48% 50%

W O R L D W I D E S M A R T P H O N E U S E R S & P E N E T R A T I O N

Smartphone Users (Billions) % of Mobile Users

Source: eMarketer, June 2014.

6

2007iPhone Gen 1

Launch

2008iTunes App

Store Launch

= The Mobile RevolutionPlatform | Experience | Globalization

+

7

The Mobile Revolution #1: Distribution Platform

After App Store • One free, centralized

platform• Millions of users + millions of

developers in one place• Streamlined discovery and

distribution• Unprecedented distribution

model• Leads to non-linear growth

The app store completely changes how companies distribute software and services to users.

Before App Store• Software downloaded from

company websites or delivered on disks

• One-by-one, mainly paid acquisition

• Even the introduction of Google only addressed the discovery side of the equation

8

A P P D O W N LO A D S G LO B A L LY I N 2 0 1 3

…up from zero 5 years earlier.

100+ billion

Source: Gartner, 2013

9

The Mobile Revolution #2: User Experience

After Mobile Apps• Totally new UX designs• Simple, streamlined interfaces• Highly curated content, highly

specific feature sets• Revolutionizing many categories:

shopping, payments, video, messaging, finance, games

• Complementary to the rise of social

• Mobile-first companies will be the next wave of billion-dollar businesses

Mobile apps have created drastically different user experiences than the web.

Before Mobile Apps• Complex, feature heavy

products• Web- or cloud-based

applications often mimic the UX of the original software

• Same old-UI, just in new locations

• Everything but the kitchen sink approach to product design

More people worldwide access the internet on mobile than on a PC.

Source: Gartner.com

11

The Mobile Revolution #3: Global

App Stores make mobile companies global from day 1

155countries and

territories

190countries and

territories

12

US163M13% growth over 2013

Middle East & Africa

122M 31% growth over 2013

Brazil41M

36% growth over 2013

Mexico33M


Argentina

13M22% growth over 2013

Japan77M


China522M25% growth over 2013India

270M287% growth

over 2013

Russia75MW

Europe197M29% growth over 2013

Total smartphone users in 2014

Sources: IDC, eMarketer, DazeInfo, Statista

13

Users are engaged across markets

Brazil

Canad

aCh

inaFra

nce

German

y

Hong K

ong India

Indon

esia

Italy

Japan

Russi

aSpa

in UKUSA

16.8

29.625.9

32.228

38.8

16.9 17.8

23.5

36.4

23.120.2

28.5

32.8

A V E R A G E A P P S P E R S M A R T P H O N E

Source: think.withgoogle.com/mobileplanet

14

All this has happened in the last 6 years. And it’s just the tip of the iceberg.

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The Chinese Market • Opportunity and Challenges• Recommended Approaches• Case Studies

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The Opportunity and Unique Challenges in China

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Smart devices in use in China - more than the population of every country except India

700 million

Source: Umeng Insight Report 2013, 03/12/2014.

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Monetization is a challenge

Source: Distimo, “How the Most Successful Apps Monetize Globally,” February 2014; Nielsen, “The Asian Mobile Consumer Decoded,” 09/17/2013.

Smartphone penetration is high in China at 71% (versus 60% in the US), but revenue generation remains challenging.

Japan

Germany

USA

UK

Russia

China

$0 .00 $ 1.00 $2.00 $3.00 $4.0 0 $5 .00 $ 6.00

$5.32

$2.30

$2.29

$2.25

$1.30

$0.92

A V E R A G E R E V E N U E P E R D O W N L O A DA p p l e A p p S t o r e ( J a n 2 0 1 2 - 2 0 1 4 )

Distribution is complicated

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There are over 200 mobile app stores in China, and the majority of Android app users come from outside of Google Play.

US CHINA

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Local competition is very strong. Only 2 of the top 30 non-game apps in China are foreign.

Source: Distimo, Jan 2014

21

App sizes have to be kept small

79% 34%of mobile subscriptions are prepaid

of mobile subscriptions

use 3G

Source: GSMA, as cited by We Are Social, April 2014. Akamai, “State of the Internet,” Q1 2014.

67%slower average internet speed than in the US

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Recommended Approaches in China

Legal Structure

Localization Local Team Hosting Distribution

App Stores Monetization Billing & Payments

IP & Regulations

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Legal Structures

L I G H T W E I G H T S U G G E S T E D S U G G E S T E D

App-Only Variable Interest Entity

Invest in China Start-up

• Submit your app to local app stores (complying with SDKs and certification requests)

• No need to create a legal entity in China if you do not hire Chinese locals or operate a website hosted in China.

• Performance issues likely due to hosting outside China and can’t leverage carrier billing, payment integration, or integration with domestic social networks.

• Allows a foreign entity to control / invest in China.

• The Chinese entity is technically majority Chinese-owned so it can legally hold the ICP license (needed to operate websites in China).

• Has become popular among US-based businesses entering China

• Not officially endorsed by the PRC, and may not be enforceable if the Chinese partner declines to uphold the agreement

• Make an equity investment in a China startup with similar product or going after similar market.

• Your product usually is not distributed in China via the partner.

• Involvement is limited to investment and exchange of knowledge.

• Good choice when local preferences would make localization of your product difficult.

• Allows you to capitalize on the growth of the market via team of local experts.

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Variable Interest Entity (VIE) Details

US CompanyChinese Individuals /

CEO / GM

Special Purpose Vehicle (Offshore)

Usually a Cayman Islands or Virgin Islands entity for

tax purposes

Wholly Foreign-Owned Entity

(WFOE)100% owned by Special

Purpose Vehicle

Domestic Licensed Co

(VIE)

Share 100% ownership of SPV

The VIE allows a non-Chinese company to retain control over its Chinese operations while still technically complying with the requirement that the Chinese entity is majority owned by Chinese nationals. The domestic Chinese company that holds the requisite operating licenses has agreements with the Wholly Foreign Owned Entity (WFOE) that give the WFOE control of the domestic company and power to consolidate its own financials with the economic performance of the domestic entity.Recommendation: Recruit trusted core team member with PRC passport who can hold ICP license.

O U T S I D E C H I N A

I N S I D E C H I N A

Contractual Relationship

Chinese Individuals / CEO / GMOperators

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Localization

Linguistic Cultural Operational• Translate content into

Mandarin Chinese • Change name to

memorable Chinese name (60% of the top 25 free apps have a Chinese name)

• Hire in-house translation team or retain 3rd party translation service

• Can also partner with a local app distribution partner that will handle localization as a service

• Adapt in-app content to include local popular & historical references

• Example: add characters or symbols from Chinese pop culture, history, astrology or myths

• Adapt app mechanics (esp. if gaming) and operations to match expectations of local players

• Integrate with the most popular social networks (QQ, WeChat, etc.)

• Provide the most common payment methods (carrier billing, Alipay)

• Adapt in-app purchase pricing to reflect average pricing for that market

Source: InMobi, “What It Takes to Win in the Chinese App Market,” June 2013.

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Local Team

Hire a GM in China• Often ideal candidates will have both US and China

experience • Look for educated abroad at undergrad/Masters level

and/or work experience in both US and Chinese tech companies

• Give the local GM/CEO a fair amount of autonomy to hire his own team and make decisions for the local market

• Plan to start with about 5 people

Hire out of domestic Chinese leaders• They will understand the market and ecosystem• Tencent for gaming, web applications, social networking,

chat• Alibaba for commerce, marketplaces, payments• Youku-Tudou for video, content• Baidu for search, social networking, mobile apps• Other major leaders such as Netease, Sohu, Qihoo360,

Sina, Perfect World, Xiaomi

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P R O V I D E R E X A M P L E C U S T O M E R S

Aliyun, Alibaba’s cloud group, is the largest domestic infrastructure provider with nearly 1M indirect & direct customers

Joyent launched in 2009 and partnered with ClusterTech to offer public cloud services using Joyent tech

Azure launched in 2014 in partnership with 21Vianet and has over 9k customers with data centers in Beijing & Shanghai

AWS launched in China in 2013 in partnership with local providers ChinaNetCenter and SINNET and has thousands of customers

Cloud Valley is an infrastructure services firm that has worked with Evernote & Linkedin on their Chinese expansions; manages 3rd party partners to provide hosting, big data services, systems integration, operations and PR

HostingHost apps in China to improve speed and availability

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* GGV Capital invested in Alibaba, 21ViaNet, Kingsoft, Reebonz

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Distribution: PartnersP A R T N E R S H I P P A R T N E R S H I P V E N D O R

Top Internet Channels

Distribution Services

Mobile Ad Networks

Leading internet channel partners are responsible for most of China’s app downloadsThe most established, premium option and may help keep copycats out of their app storesNegotiate performance-based ad fee or revenue share (30-40%, not including billing fee) for distribution in their app stores

Localization and distribution partners can help negotiate agreements with top channels and ad networksCan also help redesign and package your app for the Chinese marketAdditional fee or revenue share on top of what is negotiated with the major channels, but simplifies the launch process for a non-Chinese developer

Major mobile ad networks exist, but market is more fragmented than in the USReach is inferior to Tencent, Baidu, and Qihoo Real-time bidding is still nascent, so deals are negotiated in-person (similar to an agency model)

* GGV Capital invested in Chukong, Yodo1

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Distribution: Social and Websites

Social• Key discovery method for users • Drives down acquisition costs in a

very competitive market • 55% of the top 200 apps have social

sharing or login• Sharing of app content grew 86X on

WeChat and 29X on QQ from Mar-Nov 2013

Websites• Chinese smartphone users are more

likely than US users to discover mobile apps from accessing websites on both their phone and PCs.

Source: Umeng Insight Report 2013, 03/12/2014. InMobi, “What It Takes to Win in the Chinese App Market,” June 2013.

T O P S O C I A L N E T W O R K S

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App Stores

Qihoo 360

Tencent

Wandoujia

Hiapk

91 Wireless

Baidu

Anzhi

AppChina

Other

35.6%

25.4%

18.8%

14.2%

12.2%

9.3%

6.9%

5.4%

17.1%

T O P C H I N A T H I R D - P A R T Y A N D R O I D A P P S T O R E B Y M A R K E T S H A R E

% o f a c t i v e a p p s t o r e u s e r s

Source: Distimo, “How the Most Successful Apps Monetize Globally,” February 2014.; InMobi, “What It Takes to Win in the Chinese App Market,” June 2013.

Focus on the 10 most popular apps stores, plus first-party carrier stores from China Mobile, China Telecom, China Unicom and XiaomiPrioritize getting featured in the app stores - Chinese users are even more influenced by app store ratings, reviews and features than in the US

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Monetization

D O M I N A N T P O P U L A R G R O W T H P O T E N T I A L

In-App Purchase Advertising M-CommerceFree app download with in-app purchases for content, upgrades, items, or currency

Enable in-app advertising via ad network or direct publisher relationships

Sell physical goods through an in-app store or via affiliate links to 3rd parties

ECONOMICS: 30% commission to carrier if using carrier billing; 25-50% revenue share to app store partner; plus additional revenue share to other payment processing or distribution partnersPRO: Most popular and successful monetization method to date with variety of established billing options available (Alipay, carrier billing)CON: ARPU is low at $0.92 in China, even for top apps and revenue share for billing options can be steep, eroding margins

ECONOMICS: Highly variable based on ad format, pricing type (CPA, CPM, CPI) and target user; Global mobile eCPM on Android varied from $0.11 to $1.26 on AppFloodPRO: Willingness to spend is high – 60% of global mobile ad spend in Q2 2014 came from China; banners are being replaced by higher quality interstitial, rich media, and video adsCON: The ad network landscape is extremely fragmented, with many players over-promising results

ECONOMICS: If offering proprietary products (in an in-app physical gift shop), margin is flexible based on pricing; negotiable affiliate revenue % from brands and ecommerce partnersPRO: Ideal for social networking, gaming, inspiration or lifestyle apps where offline goods (such as toys, clothing, event tickets, food) are relevantCON: If holding physical inventory, have added commerce logistics and liabilities, and affiliate revenue only becomes material at large transaction volumes

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Direct to Carrier Billing

15-30% revenue shareMost popular method of payment for in-app purchases in China, comprising up to 75% of total app revenue

Online Payment

Processing

2.5-3% revenue shareAlibaba’s affiliate Alipay is the dominant player

Mobile Monetizatio

n & Distribution

Partners

Negotiable ratesSome distribution partners offer integrations for carrier billing and payment processing

Payments and Billing

* GGV Capital invested in UCWeb, Yodo1

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IP and Regulations

IP Protection App Store Documentation

Special Regulations

Retain an IP lawyer to certify ownership of code and UILegal counsel may be advisable for handling IP documentation, UI patent registration, app store-specific copyright certification and possibly additional governmental approval processes. Two suggested documents to obtain: 1. Copyright Registration

for software 2. Patent Registration for

Graphical User Interface

Each app store requires different documentation, but two common ones may be: 1. PRC Software Copyright

Certificate or other documentation that proves the developer’s ID

2. Documentation proving the developer is the IP owner or is authorized by the owner

Partnerships with major channels (Baidu, Tencent, Qihoo) may be helpful in keeping copycats out of their app stores.Documentation is particularly important when the developer has no proprietary relationship with a platform.

Different industries may have special regulatory requirements; be sure to research and complyFor example, mobile game developers must get a special PRC Ministry of Culture approval

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Case Studies in China

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Case Study: Evernote

Evernote is one of the few US-based companies to successfully launch a consumer internet & mobile product in ChinaSTRUCTURE: Separate service from Evernote US, with local Chinese General Manager, joint venture investment partner and cloud service

LOCALIZATION: Translated Chinese name includes a character for “elephant,” making the logo and function easier to recall

PRODUCT ADAPTATIONS: include an API for Chinese developers, integration with Chinese social networks and payment systems, and local Chinese language support

TEAM: Hired Amy Gu as General Manager, a Stanford MBA who previously worked at mobile internet companies in China; now runs separate China team

PARTNERS: Took $70M investment from and set up JV with China Broadband Capital (founder of infrastructure partner Cloud Valley); partnered with a local cloud infrastructure provider, Cloud Valley, to have greater control over speed & security

MAY 2012

Launch localized service Yinxiang Biji (印象笔记 )

JULY 2012 1.1M users

MAY 2013

4M users, including 5K companies

NOV 2013 8M users

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Case Study: LinkedIn

LinkedIn formally launched a Chinese service in 2014, to capitalize on strong existing demand USER BASE: Existing Chinese users mostly from top four cities, indicating an urban, white collar demographic.

STRUCTURE / PARTNERS: Joint venture with two VC groups (Sequoia and China Broadband Capital) to form team with ~15 employees

LOCALIZATION: Translated Chinese characters mean “leading” and “elite,” suggesting a premium service

PRODUCT ADAPTATIONS: Integration with popular services including Sina Weibo and Tencent WeChat

TEAM: For President of LinkedIn China, hired Derek Shen, a Masters in CS grad from UCLA and Chinese native who previously founded Nuomi (acquired by Baidu), led partnerships for Renren and led BD for Google China

NOV 2013

3M+ registered users from China on LinkedIn (non-localized app)

FEB 2014Launches official site in China as Ling Ying (领英 )

MAY 2014

5M+ registered users in China

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Case Study: HalfBrick / Fruit Ninja

Halfbrick Games (developer of Fruit Ninja) worked with localization partner iDreamSky to release a Chinese version of the app that saw over 400M downloads in ChinaPAYMENTS: Uses carrier billing and Alipay like most local apps

PRODUCT ADAPTATIONS: App incorporates integration with prominent local social networks, a Chinese character, and other visual adaptations to appeal to local gamers

Local Chinese name + WeChat and QQ integration

Chinese zodiac design replaces original background

Sword-like stroke design inspired by user

feedback/request

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The European Market • Opportunity and Challenges• Recommended Approaches

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The Opportunity and Unique Challenges in Europe

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A growing market

India

United

St...

German

y

United

Kin..

.Braz

il

Franc

eRus

sia

Canad

aJap

an

South

Korea

8.7x

3.5x 3.5x 3.2x 3.2x 3.0x 2.7x2.2x

1.8x 1.5x

M O B I L E A P P R E V E N U E G R O W T H M U L T I P L E S

P r o j e c t e d f o r 2 0 1 3 - 2 0 1 7

Source: App Annie & IDC, “Mobile App Advertising and Monetization Trends 2012-2017,” March 2014.OFCOM using data supplied by Tellgen, as cited by GSMA, 2013.

With low costs for mobile internet access, key markets in Europe are forecasted to have the significant mobile revenue growth in the coming years

Source: SAP, “The Mobile Consumer: Insights on Europe, Middle East and Africa Trends Impacting Mobile Momentum and Customer Engagement,” 2013.

European mobile users are most likely to make mobile payments for entertainment, bills, books, music, and apparel.

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But significantly fragmented

Source: International Telecoms Union, as cited by We Are Social, 2014.

Russia

United

King

dom

Franc

e

German

yIta

lySp

ainPo

land

Netherl

ands

Swed

en

Finlan

d

Roman

ia

Denmark

Greece

Austria

Norway

75M

45M

34M 33M 32M25M

19M10M 9M 6M 5M 5M 5M 5M 4M

Top 15 European Countries By # Of Mobile Broadband Subscriptions

Europe is comprised of 50 countries with a broad range of national languages and cultures - but most of these markets are so small that localization is not economical.

High English literacy across the region does make expansion easier.

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The business climate

Labor laws make it difficult to compensate employees in options, keep execution speed at rate of US/China, and turnover the team as quickly as US/China if neededEconomic growth and

smartphone penetration growth are fairly slow, reducing the chances of rapid growth for a new market entrant

Local startups have less access to capital compared to the US, making it possible to execute faster than local competition

Possible antitrust, taxation, and in-app purchase regulations may hinder US-based companies that are not prepared to fight policy battles

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Recommended Approaches in Europe

Platform Distribution Monetization Billing & Payments

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Platform

Europe’s dominant mobile platform is Android, making the Google Play app store one of the primary distribution channels.

Source: Kantar World Panel, Jul 2014

F r a n c e G e r m a n y S p a i n U K I t a l y0%

20%

40%

60%

80%

100%

M O B I L E O S M A R K E T S H A R E Android iOS Windows Other

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Distribution: Social

Source: Vincent Cosenza, “World Map of Social Networks” as cited on Vincos Blog. Note: Reflects top social networks based on Alexa rank.

T O P S O C I A L P L A T F O R M S W O R L D W I D E

Facebook is the top social network in Europe (except in Russia), so social media-based user acquisition in Europe can be Facebook-centric, as it is in the US.

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Monetization

Source: Source: App Annie & IDC, “Mobile App Advertising and Monetization Trends 2012-2017,” March 2014.GigaOM Research (sponsored by European Commission), February 2014.

60to70%

of app revenue in top European

markets (UK, Germany,

France, Russia) will come from mobile

advertising by 2017

4.5B€

Revenue from paid apps in the EU in

2014 - currently the top source of app

revenue

6B+€

projected revenue from in-app

purchases in 2016, at which point it will overtake paid app revenue in the EU

P A I D A P P I N - A P P A D V E R T I S I N G

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Billing and Payments

Carrier billing for digital goods in Europe is forecasted to grow from 5% of purchases to 18% by 2017.

Source: Dimoco & Juniper Research, "Is Mobile Operator Payment the Ideal Payment Method to Bill Digital Content?” 2013.

€5.2Bwill be spent in 2017 through carrier billing, up from €790M in 2012

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Key Takeaways

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Global + Mobile: How-to Guide

Find your targets Know the user How local to go• Regions in which you

are already getting traction with your app

• Countries with high smartphone penetration and broadband use

• Regions that are similar to places you are already successful

• Areas with high English literacy that will require less localization

• Lack of incumbents– no dominant existing player to unseat

• How to monetize: What

are the most successful models in the region: in-app purchases, paid apps, advertising, or m-commerce?

• How to pay: Are credit cards the dominant payment choice or are users more likely to use carrier billing or third-party payment solutions?

• How to distribute: How do your users discover new apps: social, app stores, web, ads?

• Local product: Translation, localization of app name, changing visuals, graphics, characters and more to appeal to local consumers

• Local hosting: to deliver quality app experience

• Local team: who knows the market

• Local partners: to help with operations and distribution

Thank you