Anything Could Be Free: Monetization in Emerging Markets

by Richard Zhu (blog: http://richardzhu.org/)

Think about the shopping list when you buy a new laptop:

A new laptop: $500 (OS pre-installed)

Anti-Virus: $40 (e.g. McAfee Total Protection 2011)

Microsoft Office: $120

That is what happens in US, where average per capital income is about $40,000. What happens if this is in a developing country? Let’s pick up a hot one, China, where per capita income is 6.23% of US (Only $2,500 per year? Yes! That’s why your iPhone is made there!).

Let’s see the impact such costs can have on these people’s income. (We know that the prices are the same):

% of Annual Income	US	China
Computer	1.3%	20.0%
Anti-Virus	0.1%	1.6%
Office	0.3%	4.8%
Total	1.7%	26.4%

Here we see that a new laptop is a big thing in China, like in many emerging markets. The relatively high price is giving incentive for them to seek alternative options. Here are things consumers could do to make the overall price less hefty:

Item	Option 1	Option 2
Hardware	N/A	N/A
Anti-Virus	Don’t Install	Get a counterfeit copy
Office	Don’t Install	Get a counterfeit copy

To the surprise of some people, installing counterfeit software is not their first choice to many people: the counterfeit versions are often defected, a lot of them containing Trojan or virus. So many consumers choose not to install everything. Survey indicates that 17 million internet users don’t have any security software on their computers, no mention having both anti-virus and firewall.

On the other hand, safety is a serious issue in China. According to a China’s official news agency, over 30 percent of internet users in China had their account or password stolen. Even on the non-crime side, hyper competitive market is driving websites to install varieties of add-ons or change your browser settings.

A company called Qihoo came in. In Aug 2006, the firm launched Qihoo 360 safety guard, a permanently free (and guaranteed life-long free-update) safety software. Over the past 5 years, the firm got 160 million users, covering over 60% of total Chinese internet users. (Compare with McAfee around 60 million copies sold in 2009 globally.) More strikingly, they made $50 million revenue in year 2010, and now in the preparation for IPO in Nasdaq this year. You may wonder: how are they monetizing?

Here are the products they offer: (absolutely free, and also free from advertising)

Product	Memo
360 safeguard & 360 software manager	50%+ market share
360 anti-viruses	50%+ market share
360 Safety Internet Explorer	market share 23.6%, vs. IE 67.8%, Chrome 1.2%
360 Safe Storage Space	Target top 1% of existing 160 million user

The 360 software manager bundled to 360 Safeguard, is a very active portal to software downloads. Even though 360 only allow trustworthy software downloads displayed there, the software providers need to pay Qihoo for being accessible in that portal. The 360 Safety Internet Explorer, which leveraged the huge brand value of 360 safeguard and anti-virus, provided a list of ‘safe’ websites and game providers. Aka! Money comes here! The Safe Storage Space, said to serve 1% of 360 product series user, is skimming the small portion of its large user base in subscription.

Seems this ‘free to consumer’ model is really working well, then what else could be done? The fact is: a lot! And many of them are already there!

WPS office: the Chinese local office software, completely compatible with MS office, began to offer fee versions to individual consumers in 2005. (Still charge for institutional users, or advanced functions)

Taobao.com: a Chinese online retail platform provider like ebay, made their platform ‘free’ to all merchants in 2003. At that time, ebay (where vendors need to pay a fee to be there) was holding 90% of online retail market share. Taobao’s free model created a significantly larger pie: anyone can open a store at their platform. 1 year later in 2004, the online retail market size increased from 1 billion RMB ($144 million) to 3.4 billion RMB ($493 million). Now Taobao is by far the No. 1 player in this field, with 98 million registered users. How they make money? Well, think about what happens if there are 100 vendors selling the same product: you need to pay the platform provider to get yourself displayed at a better place.

QQ (Tencent): the most popular IM in China, with 500 million registered user and over 100 million online at the same time, also provide free IM services. Their make money from Q coins, which you need to pay real money to get, and use the coins to decorate your IM image or use premium functions of online games. (Now, Tencent is the world’s 3^rd largest internet company, only after google and amazon, in terms of market cap.)

Guess all I am saying is: when the purchasing power of a market is lower, you need a different monetization approach from typical Silicon Valley approaches. Lower income doesn’t mean lower chance to make money, but maybe an opportunity for smart people to make more.

With my HBS debt further reducing my purchasing power, I feel more things could be free, or anything could be free. 

What’s next?