AI Superpowers Page 6
Zhou embodies the gladiatorial mentality of Chinese internet entrepreneurs. In his world, competition is war and he will stop at nothing to win. In Silicon Valley, his tactics would guarantee social ostracism, antimonopoly investigations, and endless, costly lawsuits. But in the Chinese coliseum, none of these three can hold back combatants. The only recourse when an opponent strikes a low blow is to launch a more damaging counterattack, one that can take the form of copying products, smearing opponents, or even legal detention. Zhou faced all of the above during the “3Q War,” a battle between Zhou’s Qihoo and QQ, the messaging platform of web juggernaut Tencent.
I witnessed the start of hostilities firsthand one evening in 2010, when Zhou invited me and employees of the newly formed Sinovation Ventures to join his team at a laser tag course outside of Beijing. Zhou was in his element, shooting up the competition, when his cell phone rang. It was an employee with bad news: Tencent had just launched a copycat of Qihoo 360’s antivirus product and was automatically installing it on any computer that used QQ. Tencent was already a powerful company that wielded enormous influence through its QQ user base. This was a direct challenge to Qihoo’s core business, a matter of corporate life or death in Zhou’s mind, as he wrote in his autobiography, Disruptor. He immediately called together his team at the laser tag place, and they raced back to their headquarters to formulate a counterattack.
Over the next two months, Zhou pulled out every dirty and desperate trick he could think of to beat back Tencent. Qihoo first created a popular new “privacy protection” software that issued dire safety warnings every time a Tencent product was opened. The warnings were often not based on any real security vulnerability, but it was an effective smear campaign against the stronger company. Qihoo then released a piece of “security” software that could filter all ads within QQ, effectively killing the product’s main revenue stream. Soon thereafter, Zhou was on his way to work when he got a phone call: over thirty police officers had raided the Qihoo offices and were waiting there to detain Zhou as part of an investigation. Convinced the raid was orchestrated by Tencent, Zhou drove straight to the airport and fled to Hong Kong to formulate his next move.
Finally, Tencent took the nuclear option: on November 3, 2010, Tencent announced that it would block the use of QQ messaging on any computer that had Qihoo 360, forcing users to choose between the two products. It was the equivalent of Facebook telling users it would block Facebook access for anyone using Google Chrome. The companies were waging total war against each other, with Chinese users’ computers as the battleground. Qihoo appealed to users for a three-day “QQ strike,” and the government finally stepped in to separate the bloodied combatants. Within a week both QQ and Qihoo 360 had returned to normal functioning, but the scars from these kinds of battles lingered with the entrepreneurs and companies.
Zhou Hongyi was one of the most pugnacious of these entrepreneurs, but dirty tricks and anticompetitive behavior were the norm in the industry. Remember Wang Xing’s Facebook copycat, Xiaonei? After he sold it in 2006, the site reemerged as Renren (“Everyone”) and became the dominant Facebook-esque social network. But by 2008, Renren faced a scrappy challenger in Kaixin001 (kaixin means “happy” in Mandarin). The startup gained traction by initially targeting young urbanites instead of the college students already on Renren. Kaixin001 integrated social networking and gaming with products like “Steal Vegetables,” a Farmville knockoff, but one where people were rewarded not for cooperatively farming but for stealing from each other’s gardens. The startup quickly became the fastest growing social network around.
Kaixin001 was a solid product, but its founder was no gladiator. When he created the network, the URL that he wanted to use—kaixin.com—was already taken, and he didn’t want (or possibly couldn’t afford) to buy it from its owner. So instead he opted for kaixin001.com, which turned out to be a fatal mistake, equivalent to entering the coliseum without a helmet.
The moment Kaixin001 became a threat, the owner of Renren simply bought the original www.kaixin.com URL from its owner. He then recreated an exact copy of Kaixin001’s user interface, changing only the color, and brazenly dubbed it “The Real Kaixin Net.” Suddenly, many users trying to sign up for the popular new social network found themselves unwittingly ensnared in Renren’s net. Few even knew the difference. Renren later announced it would merge Kaixin.com with Renren, effectively completing its kidnapping of Kaixin001 users. The move kneecapped Kaixin001’s user growth, killed its momentum, and neutralized a major threat to Renren’s dominance.
Kaixin001 sued its unsavory rival, but the lawsuit couldn’t undo the damage from live combat. In April 2011, eighteen months after the lawsuit was filed, a Beijing court ordered Renren to pay $60,000 to Kaixin001, but the once-promising challenger was now a shadow of its former self. One month after that, Renren went public on the New York Stock Exchange, raising $740 million.
The lessons learned in the coliseum were clear: kill or be killed. Any company that can’t fully insulate itself from competitors—on a technical, business, or even personnel level—is a target for attack. To the winner go the spoils, and those spoils can amount to billions of dollars.
It’s a cultural system that also inspires a truly maniacal work ethic. Silicon Valley prides itself on long work hours, an arrangement made more tolerable by free meals, on-site gyms, and beer on tap. But compared with China’s startup scene, the valley’s companies look lethargic and its engineers lazy. Andrew Ng, the deep-learning pioneer who founded the Google Brain project and led AI efforts at Baidu, compared the two environments during a Sinovation event in Menlo Park:
The pace is incredible in China. While I was leading teams in China, I’d just call a meeting on a Saturday or Sunday, or whenever I felt like it, and everyone showed up and there’d be no complaining. If I sent a text message at 7:00 PM over dinner and they haven’t responded by 8:00 PM, I would wonder what’s going on. It’s just a constant pace of decision-making. The market does something, so you better react. That, I think, has made the China ecosystem incredible at figuring out innovations, how to take things to market. . . . I was in the US working with a vendor. I won’t use any names, but a vendor I was working with actually called me up one day and they said, “Andrew, we are in Silicon Valley. You’ve got to stop treating us like you’re in China, because we just can’t deliver things at the pace you expect.”
THE LEAN GLADIATOR
But the copycat era taught Chinese technology entrepreneurs more than just dirty tricks and insane schedules. The high financial stakes, propensity for imitation, and market-driven mentality also ended up incubating companies that embodied the “lean startup” methodology.
That methodology was first explicitly formulated in Silicon Valley and popularized by the 2011 book The Lean Startup. Core to its philosophy is the idea that founders don’t know what product the market needs—the market knows what product the market needs. Instead of spending years and millions of dollars secretly creating their idea of the perfect product, startups should move quickly to release a “minimum viable product” that can tease out market demand for different functions. Internet-based startups can then receive instant feedback based on customer activity, letting them immediately begin iterating on the product: discard unused features, tack on new functions, and constantly test the waters of market demand. Lean startups must sense the subtle shifts in consumer behavior and then relentlessly tinker with products to meet that demand. They must be willing to abandon products or businesses when they don’t prove profitable, pivoting and redeploying to follow the money.
By 2011, “lean” was on the lips of entrepreneurs and investors throughout Silicon Valley. Conferences and keynote speeches preached the gospel of lean entrepreneurship, but it wasn’t always a natural fit for the mission-driven startups that Silicon Valley fosters. A “mission” makes for a strong narrative when pitching to media or venture-capital firms, but it can also become a real burden in a rapidly changing market. What
does a founder do when there’s a divergence between what the market demands and what a mission dictates?
China’s market-driven entrepreneurs faced no such dilemma. Unencumbered by lofty mission statements or “core values,” they had no problem following trends in user activity wherever it took their companies. Those trends often led them into industries crowded with hundreds of near-identical copycats vying for the hot market of the year. As Taobao did to eBay, these impersonators undercut any attempt to charge users by offering their own products for free. The sheer density of competition and willingness to drive prices down to zero forced companies to iterate: to tweak their products and invent new monetization models, building robust businesses with high walls that their copycat competitors couldn’t scale.
In a market where copying was the norm, these entrepreneurs were forced to work harder and execute better than their opponents. Silicon Valley prides itself on its aversion to copying, but this often leads to complacency. The first mover is simply ceded a new market because others don’t want to be seen as unoriginal. Chinese entrepreneurs have no such luxury. If they succeed in building a product that people want, they don’t get to declare victory. They have to declare war.
WANG XING’S REVENGE
The War of a Thousand Groupons crystallized this phenomenon. Soon after its launch in 2008, Groupon became the darling of the American startup world. The premise was simple: offer coupons that worked only if a sufficient number of buyers used them. The buyers got a discount and the sellers got guaranteed bulk sales. It was a hit in post-financial-crisis America, and Groupon’s valuation skyrocketed to over $1 billion in just sixteen months, the fastest pace in history.
The concept seemed tailor-made for China, where shoppers obsess over discounts and bargaining is an art form. Entrepreneurs in China looking for the next promising market quickly piled into group buying, starting local platforms based on Groupon’s “Deal of the Day” model. Major internet portals launched their own group-buying divisions, and dozens of new startups entered the fray. Yet what began as dozens soon ballooned into hundreds and then thousands of copycat competitors. By the time of Groupon’s initial public offering in 2011—the largest IPO since Google’s in 2004—China was home to over five thousand different group-buying companies.
To outsiders this looked like a joke. It was a caricature of an internet ecosystem that was shameless in its copying and devoid of any original ideas. And vast swaths of those five thousand copycats were laughable, the product of ambitious but clueless entrepreneurs with no prospects for surviving the ensuing bloodletting.
But at the bottom of that dogpile, at the center of this royal rumble, was Wang Xing. In the previous seven years, he had copied three American technology products, built two companies, and sharpened the skills needed to survive in the coliseum. Wang had turned from a geeky engineer who cloned American websites into a serial entrepreneur with a keen sense for technology products, business models, and gladiatorial competition.
He put all those skills to work during the War of a Thousand Groupons. He founded Meituan (“Beautiful Group”) in early 2010 and brought on battle-hardened veterans of his previous Facebook and Twitter clones to lead the charge. He didn’t repeat the pixel-for-pixel copying of his Facebook and Twitter sites, instead building a user interface that better matched Chinese users’ preference for densely packed interfaces.
When Meituan launched, the battle was just heating up, with competitors blowing through hundreds of millions of dollars in offline advertising. The going logic went that in order to stand out from the herd, a company had to raise lots of money and spend it to win over customers through advertising and subsidies. That high market share could then be used to raise more money and repeat the cycle. With overeager investors funding thousands of near-identical companies, Chinese urbanites took advantage of the absurd discounts to eat out in droves. It was as if China’s venture-capital community were treating the entire country to dinner.
But Wang was aware of the dangers of burning cash—that’s how he’d lost Xiaonei, his Facebook copy—and he foresaw the danger of trying to buy long-term customer loyalty with short-term bargains. If you only competed on subsidies, customers would endlessly jump from platform to platform in search of the best deal. Let the competitors spend the money on subsidizing meals and educating the market—he would reap the harvest that they sowed. So Wang focused on keeping costs down while iterating his product. Meituan eschewed all offline advertising, instead pouring resources into tweaking products, bringing down the cost of user acquisition and retention, and optimizing a complex back end. That back end included processing payments coming in from millions of customers and going out to tens of thousands of sellers. It was a daunting engineering challenge for which Wang’s decade of hands-on experience had prepared him.
One of Meituan’s core differentiations was its relationship with sellers, a crucial piece of the equation often overlooked by startups obsessed with market share. Meituan pioneered an automated payment mechanism that got money into the hands of businesses quicker, a welcome change at a time when group-buying startups were dying by the day, sticking restaurants with unpaid bills. Stability inspired loyalty, and Meituan leveraged it to build out larger networks of exclusive partnerships.
Groupon officially entered the Chinese market in early 2011 by forging a joint venture with Tencent. The marriage brought together the top international group-buying company with a homegrown giant that had both local expertise and a massive social media footprint. But the Groupon-Tencent partnership floundered from the beginning. Tencent had not yet figured out how to partner effectively with e-commerce companies, and the joint venture blindly applied Groupon’s standard playbook for international expansion: hire dozens of management consultants and use the temp agency Manpower to build out massive, low-level sales teams. Manpower headhunters made a fortune on fees, and Groupon’s customer acquisition costs dwarfed those of local competitors. The foreign juggernaut was bleeding money too quickly and optimizing its product too slowly. It faded to irrelevance while the bloodletting among Chinese startups continued.
From the outside, these types of venture-funded battles for market share look to be determined solely by who can raise the most capital and thus outlast their opponents. That’s half-true: while the amount of money raised is important, so is the burn rate and the “stickiness” of the customers bought through subsidies. Startups locked in these battles are almost never profitable at the time, but the company that can drive its losses-per-customer-served to the bare minimum can outlast better-funded competitors. Once the bloodshed is over and prices begin to rise, that same ruthless efficiency will be a major asset on the road to profitability.
As the War of a Thousand Groupons progressed, the combatants fought for survival in different ways. Like gladiators forming factions in the coliseum, weaker startups merged in hopes of achieving economies of scale. Others relied on bursts of high-profile advertising to briefly rise above the fray. Meituan, though, held back, consistently ranking in the top ten but not yet pushing to take the top spot.
Wang Xing embodied a philosophy of conquest tracing back to the fourteenth-century emperor Zhu Yuanzhang, the leader of a rebel army who outlasted dozens of competing warlords to found the Ming Dynasty: “Build high walls, store up grain, and bide your time before claiming the throne.” For Wang Xing, venture funding was his grain, a superior product was his wall, and a billion-dollar market would be his throne.
By 2013, the dust began to settle on what had been the wildest war of copycats the country had ever seen. The vast majority of combatants had perished as victims of brutal attacks or their own mismanagement. Still standing were three gladiators: Meituan, Dianping, and Nuomi. Dianping was a longstanding Yelp copycat that had entered group buying, while Nuomi was a group-buying affiliate launched by Renren, the Facebook copycat that Wang Xing himself had founded and sold off. These three accounted for more than 80 percent of the market, and Wang’s Meituan had
grown to a valuation of $3 billion. After years spent photocopying American websites, he had learned the craft of the entrepreneur and won a huge chunk of a massive new market.
But it wasn’t by sticking to group buying that Meituan became what it is today. Groupon had largely stayed with its original business, coasting on the novel idea of discounts through groups. By 2014, Groupon was trading at less than half of its IPO price. Today it’s a shell of what it had been. By contrast, Wang ceaselessly expanded Meituan’s lines of business and constantly reshaped its core products. As each hot new consumer wave washed over the Chinese economy—a booming box office, a food-delivery explosion, massive domestic tourism, flourishing online-to-offline services—Wang pivoted and ultimately transformed his company. He was voracious in his appetite for new markets and relentless in his constant iteration of new products, a prime example of a market-driven lean startup.
Meituan merged with rival Dianping in late 2015, keeping Wang in charge of the new company. By 2017 the hybrid juggernaut was fielding 20 million different orders a day from a pool of 280 million monthly active users. Most customers had long forgotten that Meituan began as a group-buying site. They knew it for what it had become: a sprawling consumer empire covering noodles, movie tickets, and hotel bookings. Today, Meituan Dianping is valued at $30 billion, making it the fourth most valuable startup in the world, ahead of Airbnb and Elon Musk’s SpaceX.