The Clone Wars and First Mover Disavantage
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Democratic and open societies, for all of their faults, always seem to be the ones producing the Google’s and the eBay’s and the Facebook’s (NASDAQ: FB) and the Microsoft’s. And China always seems to be the one following closely behind producing the clones. This begs the question whether China’s Great Firewall is really to protect the people from harmful websites, or whether it’s to protect its own companies from outside competition.
It is always the dream of manufacturing-based economies to eventually move beyond production and into R&D and innovation, to become a place where things are conceived and developed. China has implemented a policy of innovation protectionism to prevent outside companies from dominating the local market in order to give home-grown companies a crack at the market unfettered by established and seasoned foreign players.
Google (NASDAQ: GOOG) is perhaps the most famous example, with all of its products and services blocked in China. The lack of YouTube has made way for domestic video sites like Youko (NYSE: YOKU), currently valued at $5 billion, to get traction in the market. The merger between Youku and Todou will have the new company controlling more than 40% of the total video streaming revenue in China, which has grown from a 314 million RMB sector in Q1 2010 to 2080 million RMB in in 2 years. The Google ban has helped other Chinese sites like Baidu and Alibaba to prosper as well.
Facebook is also blocked in China, a boon for social clones like Renren and Kaixin001, which have a combined user base of about 100 million.
Sina Weibo is China’s Twitter knock-off and has grown its user base from 8 million to 125 million within the last year, growing at a rate of 50% per week.
The United States has requested via the WTO that China provide details about why it bans certain foreign sites, citing rules against policies that give an unfair advantage to products and services produced domestically over foreign companies. As a WTO signatory this is an issue for China but, like their desire to control the rate at which the Yuan is traded freely, the opening up of the information stream both within and without China is proceeding on the government’s timetable.
But, clearly, there is a need for this change and the change will come. According to Socialbakers.com there are slightly more than 500,000 Facebook users in China despite the ban. Google’s traffic in China is non-zero, despite the ban. In economics banning something does not make it go away it just drives it underground. Gresham’s Law is just an extension of this principle as it applies to money. Over-valued money will circulate while undervalued money is hoarded. Is information behind the Great Firewall of China really any different?
When that wall comes down it should represent the greatest explosion of pent up demand for information flow in the history of the world. China has been increasing its spending on R&D drastically with the latest OECD figures noting that China contributed 13% to the total R&D spending in 2008, up from just 5% in 2001. Whether that spending will necessarily translate into competitive innovation on a per dollar spent basis is unknown, but the writing is certainly on the Firewall.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.