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APPLE IN CHINA REPORT MATTHEW BRENNAN & SAMIN SHA CHINACHANNEL.CO PARTS OF THIS REPORT WERE FIRST DELIVERED AT THE DHL APAC REGIONAL CONFERENCE SHANGHAI IN MAY 2017 MATTHEW BRENNAN WECHAT EXPERT, SPEAKER, AUTHOR, HOST, CO-FOUNDER OF CHINA CHANNEL MATTHEW IS A WELL-KNOWN SPEAKER AND WRITER ON THE TOPICS OF WECHAT AND THE CHINA DIGITAL ECOSYSTEM. REGULARLY QUOTED IN INTERNATIONAL MEDIA (THE ECONOMIST, BLOOMBERG, FORBES, THE FINANCIAL TIMES, BBC, TECHINASIA), HIS COMPANY ORGANIZES CHINA’S LARGEST WECHAT MARKETING CONFERENCE SERIES FOR INTERNATIONAL COMPANIES. MATTHEW’S COMPANY CHINA CHANNEL IS A CHINA FOCUSED TECH CONSULTANCY AND RESEARCH FIRM. HE HOLDS 13+ YEARS ON THE GROUND ENTREPRENEURIAL EXPERIENCE IN MAINLAND CHINA. CO-HOST OF THE CHINA TECH TALK PODCAST PRODUCED TOGETHER WITH TECHNODE, CHINA'S LARGEST ENGLISH LANGUAGE TECH MEDIA. HIS BOOK ‘BUILDING YOUR BUSINESS THROUGH WECHAT’ IS DUE FOR RELEASE LATER THIS YEAR. EMAIL: [email protected] LINKEDIN: HTTPS://CN.LINKEDIN.COM/IN/MATTHEW-BRENNAN “WE CONTINUE TO BE VERY ENTHUSIASTIC ABOUT OUR OPPORTUNITY IN CHINA.” TIM COOK MAY 2017 CHINACHANNEL.CO AFTER MUCH RESEARCH WE FOUND LITTLE TO BE ENTHUSIASTIC ABOUT… WE FEEL RATHER LESS ENTHUSIASTIC… CHINACHANNEL.CO THIS REPORT’S 3 CORE ARGUMENTS BACKED BY THE BEST PUBLICLY AVAILABLE STATISTICS AND DATA WE COULD FIND. 1. APPLE’S SERVICES ECOSYSTEM IN CHINA IS VERY WEAK AND IN MANY KEY AREAS NON EXISTENT. 2. THE PERCEPTION OF APPLE’S BRAND AMONGST CHINESE CONSUMERS HAS CHANGED FOR THE WORSE. 3. CHINESE SMARTPHONE BRANDS ARE RAPIDLY GAINING IN STRENGTH, SOPHISTICATION AND LOCAL MARKET SHARE. CHINACHANNEL.CO PART 1 APPLE’S CHINA SERVICES ECOSYSTEM CHINACHANNEL.CO “THE FUTURE OF THIS COMPANY IS GOING TO BE IN SERVICES.” TIM COOK, VIA BLOOMBERG *************************************** CHINACHANNEL.CO SERVICES IS APPLE’S ONLY SECTOR WITH CONSISTENT & STEADY GROWTH. SERVICES PLAY A KEY ROLE IN LOCKING IN USERS 25.5 21.2 19.7% 18.5 14.6% 10.2% 2014 2015 2016 SERVICES REVENUE IN BILLION USD GROWTH CHINACHANNEL.CO DATA: APPLE INC. TO MANY AMERICAN IPHONE USERS IT WOULD BE UNTHINKABLE TO CHANGE THEIR IPHONE TO AN ANDROID DEVICE. THEY ARE LOCKED IN TO APPLE SERVICES. CHINACHANNEL.CO TO MOST CHINESE IPHONE USERS THE IPHONE IS JUST A LUXURY PHONE. THEY HAVE NO SIGNIFICANT INVESTMENT IN APPLE’S SERVICES ECOSYSTEM CHINACHANNEL.CO APPLE’S CHINA SERVICE ECOSYSTEM HAS BEEN SYSTEMATICALLY STRIPPED AWAY BY LOCAL COMPETITORS CHINACHANNEL.CO IBOOKS / ITUNES CHINACHANNEL.CO FROM APRIL 2016 IBOOKS AND ITUNES STORE HAVE BEEN BLOCKED IN CHINA. CHINESE AUTHORITIES ORDERED THEM TO BE TAKEN OFFLINE. CHINACHANNEL.CO “THOSE 2 STORES* FOR THE MONTHS THAT WE HAD THEM OPERATIONAL, WHICH WAS SEVERAL MONTHS, THE REVENUE WAS LESS THAN $1 MILLION.” TIM COOK, JULY 2016 CHINACHANNEL.CO *CHINA IBOOKS & CHINA ITUNES CHINA DIGITAL READING MARKET DURING THE 2 QUARTERS* WHILE IBOOKS WAS OPERATING 2015 Q4 2016 Q1 35% 30% IBOOKS WAS AVAILABLE IN CHINA 25% FOR APPROXIMATELY HALF A YEAR. IT MADE VIRTUALLY NO IMPACT ON 20% THE CHINESE MARKET. 15% 10% 5% 0% IREADER QQ TIANYI TADU MIGU DUOKAN AIYUEDU QIDIAN PANDA DATA: SOOTOO RESEARCH INSTITUTE CHINACHANNEL.CO *IBOOKS WAS FULLY OPERATED IN 15Q4 AND 16Q1 A SIMILAR STORY IN VIDEO. APPLE MADE LITTLE IMPACT. OTHERS ONLINE VIDEO 20.25% IQIYI MARKET SHARE BY USAGE TIME, 42.3% APR 2016 YOUKU 18.10% TENCENT VIDEO 19.33% DATA: IRESEARCH CHINACHANNEL.CO * ITUNES MOVIE WAS SHUT DOWN IN LATE APR 2016 ICLOUD CHINACHANNEL.CO ICLOUD USAGE IS LOW. PRICING IS OUT OF LINE WITH LOCAL CHINESE COMPETITORS ICLOUD CHINA PRICING $18 FREE $10 $0.8 FREE $3 5G 50G 200G 1T 2T 2T CHINACHANNEL.CO IMAPS CHINACHANNEL.CO MOBILE MAPS MARKET CHINA Q4 2016 OTHERS 15% SOUGOU 7.70% AUTONAVI 34.3% TENCENT MAP 13.10% BAIDU MAP CHINESE PLAYERS 29.90% DOMINATE THE MARKET WITH OFFERINGS TAILORED TO LOCAL TASTES. DATA:IIMEDIA CHINACHANNEL.CO APPLE PAY CHINACHANNEL.CO APPLE PAY LAUNCH FEB 2016 “I WOULD RATE OUR FIRST-DAY PERFORMANCE (IN CHINA) AS 1,000, IF THE FULL SCORE IS 100.” JENNIFER BAILEY, VICE PRESIDENT OF APPLE PAY, COMMENTING ON APPLE PAY DEBUT IN CHINA CHINACHANNEL.CO APPLE HAD AMPLE REASONS TO BE OPTIMISTIC PARTNERED WITH CHINA UNIONPAY, CHINA’S SOLE DEBIT CARD NETWORK WITH OVER 6 BILLION CARDS AND ACCEPTED ACROSS ALL MAJOR STORES AND MALLS IN CHINA. BACKED BY 19 MAJOR CHINESE BANKS, INCLUDING THE BIG FOUR. 3 MILLION CONSUMERS LINKED THEIR BANK CARDS TO APPLE PAY IN THE FIRST 2 DAYS, ACCORDING TO CHINA MERCHANTS BANK. + * CHINA BANK CARD INDUSTRY CHINACHANNEL.CO DEVELOPMENT REPORT (2017) A YEAR LATER… 0% CASH APPLE PAY 11% UNION PAY CREDIT+DEBIT CARDS 22% ALIPAY + WECHAT PAY QR PAYMENT CODE METHODS IN PAYMENTS CONVENIENCE 67% STORES: BEIJING ZHONGGUANCUN CHINACHANNEL.CO Data Source: 36Kr Q1 2017 SOLID UNDERSTANDING 17% ONLY CASHIER UNDERSTANDS NO 16% COMPREHENSION 67% CONVENIENCE STORE STAFF UNDERSTANDING OF APPLE PAY CHINACHANNEL.CO DATA SOURCE: 36KR Q1 2017 PRIMARY PAYMENT METHODS FOR OFFLINE PURCHASES 94.1% 93.6% 89.4% 87.6% APPLE PAY CLEARLY STRUGGLING 49.5% 51.3% 38.6% 41.3% 33.0% 35.7% 29.0% 30.9% 13.0% 11.4% 9.6% 9.8% MOBILE PAYMENT APPS (E.G. CASH DEBIT & CREDIT CARDS SMARTPHONE BUILT-IN WECHAT PAY) PAYMENT TOOL (E.G. APPLE PAY) 1ST TIER CITIES (BEIJING, SHANGHAI) 2ND TIER CITIES 3RD TIER CITIES 4TH TIER CITIES & BELOW DATA: TENCENT PENGUIN CHINACHANNEL.CO INTELLIGENCE SURVEY PLATFORM CHINESE MOBILE PAYMENT MARKET SHARE Q4 2016 SMALL PLAYERS OTHERS 7.85% INCLUDING APPLE PAY 1.03% ALIPAY TENPAY 54.1% 37.02% CHINACHANNEL.CO DATA: ANALYSYS IMESSENGER CHINACHANNEL.CO REASONS WHY IMESSAGE IS HARDLY USED IN CHINA 1. NON CROSS PLATFORM: CHINA MARKET DOMINATED BY ANDROID DEVICES 2. EASY TO BE SPAMMED: BLACK MARKET IN SELLING PHONE NUMBERS A SERIOUS ISSUE IN CHINA 3. USER HABITS: LOT OF USERS CONFUSE IMESSAGE WITH SMS OH, AND 1 MORE THING… CHINACHANNEL.CO TIME SPENT ON MOBILE IN CHINA EVERYTHING ELSE 35% WECHAT 45% ACCOUNTS FOR OVER 1/3 OF ALL TIME ON MOBILE! 10% 10% TENCENT OTHER DATA SOURCE: QUESTMOBILE, TRUSTDATA CHINACHANNEL.CO AND HILLHOUSE ESTIMATES TIME SPENT IN WECHAT 2015 VS. 2016 2016 AVERAGE 66 MINS PER DAY 33.9% 2015 4HRS+ MORE THAN DOUBLED 2016 22.4% 20.9% 21.0% 18.1% 16.3% 13.9% 14.2% 14.4% 7.5% 6.5% 3.4% < 10 MIN 10~30 MIN 30 MIN~1 HOUR 1-2 HOURS 2-4 HOURS 4 HOURS+ CHINACHANNEL.CO DATA: QUEST MOBILE (DEC 2016) 50% OF USERS SPEND 90 MINUTES PER DAY IN WECHAT SOURCE: WECHAT TEAM IMUSIC CHINACHANNEL.CO “(APPLE MUSIC) LATE TO THE (CHINA) MARKET WITH AN INFERIOR PRODUCT THAT IS OVERPRICED” ROBERT LYONS, VISITING LECTURER AT NORTHEASTERN UNIVERSITY IN BOSTON, APR 2017 CHINACHANNEL.CO TOP MUSIC APPS IN CHINA, MAR 2017 MILLIONS OF MONTHLY ACTIVE USERS 228.95 211.43 APPLE MUSIC DOESN’T MAKE THE LIST 107.72 62.79 TOP 3 ALL OWNED BY TENCENT 14.4 14.34 11.15 7.29 DATA: QUESTMOBILE CHINACHANNEL.CO * MONTHLY ACTIVE USERS APP STORE CHINACHANNEL.CO THE APP STORE IS APPLE’S ONLY BRIGHT SPOT IN SERVICES CHINESE IPHONE USERS HAVE NO CHOICE BUT TO USE IT REVENUE FROM CHINA’S APP STORE IS INCREASING FAST CHINACHANNEL.CO DATA: APPLE GLOBAL APP STORE REVENUE YEAR OVER YEAR GROWTH 43% 43% 40% 37% 35% 29% 27% 24% 25% “APP STORE MOMENTUM IS TERRIFIC, WITH REVENUE GROWING 40% YEAR OVER YEAR TO AN ALL-TIME QUARTERLY RECORD.” TIM COOK, MAY 2017 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 CHINACHANNEL.CO DATA: APPLE “STRONG PURCHASING POWER AND CULTURAL FACTORS WILL HELP CHINA ACCOUNT FOR A STAGGERING 41% OF MOBILE APP STORE CONSUMER SPEND (BOTH IOS AND ANDROID) BY 2021.” APP ANNIE, MARKET FORCAST, 2016-2021 CHINACHANNEL.CO APP STORE REVENUE DERIVED FROM CHINA (%) 100% 80% ALL OTHER 60% REGIONS CHINA 40% 20% 0% 2014 2015 2016 2021E* DATA: APPLE & APP ANNIE *2021 ESTIMATES ACROSS ALL MOBILE APP STORES CHINACHANNEL.CO ALL DATA IS CALENDAR YEAR. GAMES ACCOUNT FOR THE MAJORITY OF IOS REVENUE ESPECIALLY IN CHINA. 100% 75% NON-GAMES 50% 95% GAMES 75% 25% 0% WORLDWIDE CHINA CHINACHANNEL.CO DATA: APP ANNIE CHINESE MOBILE GAME REVENUE TENCENT ALL OTHER GAMING COMPANIES 49% 59% 53% ALMOST HALF OF CHINESE MOBILE GAME REVENUE COMES FROM TENCENT. 51% 41% 47% 2014 2015 2016 DATA: GPC, CNG AND IDC CHINACHANNEL.CO TENCENT FINANCIAL REPORT “WE HAD EXTREMELY STRONG SERVICES GROWTH DURING THE QUARTER (2017 Q1) IN CHINA.” TIM COOK, MAY 2017 CHINACHANNEL.CO TENCENT’S GAME REVENUE FOR Q1 2017 CHINACHANNEL.CO Q1 2017 WAS DRIVEN PRIMARILY BY THE SMASH HIT TITLE HONOR OF KINGS 50 MILLION DAILY ACTIVE USERS CHINACHANNEL.CO CONCLUSION: APPLE’S CHINA SERVICES ECOSYSTEM IS VERY WEAK WHEN COMPARED WITH OTHER MAJOR MARKETS. THE SINGLE BRIGHT SPOT SEEMS TO BE IN APP PURCHASE REVENUE FROM APPS DOWNLOADED THROUGH THE APP STORE. WE SUSPECT MUCH OF APPLE’S STRONG CHINA SERVICE GROWTH IN 2017 IS BEING DRIVEN BY TENCENT’S MOBILE GAME CATALOG EPITOMIZED BY THEIR SMASH HIT GAME TITLE ‘HONOR OF KINGS’. CHINACHANNEL.CO PART 2 THE TIDE OF CHINESE PUBLIC OPINION IS TURNING AGAINST APPLE CHINACHANNEL.CO STRIKE AGAINST APPLE! ARTICLE FROM TECH INDUSTRY INFLUENCER KESO CHINACHANNEL.CO CHINESE NETIZENS’ COMMENTS “ANDROID DEVICES KEEP GETTING BETTER AND BETTER, BUT I FEEL APPLE LITERALLY MAKES NO PROGRESS. SOONER OR LATER I BELIEVE ANDROID WILL EXCEED IOS” CHINACHANNEL.CO A TRICKY RELATIONSHIP DO YOU WISH WECHAT WOULD DEVELOP THEIR OWN OPERATING SYSTEM? 20K+ RESPONDENTS DON’T CARE 23% YES 52% NO 24% SOURCE: KENENGBA OFFICIAL ACCOUNT CHINACHANNEL.CO ONLINE SURVEY APRIL 2017 A CONFLICT BETWEEN APPLE AND TENCENT OVER A REWARD FEATURE FOR CONTENT CREATORS LED TO INTENSE DISCUSSION ONLINE IN CHINA.