Decrypted is brought to you by red Hat, whose broad portfolio of open source technologies for the enterprise helps you get from where you are to where you want to be. Red Hat the open technology to help you realize your vision. Learn more at red hat dot com slash open tech. Back in early Lei Shan was just another overworked magazine
editor in Beijing. He was working for a Chinese financial magazine, his latest job of many type the magazine process, as you know, the production process is very long, from interview to writing and printing. It takes a long time. As you can imagine, there's always delays involved. I always felt like I wasn't in control of that. I'd have to stay up late into the night to finish the magazine.
Just a few months later, Lee's life would change. He decided to start producing a business newsletter on a brand new app that was sweeping the country. In just a few months, that app, The Adult, went from being brand new to attracting millions of users. That name translates to mean I get in English. People go there to get daily advice and learn everything from music to economics. Yeah, it's a bit like Corsera and other online education services
in the US. But the big difference is that under now, everybody is paying for what they read and listen to, bringing in money not just for the apps founders, but contributors to the magazine. Editor Lee Shang and his team are already generating the equivalent of millions of US dollars.
Close to one hundred thousand fee paying subscribers. Each of them are paying an annual fee of one remnant B that's close to that's right for ten minutes of content per Lee's one hundred thousand customers pay around thirty dollars each. That's almost three million dollars in annual revenue. And it's made Lei Sian richer than he could have imagined back when he was still struggling with long hours and a salary job at the magazine. And he's not the only one.
In China. Dao was just one of a vast economy of mobile apps where people like Lee Shung can make real money. Hi, I'm Brad Stone and I'm Selina Wang. And this week on Decrypted, we'll take a look at how China has been able to monetize their smartphone apps like no other country. China has dethroned the US as the largest spender on Apple's app store. People, they're spent more than two billion dollars in the fourth quarter alone.
Now that's just a fraction of the total money China's consumers spend on apps, since most people there have Android devices. Much of this has to do with how China has figured out how to make money from news, entertainment and social media in a way that the U S still hasn't, by making people actually pay for it instead of relying
on advertisers. China still has a reputation as a copycat of the West, but really it's Silicon Valley that's now scrambling to learn from the successives we've seen here across the Pacific. Selena, the Diao app now has seven million users and the service is only about a year old. Tell us what it looks like. It's a pretty clean looking app. You can easily subscribe to channels with content on topics like investing tips, or how to listen to
classical music, or even books and magazines. And this is gonna make me really jealous, but people actually pay to subscribe to these channels. Yes, you heard that correctly. None of it is free. Each channel costs the equivalent of about thirty U S dollars per year. It can curate content for you as well. There's even a portal to an e commerce section that sells products like books and high end jewelry, and part of the subscription fee goes
directly to people likely who create the content. Some of the columnists have even become millionaires, reasoning that they opened up column by an economics professor from Picking universident. Guess what, in just that month there are hundreds of thousands of subscriptions with a two hundred of buck ish so, which means this problems are generated therein a million. Okay, I am in just a month, he become the richest economists. Okay,
economics reaches you know. That's Bob Shuhao Ping, who is one of the early investors into a doll and also happens to be the most successful angel investor in China. I spoke to him at a conference. Bob's venture capital firm, called Zen Fund, has made bets on hundreds of startups, some of which are now worth more than a billion dollars or publicly traded companies. So presumably Bob has a good idea for startups with potential. Yes, And I asked Bob why he decided to back Lord's He's the man
who founded the dud app. We used to to look at the founder's profile for education side, for experience side, but the most important point to see is there as do they have whatever it takes to do? What do they want to do? So here's a bit on Lord zung you story. He was a TV producer before he started Logic Knowledge Group in twelve and that's the parent company of the Dodo app. Logic has a very big following, partly because Lord Zung is the celebrity in his own right.
The company's public wheach Had account has nine million subscribers in Lord Zungi has an online talk show that gets two point four million views per episode. Okay, so with all this firepower did that was? Growth is skyrocketing. But Dido is facing a ton of competitions as well, from companies like do Ban who in Shi Malaya right, and not to mention ten Cent, the Chinese internet giant, right, and they all allow official channels to charge users for content.
But Bob, the legendary angel investor, says Dondo isn't simply a promising company that's growing fast. He thinks this company is going to be truly transformative. This is I thought, you know, largest this company actually created uh this revolution. So now there is a heat in China, golden rush in knowledge paying services. Iob has seen a lot in the sixty years. He lived through China's cultural revolution and delivered pizzas before going on to found China's leading private
education company. So it's high praise for him to say, Dadao has started a gold rush in China. Actually, this company actually created a revolution in China. We call it a tru translated, the literary is a knowledge payment. You pay a fee to knowledge. Le Shang, the magazine editor we heard from earlier, couldn't have known how all of this would play out when Lords and the founder of a first approached him about brainstorming different ways that journalists
could get paid for their work. Before the adult Le Shang had worked out a string of different magazines, including the Chinese language version of Bloomberg Business Weeks Now school, Yes, this is my full time job. Now. When I started, I didn't expect as much attention. I didn't tell my friends or Luo gen you. When I started, I treated as an experiments through the process. I discussed with Luo gen You about different ways of providing content without advertise months.
He mentioned the idea of an app that asks user to pay a fee to subscribe for content. The story seems incredible, but it isn't as rare as you might think. Lee told me he knows other journalists who have left traditional news organizations to work for themselves and making content for apps like Dell Adult or the messaging platform we Chat. Just as you know, many of the journalists in China and many of the content producers moved their careers to
new media. On we Chat, it has a free subscription chat. What Lee means they're by free subscription channel is that anyone can set one up. And this trend of paying for online content goes way beyond just education. Video live streaming is another huge area. This is where people watch anything from people singing, telling jokes, are just going about
their daily lives. Think of those random videos you can find on YouTube but happening live and Credit Suite estimates video a live streaming alone could generate about five billion dollars this year in China. The fact live streaming has become so popular means thousands, maybe millions of people are able to earn a living this way. Here's Bob, it's a national past of time. There's this guy for the
year for some man. He spent that literally okay a million dollar on live screaming service, paying too many many minute. We quired a whole hostessess and he appeared that until he said, yeah, it's my way of appreciating them, supporting them. But you know, that's a very unusual story. But a many people would have spending lots of money, spend a fortune. The hostess is Bob's talking about, are just regular people finding they can make a live been talking to or
performing for live viewers. People can watch for free, but hostesses make money because people show their adoration by sending them virtual gifts. It's just so different from how the big internet services operate in the US. It's really hard to imagine Twitter, for example, asking users to pay before they could follow someone. It's even harder to imagine that Twitter users would accept that. In China. Uh, you know, we don't really talk about advertising supported model UM. You know,
whether it's on PC or a mobile UM. There are very few start ups that actually UM growing very big. You know, on the back of just advertising and obviously by dool with such. You know, it's a very classical model. But beyond the search based advertising model, you'll find that most of the large internet companies in China actually grugle or monetized by charging the consumer directly. That's Jenny Lee, a venture capitalist at g g V. I think that the the whole idea of having to you know, look
that d before you can access the video. Um, it's just not a very direct way of enjoying the features. Chinese entrepreneurs, I have to say, they're very practical if they can get, you know, the consumer to pay them directly, I think that's what they're gonna do. You know, in the US, both the companies that make these apps and the content creators would absolutely love it if consumers paid
them directly. Right, But as yet, there aren't many examples of big successful companies that have been able to escape their dependence on advertising. Well, they can know why the Chinese apps have been so much more successful at this than their ad dependent U S counterparts. Right after ironically this word from our sponsor, you know where you want to be? Red Hat has the broad portfolio of open
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to help you realize your vision. Before the break, we learned the Chinese consumers somehow seem to be so much more willing to pay for what they read or watch on their phones. Now, Bob has one theory as to why that might be the case. Chinese people, relatively compared to the US, they are lack awful uh more ways of the entertainment. Okay, many things in the available here in the US maybe not available in China. Bob is
talking about the Chinese government strict regulation of media. That means the type of information and entertainment that Chinese consumers can read or watch as much more limited than in the West. And you also have cultural and demographic forces at work here in China. Tens of millions of young people have migrated to the large industrial cities. They live far away from their families, so video livestream in particular
has become a form of digital companionship. In the US, we think of Facebook Live and Periscope as live streaming tools to broadcast or watch events, right. But in China, many of these streams are people doing very ordinary things like putting on makeup, giving advice, or eating food, and it's enormously popular. Some estimates say that more than three twelve million Chinese users consume live stream video in one
way or another. Okay, so that helps us understand why people are consuming so much of this content, but does it explain why they are paying for it? I think China is su pine the whole um free to play model. In the West, it was always playing um, you know, it was always paying for a time um. And it's it's critical because the whole ecosystem shift one where the product has to be better designed to cater to the consumer, because if they're not well done, if the features are
not appropriate, the consumers are gonna pay directly. Um. And that's key. That was the venture capitalist Jenny And this free to play model that she mentioned is a term that emerged from the world of video games. It refers to the games that won't charge you for playing, but you do get the option of paying for all kinds of things that make the game more enjoyable for you. So they hook you in with the zero dollar price tag, and then before you know it, even the paying for
this and that upgrade. And these games are everywhere in China, and Jenny thinks those games made this act of paying for content seem normal. So now for most people it's just a habit. The rapid rise of knowledge sharing apps like the Adult might satisfy another source of anxiety in Chinese society. There's a hunger of ledge, there's a hunger of quality contents trying. This is Bob, the early investor
in Doda, who we met earlier in the show. So Chinese people in general, okay, they are eager to study. They're eager to enrich themselves not only in money, okay, but also in thoughts, in ideas. I think that there is a true, you know, hunger and my Chinese people to have quality knowledge, quality ideas, satisfying the intellectual curiosity
of China's new middle class. Yeah, and in particular, the venture investor Jenny V said, you know, if you think about the millenniums today, China is over three million millenniums h below thirty five, they're no longer that young, right. This is a this is a population that have graduated. You know, they are in the workforce, some of them, uh, they're married. The cause of leaving in China means that
most of them don't have their own home. Part of that translate into uh, the should continue to invest back into their own learning and education. We'd be remiss if we didn't mention how much the shift to mobile computing has played a role in the way people use the Internet in China. For millions of people in China, a smartphone was their first Internet connected device. They may not have money for a computer or laptop, but companies like
show me we're selling phones at very affordable prices. So you know, when when the mobile phone becomes your only access to the Internet, you actually do everything there, right, because it's it's your point of sale to a certain extend, your point of access to information, uh, to commerce, and you know, to consumption. Now I want to focus on commerce for a moment. China never had an established credit card system like in the US, so with your arrival
of smartphones, China leap frog to mobile payments. That explains the rise of we chat and Alley Pay, which connect your phone to your bank account. Now, some Western listeners are probably thinking, sure they have Venmo or Apple Pay or Google Wallet. But just to put things in perspective, China's mobile payment market is nearly fifty times bigger than
in the US. Ali Pay started out as the online payments processor for Ali Baba's e commerce sites, and we Chat pay is the payment service linked to ten cents ubiquitous social messaging app. These two services operate in a market that's already worth five point five trillion dollars geez.
Just to put this in perspective, for those of us in the US who are used to using messaging apps only for messaging all, this might sound strange, but Chinese consumers use we chat for everything from paying for groceries to taxis to booking manicures. The mobile payment in China proper, it is that most convenient in the whole. That's Bob again, the Angel Investor. You can people even one buck, We got that paying the feet. So people are extremely covetable
using mobile phone to make a payment. So, in other words, China already had the systems and habits in place to make it really easy for people to spend money on these various apps. After all, you wouldn't pay for something if it wasn't easy to do. The latest twist on all of this is that in China, online shopping has started to converge with what we normally think of as
social media. So, Selena, what's the difference here? Why haven't Facebook, Instagram, Pinterest, etcetera been able to get users buying things on their apps. I spoke to Richardly recently. He's the CEO of JD dot Com, the second largest online retailer in China. He thinks that even huge companies like Facebook need to get even bigger to turn users into customers. Only in China, tess and full owned of the social media that they have, they are almost chefs. So I mean Facebook on Amazon
is what he's saying is. Richard thinks that the China model would only work in the U s if Facebook or Google acquired a part of Amazon, so that our incentives would be aligned to boost each other. And that, of course, is incredibly unlikely. It's somewhat more probable that Amazon might acquire or build its own social media tool. But borring that, what's it going to take for American Internet users to feel like spending money on the mobile
amps they have on their phones. It's exciting, Uh innovation only in China. So many of people are not trying to copy it, uh, you know to America. Many Chinese companies, okay, they want to do that scene of things, you know to America. Basically, Bob thinks it will be Chinese companies, not US companies bringing about this change. In fact, we're already starting to see that happen. You know. The one time we use is called KFC. It's a call by which is the Chinese copy from China. Charles Fan is
a ct of Cheetah Mobile. It's a publicly traded Beijing based company that makes utility apps for smartphones. He noticed a few years ago that there was huge opportunity to make money by copying Chinese app innovations and bringing them to America. I think we'll be moible KFC content where something like mobile payment, like live broadcasting kind of the first see site success in China and then and then go to other countries including US. First of all, they're
going to need an acronym other than KFC. But it is interesting because for a long time there was an arrogance in the West around China copying our ideas, not the other way around. And today the fast growing part of Cheetah Mobile's business is its live streaming service live dot Me, which targets the US market. The app only launched a year ago and it already has more than twenty million users and more than two hundred thousand hours
of content stream daily. So it seems like there is a possibility that US consumers are catching on the trends like watching live stream video and paying for at least some form of virtual content. We have proven them wrong, uh, you know, just by by practice. Uh. The in turned out. You know that the scale our population might not be
quite at a level of China. But the the answer to both questions seems to be yes, Yes, there are enough people who are interested in broadcasting and while watching broadcasts, uh. And there are people who are willing to pay for virtual gifts. That said, there are also US based companies that are starting to pick up on some elements of Chinese apps today. I think that there's so much learning between US and China market that a lot of the US internet places uh and companies are realizing that they
need to add that social element. They need to add the gamification element and the whole virtual currencies elements. Now. A good example of this is Twitch, which is a site actually owned by Amazon where you can watch people play video games. It's planning to make it easier for the gamers that stream themselves, these content creators to make money on the site with a feature called Cheering that lets fans buy animated emoticons and send them to their
favorite video game stars. That sounds kind of similar to the virtual gifting that we've seen with the live streaming apps in China. Yeah, and Twitch has already had success allowing its biggest stars to collect not just ad revenue, but also a subscription fee from their viewers, which is
of course shared between Twitch and the stars. What are some other examples, Well, Apple's eye Message has added stickers that you can pay for, Facebook allows you to pay for things inside its messaging platform, and Snapchat has talked about adding premium filters that charge of view. These are all interesting, but none of them have achieved the scale or success of what's happening in China. I'm mean, Brad, do you have a bank account connected to Facebook or Snapchat?
I certainly don't that would be a negative. Although I am more willing these days to use something like PayPal to pay for pieces of content online. And that's true. I mean I have considered now and then maybe switching from Venmo and paying my friend through Facebook. I could.
I could see it happening potentially in the future. It's also probably worth noting here, Selena, that over the last couple of months, some major newspapers like The New York Times the Wall Street Journal have seen tremendous growth in their digital subscriptions. So it does seem like Western are becoming a little more comfortable with the idea of paying
for digital content. Definitely, a lot of these innovations in China are coming as a whole news industry is kind of being upended as we're all searching for ways to make money beyond ads. So I think that a lot of the success is over there, give us some hope
over here. It does seem like the thing that we haven't gotten to here in the in the West was an idea that was very popular early on in the Internet, and that's people paying for micro content for individual articles or in vidual as we say earlier in the in the show programs like live streams. That's the thing that perhaps people aren't quite comfortable with yet. But tell us, Alina,
what's the magazine and editor Lee Shang up to today. Well, I mean he's already pulling in millions of dollars in revenue from just one daily column, so he's really thinking about what's next. Well, we foresee a big change of my team and my company in terms of the content and the business model. Well, our current users are only coming from this one product. In the future, we're looking to launch more products and more programs. Uh, the current
one is just focused on business and opinion. We're exploring other products in the future. And that's it for this week's to crypt It. Thanks for listening. Please get in touch. You can record a voice message and send it to us at Decrypted at Bloomberg dot net or I'm on Twitter at Selena Underscore, Why Underscore Wang, and I'm at brad Stone. Please subscribe to our show wherever you get your podcasts. While you're there, please leave us a rating
and a review. It really helps more listeners find our show. This episode was produced by Pia gadkari Aki, Edo, Liz Smith, and Magnus Hendrickson. Thanks to Nico Grant, who helped with some research for today's show, and to Lilian Chen who helped with Mandarin translation. Robin and Jello edited my print story about the ap economy in China, which you can read at Bloomberg dot com slash Tech. Alec McCabe's head
of Bloomberg Podcasts, We'll see you next week. Decrypted is brought to you by red Hat, whose broad port folio of open source technologies for the enterprise helps you get from where you are to where you want to be. Red Hat the open technology to help you realize your vision. Learn more at red hat dot com, slash open Tech,