Those of you who are familiar with HBO’s Entourage TV series – the day-to-day life of Vincent (Vince) Chase, a hot young actor in modern-day Hollywood, and his group of miscreant friends (the Entourage) – may remember the episode title “The Sundance Kid” where movie studio big wig Harvey Weinstein casts Vince as the lead in a surfing film he’s producing. After initially accepting the role in Weinstein’s film, Vince drops out to pursue James Cameron’s “Aquaman” throwing Weinstein in one of his legendary spitting temper tantrums.

Try, if you will, to envision Weinstein’s “condition” after discovering the new Michael Moore docu-drama, Sicko, Weinstein Co produced was bootlegged (ahead of its June 29th release date) on YouTube over the weekend. Well, hell have no fury like a pissed-off Weinstein.

And how did writer-director Michael Moore, known for his disdain for copyright laws, react to the news? According to a June 18, 2007 interview with Brandweek’s Steve Miller, Moore said that despite the Internet ripping his new film…

“[…he disapproves of copyright laws. It’s a stance] I’m sure is different than that of Harvey and Bob…I think the music industry’s response to Napster was misguided … and for me, it’s about getting people to see the movie and that’s what I want, so they will talk about it…I would never want to prosecute anybody who would download it…”

For the record, Ymer does not condone illegal file sharing however we are adamant that the existing pay-for-content model is dead. Weinstein and his fellow movie titians can either learn from the mistakes of the music industry and work with independent distribution channels, such as YouTube, to create a payment platform that leverages the viral natural of “good quality content” or not – the equivalent of the latter is losing just about everything.

Our views echo our desire to work with and support co-founder Eric Priest and his team at Beijing based Feiliu. While not revolutionary in design or concept, their business model of blanket content licensing, monthly subscription, unlimited sharing/usage and usage-based payments to content providers is, in our opinion, the most balanced and practical model we’ve seen in the market.

Some have argued that “digital music is a very difficult space to monetize” and a start-up in this space without a “massive user-base” will get crushed under the weight of industry leaders however what the public and investors are overlooking is the fact that content owners are less than excited about doing deals with established players given their less than stellar record on IP protection.

Indeed, this includes China’s leading Internet venture, Tencent, as it now faces several lawsuits from leading Taiwanese music label Rock Records. And therefore content providers will, by default, turn to independent enterprising companies, such at Feiliu, and their spotless IP track records.

There is a short article in today’s Wall Street Journal titled “Danone searches for fix in China” by James Areddy discussing the Wahaha Danone conundrum.

What is going on here? How could Danone, a weathered China hand, allow itself to get snarled into a category one China trap generally reserved for newbies? Exxon Valdez, anyone?

Indeed, the answers to these and other mind throttling questions are but a paragraph away. Journal reporter James Areddy writes:

“According to Emmanuel Faber, president of Asia for Danone…in the past, Daonone relied on Mr. Zong to run the business, additng that the French company’s own involvement rarely amounted to more than a helicopter view of the operations.”

Dah!? Someone’s head is going to roll…anyone, anyone? Bueller…Bueller?

Come on guys – China business 101 – Never Leave Your Wingman!

In other words, never leave your JV (or local partner, investee, etc) to their own devices – out of sight is out of mind. China’s an interesting place in that, money/capital, while viewed as an important commodity in other nations, only gets you in the door – it doesn’t ensure you’ll see any return or have rights to information – sadly, you’ve got to earn that.

And by earning it, we mean you’ve got to fight for your right to participate in the business – how is this done? Simple – show up for spot visits, help craft sales and marketing strategies, introduce your local partners to other locals/foreigners, crack open the books every couple of months and perform your own audit, follow the products through their distribution channels and into the hands of the end-users – what every you do make sure you do it in a constructive, unintrusive, visible manner – but do something.

It’s unlikely the Danone case will echo into eternity but it does make you stop, scratch your head, and think…maybe I should be booking a site visit next week!

Over the past couple of weeks, we’ve been receiving wave after wave of business plans for Global Positioning System (GPS) related ventures – not entirely sure what is driving this sudden surge in cases but there you have it. Indeed, the odds-on favourite for the number one reoccurring business theme is:

“We’re China’s leading GPS software application vendor developing navigation and Web2.0 compliant applications and in search of US$2 to $5 million”.

Coupled with each offering is a competitive analysis whereby software ventures are championed and hardware ventures trashed. Not surprising – hey man, big upside over here, give us some cash – their motivation is obvious. Frankly, it ain’t that simple of an argument– the GPS industry is evolving rapidly, outside of China, and for once, we sense that China’s GPS industry will not adopt Chinese characteristic (the way Baidu and Tencent have) – um, go back, of course there will be some localization but this will happen to the extend that Chinese characters replace English, French, etc (and the minor bells and whistles) but by and large we don’t see much room for this to happen. In its place we see vertical integration theming its way nationwide.

A casual observation of China’s GPS universe reveals definitive gaps in the pro-software argument (“hey man, big upside over here, give us some cash!”) – the “hugest” being that fact that the H.M.S. GPS has already set sail – at least, for this cycle. Quite frankly, Chinese and foreign GSP ISVs, both large and small, too numerous to count, have built (circa 1997) substantial beachheads on China’s shores – the most successful Chinese ventures (just a handful) partnered, early on, with major technology companies and telco providers, such as IBM and China Unicom which helped them go to the head of the venture funding line whereby millions of dollars have been doled out by international and local vc funds, such as SAIF, Gobi and Oak Investment Partners (sadly, Ymer was not one of them).

With fresh funding and strategic partnerships these first movers have quickly moved up the value chain, offering sophisticated navigation engines and tools, nationwide map databases, and proprietary value-add networks (e.g. highway sensors and tags relaying traffic information). Given the fact that the demand side of the curve has only started inching up the scale, it reasons that a young enterprising start-up will find it extremely challenging to increase its footprint until such a time that demand outstrips supply. If you consider that there is only one dominate (virtual monopoly) mapping company in the US (Navteq) and one in Europe (Tele Atlas) it become clear the difficult new entrants face in light of China’s well funded incumbents (Lingtu, Careland).

Those in the pro-software camp fade GPS hardware investments largely because they claim the industry is over saturated, highly fragmented and competitive environment. However, I’m a bit uncomfortable drawing such definitive conclusions when the industry in its infancy (i.e. China accounted for about 3.5 – 4% of total global unit sales in 2006) and positioned to benefit from the convergence of mobile device market, rising in-car GPS penetration, and heightened recreational use.

On the contrary, highly fragmented and competitive industries tend to be fantastic opportunities for existing players with means to control their own destiny – the idea being to identify and then inject sufficient capital in a market leader, structure a well articulated and thought-out business strategy, look to roll-up (consolidate) smaller (synergistic) competitors, build strategic partnerships with other industry leaders (vertical integration), and then throttle up your execution machine (experienced management team).

However, how many GPS hardware players are out there suitable for venture funding – the equivalent of a handful, at the most.

Even so to suggest that an investment in a GPS ISV vendor trumps a similar investment in a GPS hardware vendor (largely because of the operating environment) may be off-center and is slightly ignorant of the dominant trend playing out in the industry.

Convergence – that’s the ticket. The GPS value chain is melting and evolving – the top 5 GPS vendors (accounting for 70% of global market share) now have capabilities in software development, chipset design (e.g. Garmin) and module/end-product production/design. And therefore, it becomes rather clear that as the industry matures in China, the leaders will be GPS vendors with vertical integration know-how and capabilities (either in upstream chipset design or software navigation engines) will lead their peers in terms of both technology innovation and product positioning.

To the point, some of the most innovative GPS software solutions are developed by leading vertically integrated GPS vendors, such as TomTom’s Map Share technology. This unique mapping technology allows users to easily and instantly improve existing maps as soon as they identify changes in the road network, for example a smart interface allows users to change street names, unblock or block-off streets, identify one way streets, etc. Furthermore, as TomTom’s mapping system is dynamic, all updates are shared with TomTom’s 10 million users (i.e. community).

This is exciting stuff – the next step in further developing this community is to overlay additional information, similar to what US based community site Outside.in does with localized information generated by users.

Earlier the week, venture capital fund KPCB led a consortium of existing shareholders in a US$13 million Series B round in Beijing based UAA – this comes three-months after Series A closed in February.

KPCB enhances an already impressive list of world class investors and industry leaders, such as Legend Capital, Cross Country Automotive Services, and, dear we say, Ymer Venture Capital.

We expect great things to come of this partnership – as should Chinese consumers!

Ethan Smith from the Wall Street Journal filed an article titled “Listen to music free, buy pay to carry” which is about a new Palo Alto, California-based music distribution portal called Lala Media Inc. The way the service works is that visitors to Lala.com can listen to streamed music (through a normal web browser) from Warner Music’s digital catalogue for free however if they so desire to download and cart the music away they must purchase an entire album. Smith writes:

“It’s like a subscription music service, but without the monthly subscription fee. Lala is betting that in return for getting all that free access to music at home, listeners will pay to buy the songs they want to take with them on iPods and other music players. Lala, whose owners include Bain Capital…is underwriting thr free offering by paying major labels $6 to $8 a user each month, about the same wholesale rate paid by online music subscription services like RealNetworks Inc.’s Rhapsody.”

To be fair – it is a clever idea. I particularly like the site as a music “discovery site” and the way the platform is device agnostic (i.e. mobile phone, iPod, etc). Though that is where my love affair with the site comes to an abrupt halt. What bothers me is that the music is streaming, quality is poor, you must purchase the complete album, and you’re still beholden to some form of DRM.For the record, I’m coming at this proposition slightly biased in that we have been working with Beijing-based Feiliu Media for several months now as they prepare to launch their content platform in September at Tsinghua University in Beijing, PRC.Feiliu’s business model is quite unique in that it not only provides a blanket content license on its content catalog but also tracks content usage – thus allowing users unlimited freedom to share music, video, etc while fairly compensating content providers.We believe the hidden gem in this platform is not so much in the “professional” or “industry” generated content, but rather in user generated content – to whit, Feiliu will be the first platform in China to compensate students, bands, whoever, with cold hard cash for their original work. Quite frankly, this is going to turn the business of collecting user generated content on its head – how can China’s incumbent video blogs, file sharing, and content aggregators compete with a site that pays users for their content? They can’t because they neither track usage nor earn an upfront fee from end-users – all existing sites are ad revenue models which are highly dependent on a high volume of free content.Feiliu’s CEO, Eric Priest, elaborates:

“On the music side, we deal only in full-track downloads, which no one has ever been able to make any money from in China, so most don’t seriously pursue that business. We don’t do ringtones at all, and we don’t add another intermediary to the existing online structure of SPs, etc. We’re a complete platform that deals exclusively with internet service providers (of which there are three in China: CERNET, China Netcom, and China Telecom). Our licensed content is served up via our platform and user interface with loads of rich value-added features like recommendation engines and social networking tools to help people discover new media.We serve up not only music but video and documents as well, including educational materials (English lessons, Harvard lectures, TOEFL classes, etc.). We provide this complete platform for a small fee bundled into every user’s monthly ISP access bill, so we are paid by the ISP, not the user. In return, we license the whole network to freely download and share the content in our system. In order to fairly divide our content revenue pool among copyright owners, we count not just downloads but also plays and copies of each media file, accumulating the most detailed and extensive data on user media consumption in the world. End users can upload user-generated content into our system, promote it among their peers through our platform, and get paid a portion of total revenues for each time the media is watched or listened to. Imagine how important that feature will be on college campuses among bands and student filmmakers.”

In short, Feiliu provide ISPs with the technology and licensed content to serve up all the best content in exactly the way users want it–high quality, reliable, fast, no technological restrictions, in an attractive online environment that helps you smartly navigate content and discover new things you like. What if users prefer to download their content from illegal sites and use a player different from ours? No problem. They are still paying the bundled content fee to the network, which Feiliu still collects and distributes to copyright owners, and Feiliu can still log those users’ content usage because their counting technology is entirely player agnostic, and they need not get the file from Feiliu. Once they have it, Feiliu ID it, count it, and pay the copyright owner.We’re confident there’s no one in this space doing anything close to this business model.