DrunkenBlog

El bloguero cervecero (Part 1 of 2)

English-speaking users have gotten more than their fair shake of the internet as a whole, and frankly I love it. I was born somewhere else, and the few years of a foreign language I was forced to take in school have rapidly dissipated from my brain as every year goes on.

Part of me is wishing I'd paid more attention to those classes, but the other part is grateful Americans are allowed the luxury of just not paying that great of attention to other countries unless we're heading there as tourist.

Luckily, a hella lot of foreign users are forced, through sheer practical circumstances, to pick up some English. In some cases a country might have a whole bunch of languages, and English is the one they can all agree to use for transactions.

In others, it's the sheer necessity of dealing with the outside world... which more times than not is going to involve some influence from the USA. I know that in a lot of countries where I have friends you're able to get a much better job if you know English. There are more, but that's just the way it is.

For a whole host of reasons, those of us here in the USA have gotten the big end of the stick... English has been the defacto standard of the Internet since its inception. It started here, it grew from here, and most of the infrastructure was here. It still is, and in many cases English is going to continue to be dominant simply because of the logistics of how many languages there are. But the infrastructure situation has changed, and if you can think of the Internet has having a user base, that is changing rapidly and will continue to.

A few posts ago, I mentioned how the broadband situation in places like Europe (I'm sorry Australia, I know it completely sucks for you too) is behind where it is in the USA (someone can fill in fun infrastructure snafus from places like France here) but that's catching up. America, for the sheer density issues it has that most others don't, isn't actually doing all that bad in terms of access. Even broadband.

Things like Wi-Max will change that even further, but there's just about everyone knows the American market is about tapped out in terms of growth. Apple is lucky to see 6% growth in unit shipments as a whole, with some products going down and others going up. The computer industry as a whole is lucky to see 15% growth.

Places like China are seeing 25-40% growth, and while there will be stops and starts, 'they've only just begun'.

A large chunk of China and other countries who are acting as farms for the rest of the world has come from their burgeoning industustrial sectors. People go over there to setup stuff to build stuff, and they need computers. Call center people need computers. This isn't to say that consumers in these countries aren't buying and using computers... they've really only just begun.

Less than 5% of the world's total population lives in the USA, and around 70% of them are part of the online world in some form. When it comes to the entirety of the rest of the world, less than 15% of them are. And of those who are online, you might be surprised at just how much of the world accesses the Internet through shared computers at a cafe.

There are a whole host of countries with a greater than 50% penetration rate, but only 14% of the top 50 have a population of over 20 million. Iceland is neck and neck with the USA, but has 300,000 people. Sweden has a higher penetration rate, but has 9 million.

South Korea, with a penetration rate a bit below ours, has 50 million people (as an aside going back to an earlier post, due to their broadband everywhere roll-out, and a lof them using Windows... a disproportionate amount of hack attempts and spam comes from there). I get emails from people from New Zealanders all the time, who have a healthy penetration rate... but about 4 million people.

One of the really interesting about all of this is many of the more populous countries have the worst penetration for technology in general, let alone Internet usage. That's easy to say, but let's hit this closer to home:

(note: some of these are rounded, and rough)

China

• Population: 1.3 billion
  
• Penetration: 7%

India

• Population: 1.1 billion
  
• Penetration: 2%

United States

• Population: 300 million
  
• Penetration: 70%

Indonesia

• Population: 220 million
  
• Penetration: 4%

Brazil

• Population: 179 million
  
• Penetration: 11%

Pakistan

• Population: 159 million
  
• Penetration: 1%

Russia

• Population: 144 million
  
• Penetration: 4%

Bangladesh

• Population: 141 million
  
• Penetration: 0.2%

Nigeria

• Population: 137 million
  
• Penetration: 0.5%

Japan

• Population: 128 million
  
• Penetration: 52%

There are interesting aspects that these facts don't accurately represent, but you can get the idea. To make things scarier, the USA and India are expected to experience similar growth rates between now and 2050. I.E., China and India will have almost 650 million more people hanging around in less than 50 years, the USA will have around 120 million more.

Where it starts to get a little wiggy is when you realize that China, with it's much lower adoption rate, is already number two with 88 million users. The USA is hanging out at number one with 200 million, but a big difference is in the growth rate. From 2000 to 2004, the USA had a user growth of 111%, while China and India had 287% and 270% respectively.

While that is somewhat to be expected because of how low their numbers are to begin with, stop and think about what, with their population sizes, a growth rate just matching the USA's will do just a bit into the future.

People have talked about China being the 'sleeping giant' since the days of Napoleon, with the idea being that while they had a relatively enormous amount of people it hasn't meant all that much in the modern world. Think of them as a create having a gigantic body, but with a tiny mouth.

The big thing to recognize is that even though your PowerMac G5 is manufactured in China (under conditions we probably don't want to think about) very few people in China are actually using a PowerMac G5. The IT economies of China, India and some other players haven't really turned inward yet. They're primarily built around serving 'The West'. But they will turn inward as their own infrastructure grows and more comes online, and it's already starting to.

You may have noticed that IBM recently sold off its entire PC division to a Chinese company... the largest PC maker in China. What a lot of people didn't pay attention to was:

• The profits IBM made from its PC division as a whole were dwarfed by what it brings in from its various services divisions. We're talking a few percent of revenues because of the slowing domestic growth and very thin margins. It's a company now very much built around integrating technologies and solutions. They bought Price Waterhouse Coopers for a reason.
• While China's and others' computer growth rate is higher than say, the USA and Canada at the moment, the margins and competition is already very cut-throat, with Lenovo selling $350 USD PCs. Dell and others are doing OK there, but even they are trying to stay out of the low end.
• Lenovo got IBM's PC division for a damn song, but IBM got an 18% stake in Lenovo. This is extremely important for its much more profitable services focus, especially as China grows and why the Apple stuff being bandied about was just amusing. Yes, there will hopefully be a ton of Apple hardware being sold in China soon, but it'll be because HP is supposed to start selling iPods there after it returns to China from its previous withdrawal.

A few posts ago, I mentioned that I believed Linux would be gaining share pretty quickly, and it would probably end up happening overseas first if it didn't here. This is something a lot of people are talking about, mostly because it makes a hell of a lot of sense. I'm not sure many realize just how quickly it can happen, though.

The idea goes like this: when you are selling a computer for $1,500, and the hardware maker bundling the OS is paying ~$50 to $70 OEM, that's less than 5% of your gross cost. However, when that computer costs $350, that's 14-20% of your gross cost (this is a lax example, don't go trekkie on me).

In a market that cost-conscious, and with margins that cut-throat, everything depends on volume. And every cost you can squeeze out or down gives you a competitive advantage. You can then either pocket that extra margin, or you can charge $280 for your product and hopefully increase your volume while making your competition cry.

And once you've squeezed the hardware down as far as it can go, your eye is going to turn to the software.

Things like off-shoring help a company like Microsoft in a number of ways, but a huge one is helping to set the defacto standard. As mentioned, the IT economies of some of these burgeoning markets primarily look out outwards, and if you're going to interact and service the outside world, for the most part that means Windows.

This can have a beneficial reverb: If the larger businesses are passing '.doc' back and forth, chances are they're going to want to pass the government '.doc', who will need to be able to use '.doc', and will then try to pass '.doc' on to other companies, including the local companies who otherwise might not normally care what people across an ocean are using.

To anyone dealing with clients, this shouldn't feel like too foreign of a concept; unless you have an unusual demand for your services, you have to accomodate what your client is giving you. If you're one of these countries, and your predominate IT focus is outward, your predominate IT focus involves Windows. That simple.

Which isn't to say this is all peaches and cream for Microsoft. If you stop by Kyrgystan you'll find that while they have a 3% Internet penetration, all of their computers are white-boxes brought over from China and loaded with pirated software they picked up from their local market for pennies on the dollar. In most cases this isn't because they're cheap, they just simply couldn't afford it if they wanted to.

Kyrgyzstan isn't exactly a third world country, many of them are highly educated and leading rich lives (not that one begets the other). We're talking a 98% literacy rate, with way too many degreed people floating about, but rampant unemployment.

Unfortunately even buying a car, any car, is far out of reach of most when you can get a highly qualified and certified accountant for USD $500 per month, or around $3 per hour. Or even less, because taxes are so high.

My impression is whatever can be payed on the side is paid on the side as 'grey-salaries', simply because while they're being paid less they're getting home with more. The taxation can be that insane, especially if you're making anything appreciable.

A degreed teacher in these regions is salaried at $100 per month, and your average 3-bedroom apartment costs $200 per month, a computer of your own is little more than a fond dream. And there are plenty of people making $40/month.

The salary gap can't be understated here. It's easy to write a country like Kyrgyzstan off as a post-soviet style relic - an anomoly - but it's actually doing a lot better than most of central Asia. It's easy to write off that entire region, but if we turn our Drunken Eye back towards China we see something like that looks like this:

• China GDP: $6.5 trillion
• USA GDP: $11 trillion

FYI, GDP is 'gross domestic product', and is a measurement of what a country is producing.

China actually has the second highest GDP now, second only to America. Not half bad, especially when you realize it's quadrupled since circa 1980, although if you think smog in any major American city comes even close to the polution you'll find in the major Chinese cities you have another thing coming. We're talking waking up and finding your white things have turned gray.

I spent some time living in a loft above the corner of very busy intersection in Chicago awhile back, and if the windows were open on sunny days, you'd find that things around the apartment would pick up a nice 'black dust' from all the exhaust of the trucks carrying their cargo into the city. Like that, only 20 times worse.

Those shiny G5s come with a higher price tag than the one on the box.

And here's the rub about the Chinese GDP: America's GDP is still almost twice China's, but China has over a billion people.

Per capita, or per person, that GDP starts to get spread pretty thin. China's per capita GDP is about 13% of the USA's, meaning the wealth is heavily concentrated in regions and the people in them.

Of course America has its millionaires and billionaires, but as a cross-section of the whole, the majority of the people at the bottom and middle are light years ahead of where China is at the moment. 'Seriously concentrated and regionalized' is probably not doing the issue justice.

Per capita income in urban areas is a bit over $1,000. It's less than $350 for more rural areas, which are generally agricultural-based. It's very frequent to find factory workers making $0.15 to $0.30 per hour ($50-100/month, usually on the lower end). In some ways, this just isn't a fun place. The government itself has a distinct interest in helping labor prices stay low in order to keep its place as the "World's Factory". This is changing, albiet slowly, but it's there.

However, there are two big things to watch here:

The USA does, at the moment, have a GDP twice the size of China's. Unfortunately China's growth rate is more than double that of the USA's (4% versus 9%), and it is not going to be long until America is surpassed altogether.
• China is estimated to have a labor force of almost 800 million, while the USA has 150 million. Automation, technology, etc. have seriously boosted American productivity. These are still just starting to touch aspects of Chinese society. Once productivity starts to shoot up in China, things are going to get very interesting.

Microsoft isn't making a whole lot of money off of these places, but with some of these markets growing as quickly as they are, eventually there will be money. And the money will be there - the biggest thing that should be sliding into your head is the sheer amount of headroom some of these markets have for growth.

I'm using China as an example, but it applies to others. We haven't even mentioned Africa, which is practically still dark to the web, or other broad swathes of the world. When you're talking about this many people not online, one percentage point of growth is a huge amount of people.

But it's much more than that, some of which we covered by talking about the Reverb effect. What we haven't talked about are the dangers inherent with what's going on, what happens if a market is facing inward instead of outward, and how this all relates to Mac OS X and Linux.

 Posted by drunkenbatman
    December 13, 2004, at 08:13 AM