India, China, Snowden and Accelerating Cyberbalkanization
I wanted to go ahead and send out early this week given it’s Polling Day in Singapore tomorrow. Please enjoy and have a restful weekend.
This week on Emerging:
India’s app ban, the Snowden revelations, and accelerating Cyberbalkanization
China’s tech paradox: they have their cake, but can they eat it?
Winners & Losers entering a decade of techno-nationalism
A black and white internet begins to grey…
In Deglobalization - Customer Amortization is the New Blitzscaling, I touched on how the geopolitical backdrop has shaped today’s internet companies. The U.S. hegemony of the 90s and new millennium paved the way for blitzscaling under an open, market-based, liberal world order. Rising nationalism is now reversing those trends which will have important implications not only for internet companies, but the internet itself.
India’s recent ban of 59 of China’s most popular apps is a telling precedent.
The ban foreshadows how geopolitics and technology will be ever more intertwined going forward. Not only is the liberal world order in retreat - from ideals, to immigration, to capital, to free trade - the pre-ordained notion that “information wants to be free” is coming under fire.
Cyberbalkanization - or the splitting of the internet into spheres based on policy, firewalls, and splintering technological standards - is accelerating. Pre-2013, the internet landscape was largely global with the exception of China’s Great Firewall. However, in June of 2013, the Edward Snowden leaks revealed the extent of the NSA’s global surveillance apparatus.
The now widely-reported revelations include programs such as:
PRISM - a program under which the NSA collected internet communications from various U.S. internet companies - including Microsoft, Yahoo, Google, Facebook, YouTube, Skype, AOL, and Apple
Boundless Informant - the NSA’s big data analysis & visualization tool providing summaries of worldwide metadata activity
XKeyscore - an analytical tool for broad data-collection and surveillance which, according to Snowden’s Jan 26th 2014 interview, was quite comprehensive in scope:
"You could read anyone’s email in the world, anybody you’ve got an email address for. Any website: You can watch traffic to and from it. Any computer that an individual sits at: You can watch it. Any laptop that you’re tracking: you can follow it as it moves from place to place throughout the world. It’s a one-stop-shop for access to the NSA’s information…”
Obviously, this was in the name of national and global security, but still, scary stuff.
Allies were not exempt as documents revealed the U.S. had kept tabs on Brazil, France, Mexico, Britain, China, Germany, Spain and at least 35 world leaders, most notably German Chancellor Angela Merkel.
The extent of the allegations clearly impacted how other powers thought about national and information security. The global benefits of the U.S. internet contribution far outweighed the costs. However, the implications were clear. The centrality of the U.S. telecommunications infrastructure & internet companies allowed it a privileged position from which to secure its national interest. The Snowden leaks revealed the extent of the overstep and catalyzed a push toward internet norms and infrastructure which would better reflect national sovereignty.
For those interested, this post from Skycoin goes deeper on Cyberbalkanization and details the initiatives foreign governments are exploring to assert their information sovereignty. From China’s Great Firewall, to Russia’s 2015 attempted independent internet for the BRICS, to Europe’s regulatory crackdown and the now infamous GDPR regulations, political bodies are pushing back against U.S. government and tech company excesses in cyberspace.
The once global and free internet landscape is beginning to crack along national borders.
Although an extreme case, China is the precedent. The nation has walled off its own internet from the rest of the world, restricting information flow, censoring content, and refusing market entry from foreign (mostly U.S.) firms.
In light of the recent ban, China is now getting a taste of its own medicine. The same protectionist tactics which allowed China to build national champions and a thriving domestic tech ecosystem are now being used against it.
With a population of 1.4 billion and rapid increases in connectivity, India is the next China internet growth story. A growth story which Chinese tech titans have been making strong in-roads to serving. Chinese tech titans’ push into tier III and IV Chinese cities have primed them to serve customers across the Himalayan border. Low-cost Chinese smartphone manufacturers command 80% of the market in India, and Chinese app developers have followed their lead across the border. According to Sensor Tower data, Chinese apps accounted for 44 of the top 100 apps in India’s Google Playstore in 2018, up from just 18 in 2017 and a total of 4.9 billion downloads since 2014.
Clearly, expulsion from the world’s largest future internet base is a blow to Beijing’s ambitions of competing with the U.S. for tech supremacy and influence: a market where they were previously well-positioned:
China is in the awkward position of wanting to birth global tech champions after decades of protectionist, closed-off policies at home in the name of security. To have its cake and eat it too. If forced to choose, my sense is the latter will be prioritized at the expense of the former.
India Opens Pandora’s Box
India’s ban sets a significant precedent. Sure - most governments around the world resort to blocking nefarious content and many - including China, Eritrea, Ethiopia, Saudi Arabia, Iran, Syria, Tunisia, Vietnam and Myanmar - have aggressive censorship. Furthermore, the “localization” of global internet firms like Facebook and Google often involve tweaking the algorithm to reflect not only local tastes but also regulations meaning global internet company products are experienced quite differently across borders (or even across the street).
However, the world’s largest democracy leveraging digital market access as a political tool may represent the shift from censorship - generally implemented by autocratic regimes - to nationalism’s arrival in the digital sphere.
Nationalism is on the rise across the globe - regardless of government-type, culture or professed ideals. It only makes sense the most powerful trend of the decade would impact the most important frontier of our time: Cyberspace.
Whenever the status quo shakes up, there are winners and losers.
Winners & Losers
It remains to be seen whether India’s move is an outlier or foreshadows a shift in government attitudes toward information sovereignty & market access. Most countries do not have the leverage of China or India when it comes to demographics, but we are likely in the early innings of a shift to more protectionist internet policy globally.
1) Indian Tech Ecosystem (long-term)
Yes - in the short term, the ban will make life tougher for many Indian entrepreneurs. Chinese investors have backed 92 Indian startups and 18 of 30 Indian unicorns including titans like Paytm, Byju’s, Oyo and Ola. India’s ban may cause Chinese investors to pause, drying up a significant source of funds in a market where foreign investment is still crucial to sustain large growth companies.
However, a ban on apps is not a ban on capital and the same argument could have been made about China rebuffing U.S. tech years ago. Given its sizable domestic market and pool of tech talent, India is likely the next best positioned country on earth to nurture a thriving domestic tech ecosystem.
In line with the above, the regulatory blow to Chinese competitors is not only a boon to up-and-coming Indian entrepreneurs but to the incumbents, both local and international. Formidable opponents in eCommerce, news, video, chat, social, and maps with significant market share have been forced to leave the market at an important inflection point in India’s winner-take-all markets.
You can bet Facebook, Whatsapp, Flipkart, Jio Platforms and others are going on the offensive, copying products, solidifying network effects and ecosystems which could lock out Chinese counter-parts for good.
Clearly this, similar to most protectionist policies, hurts the Indian consumer. As reported by Techcrunch:
“The ban robs Indians of consumer choice, in the short term. The banned apps include many of the most popular in India today. Apps like Tik-Tok, Likee Shareit, UC Browser and Helo have penetrated rural India…
Meanwhile, Silicon Valley’s Facebook, Twitter and Instagram remain the stronghold only of the urban elite”
Driving out competition always leaves consumers with higher prices or more limited choice. Sadly, the consumers most impacted by this ban are India’s most vulnerable who favored Chinese products better suited for lower-end users.
2) U.S. Entrepreneurs and Growth Capital
I’m a bit torn on this one. On the one hand, U.S. companies will benefit from a lack of Chinese competition and further embed themselves in the lives of Indian consumers. However, this could just be the first engagement in a multi-front war. Given their global presence, U.S. tech companies have by far the most to lose from a rise in techno-nationalism. The risks are lower in smaller countries without domestic markets or tech talent comparable to India or China.
However, the cat is now out of the bag.
Is it possible that Indonesia, Brazil, Nigeria, and Pakistan - the #4 - 7 countries in terms of population - are now re-evaluating their foreign policy toolkit? Certainly. The India ban may set a precedent introducing additional friction for Silicon Valley’s global ambitions. Whether regulatory / tax driven in Europe, censorship in China, or economic protectionism, layers of friction are creeping into previously seamless multi-national, digital operations.
While it may not happen over-night, the a16z’s and General Atlantic’s of the world may need to rethink the Series D+ underwriting assumption that the Silicon Valley champion will have automatic access to a global TAM (ex China). The next wave of Googles, Facebooks, Paypals, and Twitters is likely to have a harder time expanding internationally at the same time the GDP of the internet is shifting away from the U.S.
3) Chinese Tech
Clearly, this is a negative development for Chinese tech firms and by corollary Beijing in its push to match U.S. influence. Many would point to Chinese tech’s more limited operational footprint outside of China to suggest a more narrow focus on its massive home market. That is a mistake.
Chinese tech champions are global empires. However, they are more subtle than their US counterparts, often preferring minority investments.
Map of Tencent Investments Globally (technode):
That said, Chinese tech champions have reached a stage of maturity where they are now willing to push beyond their saturating home boarders in pursuit of a global audience. Ali Express (BABA), TikTok (Bytedance), Xiaomi, and Huawei are just a few well-known examples signifying China’s arrival on the global stage.
However, my sense is many of China’s tech champions will run into a conundrum as they expand abroad.
First of all, while the U.S. government is no saint when it comes to data privacy, the only government as capable and more entrenched in its data collection efforts is China. While other nations are now wary of the U.S. espionage, inviting Huawei with open arms clearly does not eliminate the concern.
Secondly, similar to how U.S. firms have had trouble operating in China given a divergence of company stakeholder values and local regulation, the Chinese companies will run into the inverse issue.
On the U.S. side, Google’s ~15 year tango in and out of China is a good example. The recent termination of “DragonFly” - a China-aimed, censored search-engine has been terminated after employees came out against it. In a letter titled “We are Google Employees. Google Must Drop Dragonfly,” passionate Googlers protested the product on grounds of human rights violation. This is far from an isolated incident.
I imagine companies like Bytedance (Douyin / TikTok) will face the inverse issue abroad. Excluding a potential U.S. regulatory ban, what happens when US users create clips critical of the Chinese Communist Party? And claims continue to mount critics are being censored?
Or cross-border Zoom meetings between U.S. and China violate CCP censorship?
These are hard issues that are unavoidable. The views of the US and Chinese governments and populations around freedom of speech are diametrically opposed. Attempting to straddle both and pleasing the constituents of both sides may be impossible.
The more interesting question is what happens in other markets which will serve as a proxy between the two worldviews. The previous: black & white, open vs closed, China vs US internet policy is now blending towards 50 shades of grey.
Notably, India is striking at China and pushing closer to the US, largely using Chinese tactics. I’m not sure who really wins here.
This appears to be a win for the U.S., but a loss for American values in cyberspace. Though to be fair, as the early mover, American values in cyberspace meshed nicely with American interests over the last three decades.
Countries are starting to realize their interests may not be as aligned.
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Prior posts can be found at emerging.substack.com