The market for software has shifted to the cloud. Using the Internet cloud, software products are no longer delivered as compiled programs installed on physical devices. The software is delivered online as an Internet-based service. This is known as Software as a Service (SaaS).
SaaS works fine when confined to the Internet of a single country or region such as North America or the European Union. The core concept of SaaS is that an open Internet exists on which SaaS can be built and delivered. But what happens when companies attempt to deliver SaaS into a closed Internet system?
That is the ultimate issue in providing an SaaS product in China. SaaS products not approved by the Chinese regulators are either blocked or in danger of being blocked. Gmail, Google Docs, Dropbox, and GitHub are all examples of SaaS products that are always at risk of being blocked in China. For SaaS products housed on servers located outside China, Chinese regulation makes active commercial exploitation difficult.
This applies to new SaaS products. Both IBM and HP are planning to roll out SaaS-based blockchain products. HP even calls their new offering “Blockchain as a Service.” Almost by definition, the blockchain system is intended to be global. But what happens when that service hits the closed Internet of China?
There is essentially only one way to deliver SaaS in China. The system must be housed on a server located in China and be licensed to a Chinese owned entity that has direct contact with Chinese customers.
The China server/China licensee model works like this:
1. The SaaS software is housed on a server located in China. This means the Chinese government will at all times have the right to access the server and inspect the contents of the software and all related data and information.
2. The SaaS service typically must be provided by a Chinese owned entity even though the regulations suggest this entity may be a Sino-Foreign joint venture.
3. The SaaS service is licensed to the Chinese entity in accordance with a very expensive and restrictive set of minimal requirements.
4. The SaaS software/platform has received the required approvals.
It has been difficult for many foreign SaaS developers to accept that the China server/China license model is in most cases the only way to sell SaaS products to Chinese consumers but the major SaaS players have already figured this out.
For example, the developers of video games have always been plagued by pirating in China. Game developers moved to the online model and developed the Massive Multiplayer Online Game model (MMOG), which is a form of SaaS. All of the major U.S. MOOG game developers now deliver their product in China using the China license model:
- Valve Software’s Dota 2 is provided in China by Perfect World.
- Blizzard Entertainment’s World of Warcraft is provided in China by Netease.
- Riot Game’s League of Legends is provided in China by Tencent.
In the field of business software, Microsoft provides its Office 360 and Azure cloud service in China through a license with 21 Vianet.
Having accepted that a license in China is required, the real difficulties begin. The Internet infrastructure in China is quite advanced and due to the work of 21 Vianet and others, there is plenty of server space and bandwidth available for effective delivery of even the most complex SaaS products. The success of MOOG products in China is proof of this.
The real problem in China is in finding an appropriate partner/licensee. For the Chinese entity, operating as a licensee is expensive and technically demanding. So the real challenge in China is to find a licensee that is a) willing to take on the burden, b) has the technical capability to do the work, and c) the financial ability to take on the burden of ICP licensing, obtaining and maintaining approvals and then operating the complex server and software systems. Finding a willing licensee is oftentimes difficult for small SaaS systems and start-up products with no existing base of customers to provide immediate cash flow for the licensee.
For large, established SaaS providers, the issues are different but still significant. In this setting, due to the advanced technical requirements, the licensee will often be a direct competitor. So the challenge for large SaaS developers comes from managing the business in China, in protecting IP, and in dealing with the development and marketing of spin-off products. For many SaaS developers, these spin-off products are where the real value is generated.
In trying to evade the rules to avoid the China server/China licensee requirement, foreign SaaS developers are missing their opportunity to access the Chinese market. The real challenge is in finding ways to work within the China system in a way so the foreign SaaS developer both remains in control and earns a profit from China.
So resistance to China’s system for foreign involvement in SaaS is futile, but success is possible, so long as you get clear on what needs to be done.This article was written by Steve Dickinson and published on China Law Blog. Original Post: https://www.chinalawblog.com/2017/12/selling-saas-in-china-resistance-is-futile.html