JLM Pacific Epoch interviews CEO Steve Mushero

JLM Pacific Epoch interviews CEO Steve Mushero

 Text From:http://www.jlmpacificepoch.com/pecontent?id=156152_0_3_0_M  7th Sep.2009

Former Tudou.com CTO Steve Mushero founded China Net Cloud to help domestic game and internet companies mind the gap that is widening between web users and operators in China. Mushero recently sat down with Pacific Epoch to discuss the state of the Chinese internet, cloud computing and outsourcing, and how it can all benefit from Silicon Valley know-how.

(PE:Pacific Epoch) What's the idea behind your business?

(SM:Steve Mushero) Our business is running back-end servers and infrastructure for Chinese internet and game companies. As a part of that, we also provide cloud computing infrastructure, similar to what Amazon (Nasdaq:AMZN) does, where it makes sense. Our job is to provide resources to help manage the fact that the Chinese internet is the fastest growing in the world but has the fewest people to actually operate it. In the U.S., we have 10-20 years of experience; here it's 3-5 years. The fundamental problem with the Chinese internet is that it is essentially the youngest but also the largest in the world, with 350-360 million users.

Two years ago, I was the CTO of video site Tudou.com, and even there we struggled to find talented operational employees. So, you can imagine what it is like for smaller companies or companies that are new and don’t have a lot of money.

PE: Is it difficult for you to find talented employees?

SM:  It is, but we have several advantages. One is that we have a lot of processes, systems and training. We also have a lot of unique ways to find people based on more Silicon Valley-style recruiting techniques, from parties to networking and speaking events. Also, because of our scale, we can take people who are not experienced enough to do everything on their own and give them a specialized task.

We started in the summer of 2008, our third or fourth employee didn’t show up until November or December, and now we have around 25-30 customers and 17 people. Our average sales cycle is a couple of weeks, maybe a month. We are two white guys and a team of Chinese staff located in China, but everything we do here is exactly the same as in Silicon Valley, except for sales. We had offices, customers, employees and revenues before we had fully set up.

PE: Where’s the bigger opportunity these days, running the backend system or the cloud?

SM:  Long term for us, it’s still managing everything broadly, but that includes building what we call private clouds. We provide basic cloud infrastructure, using our hosting partners also, similar to what Amazon does. But in the U.S., these are high capital businesses, and we don’t want to do that. Another problem with Amazon and other platforms is once you use them, you still have to run them.

More cloud infrastructure providers are already starting to come in to China. Long term for us, having more cloud providers is a good thing. We will still do a lot of private cloud stuff, but probably less and less public, small things.

PE: Can you talk more about what you see as the differences between the internet in the U.S. and China?

SM: Sure. People often think about firewalls and things, but those issues are not nearly as important as the fact that the Chinese internet, internally, is split into three areas: the north, which includes Beijing and about 40% of the country; the south, which includes Shanghai; and the student networks. Those three networks are not well connected, so if you are a content provider or a website you have to have a strategy to deal with the fact that in each of these areas there is only one carrier or one internet company. That’s very different from the rest of the world. In the U.S. and Europe, you have an overlay, a mesh of many carriers that are all interconnected.

Companies who do what we do in the U.S. often run everything out of one place. In China, it is the exact opposite. If you want to reach Shanghai, in many cases, you have to be in Shanghai, and you have to worry about the links between other cities. The infrastructure is quite good and high-performance, but, because China has the largest user base, there are a lot of technical issues including DNS, CDN and mobile issues. The mobile networks for your phones – and everyone is talking about sexy 3G – are separate. So if you want to serve content to mobile phones you really have to have servers in the facilities where the phones are connected.

Many people ask us if we have our own data center or facility like most companies do in the U.S. The answer is no because, wherever you set up, it would be in the wrong place for 80% of your customers. Also, for foreign companies, there are licensing requirements, content issues that need to be managed.

PE: I know that Tudou had some licensing issues with its video content, but, in your new business, are you more insulated from those challenges?

SM:We, individually, are isolated because we are helping our customers, but one of our roles is to make sure our customers are aware of their legal responsibilities. All websites have to be licensed, and there are issues about content control and review particularly for user-generated content. We warn people that if they have users submitting blog content, they have to look after it. For instance, pornography is illegal in China, and, since we don’t have porn sites, people try to put it in everything. Or, for example, if you are doing games, you need to have a license. So we manage that with our data center and infrastructure partners and with the customers. It’s not difficult, but it’s something you’ve got to stay on top of.

PE: Are your customers Chinese or foreign companies?

SM: Both. Initially, we thought it would be 80-90% Chinese, but we were surprised to find a lot of interest from foreign companies and there are still a lot of foreign companies coming in. We work on sites like Nike (NYSE:NKE) and Nokia (NYSE:NOK) on ad campaigns. Because of the distance and performance issues, they want to host things here, and it’s very hard for them to find local companies that are compatible in a variety of ways. Also, there are a lot of American websites like Facebook, MySpace and smaller social networking/Twitter-type sites that need stuff on the ground to be able to operate. It’s really a mix, but it is still largely local Chinese companies. However, even these local companies can be foreign-run, and we have a lot of returnees and foreign money so it is very international. We may eventually do more overseas, but now we are China-focused.

PE: Do most of your clients come to you with similar concerns, or does it vary?

SM:  It varies a lot. Saving money is a popular one but, usually, saving money as they grow. Our business is entirely internet-focused, and our customers are growing, high-performance, high-scale. So, they are mostly concerned with how to grow a lot without spending a lot. That’s one problem. Another is: how do we scale? This is for clients who have already overloaded on the database, are already in three cities, but want to grow faster and solve security problems.

Those are the main things, but we also have customers that are new and need help buying hardware. We find that a lot of customers waste a lot of money, more than we thought, by buying the wrong or just too many servers.

PE: Have you been affected at all, either positively or negatively, by the global financial situation?

SM: The Chinese market is more insulated, and things are growing more quickly here. It looks like the economy is getting better, but, even if things were going down the tubes, there are still a lot of the companies that have already been funded, so we don’t see it so much.

Also in China, and to some extent in the west, when the economy goes bad, people go home to play games and get on the internet so traffic actually rises. Also in China, you see a move in advertising from traditional, print and other things to online as those companies try to cut their costs. I see a substantial transfer here, which for us is good, because it increases the opportunity for our customers in the advertising space. One customer in July told me that they had already reached their 2009 revenue target.

PE: How do you define the type of cloud computing that you are doing in China?

SM:   For me, there are three definitions of cloud computing. The first is what IBM (NYSE:IBM) calls cloud computing, which is really grid-computing or scientific grids of a lot of computers doing high-end work. This type is very useful in doing weather and scientific work. There are many of these kinds of clouds in China, and IBM is building more. The issue with them, though, is that you have to write your software explicitly for them.

The second type, which is really confusing, is claimed by software as a service outfits like Salesforce.com (NYSE:CRM) and Facebook. To some extent this is accurate because you can run your applications in their system, but again you have to write everything for it and I don’t really think this is most people’s definition.

What  we call cloud computing, which is more the Amazon style, is providing virtual computers so you don’t need to change anything. You don’t even know you’re running on the cloud. In China, there is not a lot of this right now, but you will see this coming. There is no word that Amazon is coming, but some other American companies are. Joyent, for example, is coming in the fall, and some of the local data centers are starting to join this business. It’s a bit challenging to manage because you need a lot of people to run the system, but this is something we can do.

PE: Can you talk about how outsourcing is perceived in China, especially in terms of IP protection and security issues?

SM: Not most but some companies in China are concerned about security issues. Most websites are not concerned about IP, but about payment systems. Historically, the Chinese internet was blogs and videos, and if you lost a blog no one cared. Now that the internet has become more e-commerce, online service and gaming-focused there is a need for more operational expertise and security to protect transactions. We usually improve security. One of our arguments is that an outsourcing company is safer than your employees because outsourcers don’t have an ax to grind. Our security controls are also a lot stronger than those of our clients.

PE: Are you funded?

SM: We are angel funded. We are still working on that a little bit. We are looking for a Series A VC round around the end of this year. We have a lot of interest, but we are still too small. A couple of investors are potentially in the $1 million range, but everybody wants to do more and we are still too small to take $3-5 million more.

We have cash; we have revenue. We are not cash-flow positive yet, but we could be if we weren’t still investing in the business. In another six months, we will be much further along. We just hired our first Chinese sales team, more engineers and we need more partners and more managers. We are in the middle of executing all of these things.