An Opportunity for Wall St. in China’s Surveillance Boom (NYTimes, 9/11/09)

September 11, 2007
An Opportunity for Wall St. in China’s Surveillance Boom
By KEITH BRADSHER
SHENZHEN, China, Sept. 7 — Li Runsen, the powerful technology director of China’s ministry of public security, is best known for leading Project Golden Shield, China’s intensive effort to strengthen police control over the Internet.
But last month Mr. Li took an additional title: director for China Security and Surveillance Technology, a fast-growing company that installs and sometimes operates surveillance systems for Chinese police agencies, jails and banks, among other customers. The company has just been approved for a listing on the New York Stock Exchange.
The company’s listing and Mr. Li’s membership on its board are just the latest signs of ever-closer ties among Wall Street, surveillance companies and the Chinese government’s security apparatus.
Wall Street analysts now follow the growth of companies that install surveillance systems providing Chinese police stations with 24-hour video feeds from nearby Internet cafes. Hedge fund money from the United States has paid for the development of not just better video cameras, but face-recognition software and even newer behavior-recognition software designed to spot the beginnings of a street protest and notify police.
Now, the ties between China’s surveillance sector and American capital markets are starting to draw Washington’s attention.
Rep. Tom Lantos, the California Democrat who is chairman of the House Foreign Affairs Committee, said he was disturbed by a recent report in The New York Times about the development of surveillance systems in China by another company, China Public Security Technology, which, like China Security and Surveillance, incorporated itself in the United States to make it easier to sell shares to Western investors.
Mr. Lantos called American involvement in the Chinese surveillance industry “an absolutely incredible phenomenon of extreme corporate irresponsibility.”
He said he planned to broaden an existing investigation into “the cooperation of American companies in the Chinese police state.”
Executives of Chinese surveillance companies say they are helping their government reduce street crime, preserve social stability and prevent terrorism. They note that London has a more sophisticated surveillance system, although the Chinese system will soon be far more extensive.
Wall Street executives also defend the industry as necessary to keep the peace at a time of rapid change in China. They point out that New York has begun experimenting with surveillance cameras in Lower Manhattan and other areas of the city, and that corporations make broad use of surveillance cameras in places like convenience stores and automated teller machines.
“Is New York a police state?” said Peter Siris, the managing director of Guerrilla Capital and Hua-Mei 21st Century, two Manhattan hedge funds that were among the earliest investors in China Security and Surveillance.
Mr. Lantos and human rights advocates contend that surveillance in China poses different issues from surveillance in the West because China is a one-party state where government officials can exercise power with few legal restraints.
Mr. Lantos is part of a Democratic Congressional majority that is increasingly eager to confront China at a time of high Chinese trade surpluses and considerable economic insecurity in the United States. He is also a longtime ally of Nancy Pelosi, the speaker of the House and a fellow Californian, who made her reputation in Congress as a critic of China on human rights issues.
A White House spokesman, Tony Fratto said the White House would not comment on specific companies, adding, “It’s not appropriate to interfere in the private decisions of Americans to invest in legally incorporated firms.”
The New York Stock Exchange said that it had no comment except to confirm that China Security and Surveillance was expected to list on the exchange “later this year, subject to the usual conditions, including approval by the S.E.C.”
Because the company already has shares traded in the United States and is not selling any additional shares, Securities and Exchange Commission regulations say approval is automatic once the company fills out a notification form and the New York Stock Exchange confirms it has approved the listing.
Over the last year, American hedge funds have put more than $150 million into Chinese surveillance companies.
The Chinese government trade association for surveillance companies, which also regulates the industry, predicts that the surveillance market here will expand to more than $43.1 billion by 2010, compared with less than $500 million in 2003. Under the Safe Cities program adopted by the government last winter, 660 cities are starting work on high-tech surveillance systems.
Many Western experts, skeptical that China faces a terrorism threat, have suggested that the government may be using it as an excuse for tougher policies toward ethnic minorities in western China, notably Xinjiang Province, and toward Tibet.
Terence Yap, the vice chairman and chief financial officer of China Security and Surveillance Technology, said his company’s software made it possible for security cameras to count the number of people in crosswalks and alert the police if a crowd forms at an unusual hour, a possible sign of an unsanctioned protest.
Mr. Yap said terrorism concerns did exist. His company has outfitted rail stations and government buildings in Tibet with surveillance systems.
Mr. Yap and Lin Jiang Huai, the chairman and chief executive of China Public Security, said that their companies did not do business with the Chinese military and should not raise concerns in the United States. They also said their businesses used technology developed in China and were therefore not subject to United States export controls.
China Security and Surveillance has been aggressively raising money in the United States, including $110 million in convertible loans so far this year from the Citadel Group, a big hedge fund in Chicago. In the last 18 months, the company has used the money to acquire or make a deal to buy 10 of the 50 largest surveillance companies in China.
James Mulvenon, the director of the Center for Intelligence Research and Analysis, which does classified analyses of foreign military and intelligence programs for the Pentagon and other government agencies, said that Beijing clearly wanted the company to consolidate the industry.
“They’re really sort of the Ministry of Public Security’s national champion,” Mr. Mulvenon said of China Security and Surveillance. “In terms of the gear and building the surveillance society, they are the ones.”
After the company announced sharply higher sales and profit on Aug. 13, a succession of American hedge fund managers and investment bank analysts took turns on a conference call questioning and congratulating Mr. Yap.
Traded on the over-the-counter bulletin board market while waiting for the beginning of trading on the New York Stock Exchange, the company has raised almost all of its money through the Citadel loans and private placements of stock with 17 institutional investors in the United States, including the Pinnacle Fund and Pinnacle China Fund in Plano, Tex., and JLF, a hedge fund based in Del Mar, Calif.
The Pinnacle funds’ investments have risen six-fold in 17 months. The funds, which raise all their money in the United States, are also the main investors in China Public Security Technology, with a stake that has nearly tripled in value since February.
Barry Kitt, the founder and general partner of the funds, declined to comment. Citadel and JLF officials also declined to comment.
Each time China Security and Surveillance makes an acquisition, it holds an elaborate banquet, with dancers. The majority of the 500 or more people invited are municipal and provincial security officials, as well as executives of rival companies that may become acquisition targets.
“When they come, they hear central government officials endorsing us, they hear bankers endorsing us or supporting us, it gives us credibility,” Mr. Yap said. “It’s a lot of drinking, it’s like a wedding banquet.”
Lehman Brothers bankers and various Ministry of Public Security officials have spoken at such events, which have been held all over the country. One was at the Great Hall of the People in Beijing, where Mr. Li himself — of Project Golden Shield — addressed the crowd.
China Security and Surveillance has headquarters in Shenzhen, a high-tech manufacturing center in southeastern China, but two years ago it purchased a “shell” Delaware company with no operations but a listing on the American over-the-counter bulletin board market. It turned the Delaware company into its corporate parent.
China Public Security, also with headquarters in Shenzhen, incorporated in Florida in the same way to obtain a listing on the over-the-counter bulletin board.
China Security and Surveillance is involved in some of the most controversial areas of public security. Mr. Yap said on the conference call with Wall Street analysts and hedge fund managers in August that one of the company’s growth areas involved surveillance systems for Internet cafes; the government is trying to clamp down on users of the cafes in order to discourage pornography and prostitution.
Critics say the surveillance is aimed at catching democracy advocates, Falun Gong adherents and others the Communist Party regards as threatening, noting that rules for nightclubs are less rigorous, and do not require live feeds to police stations.
Mr. Yap said investment firms from Europe, the United States and Asia were so enthused about the surveillance market in China that he typically led a full-day tour each week to some of the company’s factories and installations.
At an aging Shenzhen police station, where the scuffed and peeling yellow walls look as though they have not been painted since the Cultural Revolution, a $100,000 bank of new video screens behind the duty officer’s desk shows scenes from nearby streets. In another neighborhood, the company has installed a $1 million system.
Many of the surveillance cameras are still assembled at a modest factory. But the company has used $20 million of the cash it raised in the United States to acquire a large industrial park with six just-completed factory buildings and six dormitories.
In Shenzhen, white poles resembling street lights now line the roads every block or two, ready to be fitted with cameras. In a nondescript building linked to nearby street cameras, a desktop computer displayed streaming video images from outside and drew a green square around each face to check it against a “blacklist.” Since China lacks national or even regional digitized databases of troublemakers’ photos, Mr. Yap said municipal or neighborhood officials compile their own blacklists.
To show off his systems, Mr. Yap strode across a nearby plaza flanked by apartment towers and a low-rise shopping area, pointing out tiny unobtrusive domes and tubes attached to various poles. “See, there’s a camera on the lamp pole, and another one over there and another one here,” he said. “Big Brother is watching you.”

Even in a Virtual World, ‘Stuff’ Matters (NYTimes, 09/09/07)

September 9, 2007
Even in a Virtual World, ‘Stuff’ Matters
By SHIRA BOSS
IT’S payday for Janine Hawkins. Not in the real world, where she is a student at Nipissing University in Ontario, but in the online world of Second Life, where she is managing editor of the fashion magazine Second Style.
Ms. Hawkins, who in Second Life takes on the persona of Iris Ophelia, a beauty with flowing hair and flawless skin, keeps a list of things she wants to buy: the latest outfits from the virtual fashion mecca Last Call, a new hairstyle from a Japanese designer, slouchy boots. When she receives her monthly salary in Linden dollars, the currency of Second Life, she spends up to four hours shopping, clicking and buying. After a year and a half, she owns 31,540 items.
Living it up in Second Life is a break from Ms. Hawkins’s part-time job as a French translator, but she works just as hard in the virtual world.
Last month, she earned 40,000 Linden dollars ($150), for interviewing designers, arranging fashion shoots and writing about trends in Second Life, called SL by frequent users. “I usually spend what I earn,” Ms. Hawkins said. “It’s entertaining.”
It also says a lot about the real world, especially when it comes to earning and spending money.
When people are given the opportunity to create a fantasy world, they can and do defy the laws of gravity (you can fly in Second Life), but not of economics or human nature. Players in this digital, global game don’t have to work, but many do. They don’t need to change clothes, fix their hair, or buy and furnish a home, but many do. They don’t need to have drinks in their hands at the virtual bar, but they buy cocktails anyway, just to look right, to feel comfortable.
Second Life residents find ways to make money so they can spend it to do things, look impressive, and get more stuff, even if it’s made only of pixels. In a place where people should never have to clean out their closets, some end up devoting hours to organizing their things, purging, even holding yard sales.
“Why can’t we break away from a consumerist, appearance-oriented culture?” said Nick Yee, who has studied the sociology of virtual worlds and recently received a doctorate in communication from Stanford. “What does Second Life say about us, that we trade our consumerist-oriented culture for one that’s even worse?”
Second Life, a three-dimensional world built by hundreds of thousands of users over the Internet, is also being used for education, meetings, marketing and more obvious game playing. It’s a wide world with a lot going on, in multiple languages, and it can be real-life enhancing for populations who are isolated for physical, mental, or geographic reasons. But as a petri dish for examining what makes many of us tick, Second Life reveals just how deep-seated the drive is to fit in, look good and get ahead in a material world.
Many residents have lived the American dream in Second Life, and built Linden-dollar fortunes through entrepreneurship. In what could have been an ideal world, however, or one where anyone could be a Harry Potter, Second Life has an up-and-down economy, mortgage payments, risky investments, land barons, evictions, designer rip-offs, scams and squatters. Not to mention peer pressure.
“Second Life is about getting the better clothes and the bigger build and the reputation as a better builder,” said Julian Dibbell, author of “Play Money,” which chronicles his year of trying to make a living by trading virtual goods in online games. “The basic activity is still the keeping up with the Joneses, or getting ahead of the Joneses, rat race game.”
TO have a Second Life, one needs a computer, the Second Life software, and a high-speed Internet connection. You use a credit card to buy Lindens, and Lindens earned during the game can be converted back into dollars via online currency exchanges. Players start by choosing one of the standard characters, called an avatar, and can roam the world by flying or “teleporting” (click and go). Nobody can go hungry, there is no actual need for warmer clothes or shelter, and there is much to do without buying Lindens.
But walking around in a standard avatar, when there are so many ways to buy a better appearance, is like showing up for the first day of school dressed differently than all the other kids. You stick out as different, as an SL “newbie.”
“It’s hard not to fall into that,” Mr. Yee said. “There are shops everywhere, so it’s easy to say, ‘Oh, O.K., I guess I’ll get a better pair of jeans.’ ”
Second Life was started in 2003 by a Silicon Valley techie inspired by a sci-fi novel, “Snow Crash.” It is owned by a private company called Linden Lab. The original idea of the game was to unleash creativity. Residents don’t have to wear the latest fashions; they don’t have to look — or act — human at all. They can take any animal, robotic, or inanimate form they want.
And while there is a minority population of animal characters, and wearing butterfly wings is currently in vogue for humans, for the most part the population is young women bursting from their blouses and young men bulging with muscle. (Underneath the clothes are cyber genitalia, sold separately. Mark Wallace, a blogger who writes about Second Life, explained that the parts are not fashion accessories but rather “a functional appliance” for, ahem, entertainment purposes.)
While a frequent criticism of Second Life is that spaces are often empty and that there’s “nothing to do,” a crowd can be found at the mall, just as it can in suburbia. For example, the Xcite! store, which sells body parts, is “always crawling with avatars,” said Mr. Wallace, co-author of a forthcoming book, “The Second Life Herald.” Fashion is big business in Second Life, along with entertainment and land development.
Big corporations like Toyota have set up islands in Second Life for marketing. Calvin Klein came up with a virtual perfume. Kraft set up a grocery store featuring its new products. But those destinations are not popular.
“These brands that have this real-world cachet are meaningless in Second Life, so most are ignored,” said Wagner James Au, who blogs and writes books about Second Life. “Just showing up and announcing ‘We’re Calvin Klein’ isn’t going to get you anywhere.” American Apparel closed its virtual clothing shop, and Wells Fargo abandoned the island it had set up to teach about personal finance.
Second Life exclusives do exist: A magic wand was a hot item at one point, and the sex bed is currently in demand. (“If you lie on it with more than one avatar, it’s like you’re in a porn movie,” Mr. Au explained.)
But the more mundane items are what really drive the economy: clothes, gadgetry, night life, real estate. “People buy these huge McMansions in Second Life that are just as ugly as any McMansions in real life, because to them that is what’s status-y,” Mr. Wallace said. “It’s not as easy as we think to let our imaginations run wild, in Second Life or in real life.”
Mitch Ratcliffe, an entrepreneur and blogger, was an early resident of Second Life and built a house with a lake. But he was soon disillusioned with the upkeep involved with owning the property. “I don’t see why I would want my second life to be about the same striving and profit that my first is,” Mr. Ratcliffe wrote in a blog entry about his Second Life adventures. He eventually reincarnated himself as Homeless Hermes.
“People come by, see the user name and tell me how sorry they are that I don’t have a home. Why?” he wrote. “It’s very middle class, very staid in the way economic stigma is attached to a failure to get to work.” In the meantime, Homeless Hermes took up buying and selling virtual land and has pocketed the equivalent of $800.
Land is the biggest-ticket item in Second Life, with Linden Lab selling islands for $1,675, plus a $295-a-month maintenance charge.) Catherine A. Fitzpatrick, a Russian translator in New York who in Second Life is a landlord known as Prokofy Neva, got into the game three years ago and now owns hundreds of apartment buildings, houses and stores that she rents out to about 1,500 tenants who pay from $1.50 a month to $150 a month. She takes several hundred dollars a month out of the game to pay real-world bills. Prokofy Neva herself does not have a house. “If I did, I would rent it out,” she said. “Why not make money from it?”
She has, however, turned over virtual acreage for a land preserve and public use. She and an architect friend were initially entranced by the idea of creating artistic homes that could defy gravity, but they discovered that there wasn’t demand for that in Second Life.
“The average person wants a ranch house or a beach house,” she said. “They don’t want even Frank Lloyd Wright.” (She added, “These people are my customers, so I respect that.”)
Some residents do wear grunge clothing — itself a status symbol in Second Life because of the difficulty of replicating ripped and stained clothing digitally. But the largest slice of the population follows the crowd, and the crowd is not dressing up as dragons.
“The money is in the real-looking stuff: making skins with red lips and smoky eyes, and stiletto boots,” said Ms. Hawkins, the Second Life fashion writer. First comes something popular, then the knockoffs. Soon everyone has one. “People go for similar looks and similar things,” she said.
In Ms. Hawkins’s online closet are avatars that let her move around as a rubber ducky or as a fruit salad encased in gelatin. But those identities are novelty items that usually stay on the shelf. When she goes out in virtual public, Ms. Hawkins usually takes the form of Ms. Ophelia, who has more than 250 pairs of shoes.
Items are real-world cheap — an outfit usually costs $2 to $5 — but they can add up quickly. “It’s so easy to buy something, you don’t realize how much you’re spending,” said Carrie Mandel, a homemaker and mother in Chicago who spends two work days a week as well as evenings and weekends on her Second Life business, selling pets.
One coveted status symbol in Second Life is a souped-up muscle car called the Dominus Shadow. It currently costs 2,368 Linden dollars, about $9 at the current rate of 268 Linden per dollar. Many players pay that much every month for premium membership that lets them own land, and all are sitting at computers with high-speed Internet access. So why don’t more people treat themselves to the prized possession of a Dominus?
“It’s expensive in-world,” said Daniel Terdiman, author of the forthcoming book “Entrepreneur’s Guide to Second Life.” “You don’t think of how much things cost in real dollars; you think in Linden dollars. When something is expensive, even though it comes out to a few dollars, a lot of people don’t want to spend that much money.”
Although Linden dollars can be bought with a credit card, there is evidence that the in-world economy is self-sustaining, with many players compelled to earn a living in-world and live on a budget.
Surprisingly, many take on low-paying jobs. They work as nightclub bouncers, hostesses, sales clerks and exotic dancers for typical wages of 50 to 150 Linden dollars an hour, the equivalent of 19 to 56 cents. A recent classified ad stated: “I am looking for a good job in SL. I am sick of working off just tips.” This job seeker listed potential occupations as landscaper, personal assistant, actor, waitress and talent scout.
Second Life players are evidently discovering what inheritors have struggled with for generations: It’s not as much fun to spend money you haven’t earned. Apparently, despite the common lottery-winning fantasies, all play and no work is a dull game, after all.
“People don’t take jobs just for the money,” said Dan Siciliano, who teaches finance at Stanford Law School and has studied the economies of virtual worlds. “They do it to feel important and be rewarded.”
And to buy more things. “A lot of exotic dancers want to become models, so they can earn more money to buy more clothes,” Ms. Hawkins said.
It’s not just vanity that drives people to dress up in Second Life. It’s also seen as good for business. Ms. Fitzpatrick, the landlady, says she doesn’t really care about how her avatar looks. But she cares about what prospective tenants think. “I felt I had to go, finally, and buy the hair and the suit,” she said, “or my customers might think I’m too weird.”
Appearances count in Second Life’s financial world, too. Banks and stock exchanges are housed in huge, formal structures draped in marble and glass. “People in the banking industry wear shiny silver suits and are absurdly tall and have hired a couple people to walk behind them in black suits with ear bugs and shoulder holsters,” said Benjamin Duranske, a lawyer who blogs about legal issues related to the virtual world.
THE stock exchanges and banks in SL are imposing, but they are unregulated and unmonitored. Investors fed Linden dollars into savings accounts at Ginko Financial bank, hoping to earn the promised double-digit interest. Some did, but in July there was a run on the bank and panic spread as Ginko A.T.M.’s eventually stopped giving depositors their money back. The bank has since vanished. With no official law and order in Second Life, investors have little recourse.
Robert J. Bloomfield, a behavioral economist at Cornell University, studies investor behavior in the real world and recently became interested in how investors behave similarly in Second Life. “We know the little guy makes lots of dumb mistakes,” Professor Bloomfield said. “They tend to be overly impressed by the trappings of success. We see that magnified in Second Life.”
Some Second Life residents are calling for in-world regulatory agencies — the user-run Second Life Exchange Commission has just begun operating — and some expect real-world institutions to become involved as the Second Life population and economy expands. “It’s a horse race as to whether the I.R.S. or S.E.C. will start noticing first,” Mr. Duranske said.