Government regulators and China Mobile, the country’s dominant mobile phone service provider, have responded to customers' complaints with new protocols to stop these wireless value-added service (WVAS) providers from overcharging customers, sending spam, and not letting users easily cancel mobile services.
The move was “healthy overall for the market,” said Richard Robinson, Beijing-based CEO, Asia for Dada Mobile, an Italian wireless content provider. “But every service provider is feeling pain.”
In China, where consumers view phones much more as a device for games, a portable music player and a fashion accessory than a telephone, such services are lucrative for wireless content providers. China Mobile reports that its users send more than 700 million SMS messages daily. Non-voice services provided over 20% of the company's revenue in 2005, up from 15.5% a year earlier. Revenue from wireless value-added services could surpass $60 million this year, according to industry estimates.
416m mobile subscribers
China, the world’s largest mobile phone market with 426 million subscribers, is way ahead of more advanced economies like the U.S. in developing non-voice services, said Shaun Rein, Shanghai-based managing director of China Market Research Group.
“With all the start-ups and venture capital money flowing into this market, this is where major development will be for how to do mobile phone advertising, as well as other mobile applications like chat, games, ring tones, video and search.”
Even so, the glory days may be over for the nation’s top pure-play WVAS companies like Linktone, Hurray Holding Co, Kongzhong Corp. and Tom Online, a subsidiary of Hong Kong-based media conglomerate Tom Group. All four are scrambling to develop new products.
One major obstacle is regulatory. New rules that went into effect in July 2006 could wipe out one-third of WVAS companies by the end of the year.
Share prices dive
“All of them have taken a hit in their share price. The whole industry is facing a tough time since the new rules were announced,” said Dick Wei, a Chinese internet analyst at JPMorgan in Hong Kong. “There is also a lack of differentiation between wireless service providers, so they are trying to expand into different areas. It’s going to be difficult for them going forward, unless they prove they can provide good and differentiated content and be more than just a channel.”
Linktone, for example, is moving into content production. The company is best-known for processing over 20 million SMS and online votes for the second season of “Supergirl” last year. Distributed nationally by Hunan Satellite TV, the reality show modeled on “American Idol” became the most successful TV series in China’s history, with more than 400 million people tuning in for the season finale.
But the provincial broadcaster parted ways with Linktone two months ago, after a disagreement about splitting revenues and a lackluster third season that saw SMS revenue drop. Hunan Satellite opted to work directly with China Mobile's own subsidiary, Aspire Technologies, a frightening trend for WVAS companies.
“Why should Hunan need a company like Linktone as the business gets big enough. What do they bring to the table? If you can go straight to China Mobile, why not do that so your revenue stream isn’t split three ways? Hunan realized this, which is why Linktone’s stock has been hammered,” said Mr. Rein.
Looking forward to the launch in China next year of 3G networks that will speed up downloads of wireless content, China Mobile is also eager to control the lucrative value-added services passing through its network.
Linktone, meanwhile, quickly hopped to rival Shandong TV Station (SDTV). Although it is less profitable than Hunan Satellite, SDTV owns seven channels that reach 700 million cable and satellite viewers.
Linktone has already handled the SMS election for the “Image Ambassador for Beautiful Shandong” program. Last month, it expanded the Shandong TV relationship by creating a joint venture with SDTV called Shanghai Zhongbang Culture Media Co.
The joint venture will help SDTV develop a comprehensive wireless strategy across all its programs, as well as events, public relations activities, and live entertainment, while giving Linktone valuable access to programming and content development. The first project is an "American Idol"-inspired reality show called “China Union.” Linktone will be the sole wireless service provider for the show and own the brand, advertising rights and copyright.
Last month, Linktone invested in Beijing Center National Radio Media, the ad agency for China National Radio-1 and 2, as part of its ongoing strategy: "We're going in the interactive media direction, merging traditional TV and radio media with new media,” said Edward Liu, Linktone’s Shanghai-based director of investor relations. “We’re actually excited about the changes in the market. All four of the main players--since we all went public in 2004--offered the same type of services. After the shakeout, we’re now going in different strategic directions."
Developing new strategies
Tom Online, heavily funded by its parent company, is focusing on new areas like developing mobile payment systems and introducing the internet telephony network Skype into China. Tom Online is also rumored to be looking at buying EBay’s business in China.
Even though WAP-based services put KongZhong in the most heavily regulated area, the company launched one of the first wireless internet commercials on its wireless internet platform (Kong.net) for Motorola Corp.'s V3 phone in October 2004. Since then, HongZhong has run ads for other brands such as Nokia, BMW, General Motors, Toyota, and Lenovo. Its platform also hosts KongZhong Channel V, a wireless music brand created last month through a joint venture with News Corp.’s music brand, Channel V.
Another rival, Hurray, “is trying to move up the value chain in China’s music industry,” Mr. Wei said. Music is one of the most profitable wireless applications in China, through artist development, music production and offline and online distribution.
In July 2006, Hurray inked a deal with Viacom’s MTV Networks to deliver wireless value-added services to MTV’s online and TV viewers in China. Hurray also acquired majority control of two local record labels, Freeland Music and Huayi Brothers Music, and owns mobile game developer Magma Digital.
Market leaders "failed themselves"
In addition to aggressive diversification, wireless content companies also need to “build a strong brand affinity with end-users to really make themselves must-carry services by operators as well as advertisers,” said David Wolf, founder of the Wolf Group Asian telecom consultancy in Beijing. “It’s difficult for marketers to know who to place a bet on. It’s a malleable world, there are no fully-established leaders in the market for a long-term agreement. They have kind of failed themselves.”
Some industry execs may agree. Last month, KongZhong’s high-profile chief financial officer, J.P. Gan, resigned to pursue a career as a venture capitalist.
His departure “indicates that he doesn’t see sustainable growth for wireless value-added service companies in China. It’s bad news for the industry,” warned Mr. Wei.
But Mr. Robinson, a China internet veteran, said there is still a place for third-party providers. "The challenge now is to be across all platforms in all provinces, and to keep connectivity humming for key blasts like elections but also maintain steady traffic. That’s hard for the TV stations to do on their own."