Mobile Entertainment

HALF way through 2006, China's largest mobile carrier China Mobile stunned the D2C content sector (usually termed the ‘wireless value-added services’ or ‘WVAS’ market) with a string of regulations the drastically curtailed their ability to operate. The effect was lasting. Premier WVAS player Linktone, which went public in March of 2004 at $14, was trading at below $3 as of September 2007 and is worth close to its cash holdings.

It wasn’t the only one to suffer. Kong Zhong recently reported Q2 2007 earnings that had shrunk 98 per cent from the same period in 2006 while Tom Online voluntarily de-listed itself from both Hang Seng and NASDAQ; the dependence on China Mobile effectively caused Tom to go from ‘Initial Public Offering’ to ‘I'm Pulling Out’.

Some would say that many of the smaller players had it coming. In 2000, China Mobile created an ecosystem, dubbed Monternet, to provide WVAS. It fashioned Monternet after Japan's iMode which was based on the premise that operators should focus on core competences such as billing and data delivery and farm out non-core competences such as content sourcing/creation to a walled-garden of service providers. Great idea, except that unlike Japan, the self-regulation of the WVAS industry in China was close to non-existent.

Deceptive marketing practices, unethical pricing and spamming became best-in-class industry practices until China Mobile came in and broke up the party. Monternet had spawned over 8,000 service providers and billions in revenues leading up to its heyday in 2005. Since that peak, more than 5,000 of these providers have gone bust or lost their licenses, leaving about 3,000 active players struggling to stay alive.

Sounds pretty bleak and you'd be forgiven if you thought that the end was
nigh. However, in August China added another 6.9 million subscribers, bringing the total to 508 million in the mobile Middle Kingdom. The underlying fundamentals of the market are actually solid: users are consuming more WVAS content and demanding faster access to mobile data while purchasing more powerful and feature-rich handsets. In fact, China Mobile's WVAS revenue grew by 35 per cent to over $5.5 billion in Q207 and it now makes up more than 25 per cent of China Mobile's total operating revenue.

Why? Because China Mobile has taken more and more in-house and created its own services to go head to head with the SPs they once nurtured. Services such as the chat service Feition, which now boasts 38 million subscribers, and a wireless music club that now has a whopping 48 million subscribers. Clearly, this is great news for music labels whose products drive mobile downloads via the desire of consumers for personalisation.

For other content providers, working with China Mobile will become increasingly possible, but the best bet will be to work the operator directly and through its SP channels. Next year, with Olympic hype, even more mobile phone subscribers and potential 3G roll out, there will be even more of a spotlight on the Chinese WVAS. A more level playing field could result – especially with other operators getting some traction – so it makes sense to sit tight until 3G hits and the market (hopefully) stabilises once again.