Wireless value added services providers in China are switching their focuses, after latest shake up in the sector, which began when China Mobile implemented its user protection policy last July.
“We are developing cross media advertising services to diversify our business. We want to decrease our dependency on wireless services and China Mobile,” said Edward Liu, investor relationship director of Linktone, a wireless value added services provider listed in Nasdaq.
The company currently gets 95 percent of its revenue from providing wireless services and 70 percent from China Mobile alone. But the latest shake up in the sector is making the company to re-think about their long term direction.
Linktone wants to be an advertising company. Company CEO Michael Li talked about the bright prospect of China’s media market in conference with analysts in the latest quarter result announcement.
The company’s newest services are to offer advertisers, such as chip maker Intel, TV advertisements together with some interactive promotion services through the wireless platform. It had made a deal on interactive wireless services with Shanghai Media Group, which controls the TV and radio stations in China’s second largest city, and it has also become the exclusive advertising agents of a second tier television station in China, Qinghai Satellite Television.
Whether Linktone can revive itself via its new direction remains questionable, but its determination to find new opportunities other than China Mobile is clear.
Linktone targeted its non-wireless revenue to be 20 percent by year end and by the end of 2008, it hopes to decrease revenue from China Mobile to 50 percent, said Mr Liu.
Other wireless value added services providers are doing the same. “Hurray, another Nasdaq listed services provider, want to be a record label company,” said Dick Wei, China internet analyst of JP Morgan. The company acquired a local record company, Secular Bird, in March. Before that it has signed up local singers and published its own music albums.
“The largest wireless service provider Tom Online is developing its internet presence,” said Jin Fei, analyst of Beijing based market research firm, Analysys. Tom Online has a joint venture with U.S. based internet telephony services provider, Skype, to develop its China operation. It has also acquired online auction giant eBay’s operation in China.
“Sina and Sohu are not highly enthusiastic on wireless services anymore. Their online advertising is growing strong. Netease focused on online game,” said Mr Wei.
The only major third party service provide which remain to focus on wireless service alone is Kongzhong. “But even so, Kongzhong is focused on developing free WAP, services which does not depend on China Mobile for collecting revenue,” said Mr Wei.
Last July China Mobile issued a series of new rules for user protection. All service provides are required to send reminder to all existing subscribers on their active subscription during last August and September. Moreover, one month free trial and double confirmations are needed from users for subscribing any new monthly services.
The one month free trial has stopped since last October, while the other rules remain. The incident caused significant revenue and profit drops to the wireless value added service providers.
“I believe those policies were indeed aiming at making a healthier business environment. After all, incidents, such as, users got cheated for paying for services they do not want, are happening in China,” said Mr Jin.
“But on the other hand, it is also nature for China Mobile to want a bigger share of wallet from its subscribers,” said Mr Jin.
Value added services have become more and more important for China Mobile to sustain its growth. China Mobile’s revenue from value added business reached 69.3 billion yuan last year, up 38.1 percent from a year ago. It accounted for nearly a quarter (23.5 percent) of China Mobile’s revenue.
China Mobile is not longer solely depending on the third parties to provide value added services. They are offering those services themselves and actively promoting their own brand of services, said Mr Jin.
Mr Wei also agreed China Mobile want a bigger share of revenue on valued added service. For some services, such as interactive voice responses, China Mobile required a higher commission of 30 percent, said Mr Wei.
“In long term, I believe more revenue would go to the mobile operators and content providers (such as record labels) and less to the wireless value added services providers,” said Mr Wei.
If that is the case, is there any future for the third party services providers? “I believe eventually the sector is going to revive. After all, China mobile can not do everything on its own. It will need the third party service providers for some services,” said Mr Jin.
But different companies might revive at different rate and via different paths, said Mr Jin. For example, impact to Hurray has been the least for the current shake up. “This is because Hurray is able to switch from monthly base services to message based services. China Mobile’s policy change last summer affected mostly the monthly base services,” said Mr Jin.
Trouble for the Wireless SP
Started first half of 2001, China Mobile’s open platform for third party companies to provide value added services, such as ringtones and picture downloads, used to be a heaven for companies like Linktone and Hurray.
Copying the i-mode business model of Japan’s NTT Docomo, China Mobile launched its Monternet platform to promote wireless data services. Under the platform, the third party services providers offer content and services to mobile subscribers and China Mobile collects information fees on behalf of them through its billing system.
They pay China Mobile commissions of 15 percent of the revenues collected. The uniform service platform and billing channel that China Mobile launched allowed third party players to build profitable businesses around mobile data services, and a large number of services providers entered the sector. That, in turn, attracted more data users and generated traffic fees and billing commissions for the mobile operators. It was estimated there are about 2000 services providers in China, according to a report from International Finance Corp.
When China internet was still in its infancy, all the major internet portals, such as Sina, Sohu and Netease, used to be depending heavily on the wireless services for revenue. In the fourth quarter of 2004, wireless revenue accounted for 63 percent of Sina, China’s largest online portal.
But China Mobile’s changing policies has constantly caused setback to the third party service providers.
It happened once in late 2004 when China Mobile wanted to clean up porn content. “Porn websites were billing their customers through the wireless value added service providers,” said Mr Wei. The latest shake up happened when it issue the user protection rules last summer.
Morgan Stanley estimated the first round of regulation tightening has cause 33 percent drop in share prices for the top four wireless players. The second round, 57 percent.
Partly due to regulatory risks, mobile value-added service providers (Tom Online and Kongzhong) are trading at 30 – 50 percent discounts in earnings multiples relative to online advertising companies (Sina and Sohu), wrote Richard Ji, executive director of Morgan Stanley in a report. Kongzhong’s market capitalisation is only about US$ 180 million, while its cash on hand is about US$115 million.
Copying the i-mode business model of Japan’s NTT Docomo, China Mobile launched its Monternet platform to promote wireless data services. Under the platform, the third party services providers offer content and services to mobile subscribers and China Mobile collects information fees on behalf of them through its billing system.
They pay China Mobile commissions of 15 percent of the revenues collected. The uniform service platform and billing channel that China Mobile launched allowed third party players to build profitable businesses around mobile data services, and a large number of services providers entered the sector. That, in turn, attracted more data users and generated traffic fees and billing commissions for the mobile operators. It was estimated there are about 2000 services providers in China, according to a report from International Finance Corp.
When China internet was still in its infancy, all the major internet portals, such as Sina, Sohu and Netease, used to be depending heavily on the wireless services for revenue. In the fourth quarter of 2004, wireless revenue accounted for 63 percent of Sina, China’s largest online portal.
But China Mobile’s changing policies has constantly caused setback to the third party service providers.
It happened once in late 2004 when China Mobile wanted to clean up porn content. “Porn websites were billing their customers through the wireless value added service providers,” said Mr Wei. The latest shake up happened when it issue the user protection rules last summer.
Morgan Stanley estimated the first round of regulation tightening has cause 33 percent drop in share prices for the top four wireless players. The second round, 57 percent.
Partly due to regulatory risks, mobile value-added service providers (Tom Online and Kongzhong) are trading at 30 – 50 percent discounts in earnings multiples relative to online advertising companies (Sina and Sohu), wrote Richard Ji, executive director of Morgan Stanley in a report. Kongzhong’s market capitalisation is only about US$ 180 million, while its cash on hand is about US$115 million.
Nineyou
Shanghai based online game company, Nineyou information Technology, found teenagers want to state trendy no matter in the real world or the virtual one. The company’s top game, Audition, which at the peak hours has more than 800,000 people playing together, thrived on players dressing up their characters online.
More than half of the free-to-play dancing game players are girls, the highest proportion among all Chinese online games, mainly the age of 14-26, said Jamsper Wu, corporate management director of Nineyou. Total registered users amount to 230 million, even more than the official China internet popular of 130 million.
High score is not as important as cool dresses, for players of China’s most popular casual game. Most of items sold in Audition, hair style, blouses, skirts, boots, etc., have no function at all, beside the look. They are sold from several yuan to several hundred yuan a piece – for a week or a month of use.
“The items get expired in a week or a month time. Just like real fashion, you want to change to a different style from time to time,” said Mr Wu. And if you are a little short of cash, “why don’t you ask your boy friend to send it to you,” added Mr Wu.
Boys meet girls - that is what the game is really about. Girls dress up to stand out among each other. Boys come up with gifts to impress their girls. Not too unfamiliar even for the generation who have not touch any online game before.
The only different is everything is happening much faster in the online world. “Would you want to marry me?” said one boy-looking character to another girl-looking one, just after they exchanged “hi”. Sure, there are “wedding pass” on sale in Audition, as well.
Audition is not the first game to sell virtual fashions. So is Nineyou’s first major hit, O2jam, a music game which had 200,000 peak concurrent gamers when launched in April 2005. Although O2jam created a buzz among youngsters, it failed to be real revenue driver. “The rhythm is too fast. Nobody has time to check out what the other players are wearing in the game,” said Mr Wu.
When the company launch Audition in May 2005, it slower the pace, so that boys and girls have time to check up each others and socialised online. Revenue from items sales in Audition shoot up and has been the chief revenue source of the company ever since.
“Audition is still growing fast at the moment. The first quarter revenue is double from the same period last year,” said Mr Wu.
The company also start to develop online advertising. They have not been able to attract Gucci or Channel yet, but some local fashion chains have had co-branding promotion with them, mostly in form of in game items, said Mr Wu. For example, when a person buys a dress in the shop, they will get some game points to allow them to own a virtual dress of the particular brand in the game. Pespi and others consumer products companies targeting the youths have had lines of fashion under their brand in Audition, too.
Audition and O2jam are licensed from Korean game companies T3 Entertainment and O2media respectively. Nineyou developed another dancing game in-house, Super Dancer, but it failed to be a real hit – showing how unpredictable game players’ sentiments are.
“The risk of Nineyou would be that it depends on only one game, Audition. What if the game is no long popular?” said Fu Xinghua, analyst of Beijing based market research firm Analysys.
Analysys estimated Nineyou’s revenue account for 6.86 percent of the total China online game market in the fourth quarter last year. That is more than half of the revenue of The9, China’s third largest online game operator, which has about 13.3 percent, according to Analysys. The9’s fourth quarter revenue reached 282.7 million yuan, according to its financial statement.
Nineyou was founded by Wang Zijie, who has been a deputy supervisor of research institute of Japan game company Konami Corporation, as well as it supervisor of overseas business in its arcade machine division, from 1993 to 1998. Nineyou currently has 900 staff, of which 400 are in research and development.
Book draft - China Internet
China internet sector started by imitating successful companies overseas, specially the U.S. ones. Many of leading internet companies in China got their original ideas and capital from the U.S. However, a direct copy of the U.S. model usually failed miserably in China. After all, the differences between the two countries are vast – from people’s living standard, their day-to-day life to the business environment.
That is why Google - the number one search engine, eBay - the leading online auctioneer, Yahoo - the number one online portal, Expedia – the largest online travel site, etc., all fail to dominate the China market. On the other hand, those started with their ideas, but adapted to the local market, thrived.
Sina and Sohu, China’s leading online portals, build their dominance by posting news online – they employed hundreds of editors painstakingly copy and paste pieces of news from all the leading newspaper and magazines in China to their sites. Very different from the Yahoo China site, which was largely a replicated of the Yahoo U.S. operation.
Ctrip, China’s leading online travel site, send people to distribute booklets, with hotel room prices and a telephone number for reservation, in airports and railway stations, after finding out it was very difficult to get people in China to book hotel rooms over the internet. Most of the reservations Ctrip got are still coming from its call centres.
Stories like those go on and on. The myths of better brand name and deeper pocket of the U.S. internet giants was also misleading. They are well known in the U.S., but not in China. Believe it or not, there are many people in China who cannot spell Google. Their headquarters are rich with cash, but their China subsidiaries are not. In contrast, first class China internet companies have no trouble attracting the required capital, either from direct investment or through listings in the stock exchanges.
This partly explained how eBay lost its dominance to Taobao, a late comer which swiftly became China’s most popular online auction site, and Google lost its throne to Baidu, also a late comer which eventually became the country’s most popular search engine.
This book seeks to help readers to understand the multiple facets of China internet sector. So, one day, they can make better decisions either as investors, competitors or participants of these companies.
China is now the world second largest internet market, after the U.S. It has more than 130 million users, but that is only about 10 percent of its population. There are certainly more to come in the next decade or so. China internet is a fertile land for entrepreneurs, both local and foreign.
There are roles for foreigners to play. Many foreigners worked in the early ventures. And they still do. A friend of mine, a Californian, is working on his startup in China. Another I knew is working on his second venture, after floating the first one on Nasdaq.
Moreover, the sector is easier to understand than others in China, where government policies still affect most business decisions. By and large, business 101 applies to this sector. The most successful businessmen in this sector are not sons or daughters of high-ranking government officials, but hungry entrepreneurs ready to risk it all. There is no denying frauds are everywhere in China, which is still an emerging market. But to a large extent, companies in this sector win by providing most desirable products or services to their customers.
In the first part of the book, I am going to give details about the leading players in the China internet sector. And in the second half, I am going to talk about certain topic crucial to understand the sector, including its darker side.
Part One
-----------
Chapter 1: Sina, Sohu and Yahoo China – the portal war
Internet boom of the U.S. in the late 90s also marked the beginning with China Internet industry. Among the first are Sina and Sohu. One founded by Beijing local Yan Wang, another by MIT graduated Charles Zhang. Both were copying what was hottest then – Yahoo. Yahoo, at the same time, though it can branch into China, via its Taiwan subsidiary, Ki
Chapter 2: Ctrip and eLong (controlled by Expedia) – the travel sites
Investment banker Neil Shen and James L
Chapter 3: Alibaba – online marketplaces for small businesses
Chapter 4: Tencent – the MSN of China
Chapter 5: Tom Online, Kongzhong, Hurray and Linktone – the crowded wireless valued added services sector
Chapter 6: Netease, Shanda and the9 – the online game Trio
Chapter 7: 51job and ChinaHR (controlled by Monster.com) – the online recruiters
Chapter 8: Taobao and eBay – the fight for online auction market champion
Chapter 9: Baidu and Google China – the search for searching engine king
Part Two
-----------
Chapter 10: Who are the Chinese internet users?
Chapter 11: Why the U.S. giants fell?
Chapter 12: Don’t limit yourself with just the online world. Go offline if the pasture is greener.
Chapter 13: Frauds – how three stupid acquisitions Monstermob made in China brought down the once high-flyer?
Chapter 14: Sex sells – a significant part of China internet traffic is driven by soft porn
That is why Google - the number one search engine, eBay - the leading online auctioneer, Yahoo - the number one online portal, Expedia – the largest online travel site, etc., all fail to dominate the China market. On the other hand, those started with their ideas, but adapted to the local market, thrived.
Sina and Sohu, China’s leading online portals, build their dominance by posting news online – they employed hundreds of editors painstakingly copy and paste pieces of news from all the leading newspaper and magazines in China to their sites. Very different from the Yahoo China site, which was largely a replicated of the Yahoo U.S. operation.
Ctrip, China’s leading online travel site, send people to distribute booklets, with hotel room prices and a telephone number for reservation, in airports and railway stations, after finding out it was very difficult to get people in China to book hotel rooms over the internet. Most of the reservations Ctrip got are still coming from its call centres.
Stories like those go on and on. The myths of better brand name and deeper pocket of the U.S. internet giants was also misleading. They are well known in the U.S., but not in China. Believe it or not, there are many people in China who cannot spell Google. Their headquarters are rich with cash, but their China subsidiaries are not. In contrast, first class China internet companies have no trouble attracting the required capital, either from direct investment or through listings in the stock exchanges.
This partly explained how eBay lost its dominance to Taobao, a late comer which swiftly became China’s most popular online auction site, and Google lost its throne to Baidu, also a late comer which eventually became the country’s most popular search engine.
This book seeks to help readers to understand the multiple facets of China internet sector. So, one day, they can make better decisions either as investors, competitors or participants of these companies.
China is now the world second largest internet market, after the U.S. It has more than 130 million users, but that is only about 10 percent of its population. There are certainly more to come in the next decade or so. China internet is a fertile land for entrepreneurs, both local and foreign.
There are roles for foreigners to play. Many foreigners worked in the early ventures. And they still do. A friend of mine, a Californian, is working on his startup in China. Another I knew is working on his second venture, after floating the first one on Nasdaq.
Moreover, the sector is easier to understand than others in China, where government policies still affect most business decisions. By and large, business 101 applies to this sector. The most successful businessmen in this sector are not sons or daughters of high-ranking government officials, but hungry entrepreneurs ready to risk it all. There is no denying frauds are everywhere in China, which is still an emerging market. But to a large extent, companies in this sector win by providing most desirable products or services to their customers.
In the first part of the book, I am going to give details about the leading players in the China internet sector. And in the second half, I am going to talk about certain topic crucial to understand the sector, including its darker side.
Part One
-----------
Chapter 1: Sina, Sohu and Yahoo China – the portal war
Internet boom of the U.S. in the late 90s also marked the beginning with China Internet industry. Among the first are Sina and Sohu. One founded by Beijing local Yan Wang, another by MIT graduated Charles Zhang. Both were copying what was hottest then – Yahoo. Yahoo, at the same time, though it can branch into China, via its Taiwan subsidiary, Ki
Chapter 2: Ctrip and eLong (controlled by Expedia) – the travel sites
Investment banker Neil Shen and James L
Chapter 3: Alibaba – online marketplaces for small businesses
Chapter 4: Tencent – the MSN of China
Chapter 5: Tom Online, Kongzhong, Hurray and Linktone – the crowded wireless valued added services sector
Chapter 6: Netease, Shanda and the9 – the online game Trio
Chapter 7: 51job and ChinaHR (controlled by Monster.com) – the online recruiters
Chapter 8: Taobao and eBay – the fight for online auction market champion
Chapter 9: Baidu and Google China – the search for searching engine king
Part Two
-----------
Chapter 10: Who are the Chinese internet users?
Chapter 11: Why the U.S. giants fell?
Chapter 12: Don’t limit yourself with just the online world. Go offline if the pasture is greener.
Chapter 13: Frauds – how three stupid acquisitions Monstermob made in China brought down the once high-flyer?
Chapter 14: Sex sells – a significant part of China internet traffic is driven by soft porn
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