Almost any statistic regarding the mobile phone market in China is staggering -- more than 300 million users as of August 31, 2004, growth projected to continue increasing at double-digit rates for the foreseeable future, and billions of dollars in revenue for the principal mobile phone operators in China, just to name a few. This unprecedented explosion in mobile activity in China has spawned a vibrant "thumb culture" of mobile phone users. For these users, the mobile phone is not just a device for speaking to people, but rather is a complete mobile communication and entertainment center for playing games, downloading news, music, and cartoons, participating in fan clubs and engaging in a whole host of other activities. The thumb culture is visible everywhere in China with the sight of people busily typing messages or playing games on the dial-pads of their mobile phones as common as people speaking into their phones.
The key development in this market which should be of interest to international media and content companies is the convergence of several trends which has greatly heightened the potential appetite for premium branded content among mobile users:
Equally importantly, the market in China for mobile services, also commonly known as wireless value-added services, has one singularly unique characteristic which makes it very attractive to media and content companies: it is relatively free from piracy concerns which is a constant issue in other business sectors in China.
At the same time, the wireless value-added services market in China is both idiosyncratic and highly fluid, with constant technological and regulatory changes and the domineering presence of the two principal phone operators, China Mobile and China Unicom, which essentially still control the market at all levels. International media and content companies thus need to grasp clearly the practices and pitfalls of this market before entering it so they can understand how best to leverage their content, how and why they should select local partners and how to structure their fees and other aspects of cooperation with local partners. This article summarizes key features of the wireless value-added services market in China as we see it, and concludes with practical pointers on how best to navigate it.
The Wireless Value-Added Services Market in China
China Mobile and China Unicom currently control virtually all of the mobile phone market in China. As the wireless market in China continues to expand to less-developed and -wealthy provinces, an increasing portion of the mobile operators' users have relatively low per capita incomes. These subscribers generally yield lower levels of average revenue per user because they are primarily users of pre-paid services. In addition, China's wireless market is becoming increasingly competitive, with non-roaming, single-city limited mobility networks springing up across China. In fact, China Telecom and China Netcom, which are better known for their large fixed line telecommunication networks in China, claim to have added a total of two million new users per month on average in 2003 to their limited mobility networks located throughout the country. Due to these pressures on the traditional voice-related businesses of the mobile operators, wireless value-added services have become an increasingly important market development tool for China Mobile and China Unicom and the privately-owned service providers that support them.
In turn, the market for wireless value-added services in China has expanded significantly and is expected to continue to grow at a fast pace. Norson Telecom Consulting, an independent research firm, estimates that total wireless value-added services revenue in China rose from RMB1.0 billion ($120.8 million) in 2001 to RMB15.0 billion ($1.8 billion) in 2003 and is expected to grow to RMB26.0 billion ($3.1 billion) this year. The eastern and southern provinces of China have been key sources of this revenue growth because they are relatively wealthier than other parts of China. In addition, mobile users in those provinces have been exposed to wireless value-added services for a relatively longer period of time and have become discriminating consumers with high expectations as to the content of the services they purchase. Finally, growth in this market has also been driven by the fact that China has low personal computer, Internet and broadband penetration. In this entertainment vacuum, wireless value-added services have become an important form of entertainment for Chinese consumers.
Following the successful model established previously in Japan and South Korea, China Mobile and China Unicom outsource almost all content and applications for their wireless value-added services platforms, meaning that these operators rely almost entirely upon third party service providers to drive their network traffic, supply attractive services and increase revenue from their services. In turn, the mobile operators focus on the operation and technical enhancement of their networks, while monitoring service providers' offerings for prohibited content such as pornography and political and religious discourse. For their part, wireless value-added service providers in China rely on the two mobile operators for the network distribution of their content and services, billing and collection, and remittance of revenues.
When first setting-up, a third party service provider will obtain the requisite value-added telecommunications licenses from the Chinese government and seek permission from one or both of the mobile operators to offer its services through their networks to their ultimate end-users. The mobile operators, particularly China Mobile, have highly decentralized organizational structures. As a result, separate contracts are usually entered into by the service provider, on the one hand, and the national, provincial and local offices of the mobile operators, on the other hand. The relevant office of the mobile operators will then evaluate the proposed services to ensure, for example, that they do not contain inappropriate content and are not substantively identical to an existing service. If approved, the services can be offered to the mobile operator's users at a price approved by the mobile operator. Prices for the most basic services can be US$0.01 per use or less, while monthly subscriptions for more advanced services can be several dollars.
Approved services appear on the service menus of the mobile operators which can be accessed through mobile phones and on the websites operated by the mobile operators. When a mobile user selects a service, the third party service provider delivers it over the mobile operator's network and the charge for such service appears on the user's next mobile phone bill.
Given their dominant market positions, the mobile operators have significant negotiating leverage over third party service providers and largely dictate the terms of their cooperative agreements. However, recognizing that they are dependent on service providers to continuously create new, innovative services and drive revenue growth, the mobile operators have to date been willing to give service providers the majority of the revenue generated by their services, typically in the range of 80% to 90% of the gross revenue. In many cases, this percentage can change if the service provider fails to satisfy various performance criteria, such as revenue, number of users and number of customer complaints. Poor performance by a service provider can also lead to it being denied access to part or all of a mobile operator's network. In addition, service providers are usually charged network transmission fees for each message sent by them to the ultimate end-user according to a formula. (Recent rumored changes in the basic revenue sharing percentages have so far failed to materialize, but remain a distinct possibility as the mobile operators seek additional sources of revenue to fund their multi-billion dollar investments in the network infrastructure needed to support next generation, or 3G, mobile technologies and services.)
It is widely anticipated that other parties such as fixed-line operators China Telecom and China Netcom will also be granted licenses to operate mobile networks in China. While this should further heighten competition in the wireless value-added services market, it is difficult to predict what effect, if any, the entry of new operators will have on the revenue sharing model described above. Moreover, there has been speculation in the market that the current or new mobile operators could introduce their own portfolio of self-developed services, which, if true, could radically alter this market.
There are several hundred service providers operating in China at this time, and they generally fall into three categories:
The predominant wireless value-added service in China is currently short messaging services, or SMS, that allow users to send and receive simple text messages over their mobile phones. Users can also play basic games and download ringtones and icons for the screens of their mobile phones through SMS. SMS is offered through China Mobile's and China Unicom's second generation, or 2G, mobile telecommunication networks.
In recent quarters, there has been dramatic growth in the use of services offered over the advanced second generation, or 2.5G, mobile telecommunication networks in China which are accessible with phones that are 2.5G-compatible. The advantage of the 2.5G technology standard is that it enables high capacity wireless data transmissions. As a result, services offered over 2.5G networks can be significantly more sophisticated and offer users higher quality graphics and richer content and interactivity, commanding a premium price over the more established SMS-based services. Thus, we are seeing increasing interest among service providers in China in obtaining premium branded content from international partners to fully utilize the capabilities of 2.5G services and thereby differentiate themselves from their competitors. The Chinese government has also announced its intention to grant licenses for 3G mobile telecommunication networks in the next several years, which will enable even more advanced, content-rich services to be offered.
The more common 2.5G services include games, information services (e.g. news stories sent directly to a user's mobile phone), community forums and dating services, animated cartoons and sophisticated ringtones and icons.
The third major category of wireless value-added services is interactive voice response services, or IVRS, which allow users to listen to songs, jokes, stories and other audio content. Users can also send such audio content, along with personal messages, to the mobile phones of their friends or others.
Service providers in China have shown great ingenuity in integrating all kinds of content into wireless value-added services. Thus far, the primary categories of branded content that have proved successful with Chinese mobile users include:
A number of major international media and content companies have already entered the Chinese wireless value-added services market, including Sony, MTV and Time Warner. However, a consistent approach to entering this market has yet to emerge, and many entrants have entered into arrangements that do not properly reflect the nature of the market or do not fully maximize the opportunities available. The following are practical pointers we believe are key to avoiding such problems:
Thus, international media and content companies must, in essence, funnel their content through one or more local service providers. Although this involves sharing revenue with the service providers and the loss of a certain degree of control over the content, many local service providers can add significant value by, for example, customizing and localizing content to maximize its appeal to the Chinese market (see discussion in next bullet point).
Additionally, given the rapid speed at which the wireless value-added services market is evolving in China, careful thought should be given to whether multiple local partners, licensed on a non-exclusive basis, should be used. In particular, the mobile operators have recently begun enforcing their customer service policies more rigorously than in the past and have initiated steps to improve customer service. This rigorous enforcement has resulted in severe penalties being imposed on numerous participants in the market. Penalties have included prohibiting these service providers from offering certain services over a mobile operator's network, or from offering new services, for a fixed period (to date, publicly announced suspension periods have typically ranged from six months to one year). Naturally, no international media or content company wants to be in the position of signing an exclusive content license with a service provider and then discover that its new partner has been banned from a mobile operator's network for violating customer service policies.
It is also important to note that while 2G SMS services represent the dominant service category now in China, 2.5G services are rapidly gaining ground. Furthermore, many of the strong 2G service providers have had very mixed success thus far in 2.5G services. As a result, prior performance in the 2G market is not necessarily indicative of future performance in the 2.5G market.
This approach may make sense if the content provider is still evaluating the local partner or if the local partner is particularly strong in that one type of service. On the other hand, the one constant in China's wireless value-added services market is rapid change in technologies and mobile users' tastes, resulting in relatively short life spans for many individual services. Consequently, the value of the cooperation or license agreement between the parties can be severely affected if the agreement is not flexible enough to allow the services offered under it to evolve in a timely manner as the market changes. Moreover, to maximize the potential user base, the parties should consider how the content could be used across multiple 2G and 2.5G services.
In addition, termination clauses can be problematic. If a service provider is denied access to the networks of one or both of the mobile operators, that would seem a fair basis to allow the content provider to terminate the relationship. But what if the service provider receives a temporary or permanent service suspension in only one or two provinces? Or alternately, what if the service provider only obtains approval to offer services utilizing the content in a handful of provinces after a significant roll-out period has lapsed? There is no bright line industry standard in these cases, and the parties, along with their legal advisors, will have to carefully consider what events should justify termination.
These policies need to be considered when preparing the cooperation or license agreement so that, for example, services and their pricing are updated flexibly in the manner and timeframe allowed by the mobile operators. It is also advisable that the agreement recognize that the mobile operators' policies change over time. Thus, the parties may authorize each other to use personal information of the service provider's users but only to the extent allowed under the mobile operators' then current privacy policies.
To further augment the protection of intellectual property, it is helpful to partner with a local service provider which also diligently monitors the wireless value-added services market so that it can quickly notify the mobile operators of any suspected infringement.
The wireless value-added services market in China is dynamic and rapidly-evolving which can present risks for the unwary. However, international media and content companies which are well-prepared and enter with a comprehensive understanding of the market and its players can also find that wireless value-added services are an effective and profitable way to distribute content in China.