Sherman So’s Weblog

Alongside the growth of China’s Internet market is the development of its wireless data sector. More than 500 million people have mobile phones in China and the mobile operators — the overwhelmingly dominant China Mobile and its poor cousin China Unicom — open their platforms for third parties to provide value added services, such as ringtone downloads, games, etc. 

The sector has attracted many players.  Among the top ones are Tom Online, Kongzhong, Hurray and Linktone.  Before the China Internet was large enough to attract advertisers, wireless valued added services formed a major part of the revenue of companies such as Tencent, Sina and Sohu. 

Besides the basics, many creative ideas have flourished  — for example, using SMS voting to decide the winner of a nationwide singing contest (Super Girl China).  There are also examples of where the Internet and the wireless data world have merged – composers and singers distributing their songs over the net for free and earning their money through ringtone downloads.  Mice Love Rice, the first major hit of this kind, recorded over 5 million ringtone downloads in a month, whereas a best-selling CD in China usually sells no more than 1 million copies.  

However, the competition is fierce. Value added providers get squeezed from both ends – by the phone companies and the content providers (music labels such as Sony BMG) who both want a larger share of the revenue.

The problem is that there is no way for the value added companies to differentiate themselves. A ringtone provided by Tom Online is the same as one from Linktone.  Users don’t even know who the provider is in most cases – they just dial a number to download ringtones or subscribe to particular services.

Some companies employ tricks to con people into using their services or make it hard to cancel their subscriptions. “It is the dirtiest of all the Internet businesses,” says a venture capital investor.

The industry is vulnerable to sudden policy changes by the phone companies.

In the summer of 2006, China Mobile, followed by China Unicom, adopted a user protection policy, requiring such things as double confirmation for new subscriptions and one-month free trials.  There followed a nuclear winter for all players – many of them sank into long-term losses. Tom Online decided to go private and de-list from the Nasdaq. 

In the fall of 2004 China Mobile decided to clear out “inappropriate content”, a code name for pornography. That too was a severe setback for the industry. 

Insiders reckon that China Mobile was really just using its concerns about content and user protection as a smokescreen for what it really wants to do, which is to replace the third parties with its own wireless data services, which are an increasing source of revenue and growth. (For some services, China Mobile gives as much as 85 percent of the revenue to third parties.)