In China, mobile phones are a status symbol, an entertainment console and vehicle for self-expression – for those with an image to live up to, only the newest, fastest and most versatile handset will do. The fashion statement extends to applications that run off the phone, which means wireless value-added services (WVAS) – ringtones, games, pictures and so on – are big business.
Credit Suisse First Boston (CSFB) and Beijing-based research company Analysys International estimate China’s WVAS revenues will be worth around US$1.6 billion in 2008.
This money is divided between the three players in the WVAS value chain: content providers (CPs), service providers (SPs) and mobile operators. A CP will license out a ringtone to an SP, which sells the product to consumers via mobile networks. Mobile operators – China Mobile and China Unicom – act as the gateway between SP and consumer, taking a slice of the profits for running the billing system.
The problem facing SPs is that the operators are looking for a larger slice of the pie – to the point that they are willing to cut service providers out of the loop altogether.
“Carriers are increasingly in direct contact with CPs, bypassing the SPs,” noted Sean Wang, president of Beijing-based WVAS player Hurray Holdings.
When Hurray listed on NASDAQ in 2005, the industry outlook was rosy. Hurray and rival SPs TOM Online, KongZhong and Linktone – all of which went public within a year of each other – were seen as being at the forefront of China’s technology drive.
The magic came to an end in spring 2006. Spotting the success of these WVAS first movers, a raft of start-ups charged into the market and, with nothing to lose, proceeded to abuse it. Swamped by complaints of spamming as well as subscription and billing malpractice, Beijing told the operators to clean up the mess.
They introduced more demanding regulatory requirements which took their toll on WVAS revenues. By September 2007, TOM Online had de-listed while Linktone, Hurray, and KongZhong had seen their stock prices hit all-time lows. Their suffering has been compounded by China Mobile and China Unicom’s efforts to license content from the CPs directly. With many of the smaller SPs having already gone bust, the larger players that remain are looking for new business.
“When the carriers started to provide certain services themselves and also started making some noise about getting a larger piece of the pie, we felt pressure from both sides,” said Hurray’s Wang. “We decided to fight back and find a way to stay in this value chain.”
What the company has done is start acquiring significant content of its own. In November 2006, Hurray paid US$2.25 million for a 30% stake in Beijing-based indie label New Run Entertainment, whose roster includes popular artists Pang Long and Nanhe Beidou. It has since added a majority stake in Beijing Secular Bird Culture and Art Development Center, which is involved in music development, production and distribution.
Meanwhile, Linktone is taking a different path, eschewing what Edward Liu, its director of corporate development, calls “subscriber-based strategies that leave SPs open to regulatory problems.”
Linktone’s best bet may be re-visiting its former glories. In 2004, the company partnered Hunan Satellite TV in creating television sensation Supergirls, an American Idol-style show in which viewers vote for their favorite musical act. Linktone provided the wireless voting platform.
It found this participation-based model – rather than one in which it cooperates with mobile operators to charge subscribers – highly lucrative and launched China Union, a similar kind of reality TV series, at the end of 2006. As well as co-producing the show and providing wireless services, Linktone also owns the rights to the China Union brand.
“Others have tried reality programming with interactivity in China but most of them have screwed up,” noted Derek Sulger, who co-founded the company and was a board member until last year. “Linktone has confidence in this area.”