China's NASDAQ-listed internet portals, epicentres for a fast growing, cashed-up, online urban economy, had analysts and investors swooning in the years following the dotcom meltdown. China is the golden land for internet investors, adding 4-8m mobile subscriptions monthly, adding up to 800m mobile users come 2010. In the second half of 2004, however, the waters turned choppy, sinking stock prices as investors jumped ship, fearing new and tighter regulations would cut revenues.
Raymond Yang, chief executive of Linktone, one of the largest portals, remains bullish though, certain that long-term prospects remain bright and that telcos will be kind to portals providing full customer service and marketing. Indeed, business was hitting its stride again: 2004 unaudited topline revenue was US$50m, a 200% increase over 2003, delivering a net income of US$12m, up 250% on 2003, as Yang told CHINA ECONOMIC REVIEW in a recent conversation. Excerpts:
Q: Last year the Ministry of Information Industry launched high-profile crackdowns on internet cafes deemed harmful to morals and introduced regulations, such as raising the bar for paid-up capital, and pushed the telcos into reforming charging mechanisms after a chorus of complaints about overcharging by content providers. That has led China Mobile to introduce a unified gateway for charging that it controls. Are you worried this will have an adverse effect on revenue splits, as some analysts and investors fear?
A: I talked with senior executives at the operator recently. They assured me the basic revenue split is not going to change from 15 to 85. However, for content providers that don't provide customer service or marketing, the operator is probably going to increase its share of revenues to offset that. Regulatory change creates huge turmoil but also huge barriers to entry; it's very hard to create a new Linktone.
Q: New regulations are also having the effect, intended or not, of sparking a shake-out in the sector, where 10% of the 3,000 content providers take 90% of the revenue, and talks of mergers and acquisitions. Meanwhile, we've seen Shanda, the largest online gaming platform, take control of a Korean rival game developer and make a bid for control of the portal Sina. Is Linktone looking to buy up struggling players, or even a rival?
A: There are only a few [major] players left and the market is big enough for all of them. Linktone is one of the few in the space to have very comprehensive product range. I don't see how even Shanda, which is doing well in online gaming, can compete with a company like Linktone. That's why they had to try buying something else. For smaller players, they can become content providers. But how can they produce better quality content than us? We have the best people. In reality, those people are being pushed out of the space. Some companies have never done M&A, like Netease. Others, like Shanda, have done a lot. Within the next 12 months – sooner maybe – Linktone is going to be making some significant acquisitions. We are looking very actively for different types of businesses and companies that complement our existing business, like online casual games or online communities. We still believe wireless is going to grow, so that's one area we are looking at. We also have to look at complementary business by the product they make, the channels they have, the team they have.
Q: While M&A looks like it will be a significant source of new customers for Linktone, are you still trying to sign up new customers through other channels?
A: Linktone now has more than 7m paying users a month and 20m users in our database. The majority of our new customers are coming from non-operator channels. More than half of our new customers come from print and television advertising and tie-ups with FMCG companies. Linktone has taken a very grassroots approach, with sales and marketing teams in every province working with the operator because China Mobile is very decentralized.
Q: Major foreign content providers, like 123 Multimedia from France and US-based Jamba, are eyeing moves into China. More foreign films are finding their way into Chinese cinemas, with more certain to follow as World Trade Organisation rules force China's markets open. Each of these potentially represents huge mobile content opportunities. Do you think these developments will open huge new libraries of content for Linktone to offer its customers?
A: I don't necessarily believe 100% of foreign content will be used here. Some, like movies, will. But others will need to be localized. China is so big, the culture is so diversified, people in different areas will like and enjoy different things. You have to work with the local operator to promote this.
Q: Until now it has been ringtones, wallpapers, news, chat and music. What's the next big thing?
A: Wireless gaming is going to be huge. Bandwidth will not be an issue. Even further on we will move into mobile payments and mobile monitoring, checking on traffic or kids at home, or what's happening at the office. There are many, many things we can do. Operators are still doing their internal trials. We are one of the largest players – when they're ready, we will be there.
Q: With 3G seemingly around the corner and a host of other wireless technologies, like Wimax coming along, will there be a place under the sun for the short message service (SMS) that has been the main vehicle for delivering the online services market, for content providers and portals, in China and worldwide?
A: SMS is a stepping stone to the next-generation of wireless data services. It creates the perception that the phone is no longer just a telephone, but a data source and entertainment device. We're moving from this SMS 2.5G to the internet. This is a huge user base. China is a very mobile-centric country com pared to Western countries which are very PC-centric. SMS is not going to go away because it is so effective and so cheap. It will remain a very practical way to communicate. MMS [multimedia message service] will also still exist. It's like a magazine, but the difference is that it's interactive. People can also click to reply, so we can collect a lot of feedback. IVR [integrated voice response] and ringtones are still going to stay, even with 3G. 3G only offers better bandwidth, so people can download video or true tones. Ringtones become video-tones.
Q: With foreign players looking at China and trade barriers worldwide coming down, in theory at least, as World Trade Organisation rules take effect, is Linktone looking to expand overseas, especially as much of its content has a cultural affinity for East Asian neighbours?
A: Since China is such a huge market, this is our core competence, our core focus, but we certainly do not eliminate the possibility of going abroad to Asia, or even the US. However, it is too early to say anything though. The only question is the size of the population. Singapore has only 4m people; that's one month of new users in China.