China, the current king of knock-offs, is proving to be somewhat of a pioneer in executing business models invented elsewhere. However oxymoronic that may sound, the fact is, the Chinese are recycling tried-but-not-necessarily-bankable business models, adapting and taking them to new heights by taking consumption cues from their country's culture and psyche. In many respects, China is uncharted territory due to the immaturity of its market, but arguably it is China's pubescence that makes its markets so open to experimentation.
"There are lots of new business models [in China] that you've never seen elsewhere before," said David Zhang, a venture capitalist with WI Harper.
China's mobile communications industry, for example, has spawned business models notable for their unparalleled scope and scale. In a land where the masses live and die by their mobile phones, preferring their immediacy to the personal computer, China is leading the way in monetizing mobile content, particularly the killer app of text messaging, also known as SMS. Companies like Linktone and Tom Online have ridden to riches on the backs of such wireless value-added services (VAS) as custom ring-back tones, multimedia SMS and a smorgasbord of entertainment options. While China is not the first to adopt wireless VAS, the mobile phone as a content distribution platform is widely embraced there. The subscriber base, numbering about 335 million at last count, demonstrate more than a willingness to adopt new generation phone technologies that enable richer and more interactive content – a bridge to ever-more lucrative new offerings and business models.
After Tom Online met with a slowdown in the first quarter this year, it looked to leverage mobile entertainment venues like interactive voice response (IVR) in which users dial into a number to listen to everything from astrological predictions to jokes. In its second quarter, Tom's IVR revenue totaled over US$1 billion, versus US$830 million in the first quarter.
China's state radio stations and TV channels are getting in on the act too. Their formula is simple: invite listeners or viewers to vent their approval or (apolitical) disapproval via text messages, then dig deep into the ensuing SMS revenue stream. The "supergirl" phenomenon – in which female contestants vied to be anointed China's singing sensation by a voting fan base – is perhaps the most celebrated example of milking the SMS model, all the while driving the mania of a TV show to fever pitch and raising the premium of its ad slots. All told, up to nine million votes were dialed in for the final voting of Supergirl, essentially a copycat of the US reality hit 'American Idol'. The show's producer, Hunan Satellite TV, gave fans a generous quota to vote 15 times, a move that is nothing if not calculated. Hunan's take from SMS was a cool US$3.7 million, which managed to eclipse the US$2.4 million take from the commercial spots, an eye-brow-raising feat. According to state media, the SMS from the millions who rang in their Supergirl pick will account for half of Hunan's total profits in 2005. While the entire 12-week season of 'American Idol' generated a record 41.5 million text messages – impressive for a country where SMS is largely unused – experts say the takeaway there is that Americans may be waking up to SMS.
At a rate of RMB0.10 (1.2 US cents) per text message, coupled with millions of mobile phone users, the numbers can grow quickly. By year-end, mobile phone users in China will total 400 million, up 20% from 335 million at the end of 2004.
For businesses that understand the centrality of mobile phones in the Chinese lifestyle – much in the way that the PC in the US is the go-to for connecting with the world, there is much to mine from the mobile-centric Chinese.
"The wireless phenomenon has created new opportunities," said Derek Chen, a venture capitalist with VC firm SAIF Partners. Global companies have recently sought to cash in on the mobile content cravings of Chinese consumers. MonsterMob, the British mobile phone service and content company, in August announced plans to buy ATOP Century, which supplies ring-tones and pictures to Chinese mobile users, for US$100 million. Nokia is now in talks with TV station Television Broadcasts about launching a handset television service in Hong Kong by the middle of next year.
On the corporate side, business innovations are also brewing, and one example is the emergence of the so-called out-of-home television advertising network providers, led by Shanghai-based Focus Media. Going beyond traditional venues of television, billboards and print media, Focus Media has hit gold with a new advertising model for China: reach Office workers and upscale consumers by running continuous television ads on digital displays in the high-traffic buildings and retail outlets that they frequent. The model is not new. The US has Captivate Networks, the country's largest elevator media network delivering advertising and programming (like news broadcasts). The model, however, has not caught on in America as most elevators are absent of advertising; in fact, when Captivate first announced it would air in-elevator advertising, consumers were up in arms over what they considered to be a violation of choice as captive audience in an elevator.
The twist to this model in China has been to place the digital displays outside the elevators to capture more eyeballs. Focus Media, which in June debuted on the NASDAQ and now has rival Target Media on its heels, makes money by selling advertising time in those slots. At the end of the first half of 2005, Focus Media had more than 35,000 displays in its network covering more than 35 cities. In August, the company reported second quarter sales of US$14.6 million, a 128% year-on-year gain. The total number of 30-second ad slots sold on Focus Media's commercial location network in the second quarter was 3,057, with average advertising revenue per time slot (ASP) of US$4,573, versus 832 time slots and an ASP of $6,607 for the same period last year, and 1,998 time slots and an ASP of US$4,721 for the previous quarter. The company said the average ASP declined because it was selling more time slots in cities with lower advertising rates.
Companies like Focus Media and Target Media can thrive, owing to China's nascent market conditions, among them a fragmented real estate market. "There are a lot of new buildings going up, and they're owned by individuals rather than big groups, which tend to create entry barriers. But with individuals, no one has disproportionate bargaining power," said Wayne Tsou of the Carlyle Group, which recently funded Target Media. The fact that the Chinese spend a lot of time outside their homes also lends credence to this "but-of-home" advertising model, Tsou said.
What's next for Focus Media? Though he did not elaborate, the company's chief financial Officer Daniel Wu said in a recent earnings conference call that "We pretty much cover China comfortably at this time; however, there are cities that we are looking at to make acquisitions." He did not elaborate on possible targets. The company is also reportedly eyeing other venues such as hospitals, restaurants, cinemas, golf courses, airports and even beauty salons.
For WI Harper's Zhang, Focus Media's model is compelling because of China's budding advertising market. "China's ad market is not efficient and is still evolving. There's a lot of wasted money and advertisers are not reaching their market, because newspapers, billboards, televisions are oversaturated." Cultural idiosyncrasies play a role here too. In the States, Zhang says, these models are considered "Invasive" and met with limited success, but in China, no one seems to mind the never-ending looping of car and cosmetic commercials. That isn't to say China is a complete open book. The business models that fly in mature, Western markets, do not necessarily resonate in China. It is also dangerous to assume that China is a homogenous market: even between the coastal regions, tastes and habits can vary. Electronic payment and the credit card revolution have yet to subvert the cash-only dealings, making some multinationals, most notably online retailers, reticent to import their homegrown business models. Dell, for example, took care in taking its direct marketing model to China, knowing the Chinese prefer to see and touch before buying.
However you slice it, the scale of the Chinese market is an undeniable force behind China's new business models. "The brand new business models special to China are predicated on China's mass consumer markets," Zhang said. "Four hundred million is a lot of applications that you can push to consumers. There are a lot of companies that can go public on that consumption."