China Telecom Shapes Up As Leading China Mobile Competitor

August 31st, 2008

In an earlier article, I talked about my take on the telecom shakeup in China in May. Three months after, it looks more like China Mobile is being slapped down by the State Council for growing too big too fast and being overly aggressive and dominant in the growing Chinese mobile market, which is now the single largest national mobile market in the world.

For this transgression, China Mobile is:

  • Saddled with China’s own 3G mobile standard, TD-SCDMA, which by China Mobile’s own admission is behind the competing western-developed standards;
  • Facing new marketing rulings which stand to help China Mobile’s competitors, especially the newly resurgent China Telecom;
  • Even considering partnering with Apple to distribute the iPhone in China. The only way this would make sense for both parties is if Apple agrees to build China iPhone3Gs with the TD-SCDMA chipset, since TD-SCDMA is not currently supported by the iPhone3G.

The greatest beneficiary of the great China Mobile slapdown is China Telecom, which has shrewdly positioned itself as an underdog to the China Mobile bully. With its recent rulings, the State Council is cheering on the underdog.

China Telecom, for a long time, was the odd man out, until the May telecom ruling allowed it to introduce 3G mobile services in direct competition with China Mobile and China Unicom.

Obviously, the Chinese government feels that there is a lot of room for pruning back on China Mobile’s dominant position in the mobile market.

Honey, You’re Looking Old

June 7th, 2008

In 72 hours, more than 600,000 persons in China, and 6-7M persons worldwide, are going to turn to that little something dearest to them and say those dreaded words, “Honey, you’re looking old”.

I’m not talking about their spouse, I’m talking about something they normally spend far more time with: their iPhones. Within 72 hours in San Francisco, Steve Jobs will take center stage at the Apple Worldwide Developers Conference (WWDC) to announce the second generation of the iPhone, which many refer to as the JesusPhone. We already know that the new phone will include 3G and GPS features.

Hmmmm…. Does that mean we can call the second generation of the iPhone the Second Coming of the JesusPhone?

For China, the big question is whether the new revs of the iPhone will include the Chinese government backed and developed TD-SCDMA technology, which is the local version of the 3G standard, and has now been handed over to China Mobile for care.

China Unicom and China Telecom will support competing 3G standards which are not China developed and are most likely already supported in the current chipset for the 3G iPhone.

The thing to watch for will be whether Apple starts ordering TD-SCDMA chipsets. In the meantime, dedicated users of the Apple iPhone in China will most likely switch their mobile phone accounts to China Unicom and China Telecom if they want to take advantage of China’s not-yet-launched 3G services. The thing that they should remember is that China Mobile holds the vast majority of mobile phone accounts, with China Unicom coming in a distant second and China Telecom just recently starting to offer mobile services. And 3G services have not yet launched in China, though everyone is expecting that to happen within the next six months.

In the meantime, you might not want to tell your spouse yet that she is looking old.

China’s Telecom Shakeup And What It Means

May 28th, 2008

Several days ago, a different kind of earthquake happened in China in the telecoms field. Unlike the Sichuan earthquake which took so many lives and caused so much damage, this shakeup was not unexpected. It’s ramifications will be large, if not huge, and it’s worth going into some depth to get a deeper understanding of how this change will affect the development of mobile usage of the Internet in China.

Before leaving the Sichuan earthquake as a subject, I would like to point you to this excellent slideshow by CIC Data (h/t to Tangos Chan) which shows how China’s grassroots social media has helped in the disaster rescue and recovery process.

China’s New Telecom Landscape

The main points of the new joint interagency government announcement by the MII (Ministry of Information Industry), NDRC (National Development and Reform Commission) and Ministry of Finance (MOF) are phrased as an opinion and encouragement. (Note: When you get two government ministries and one super-ministry “encouraging” you this way, you do what you are encouraged to do, even if you are China Mobile and have the largest single-country number of subscribers in the world. After all, this is China, not the US, where big corporations tell Congress and the executive through lobbyists and lawyers what they want and are willing to do, and then sell it to the American people through the media as “being in the best interests of the people”.)

The main points are:

  • China Telecom is “encouraged” to acquire the CDMA business of China Unicom
  • China Unicom and China Netcom are encouraged to merge
  • The basic telecom service of China Satellite should be merged into China Telecom
  • China Tietong (part of the railways infrastructure and the third fixed line operator after China Unicom and China Netcom) is to become a wholly-owned subsidiary of China Mobile

All six operators (China Mobile, China Telecom, China Unicom, China Netcom, China Satellite and China Tietong) have been asked to separately submit their implementation plans to the relevant ministries where they will be encouraged (again) to reconcile their different plans and agree on a schedule. Once this is completed, the Chinese government will then announce the granting of the three 3G licenses and which operators they will go to.

Following the reorganization, there will be three companies left, which meshes perfectly with the number of 3G licenses to be granted by the government. There will be one license granted for each of the new 3G technologies: TD-SCDMA (China’s natively-developed standard), CDMA2000 and WCDMA. Current opinion is that China Mobile will get the TD-SCDMA license, with China Unicom and China Telecom getting the other two foreign technology licenses.

Reaction

The immediate reaction on the HKSE, where China Mobile, China Unicom, China Netcom and China Telecom are listed was unfavorable to China Mobile, the giant in the mobile sector in China. Goldman Sachs issued a sell rating on China Mobile.

You can bet that the six companies will be burning the midnight oil to complete and submit their implementation plans so that they can get the 3G licenses as soon as possible, which should be sometime within the next 3-6 months. Most likely it will not happen before the Beijing Olympics, even though the network infrastructure is there, simply because there is a lot of training and testing to be done.

My Take

This change marks the end of the first stage of the rollout of mobile phone services in China. While China has the largest single-country number of mobile subscribers, most people use mobile overwhelmingly only for voice and SMS services. From a business standpoint, China’s telecom industry has been in a wait-and-see mode for the past two years.

This second generation, or next stage of mobile services will be about a renewed rollout and introduction of more data services, and the more important metric for the operators will be ARPU (average revenue per user) instead of number of subscribers. So please, let’s stop talking about number of subscribers, and let’s talk about ARPU instead from now on.

ARPU will be the real metric to measure the performance of the three operators. I say “It’s about time!”

This change opens crack and opportunities for investment and new players, and gives more choices to Chinese consumers. China Mobile, the industry leader in mobile services, has continued to expand the number of subscribers, having the world’s largest number of subscribers in one country, with more than 500M. China Unicom has been playing catchup because it started as a CDMA service provider (as opposed to China Mobile’s GSM) and although it also later entered the GSM field. The small independent mobile operators such as Tom.com, Linktone and KongZhong have all languished because China Mobile was seen as the dominant player which wanted to completely dominate the platform and application-level services. While it would be a real challenge for those companies to claw their way back to health, venture capital and private equity firms can now look more favorably at the next generation of mobile services, which will no longer be as dependent on a single mobile provider, since there are now three choices available, and they will differentiate on the basis of how they cooperate with service providers and services they offer to Chinese consumers.

In order for Chinese startups to survive and prosper, they will increasingly differentiate themselves on their business and execution skills instead of just technology. Good management will be key.

It goes without saying that Apple’s iPhone will be the most high-profile beneficiary of the change, since it will have two other mobile operators to talk to besides just China Mobile. Instead of just having a loyal base of hacked iPhone users in China, Apple will have a chance to test its vision of the mobile Internet with Chinese users.

The major handset makers such as Nokia, Sony-Ericsson and Samsung will also want to test their application services among Chinese users, and will have greater chance of reaching them.

There are many opportunities in search and display advertising, and subscription-based services. Most of these opportunities are not infrastructure-related, but service- and tool-related. I will talk about some of these opportunities in the future.

While this is a short-term setback for China Mobile, it will ultimately help the company because instead of becoming a lazy monopolist offering bad services, it will have to compete on service. This will make the company more competitive when China starts planning seriously for 4G.

I give the plan an enthusiastic “thumbs-up”!

This is a good example of central planning working to help competitiveness, and in favor of consumers.

It would be nice if, ahem, other countries with large consumer markets, took a closer look at this move and how it helps competitiveness.

More on China Mobile and Baidu

April 29th, 2008

This article is a follow-up posting to my previous article about why China Mobile should buy Baidu.

One of the rules for mergers and acquisitions is that if one company wants to be acquired by another company, they have to be moving in generally the same directions. This way, less management attention needs to be spent on changing direction and redirecting resources.

If we take a look at China Mobile, they are a Chinese company which has been looking aggressively outside of China. With 500M+ mobile phone subscribers in China, it has the user base and cash flow to be truly a world-class company. China Mobile is proposing to set up a development lab with Vodafone and Softbank to work on widgets and others services to offer China Mobile and Vodafone subscribers. From the surface, it appears that these two leading carriers are trying to wrestle some of their technology dominance back from Apple’s iPhone, which will offer its own Apple App Store, selling mobile apps directly to Apple iPhone users beginning in June.

Interestingly, Vodafone is helping to bring Apple’s iPhone into the Indian market. According to a recent article, Apple may be discussing launching the iPhone officially in China with China Unicom. (Note: I disagree the author’s tone about Apple not getting it right in selling in China, I think that Steve Jobs knows very well what he is doing, and is biding his time until the 3G iPhone comes out in June. China is another piece on his chessboard, albeit a very important one.)

On the business side, China Mobile has been most agressive in Pakistan, following on its purchase of Paktel in 2007, and has just launched its Mobile Zone in the country. This looks like a test learning market for China Mobile. There are not many companies which can afford to “test” in a country with a population of 180M, China Mobile is one of them.

Based on this, it would be fair to say that China Mobile is leaning forward into overseas markets. It has enough money in its coffers to expand more quickly, but the most serious barrier is lack of international management talent who can execute in non-Chinese markets.

In contrast, Baidu is much more focused on the Chinese domestic market, where it continues to grow and pull ahead of Google. Everything suggests that the Baidu management believes that there is much more room for revenue growth domestically in China. The only tentative step Baidu has taken outside of the China market is with Baidu Japan (baidu.jp), which has only 0.3% of the Japanese search market.

Compared to Google, Baidu still continues to go after the easy money in China. Google continuously introduces and refines it search algorithms which are the secret sauce of its success. In comparison, Baidu relies less on search algorithms, instead using human search to assist in search results.

Baidu’s search results are also fundamentally different from Google’s. While Google’s search results strictly differentiate between unpaid organic search and PPC advertising, Baidu makes no such differentiation. The end result is that unpaid search results are pushed further back in position on the search results pages.

If there is one challenge in Baidu’s reliance on human-assisted search (as opposed to automated search algorithms as Google uses) and giving preference to paid advertising over unpaid in search results, it is that while it boosts revenue in the short-term, it is not extensible outside China, except for some of the other East Asian markets (Naver.com in South Korea is one such example. It would be nearly impossible for Baidu to oust Naver.com from its leading position as the home-grown leader in that very nationalistic market.)

Here lies the challenge: China Mobile is looking outside of China now, and Baidu is still looking to grow revenue on the domestic market, while nearly ignoring the overseas market.

Is there room to narrow the gap and create a new company for mobile search advertising and location services, first in China and then which can be extended overseas?

That is the challenge.

Why China Mobile Should Buy Baidu

April 26th, 2008

A few days ago I read an interview with Steve Jobs published in Fortune in March. One of the ideas which Steve Jobs put forth is that you really need to understand the technology issues, then follow how they will roll out in order to be successful. Apple has a certain advantage because it owns the operating system and the hardware. This means that the hardware and technology can be integrated much more tightly together.

This makes me think that one of the issues with the current media and advertising space in China is that there is not enough understanding of the integration of the hardware and software. Basically, DoubleClick came up with the idea of the banner ad, then Google came up with the idea which came from came up with the idea of PPC advertising on the search results page, and the algorithms which would optimize the system to become a money machine for Google. For too long, players in this space have come from the media space, offering a “me too” solution full of buzzwords but with little real content to differentiate.

What did Google do which was so different from Yahoo!, the leading Web 1.0 portal? They got very close to the technology, to the point where they built the servers and disks, and created MapReduce, Google’s search technology which could run on huge clusters.

Now, I hear a lot of talk about all the startups in China, but most of the time, I don’t see how any new technology is used to take a whole new look at how advertising should be delivered over a complex network. Most are consumer plays which do not deliver anything spectacular. That would not be an issue if they had a good feel for the marketing process, but more often than not, they do not. As a result, most advertising buys gravitate to the big online media companies, which include Sina, Sohu, Netease and QQ, as Kaiser Kuo frequently talks about in his blog at Ogilvy China Digital Watch.

In fact, we are just at the beginning of a whole new wave for technology and advertising: this is the mobile wave. Handset makers now only pay US$15 per handset for software, and with the upcoming development and launch of Google’s Android, per handset payouts are going to go down even more. This means only one thing: there will have to be a steady advertising revenue stream to finance all the content. The mobile network though is not one network, it will have to be two:

  • The search and search results network including GPS location-based detection
  • The network delivery system

In software development, there is the MVC or model/view/controller system for software design. The rules are defined at the model level, there is the presentation end for how the viewer sees the content (Apple is now taking a grab at this with the Apple iPhone) for view and the controller, which connects the rules at the model level with the view, and handles delivery.

Basically, Apple is trying to leverage its control of the iPhone audience at the view level to get leverage with the carriers, who act at the model level. In some markets it has been successful, but not with China Mobile so far. The handset makers such as Nokia, Samsung, and LG have solutions, but since their product lines are spread across so many products, they have little leverage unless they came up with their own operating system and hardware as Apple has. What are the chances of that happening? Microsoft has a solution with Microsoft Windows Mobile, but it is just one among many players and does not have a dominating position on any of the model, view and controller levels of the mobile network.

China Mobile has made no secret of its plans to control the platform as much as possible by virtue of its near-monopoly role in this space. Ultimately, it will have to make marketing choices about what audience it wants to serve: the casual youth market or the productivity worker, and how to maximize revenue from the market they choose. The only way for them to avoid having to make this choice is to offer contextual advertising on the mobile network. It would make a lot of sense for China Mobile to buy Baidu to protect its mobile advertising revenue stream from Google, and then make a serious technology effort to combine improved search algorithms with location services. Search technology involves a great deal of non-trivial technology which cannot be easily replicated, even by a company as huge as China Mobile.

As for smaller players, they will have to come up with ways to get revenue from a market which has been bombarded with a huge amount of free content.

Google has a tremendous advantage with the Google Android operating system, which will have hooks built into it for search and location services. If you think that they are giving a mobile phone OS away for free just because they are nice people, you are delusional. They are offering a new mobile ad platform with other services to attract developers.

I expect that the mobile network will very soon become the “smart network” compared to the PC-based network, which will become the “dumb network” because it does not have location sensitivity. (Of course, newer computers will have location sensitivity. This will then combine with Google’s current services to deliver ads which will make the current ad networks look like something from the Stone Age.) The PC network will continue to be good for banner and brand advertising, but if you really want smart contextual advertising which operates on a PPC basis, mobile will be the leader.

The smaller mobile players will have to pay “toll fees” to the model (China Mobile, China Unicom, etc,.) and view (Apple) players. It will be much harder to get onto the technology ramp for mobile than it is for the PC, at least in the beginning.

Apple’s iPhone Computer SDK Just Changed the World Today

March 7th, 2008

iphonesdk.jpeg

In Sept. 2007 I wrote an article about how Apple’s global marketing for the iPhone was attracting and creating a new user base in China. Now, we know that there are more than 400,000 unlocked iPhones in regular use in China.

Since Apple gets recurring revenue for the iPhone through its contracts with the operators, many analysts have said that these unlocked iPhones represent lost revenue for the company. In China, China Mobile gets all the revenue spent by users for moving data up and down from the cracked iPhones, and does not have to share any of the income with Apple. And the statistics show that iPhone users consume much larger amounts of data than competing mobile phone platforms.

Obviously this is a serious loss for Apple.

I say “Not so fast!”

Today, Apple just announced its new iPhone SDK. Now, the Apple iPhone will talk with Exchange servers, morphing the Apple iPhone from something corporate IT departments viewed as a consumer toy, to a full-fledged platform on a par with Blackberry, Windows Mobile, Symbian and Linux.

As in most Apple presentations, the most important stuff always get buried close to the end of the presentation. That was the announcement of the Apple App Store, which will allow developers from all over the world to build and sell their iPhone applications. Developers will be able to charge any price they want, and Apple will keep 30% to cover hosting, distribution and credit card fees. The App Store will be available as a new button on the iPhone beginning in June. Presumably, this download will work on all iPhones, including cracked and jailbreaked iPhones.

Make no mistake about it, this is truly revolutionary news. The iPhone platform has taken over the role which the carriers once took for themselves. Today is as important a day as when Apple announced the Macintosh platform in 1984, singlehandedly launching the desktop computing industry.

Today Apple launched the mobile applications industry. When the Macintosh platform was launched in 1984, it led to the growth of Microsoft with the Office applications suite, which was developed for the Macintosh before the PC platform.

Now, do you think that Microsoft will have enough sense to develop apps for the Apple App Store, or will they continue to stick to developing for the Windows Mobile platform only? My feeling is that if Microsoft developed for the Apple App Store, they would get traction very quickly, if only they would let their developers develop.

Make no mistake about it, today, Apple launched the mobile computing industry with the iPhone computer SDK which user statistics show, is the favorite platform among consumers, and is gaining headway in the corporate space.

Even in China, where it is not officially sold and supported yet.

With the iPhone computer SDK and App Store, along with Apple’s excellent development tools, any developer with any sense will start building apps for the iPhone computer.

Including in China.

So where does this leave China Mobile? Much press has been devoted to Apple’s unsuccessful negotiations with China Mobile to distribute the iPhone in China.

In reality, the interests of the companies are aligned.

  • Both China Mobile and Apple want the mobile computing industry to succeed.
  • Both stand to make MUCH more revenue when the platform takes off.

Right now, they are just jockeying for position in this new business ecosystem. Where they rub against each other is on the applications platform level, which China Mobile wants to control as much as possible, and on the revenue share level, which China Mobile wants to control, and does not want to share with anyone.

Today, Apple just won on the application platform level round on the rapidly growing iPhone computing platform.

But I predict that China Mobile is quietly pleased with all the extra revenue data consumers on the iPhone computer platform have been generating, and which it does have full control over. Have you noticed that China Mobile has not broken out those revenue numbers yet? When the Apple App Store launches in June, those numbers will shoot up even higher.

You see, there is nothing wrong with being a commodity data mover when you run into the ideal data platform for users.

Round two will be about who will define ad standards and specifications for the iPhone platform (Apple), and how advertising revenue will be shared in different markets on this platform.

Chinese-Language Search Grows, and the Mobile Internet…

January 28th, 2008

Rupert Murdoch and wife

Everything else being equal, it is safe to assume that human language-specific search should closely map to populations. For example, the US population is 300M, Canada’s is about 30M, the UK is about 60M, and Australia is about 15M and New Zealand is about 4M. These are the main English-speaking populations, and they total about 4.1B, and make up most English-language search. Of course, there are many other English speakers living in other countries, and there are many non-native speakers who also choose to search in English for their own reasons.

Most of them use Google as their leading search engine.

There are about 1.3B Chinese who use Chinese as their language of choice for search; for the most part, they use Baidu.

If the Chinese searched as much and as frequently as Americans, Canadians, Britons, Australians and New Zealanders combined, it is safe to assume that Baidu’s Chinese-language search would have about three times the volume of Google’s English language search.

This has not happened yet, but this report shows that the growth trend for Baidu’s Chinese language search is beginning, since it has already overtaken Microsoft, according to this report from Techcrunch. In China, Baidu commands more than 60% of the search market share, while Google’s Chinese-language search in China has only 20+%, and the gap appears to be growing…

In the US, Google is putting its efforts into the mobile Internet, and sees the mobile phone as soon replacing the PC-based Internet as the access device of choice for most people, even in the US. In China, South Korea, Japan and Europe, the mobile phone already is the access device used by most people, which accounts for the huge volume of SMS traffic.

Google Android is the major part of Google’s effort to define a mobile platform for communications. Since the Chinese carriers, especially China Mobile, and Baidu, have not yet defined an SDK for the mobile platform, many assume that Google will soon have a mobile strategy in China which will turn the tables on its Chinese competitors.

My answer to this: “Dream on…”

China Mobile has a well-deserved reputation as a very tough company to deal with in China, but they are not stupid…

The Economist has an excellent article on Rupert Murdoch which is in fact a review of a book titled: “Rupert’s Adverntures in China: How Murdoch Lost A Fortune and Found A Wife”.

All’s well that ends well…

It makes me wonder if the presence and performance of many western companies in China can be explained as company-financed executive wife searches?

Maybe Google should take heed.

Apple’s iPhone Marketing in China Leverages Global Buzz

September 5th, 2007

Apple’s iPhone

What do you call it when people pay nearly double current sales price to buy a product which is basically crippled of its most important function, and the maker has spent zero marketing dollars to sell the product?

I’d call that pretty powerful buzz marketing.

According to this USA Today story, some Chinese are willing to part with 8800 yuan to own an iPhone which doesn’t have working phone capabilities in China, because Apple has not yet signed a partnership agreement with a carrier. (Presumably, Apple would part with China’s leading mobile service provider, China Mobile, to launch iPhone service in China.)

Any way you look at it, Apple’s iPhone has had a successful launch in the US. Apple has taken its legendary experience in hardware/software design and integration and applied it to a whole new product, the mobile phone, bringing good design sense and functionality to a product which has confounded most users for years. On the marketing side, Steve Jobs has put the reality distortion field into overdrive, convincing many Americans who have never used smartphones before to part with their money. A few analysts have gone so far as to predict that Apple will replace Microsoft in the mobile space, becoming the leading player for a new category combining hardware and software design and integration in mobile computing. A report which came out on Sept. 4 has claimed that iPhone sales in the US in July have already beaten smartphone sales.

In China, mobile phones are very popular and are more than just communications devices. Often, with the Chinese concern for social rank, they are indicators of social status. On the business side, this translates into frequent replacements of handsets among China’s rising urban middle class as users want to have the latest devices. Mainly for this reason, handset makers have placed most of their research and development in China, to lower costs and to be close to trends for their single largest market.

But could Nokia, Motorola, Samsung and LG have missed something Steve Jobs and Apple saw, an opportunity which Jobs’ gang could not pass up? And could the high rate of handset sales belie not only a desire to have the latest mobile device, but be an indicator that Chinese users were not satisfied with any of the handsets made by any of the major hardware makers?

Moreover, could this represent an opportunity for Apple, which has never had major market presence in China for its computer business, but has made limited inroads with its iPod business? And is this a major opportunity for iPhone in a major emerging market?

First of all, let’s take a look at what Apple has done differently. In typical Steve Jobs style, Apple has played God, giving buyers a complete final sealed package and solution, including software (a version of OS X) by Apple, and a hardware design by Jonathan Ive, Apple’s superdesigner who has been largely responsible for the elegance factor in Apple’s products. To the consternation of a new generation of software developers, Apple has provided only very limited support and documentation for designers of third-party applications for the iPhone. But even with this very limited support, something interesting has happened: the developers have organized themselves to develop new apps for the iPhone.

When was the last time you heard of a large group of developers organizing themselves to develop and extend apps for new Nokia, Motorola, Samsung and LG phones? And for nothing?

While Apple and Steve Jobs try to create consumer reverence somewhere along the lines of Moses coming down from Mount Sinai with the Ten Commandments, the fact is that the first iteration of Apple’s products still are far from perfect. But the products always gets better. This reveals something about Steve Jobs which he strives to keep from the market: he listens and acts on intelligent customer input.

Uniquely among major hardware/software companies, Apple does not use focus groups. Designers design for Steve Jobs: designs and features Steve Jobs likes are kept; designs and features he dislikes are tossed away. There are no focus groups by marketing groups for senior management to use as crutches for their decisions.

If you look at it closely, what is happening with all the buzz for the iPhone is a mirror copy of what happened when the iPhone was announced on Jan. 7 at Macworld in San Francisco. The six month waiting period created a huge amount of pent-up demand and free buzz for the iPhone in the US, which translated into record sales for the product when it was launched on June 29.

Now, it’s happening even in China.

Genius. Pure genius.

How Chinese Use Their Mobile Phones

September 4th, 2007

Last night (Sept. 3) I attended the Mobile Users Panel held by Mobile Monday in Beijing. This event was held at the Radisson Hotel. This event was the evening part of the Wireless Developer Forum sponsored by Sony Ericsson and Nokia.

I always like to listen to how users use new technology products and services. There are a lot of very smart technology and business people who, at the beginning of a project, have all kinds of ideas of what they are going to build into the next killer app. Then, when they test the product on a focus group, they are always humbled by the experience. I call this phenomena “the revenge of the user”.

Mobile Monday assembled a four-person panel: one 25 year-old research student (technology) from Chongqing and who had lived in Beijing for the past seven years; one 18-year old high-school student who called himself Rico, and appeared anxious to test his fairly good English on the audience; one 25 year-old female math teacher in high school and one 30+ tech startup guy. Because the 25 year-old researcher and the startup founder knew more about technology, I tended to discount their views, and was much more interested in how the 18 year-old high school student (Rico) and the 25 year-old female math teacher used their mobile phones.

Benjamin Joffe, CEO and founder of Plus8star, presented the questions, and a female co-host did the English-Chinese translation work.

The 25 year-old researcher spent about 150 yuan on service charges per month, and was a subscriber to China Mobile’s M-Zone service package, which is targeted at youth. He made about 10 calls daily, and received 20-30 SMS messages daily.

Rico also subscribed to the M-Zone package, which offered 800 SMS messages monthly. He would send about 40 SMS messages daily, which would suggest that even 800 SMS messages a month is not enough for him. He used a Samsung phone; previously he had used Nokia phones. Although he was only 18, this was already his 10th phone, which seemed to cause a gasp in the audience, and Benjamin Joffe did a double-take when he heard this.

The 25 year-old female teacher also used the China Mobile M-Zone service, but also used PHS service at home because of the low monthly charges. Her use was much lighter than Rico.

When it came to services used, Rico said that he had once used China Unicom, but the monthly charges had gone up to 300 yuan a month, and he had cancelled. The rate he seemed most comfortable was in the region of 150 yuan monthly.

Aside from the 25 year-old researcher, all had more than one phone and one SIM card.

Benjamin Joffe asked all of them if they knew about 3G. Rico said that he didn’t know the details, but that he thought that it meant there would be higher quality services at lower prices. All said that they occasionally played casual mobile games and never expected to pay for them. This would suggest that entertainment on the mobile platform is headed for an advertising model.

It became most interesting when Benjamin asked what single feature they would like their next phones to have. The answer from both the female teacher and Rico were maps. Rico suggested that he would also like GPS so that he could find his way around. The female teacher recounted how she got lost meeting her class one day on a day trip, and how helpful it would have been to her to have a mapping service; she said that it would have prevented her from being some 10 minutes late to meet her class.

Maps and mapping are still sensitive government-regulated issues in China, and it will be interesting to see how the different regulatory ministries will reach consensus on how to offer these services.

My conclusions are:

  • It will be very difficult to monetize mobile content in the next 2-3 years because of government regulatory hurdles and a generally challenging environment.
  • While China is a very big market in the mobile and Internet space, users are still very price-sensitive. Most teenage urban users would cap their monthly subscriptions at 150 yuan, and 300 yuan would be a ceiling for most salaried people. (Rico was spending his parent’s money; and I assumed that working people would be willing to spend up to 300 yuan of their own income on monthly mobile services.)
  • Just because someone likes a service a lot does not mean that they are willing to pay for it, so please remove those rose-tinted glasses and stop fantasizing about the “China market” is my advice to those entering the Chinese market.
  • Mapping and GPS on mobile phones are the killer app, but are currently regulated by different Chinese government ministries. Currently, there are still no standard published APIs for accessing an online mapping service. A lot of horse trading will happen before everything gets sorted out on the government level. When that is done, advertisers will have to figure out how to monetize maps and GPS services, which involves yet another round of horse trading.
  • The times when telcos and their partners were fantasizing about people spending kajillions of dollars, yuan and yen on mobile services will be hit hard by the expanding credit crisis. I expect users worldwide to put fairly solid ceilings on their discretionary spending, at least in the US. In China, the government may further slow down credit expansion since they have already seen what fast credit expansion has done in the markets of Japan, South Korea and Taiwan, where there are swathes of the local populations which have become victims of their monthly credit card payments.
  • The ultimate measure of how much users spend on mobile services is ARPU (average revenue per user). While China is much larger than Japan in population and market size, the amount of revenue generated by the telcos in the two countries are about the same. It’s going to be a long long time before the average Chinese user spends nearly the same amount on mobile services as the current Japanese user does.