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Reshuffle Affecting Telecoms Industry

Twenty-three-year-old Jason didn't expect he would find a satisfactory and rewarding job so quickly after graduating with a Bachelor of Science degree in computer sciences.

 

One month after his graduation, he received his first job: An engineer with a Beijing-based mobile service provider.

 

The firm is one of the top 10 players in China's mobile value-added service market. The company is planning an initial public offering (IPO) on the tech-heavy New York-based NASDAQ.

 

Jason declined to reveal his company's name. He also didn't want to give his first name.

 

Jason also never expected to lose his job within two months.

 

His company was fined nearly 1 million yuan (US$120,000) by China Mobile, the country's dominant mobile operator. Its multimedia messaging service, sent mainly to China Mobile's subscribers and which is one of the firm's three pillar business lines, was also suspended.

 

Jason and his company were victims of the ongoing reshuffling of the mobile value-added service (VAS) sector in China. That process will be enhanced this year.

 

Year of reshuffling

 

"It will be a year of adjustment in 2005," said Zhou Yi, a mobile VAS analyst with Beijing-based market research house Analysys.

 

He suggested larger firms will control larger shares of the segment, and smaller players will disappear.

 

An Analysys report on China's mobile VAS industry last year, which was released last week, predicted 20 percent of the players will hold the lion's share of the market, while 40 percent of the service providers (SPs) will either be eliminated or withdraw from the business.

 

The remainder will continue on, but with shrinking revenues and profits.

 

Wang Leilei, chief executive officer (CEO) of NASDAQ-listed Tom Online, has a more dire prediction: Half of the 2,000 SPs will disappear this year.

 

A sector-wide slowdown -- which has even affected short messaging service (SMS), multimedia messaging service (MMS) and wireless application protocol (WAP) -- is the main reason for the reshuffle.

 

Analysys said China's VAS market, including services provided by mobile operators and SPs and the service charges by mobile carriers, was worth 30 billion yuan (US$3.6 billion) last year. That was up 60 percent year-on-year.

 

Although the 60-per-cent growth rate would be a desirable number for many industries, it was too slow for the mobile VAS business. The growth rate had been several times greater in the previous two years.

 

The Chinese Government's efforts to curb the spread of pornographic and illegal content via mobile phones led to the suspension of many SPs' businesses.

 

China's two mobile operators, China Mobile and China Unicom, also launched new schemes to stop SPs from harassing subscribers with junk messages, and from charging subscribers without their consent -- or, sometimes, their knowledge.

 

Almost all of China's major SPs were fined or otherwise punished during the campaigns last year. Some smaller firms even closed.

 

Zhou said new investments continued into the sector last year, despite the regulatory efforts. That means the full impact will be felt later this year.

 

A regulation recently implemented by China Mobile will likely add to the difficulties encountered by small firms. The regulation requires SPs to sign SMS and MMS service contracts with every provincial subsidiary of the mobile operator.

 

Zhou Yunfan, CEO of Beijing-based SP Kongzhong Corp, said the regulation could have a significant impact on small SPs, which do not have the financial and human resources of large firms. As a result, they may have a hard time supporting the development, in all provincial units, of China Mobile.

 

Zhou Yunfan said his company has signed agreements with more than 20 provincial subsidiaries of China Mobile.

 

Tom Online has also completed negotiations with 23 subsidiaries under the world's biggest mobile operator, in terms of subscribers.

 

Market maturing

 

As a result of the slowdown, the market will become more mature, as many SPs will focus more on their businesses, rather than making quick money by cheating subscribers or sending illegal information.

 

Analysys' Zhou predicts the mobile VAS market will grow less than 30 percent this year.

 

SMS will continue to be the biggest slice of the pie. It is expected to generate 33 billion yuan (US$3.99 billion) in combined revenues for the SPs.

 

The increasing number of mobile subscribers and low-end users' attraction to SMS will be the two main reasons for the growth.

 

However, as most of the text messages are sent between phone users, SPs won't be overly excited by the growth of SMS.

 

The real stimulus will come from the so-called 2.5G services, such as MMS, WAP and Java downloads.

 

WAP services are forecast to grow from 2.9 billion yuan (US$350 million) last year to 4.7 billion yuan (US$568 million).

 

Revenues from multimedia messages are expected to more than double, from 700 million yuan (US$85 million) last year, Analysys said.

 

Revenues from Java downloads will experience the fastest growth, from 100 million yuan (US$12 million) last year to 1.5 billion yuan (US$181 million).

 

Wang expects colourful ring-back tones, which allow subscribers to use individualized ring tones on their phones, interactive voice response and WAP will be the sector's top three growth engines this year.

 

SPs are being encouraged to adjust their strategies and operations, as the days of making quick money are gone. Now, mobile operators will have greater control over the industrial chain.

 

Analysys' Zhou suggested China Mobile might change its revenue-sharing scheme with SPs, and that it might change the proportion in favour of itself.

 

Currently, SPs receive approximately 85 percent of the revenues, while China Mobile receives about 15 percent.

 

China Mobile reportedly is unhappy with that arrangement.

 

The mobile operator last February launched a mobile information service centre (MISC) platform, which is capable of monitoring the content and amount of the services SPs provide. It also prevents the infringement of consumers' rights.

 

Zhou said the platform will win the trust of subscribers, and it will be good for the long-term development of the mobile VAS business. However, the importance of SPs will be reduced.

 

SPs must find new ways to add value to their products and services so they can maintain their positions and profits.

 

(China Business Weekly January 21, 2005)

 

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