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By Gordon Chu | June 16, 2009
My 3G Nephew
January 2009 marked a momentous moment in China – 3G licenses were issued to just 3 mobile companies in China. It was a long-time waiting, with rumors of 3G in China since the middle of 2004, the global mobile industry waits in anticipation to see how it will play out in China. Although The Economist suggested in 2001 that the sizable investment in the 3G infrastructure is one “the biggest gamble in the economic history of mankind”, the sheer size of China’s market makes this a very interesting market for content providers with huge risks and huge rewards.
To put China’s mobile market in perspective – China has the largest ‘pure mobile population’ – 670 million subscribers, 400 million of whom does not own a personal computer (MIIT 2009). China is also the largest mobile entertainment population – with 35% of the mobile subscribers in China who use their phones to listen to music, compared to 6% in the US (M:Metrics 2008). China also happens to be the largest mobile Internet population – with 117 million mobile subscribers who have accessed Internet through mobile in China (CNNIC 2009). Lastly, China is the largest mobile operator – feeding the 3G network with $6.2 billion in 2009.
Even the deep-frozen tundras of venture capitals investments are thawing and more dollars are flowing to Chinese 3G start-ups despite this cold economic winter. And, the global media companies, who have been scared off for years from this ‘pirate land’, are also eyeing the China market with new 3G strategies. It seems that with all this buzz about the 3G network in China, everyone is packing (and packing well) for a ride on the ‘3G train.”
As Mr. Tomi Ahonen, the former Global Head of Business Consulting at Nokia, pointed out:
“We can now say, with great confidence, that any 3G investment in an Industrialized World country, that has been reasonably well managed, should turn a profit.”
Let me stop right there before I claim my ticket on the 3G bandwagon. Yes, all roads seem to point very positively for an unprecedented growth for China’s mobile industry. Yes, content providers and mobile operators all herald and praise the beginning of the 3G network. However, in a country where free content is king and consumers behave with their wallets, you have to wonder will China be the exception to the rule?
As a general mobile rule, many have argued that the 3G network is a content driven business. Apple’s iPhone is a prime example of this argument – within 9 months, iPhone application downloads have reached 1 billion. In the first three days of iPhone’s 3G launch, sales were over 1 million. Even rumors of Hulu developing an iPhone application to further harness the power of iPhone 3G. You can make a very strong case that (at least in the US), content drives the mobile business.
But in China, where the market has been waiting patiently for a comparable 3G network for the last 5 years, the business model has changed. Seeing the rest of the world benefit from the evolution of 3G, China is not the country to sit along the sidelines until 3G was available. China is a country that is quick to learn and to adapt in order to get what they want. Very similar to how unavailable content on terrestrial television drove the masses to consumer content via the Internet, the lack of fast content over a 3G network drove consumers to think about alternatives. In this particular case, the business model shifted to the handsets.
In China, cell phones have never been bounded with operator plans and term agreements until the 3G phone came out. Thousands of cell-phone brands are stocked in chain stores and mom-and-pop stores all over China, including those ‘‘bandit cell phone’ manufactured by small-scale factories offering Wi-Fi phone below $200. Let’s take my 15-year old nephew in Beijing as an example. Last year, I knew just how hard my nephew begged his mother to buy him a bandit cell phone heavily loaded with all the latest technology functionalities available – Wi-Fi, Bluetooth, 4 gig storage, 4.0 Mega-pixels Camera, and, let’s not forget, the 6 Stereo Speakers set built-in. Within 10 minutes of getting his new phone, the phone was filled with hundreds of applications, MP3 music, comics, games and 10 episodes of NBC Heroes – all of which he downloaded online and were transferred to the phone through a USB cable. Mind you – this is my nephew’s third cell-phone in 2 years, a little behind all his peers’ 6-month turnover rule. Needless to say, I felt embarrassed when ‘educating’ my nephew about the magic of 3G as obviously I was the one being schooled about just how the market functions in China.
Content will only drive the mobile business when the market feels comfortable with pricing flexibility. Most of the digital content distribution businesses in China have evolved to either an ads-support or a micro-transaction model. Case in point – seven years after Baidu, Google finally launched their ads-supported free MP3 download in China. Most of the online games are free to play and make money from selling virtual items. Another example, in 2008, Tencent made $279 million from virtual item/value added service sale through its online virtual communities.
All is not lost in China however. Despite how much my nephew has robbed the likes of NBC for its proper royalty rights on Heroes, the mobile industry in China is nothing like the Internet, where no one wants to pay for the content. My nephew still received a ‘the most valuable customer’ reward card from China Mobile since he spends $10/per month on ringtones and Internet surfing while sitting in his history class. But $10 is the price for 2.5G network. 3G? Well – 3G is a much more expensive network that leaves very little space for pricing flexibility, which is the key to drive a business to grow in China.
I am not saying 3G will not succeed and operators will stay in SMS and the ring-tone business for the next 10 years. The emerging new powerful players, such as Apple who are currently in talk with China Unicom, might be able to reshape the market with different business models, especially for the high-end user market. For example, if the future iPhone business applications are innovative and localized to the China market, it could be the spur of something much bigger and utilizing the 3G network to the potential everyone envisions it to be. With the introduction of new business models into China, the mobile space has much to anticipate and look forward to.
Like most introduction of new business practices in China, there is no one “right” answer to mobile. But it is important not to let your mind to be led by the news such as ’2-year investment on 3G will reach $58.8 Billion’ and to think of all the ‘potential talents’ a cell-phone can have in China.
Like Internet businesses in China, everything starts with content. In the early days of Baidu, the largest Chinese search engine, over 70% of the traffic is brought by its ‘free MP3 search & download’ service. The Chinese youth have been hungrily searching for content for years and they are the ‘alpha users’ of ring-tone and WAP surfing. As long as your content service is well packaged, those 35% of the mobile subscribers who use their phones to listen to music will come.
If you are a content provider, think about all channels for mobile. Your business may be in 3G, what what about WiFi? Bluetooth? Or CMMB (China Multimedia Mobile Broadcasting)? A typical pay-back period for a 3G operators is 7-10 years, which is an eternity considering how fast technology evolves and before any of Chinese 3G operators are able to lower the price. Be cognizant that multiple substitute mobile channels for 3G will emerge. They will be much cheaper, more flexible, and come loaded with all kinds of multimedia services and content. For example, the CMMB’s mobile TV coverage has reached all the tier 1-2 cities and 113 smaller cities. Operated by TV stations, it offers free basic channels and additional channels for pay-to-watch.
So, what does this all mean for mobile business in China. It is quirky, it is consumer-driven, and it definitely does not behave like the rest of the world. Like all new business, it’s about a understanding the market, understanding your product, and definitely understanding how consumers act. My nephew is the best example for this. He called yesterday and informed me that he had just reached investment profitability, meaning his self-made cell-phone comic business has covered his new cell-phone cost. Not bad for a 15-year old.
Gordon Chu is the VP of Business Development at METAN Development Group. For comments/questions, email gchu@metanmedia.com.
