Are you like me? Are you hemming and hawing about the price tag of the new iPhone 3GS, and angry the subsidy isn’t bigger? Well put down the gov’t cheese and take a look at how much people in China are willing to pay on TaoBao for an 8gb iPhone: $616.39 + $73 unlocking fee. Really.
With demand like that for handsets, China has a chance to drive serious handset penetration if they start offering subsidies. Until now the only relationship with Chinese consumers the carriers have has been to give away golf balls to high-spending customers, rather than bait consumers with data guzzler devices to drive monthly revenues.
But carriers don’t particularly benefit from launching the iPhone as much as they would from launching an Android handset which gives the carrier app store revenues. That is why China Mobile has been struggling to launch an oPhone, (where the ‘o’ stands for Open Mobile System (OMS)). If China Mobile added a subsidy, they could supply the electricity necessary to bring China Mobile’s Android, and the market for mobile services to life.
If the US is any indicator post-iPhone launch, data is going to become a much bigger cost centre for China, with 5x (102 million) the regular mobile web users than the US (22 million), and could potentially threaten China Mobile’s 52% EBITDA margin. China Mobile has 75% of the China market (483 million subscribers), which they control mainly because of geographic restrictions.
So China Mobile does not need to lure subscribers, rather it needs a new revenue stream that can shift handset revenues to services revenues, and shift marketing control from the OEMs like Nokia and Sony Ericsson to China Mobile. Mobile content is China Mobile’s third heat, which they think will bring in higher margin revenues than voice and data.
China never subsidized mobile phones:
- China’s smaller computer to mobile phone ratio meant China did not create a culture that relied heavily on email, so there was no hook for employers or consumers to demand flat data plans.
- China Mobile’s 32 operating entities charge wildly different rates for data plans, and are terrified at widespread tethering for users who have no home internet connection.
Chinese carriers, like all carriers, fear becoming a dumb pipe: No carrier in the world has figured out a way around this problem, mainly because most carriers have little control of the handset OS, and Android changes that. The last time mobile content revenues got big in China with Premium SMS, China Mobile felt shut out, so they shut the whole market down in 2006 wiping out the business of companies like Linktone. Since then, China Mobile just didn’t have a platform they felt comfortable using to build out their great wall-ed garden. But when they saw Android, China Mobile figured they could control mobile content delivery with pretty much a direct proportion to how much time they spent customising the free Android platform.
China’s mobile scene has been dark for 3 years: Walk around China, and you’ll see lots of Nokia and Sony Ericsson handsets, phones with great screens and cameras, but weak UIs and no traction for their expensive developer platforms. Tencent’s success with QQ chat aside, mobile app developers in China have been ignoring the China market and instead doing everything they can to get noticed on the iPhone app store. The final disappointment for China’s mobile scene was that 3G licenses were not released in time for the 2008 Olympics. In this dormant period the WSJ hinted at Android ennui in China, but it was just a slow start to something big.
China Mobile is creating a monster: The WSJ commented that the Android SDK was seen as harder to translate into mandarin and generally unstable vs. the iPhone SDK. However, we missed the real story. China Mobile would likely say that they *were* struggling, struggling to ‘make revolution’ (géxīn 革新). China Mobile had enlisted ASPire, Borqs (a company backed by Kleiner Perkins and GSR Ventures) and Lenovo Mobile to come on their Long March with a total of 200 engineers in Sichuan province to completely customise the Android OS in their own image. They were hard at work spicing up basic features and numbing others to give China Mobile total control.
China wakes to mobile commerce: Mobile content in China starts in 2009. Remember, grey iPhones do not have iTunes yet, so the Android launch this summer is the starting gun:
- Chinese users really, really want apps. In the US a $99 iPhone purchaser requires TV advertising to teach them what apps to buy, and even then often stop after the Urban Spoon app. Chinese users at that price point are much more inclined to buy games and want to play them with others.
- Chinese developers don’t fear complexity. Ask Chinese developers, and they are not afraid of Android’s complexity of developing in Java.
I’ll be clear – China Mobile has NOT announced subsidies or intent to do so. However, the terms to launch an app in China Mobile’s Mobile Market app store requires developer cede 50% of their revenues so China Mobile has a big interest in backing mass distribution of oPhones. Like Palm’s Pre, the Lenovo oPhone has been built to offer many one-tap services that do not rely on 3rd party apps for contacts, backup, MMS, Ringtones as well as IVR and SMS based information services.
Moreover, China Mobile will also reserve the right to kick out any app that looks like it would take away revenues from China Mobile. So I would doubt that Imeem or Pandora will make the cut when China Mobile would rather sell you via their ‘12350 Wireless music club—All My Music in My Hands‘ service. Games will probably be less restricted. Games just won’t be called games because it’s actually illegal to sell gaming devices in China. (Change your iTunes store to the Chinese version and you will see that all of the games are in the ‘entertainment’ category.)
China Mobile may be too late. The question is whether Chinese carriers can sell enough of the phones with walled gardens to foster behaviour where Chinese consumers pay for digital content. China Mobile loses if consumers buy grey imports or shanzhai phones (my favourite, the zhonghua cigarette pack phone) which make up 35% of handsets in China. China Mobile also loses if consumers buy phones with open file architecture which enables users to download and save free MP3s just like they do on the desktop via Baidu or Google. Allegedly the site with the highest mobile web traffic in China is http://wap.3g.cn an illicit, free MP3 search site.
As we come closer to mobile and desktop convergence consumers will notice quirky rules, e.g. Google does not enable MP3 search when you load http://g.cn from a mobile browser. This is mainly because Google has a search deal with China Mobile in place that took years of negotiating and China Mobile doesn’t want free music downloads on mobile. Yet, music sales never happened on the desktop in China, and Gary Chen from http://top100.cn knows the sad ballad of Chinese music licensing best. Gary once convinced nearly all music labels to let him sell music downloads for 1 RMB ($0.15); then subscriptions for 10 RMB ($1.50) and both failed because users wouldn’t pay. Now he uses take-over ads on the playlist box to support the entire free music streaming and downloading service for Google China’s desktop MP3 search on http://g.cn.
The Open Door: If China Mobile doesn’t do something to control and lock out free downloading services on phones, much of those potential mobile content revenues will not materialise. So the question remains – when China Mobile’s Android monster is set free, what will it take for Chinese consumers to embrace it?
Tom Limongello is Senior Director of Business Development at Crisp Wireless, a mobile advertising company based in Manhattan, and is responsible for partnerships with publishers like Time Inc, Turner, FastCompany, Discovery and BlogAds.
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