Maverick China Research

Last week advertising leader Focus Media released its latest quarterly earnings report, and the main news was from its mobile advertising division:

Total GAAP revenues grew 214.7% year-over-year to $161.6 million. Total GAAP revenues exclude $11.3 million of revenue from our mobile handset advertising business which is classified as discontinued operation...

 

GAAP net loss for the first quarter was $53.8 million or $0.42 per fully diluted ADS. The GAAP net loss includes a non-recurring loss of $79.3 million resulting from the restructuring of our mobile handset advertising business.

Focus Media's problems started on March 15 (World Consumer Rights Day), when a Chinese television program exposed the company's practice of sending unlicensed SMS and of sending millions of spam SMS. While the wireless division is essentially out of commission for the near future, the rest of Focus Media's business is going strong. We have long been skeptical of wireless advertising in China, with much of current revenues coming from the waves of spam and illegal text messages.

The recent announcements regarding operator restructuring are a good sign for the future of the sector. We don't expect it to really take off until 3G networks are up and running and at least a few million users are using their new 3G phones for internet browsing and other advanced features. And since that time is in all likelihood at least a year away, Focus Media should have time to rebuild its wireless business around a 3G focus.

The three million people who ride Beijing's subway every day entered a new era on June 9, as the sale of paper tickets stopped and all riders began using contactless cards:

With the introduction of the new Automatic Fare Collection (AFC) system, passengers can now buy the new tickets from vending machines at the entrance to each platform.

 

People with Yikatong prepaid cards that can be used on buses and the subway network, can continue to use them.

 

Before yesterday, most passengers bought paper tickets which were checked manually.

Actually, the majority of subway riders had already purchased a contactless Yikatong card before June 9, but many less frequent riders and tourists were still buying paper tickets. Many of them were confused at the new system, and some had tried using their identification cards or even business cards, according to one subway worker I talked to. The city put out an extra six thousand employees to help explain the new system to passengers.

Even some regular commuters who had been using their Yikatong cards for years in Beijing's subway and bus system were baffled by the top-up machines and the need to swipe one's card when leaving the station. As the week progressed, though, the chaos declined significantly, and the top-up machines have eliminated most of the previously long ticket lines.

As we have mentioned before, the Yikatong card also can be used for micropayments at a few stores in Beijing. But progress here has been slower; currently the authority behind the "Beijing SuperPass" lists just 762 locations in Beijing that accept Yikatong payments, most of them concentrated in a few supermarket, convenient store, hair salon, and movie theatre chains.

On May 27, the Bank of East Asia (BEA) has become the first foreign bank to issue debit cards in China. BEA's three types of China Unionpay-compliant debit cards are the Bauhinia Card, SupremeGold Card and SupremeGold Platinum Card. The minimum deposit amount to open an account is 5,000 RMB for the Bauhinia Card, 500,000 RMB for SupremeGold, and 2 million RMB for SupremeGold Platinum. Previously, the lowest initial deposit amount for foreign banks was 100,000 RMB. Despite the lower threshold, BEA's debit card accounts will still target wealthier users. (In comparison, one can open an account at a domestic bank for as little as 10 RMB.)

BEA is promoting its cards aggressively, but the company is limited to no more than one million of the debit card accounts in 2008. Given such a small limit, I believe that BEA simply hopes to use the cards to expand its presence in China. As restrictions on foreign banks (presumably) continue to be relaxed in the coming years, BEA would be well positioned to offer a wider range of services to a much greater number of customers.  

Recently, Moconews wrote about a Pacific Epoch interview with an interesting music downloading service from Duo Guo:

Apparently, in China’s smaller cities where mobile phones outnumber wired internet connections, there’s a flourishing black market where bootleggers are doing a brisk business selling mobile content to queues of people. Not only that, but people are actually paying the same amount of money for the pirated content, as what the legal version sells for.

 

DUO GUO, a recently launched Chinese mobile content retailer, which sells digital downloads such as games, music, and stock quotes in physical stores and staffed kiosks, is trying to offer itself up as the legitimate version of this process.

This idea might strike many Chinese as ridiculous because it is so easy to download free content through search websites like Baidu or Sogou. But people actually do pay to have songs, pictures, video, and games downloaded onto their phones. This practice is particularly common in smaller cities and rural areas, including my hometown of Wuhai, in Inner Mongolia.

The people I have observed in Wuhai who take advantage of these "paid pirated downloads" generally have little or no computer skills but do have mobile phones. A mobile phone is often a practical necessity for many people who have either dropped their fixed-line service or never had it in the first place. But the music, video, and video game applications are just as popular, and many people are willing to pay for higher-end multimedia phones.

Those offering these downloads are usually mobile phone vendors. They typically charge 5 RMB for a customer to download videos and pictures and as much as 10 RMB for music mp3s. (The songs are more popular, and customers seem willing to pay more). This fee covers one "session" but allows the customer to take as much content as his phone can hold. 

If there were a fast, easy-to-used mobile data network with prices that were competitive with these "underground" downloads, I think many users in Wuhai and similar places across China would pay for the downloads--not in a few years, but right now. In this sense, rural users aren't that far behind their urban counterparts.

This black-market system also provides the outline of a pricing model for record companies, operators, and mobile content providers who are trying to figure out just what customers will pay for mobile downloads.

Maverick China's Junelyn Han has been invited to speak at the Mobile Payments World 2008 conference in Singapore. The conference will take place from July 9-11. Junelyn will present on the latest trends in China mobile payments.
 
Coming on the heels of the long-awaited annoucements of operator restructuring and 3G licensing in China, these next few months will be an especially interesting time for mobile payment companies, along with mobile advertising and other mobile-based services and content companies in China. 3G promises to provide a mobile network with greater mobile data speeds, enabling richer mobile-based services to be pushed to mobile users in China. For mobile payment companies, this means the ability to rely on technologies other than SMS as their payment channel. Whether this may be enough to jumpstart the industry in China, though, is another issue.