Wednesday, April 1, 2009

Mobile Industry in China

Yusuke Tanaka is one of a few Japanese who know what it is like to do mobile business in China. A member of board of executive of Fractalist, a mobile solution and mobile marketing company in Japan, Tanaka has been tackling with the rapidly changing Chinese mobile market. Fractalist established itself in Japan in 2000, and Fractalist China in China in 2003. Fractalist China's business model is rather simple, according to Tanaka, "we aim to learn from successful contents, services, technology businesses in the Japan's mobile industry and localize the business models so that they would work in China," says he. Japan is arguably the most advanced mobile market, and China is the biggest mobile market in the world and seems certain to become the center of the world mobile Internet industry in the near future. Tanaka's job is to bridge the two markets and create the world's leading mobile market within the region.

According to iResearch inc., there are 605 million mobile phone accounts in China. Around 2000, there were only 20 million accounts but since then the number is growing steadily. Last year alone, 50 million new mobile accounts were newly created. Total population of China is vast 1 billion 300 million; only half the population own mobile phones. That means there are still plenty more room for the mobile market to grow.
"Some people say that the Chinese mobile market is close to saturation because the recent market growth is propelled by purchasing of second and third phones by wealthy people. it is true to some degree. I see some rich people own two phones; one regular cell phone and one smart phone. But, considering the huge total population of China, I still think there are more room to grow." says Tanaka.

Reorganization of China's mobile market

The Chinese mobile market used to be ruled by a 800 pound gorilla called China Mobile, the world largest mobile operator. However, in order to spur more competition and innovation, the Chinese government shuffled the key telecom players into three main operators. "Perhaps decreasing number of land line phone users in China made the government realize the urgent needs of fostering a healthy mobile phone industry in China," says Tanaka.
China Mobile merged China Tietong, formally called China Railcom, the third largest fixed-line operator in China. According to Wikipedia, China Tietong's main areas of business are providing ADSL and dial-up Internet services and selling back haul on their nationwide backbone network.
China Unicom has been the number 2 mobile operator in China. The company had two mobile networks base on two different mobile technologies; one is called GSM and the other is CDMA. According to its annual report, as of Jun 30, 2008, China Unicom had 127.60 million GSM subscribers and 43.17 million CDMA subscribers.
China Unicom sold the CDMA business to China Telecom, the nation's number one fixed line operator, and instead merged with China Netcom who has fixed-line networks in northern China.
China Telecom, which was formally a state-owned monopoly but transferred its assets in China's 10 northern provinces to China Netcom in 2002, now has a fixed line business in 21 southern provinces and the CDMA businesses transferred from China Unicom.
China Mobile, China Telecom, and China Unicom; now they all have both fixed line and mobile operations.

new China Mobile = China Mobile(mobile operator) + China Railcom(land line operator)
new China Telecom = China Telecom(land line operator in southern China) + China Unicom's CDMA business(mobile)
new China Unicom = old China Unicom(CDMA + GSM) - CDMA business + China Netcom(land line + satellite)

In January 2009, the Chinese government formally awarded 3rd generation mobile operators licences. "As a matter of fact, I haven't met a single person who has a 3rd generation mobile phone in China yet, except a few governmental workers whose jobs are related to 3rd generation phones," said Tanaka. As of today, most Chinese mobile market is still based on 2nd generation technologies.
However it will be a matter of time before the Chinese mobile phone market will be dominated by 3rd generation mobile phones. In 2008 Chinese government had China mobile start a trial service of home grown 3rd generation technology called TD-SCDMA to be showcased in Beijing Olympics which took place the same year. After the Olympics, China Mobile was formally awarded the licence and continued to deploy TD-SCDMA services in eight cities such as Beijing, Shanghai, Tianjin, Shenyang, Guangzhou, Shenzhen, Qinhuangdao and Xiamen. Some observers thought the Chinese government was hoping to make TD-SCDMA as the world's de facto standard of 3rd generation mobile technology. With China's more than 6 hundred million mobile users which is still growing steadily, making TD-SCDMA as the world standard is not such a far-fetched dream. Still in January 2009, China decided to licence competing 3G technologies to remaining key mobile operators; China Unicom got licenced to operate a 3G network with a technology called W-CDMA in 252 places in the nation from May, and China Telecom got awarded a licence to operate with another technology called CDMA2000 in Beijing and other places.
The reason why the Chines government didn't to mandate all the mobile operators to use the home grown TD-SCDMA is unknown. Perhaps, the government may not be confident enough of this newly developed technology's maturity and stability. "How prevalent TD-SCDMA will be in the world market depends on how much the Chinese government push the technology. It still remains to be seen," said Tanaka.

According to Research data Mr. Tanaka has seen, China Mobile has a market share of about 60 to 70 percent. China Telecom has a 10% share which is the CDMA business it has just purchased from China Unicom. China Unicom in turn has a remaining GSM business which accounts for about 20% of the market. With new 3G services starting, these market shares might change drastically. Especially China Telecom which just entered the mobile market, is very aggressive about its new data services, said Mr. Tanaka.

With its large mobile user base, the mobile paid-contents market in China is sizable also. Paid contents such as ring tones, pictures, ring back tones consists of 100 billion Chinese yuan market. Especially ring back tones are very popular in China. According to some research, in 2008 160 million people are said to be using ring back tones.

Fractalist establish a local subsidiary called Fractalist China in 2003.
It was one of many Japanese mobile contents/services companies who tried to enter the Chinese market which already seemed very promising. They were the companies which enjoyed pretty profitable successes in Japan's the i-mode Internet service. Most of the companies thought they can simply duplicate in Chinese market what they did successfully in Japan.
"It was a little too early," said Tanaka. The i-mode is a closed network, but it looks like the PC web; information was transmitted not via email but through browsers. Chines paid-contents market was consisted mostly of sales using SMS. Users order ring tones and images on web site using personal computers, and receive them as mobile phone's short message attachment. Browser based network like the i-mode was available at that time, but the network technology was still very slow 2nd generation. Rich contents which Japanese companies made might have been sold well in Japan, but were too big in data size for the slow connection in China. Japanese companies, therefore, resorted to create smaller size contents with a limited creative expression. As a result, there weren't any notable difference between Japanese and Chinese contents.
"The difference in the levels of contents were not big enough for Chinese users to chose Japanese contents over Chinese contents," analysed Tanaka.
"Almost all Japanese contents makers closed shop in China around 2005."
Fractalist at first wanted to operate a contents aggregation site; a site which showcase array of Japanese creators' contents. Realizing the difficulty of recreate Japan's success in mobile contents business in China, however, Fractalist decided to concentrate on mobile marketing business. Around 2001 and 2002, a new type of mobile marketing using QR codes sprung up in Japan. QR codes are two dimensional bar codes. For it is two dimensional, QR codes are able to contain bigger data than traditional bar codes you find on consumer products. Many mobile phones with camera capability in Japan are equipped with QR code readers. When you activate the camera on your mobile phone, usually you can select QR code reader capability in the menu selection. Then you hold the phone close enough to a QR code printed on paper, so that the camera lens can capture a clear image of a QR code. After the camera capability of the phone adjust the focus automatically, QR code reader capability decodes the QR code into an alphanumeric data, which usually is an URL of a web site. When you click the URL, then, the browser of the phone gets booted up and shows the web site on mobile phone's screen.
In Japan, you can find QR codes on posters, magazine advertisement page, and business cards. QR codes on business cards usually lead you to the company web sites.
The type of mobile campaign using QR codes which started around 2002 is cold "must buy campaign," or "serial closed campaign" among marketers. One of the early practitioner of this type of mobile campaign was a Japanese soft drink maker, Kirin Beverage. The soft drink maker printed QR codes on coffee cans and urged consumers to access the company web site to apply for an campaign. The campaign turned out to be a great success, and many other consumer product manufacturers follow suit and tried similar QR code campaign.
Borrowing a page from the book, Fractalist approached Chinese companies with similar marketing plan utilising QR codes, and Chinese soft drink makers and other companies decide to try out the approach in China.
"Usually a consumer products company tries out this type of campaign hoping to increase customer loyalty and its brand power," says Tanaka. "Interestingly, however, we found out there are additional merits in this type of campaigns when you execute them in China."
It is said that copy cats and pirates products are a big problem in China. Microsoft says

QR code campaigns can counter attack piracy problems says Tanaka. By including a product serial number in QR code's data. consumer who purchased genuine products can only apply for the campaign. Usually serial numbers are allocated based on some inside rules. Outsiders and piracy manufacturers have no way of knowing the inside rules. Applicants with serial numbers which dd not follow the inside rules and already used numbers would be disqualified from the campaign.

Additionally, QR code campaigns could give manufactures some valuable marketing data. In China, sales channels can be very complex and manufacturers do not always have clear understanding of when, where, and how many of which products are being sold. During QR code campaigns, however, people apply for the campaign usually right after they purchased the products. From the past experience, Fractalist knows for a fact that a certain percentage of people who purchased a certain type of products apply for QR code campaign. With this knowledge, a manufacturer could tell about how many products are being sold this right minutes in which part of China.

Even though SMS was one of the main reasons why Chinese users would use mobile data services at that time, eventually users would start accessing mobile sites more, thought Tanaka. So Fractalist approached a company which operates China's number one mobile portal site; China Mobile. Fractalist has become the media representative of China Mobile. "People ask me why a start-up like Fractalist got to have become the China's number one mobile portal's only one media rep," Tanaka smiled, "I guess China Mobile got interested in our ability of creating tremendous amount of data traffic through off line campaigns."

Today, as the media rep of China Mobile, Fractalist negotiate with ad agencies and large advertisers and sell all the ad spaces in China Mobile's portal site. Fractalist also advise China Mobile on promotional campaigns and provide ad server and other ad related technological support. Fractalist and China Mobile co-develop media sites also, Tanaka says.
"As a rule, we sell China Mobile site's ad spaces through ad agencies. Sometimes though, we talk directly to large advertisers, because some advertisers still do not know how effective mobile ads are, and it is better we explain to them directly instead of talking through ad agencies," Tanaka says.
Today, in addition to China Mobile's portal, Fractalist has become one of the two media representatives of China Unicom's portal site and the portal site of Nokia, which has the top share in China's mobile handset market.
Tanaka proudly declare "through Fractalist you can reach a large mobile population in China."
But what about other sites? What happens to sites other than portals, one may wonder.
Traditionally, sites other than portal couldn't receive meaningful amount of page views with out large portals help in the mobile web, because there haven't been good enough mobile search technology availabe.

Google's famed Page Rank technology basically rates the importance and relevance of a web page based on how many other important pages link to that page. The technology works only when there were a large number of pages linking to each other. The freely linking culture was established on the PC web in the relatively early days of the Internet, but on the mobile web links were usually limited within the same sites. It is because, in mobile space, the sender of information and the receiver of information have been two different groups and the two rarely have merged.
Until recently even in Japan, a country arguably is most advanced in terms of mobile applications, most mobile users activities are limited to exchanging emails and reading web sites. Blogs and SNSs have been popular on the mobile web for some time now, yet most mobile phones don't have the HTML authoring ability. Even today mobile blogs usually consist of text and pictures; no links.
Without the mutually linking culture you witness on the PC web, the mobile search tools don't work as well. Search result pages often filled with a list of irrelevant pages, so that users prefer portal site's directories over search tools.
Since many people have been relying on mobile portal's directory listings, portals have been literally the "portal" to the mobile we. At one point, portals have become very powerful over contents providers because portals can decide the orders of contents providers listings within certain categories. Portals literally can decide which contents providers to live, and which to die.
However, with a gradual advancement of mobile search technology and a sheer power of word of mouth, sites which are not even listed on portal sites began to be popular among mobile users. Those sites which have not received portal's approvals or blessings are called off-deck sites; in China they are called "free WAP site."
Fractalist provide ads to those off-deck site through systems called ad networks.

Types of advertisers

According to Tanaka, the largest mobile advertisers in China is the automotive industry. Tanaka says, "It is probably because that people who own mobile phones are wealthier than people who don't own mobile phones, therefore the mobile users are deemed more prone to purchase cars."
Next to the automobile industry which consist of about 20% of the Chinese mobile market, financial industry, such as online bank, and online stock, are big ad spenders with about 15% of market share, followed by cosmetics, digital products, and drinks.

cautions before entering the market

Although there is no doubt Chinese mobile market has a potential to be a lucrative market. There are risks that oversee players need to consider before entering the market, Tanaka cautions. For example, in order to be a Internet contents provider in China, a foreign company needs to acquire a licence called Internet Contents Provider licence from the Chinese government. After joining WTO, Chinese government gives foreign companies equal opportunities to receive the licence, yet it is not a simple task for foreign companies which are not familiar with the process. On top of that, if a company wants to charge for their contents, it needs to apply for a online charging licence which is not easy licence to acquire even for local Chinese companies since one of the requirement for the licence is companies need to have a capital of 10 million yuan or larger. Even if a company acquire these two licences from the government, it still need to negotiate with mobile portals in order to be listed in one of their content categories.