China Mobile, QQ, AT&T (Cingular) and Verizon: a Case Study for Mobile Content:

Implications: SMS can be a damaging form of advertising for mobile contentSubscription revenue schemes have worked well and increased ARPU in ChinaContent aggregators may ultimately be squeezed by the mobile carriers

Analysis:  

The saga of QQ (Tencent Holdings) in Chinais quite interesting. QQ is the dominant form of online communications in China with around an 80 percent market share. It supports instant messaging, voice messaging, games, mobile TV services and a number of value-added services.

QQ is the biggest SMS platform in China. Historically SMS is a very effective distribution channel for new mobile content products, leveraging subscriber information from the carrier. However, this sales tactic created many unwanted messages, leading to customer complaints in China. Thus, the government decided to regulate this marketing scheme. Currently China’s mobile content aggregators are shifting their marketing tactics to off portal channels such as internet or traditional media such as TV, radio and magazine advertising. These off portal advertising costs are much higher and are thus lowering the profitability for the mobile content operators by more than 50%.

QQ and the other content aggregators had a very profitable business thru subscription revenue. However, towards the end of 2006, the carriers (China Mobile and Unicom) shifted their policy forcing the content aggregators to largely transform their transaction models to one time downloads for a fee. The margins of the one-time downloads are lower than those of subscriptions. Also ARPU has dropped due to the lack of the recurring revenues from subscriptions. QQ is essentially being squeezed by the mobile carriers, China Mobile and Unicom.

Today, China Mobile is doing direct deals with the major record companies and News Corp. However, the content aggregation business by the likes of QQ is still viable but limited to those aggregators targeted by the carriers. Carriers in China are taking a hybrid approach. The carriers have realized that mobile content providers have a comparative advantage in many genres both in terms of operational experience as well as economics. Thus the carriers are contracting with specific aggregators to source certain genre of product (such as games, music, auto, real estate).

A main difference with the carriers in the US as compared to China is AT&T and Verizon both are building large content aggregation teams at U-verse and FiOS. Due to government infighting, China Mobile and Unicom are years away from such integrated content services. Ultimately, AT&T and Verizon will have the experience and content licensing clout to be the primary aggregators of mobile content in the US. Thus leading to the conclusion of Fox’s Interactive Senior Vice President John Smelzer: “we intend to be in (the content) business with the carriers.”