Rule changes close off profits
China Mobile's changes to the rules governing its open platform for third-party companies providing value-added services such as ringtones and picture downloads have taken the edge off what was a money-making machine for companies such as Linktone and Hurray.
Copying the i-mode business model of NTT DoCoMo of Japan, China Mobile launched its Monternet platform to promote wireless data services in the first half of 2001.
Under the platform, third-party service providers offer content and services to mobile subscribers.
China Mobile, the country's dominant mobile-phone operator, charged a 15 per cent fee on revenues it collected on behalf of the providers, whose number has grown to about 2,000, according to an International Finance Corp report.
Portals such as Sina, Sohu.com and NetEase depended heavily on wireless services for revenue when the mainland internet was in its infancy. These services accounted for 63 per cent of Sina's sales in the 2004 fourth quarter.
China Mobile's move to improve user protection last summer was only the latest blow to revenue and profits of third-party providers.
In 2004, they were hit by regulator changes when the carrier acted to limit use of its platform by operators of internet pornography sites.
'Porn websites were billing their customers through the wireless value added service providers,' said Dick Wei, an analyst at JP Morgan.
Morgan Stanley said the first round of regulatory tightening caused a 33 per cent drop in the share prices of the top four wireless players. The second round prompted a drop of 57 per cent.
Partly due to regulatory risk, mobile value-added service providers such as Tom Online and Kongzhong are trading at discounts of 30 to 50 per cent in earnings multiples relative to online advertising firms such as Sina and Sohu, wrote Richard Ji, executive director of Morgan Stanley, in a recent report.
Kongzhong's market capitalisation is only about US$180 million, while its cash on hand is about US$115 million.