Flat SMS growth concerns Web portals By Li Weitao (China Business Weekly) Updated: 2004-07-19 10:11
China's listed Internet portals, by relying heavily on the country's
ever-galloping text messaging business, have survived the collapse of the dotcom
economy.
But now, they are coming under increasing pressure to look beyond the short
messaging service (SMS) to diversify their revenue streams in a bid to maintain
high business growth.
"Searching for new growth areas is a tough challenge for Web portals," said
industry professional Xie Wen.
Xie is chief executive officer (CEO) of Homeway, China's leading finance
information website.
He was previously CEO of an entertainment website, which he founded, and
chairman and co-founder of IT (information technology) research firm
Chinalabs.com.
NASDAQ-listed China Internet stocks tumbled on July 7 after NetEase.com
issued a warning that its revenues from short messaging would fall 37-41 per
cent in the second quarter compared with previous quarter.
The firm cited intense competition and the government and cellular operators'
tougher regulations on SMS as the major reasons for the warning.
The government in April issued a set of guidelines aimed at weeding out
pornographic, fraudulent and illicit messages.
Cellular operators now ask Web portals to implement a system that requires
customers to authorize service charges by sending a message to the portals.
SMS: SPs urged to diversify profit sources
A Beijing-based Internet analyst, who refused to be named, said he expects
Sohu.com's business growth in wireless services will not be as high as compared
with the first quarter.
The firm is scheduled to announce its quarterly results later this month.
Sina Corp's performance is also expected to be lacklustre, he added.
The government and cellular operators' latest move is a "correct and timely"
response to widespread irregularities in the SMS market, analysts said.
To spur SMS growth, cellular operators have been adopting a revenue-sharing
scheme with websites, or service providers (SPs).
SMS users can send messages to other cellular users via websites.
Many users have found they have been charged for months, even though they
have used the service just once. In some cases, they have not subscribed to the
service.
"Such irregularities reflect the loose supervision over the SMS market," Xie
said.
"Besides, the threshold for gaining an SP licence is quite low, which has
resulted in an overcrowded market. That has provided the conditions for
irregularities."
SMS losing steam
The SMS market will continue growing, but Web portals' heyday is gone, most
analysts said.
In 2002, about 90 billion short messages were sent via cellphones in China.
Last year, the number jumped to 240 billion.
Analysys Consulting predicts the number will reach 300 billion this year.
The SMS market is entering a stage of rational and flat growth, said Liu Lei,
an analyst with Analysys.
"It's unlikely that the SMS market will witness in future the explosive
growth rates recorded in past years."
Web portals' revenues from SMS will decrease, and government and cellular
operators' tougher regulations will help squeeze some bubbles out of the SMS
market, she added.
Decreases in the de facto voice tariffs will continue applying pressure on
SMS' development, said Guo Chang, an analyst with CCW Research.
"Low charges have been the main factor behind the rapid growth. But, now,
that advantage is disappearing," Guo said.
Cost-conscious cellphone users, in recent years, have found SMS a more
convenient and inexpensive way to stay in touch without lengthy and costly
conversations.
Sending a short text message in China costs just 0.1 yuan (about 1 US cent).
Now, in many places, de facto mobile tariffs have fallen to around 0.2 yuan
(about 2 US cents) per minute.
The combination of the SMS market's flat growth and the intensifying
competition will put Web portals under increasing pressure, analysts said.
Mobile service providers (MSPs) last year recorded a combined revenue of 3.96
billion yuan (US$477.1 million), 95 per cent of which came from messaging
services, said Beijing-based ADS Consulting.
By the end of last year, China had more than 1,100 MSPs.
Another potential risk for Web portals is operators might try to change the
revenue-sharing scheme, said He Wei, an analyst with telecoms consultancy BDA
China Ltd.
"In the short term, operators will not abandon SPs. But over the long run,
it's still possible operators might seek to increase their revenue sharing," he
said.
Currently, China Mobile keeps 15 per cent of the revenues from the scheme and
gives SPs 85 per cent.
Diversification urgent
Besides maintaining their leading position in the SMS market, Web portals
must beef up efforts to develop wireless value-added services (VAS), said ADS'
analyst Gu Jing.
Such services include MMS (multimedia messaging service), WAP (wireless
applications protocol), IVR (interactive voice response), JAVA and BREW (binary
runtime environment for wireless).
"There is enormous room for growth of wireless VAS, especially in the
corporate sector," Gu said.
Analysys said China's WAP market will grow from 183 million yuan (US$22
million) last year to 1.2 billion yuan (US$144 million) this year.
Sina Corp, NetEase.com and Sohu.com are not among the top six WAP providers
in China.
The size of China's IVR market will reach 1.5 billion yuan (US$180 million),
compared with 200 million yuan (US$24 million) last year, said Analysys.
The instant messaging (IM) service is also a market in which Web portals can
seek new growth opportunities, said Guo.
Sina Corp on July 7 announced a US$60-million acquisition of Davidhill
Capital Inc and its UC IM technology platform.
Launched in 2002, the UC IM service allows users to communicate in real-time
over the Internet and mobile phone networks, via text messages, images and
voice.
UC also provides community services, such as chat rooms, online games, alumni
clubs, online karaoke and other entertainment services.
China's IM market is dominated by Tencent Holdings Ltd, which listed in Hong
Kong last month.
Guo estimates China's IM market will reach 2 billion yuan (US$240 million)
next year.
"If IM can gain significant take-up among corporate users, the size of the IM
market may reach 10 billion yuan (US$1.2 billion) in 2008," he said.
Still, risks remain.
"I suppose the IVR sector may be the next target for tighter government
supervision, as about 70 per cent of IVR products in the market are related to
adult (pornographic) content," Liu said.
IVR allows cellphone users to dial a number to access content or chat with
online friends.
He, with BDA, urges Web portals to enhance their traditional online services,
such as online ads and paid searches.
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