The Monternet
By Eric Ransdell, Wed Jul 03 00:00:00 GMT 2002

China Mobile's new revenue model is considered one of the most equitable arrangements in the global data services industry.

While the names Kong Linghui, Fu Mingxia and Cai Yalin may mean little to those outside China, on the mainland they may well go down in history as three heroes who helped launch China's mobile data services revolution. By winning gold medals in table tennis, diving and sharpshooting at the 2000 Summer Olympics in Sydney, Kong, Fu and Cai were unwittingly part of China's first commercial trial run of SMS-based data services. Every time a Chinese athlete won an Olympic medal, subscribers who had signed up for the test service received an SMS on their mobile phones.

The Olympic SMS experiment represented the first time in that China Mobile had shared revenue with third-party mobile service providers (MSPs). And its success provided the mainland's largest mobile operator with the proof of concept it was looking for. At the end of the day, China took home a record 59 medals (including 28 golds) and China Mobile began preparations to launch its Monternet initiative, a move that may be remembered as the spark that ignited what has the potential to become the world's largest mobile data services industry.

Room to Grow

With billboards and advertisements in every Chinese major city urging consumers to download the newest ring tones, sign up for SMS horoscopes or access the latest World Cup scores, it's hard to believe that only two years ago China barely had a mobile data services industry. In 2000, what little data services existed accounted for a paltry $2.6 million, less than the price of an old art deco villa in Shanghai's former French Concession. In 2001, its first year of operations, the industry was worth $192 million. With GPRS already launched in China and WCDMA and CDMA2000 on the horizon, many analysts believe this exponential growth will continue. The market is currently growing at 15 percent a month and estimates for the size of mobile data services in 2005 range from $5- to $10 billion.

None of this would have been possible without Monternet ("MObile iNTERNET"). Today its revenue-sharing model - where China Mobile does all the billing and takes 15 percent out of every charge while MSPs get the remaining 85 percent - is considered one of the most equitable arrangements in the global data services industry. Similarly, its plug-and-play technical platform, although the technology often differs from one regional Monternet operator to the next, makes it easy for even small companies to participate.

By lowering the barriers to entry, Monternet has unleashed a wave of new business creation. From a starting point of just 6 MSPs in the first quarter of 2001, China's mobile data services industry now has anywhere from 400 to 500 companies. Though the vast majority of these are small, bootstrap operations working at the local level, companies such as Linktone, and have not only emerged as national players but have attracted major investments from the likes of NTT DoCoMo and Taiwan's Acer Corporation.

In any other country the Monternet initiative would be viewed as a major wireless success story. But in China - a nation whose telecom operators are not exactly considered paragons of innovation or generous business terms - it represents nothing less than a revolution.

"It is without doubt one of the most progressive business models we've ever seen come out of China," says Arthur Wang, founding partner of the Hong Kong-based venture capital firm, 698 Capital. "It's been a win for the operators, a win for the content providers and a huge win for Chinese consumers, who now have an abundance of choice in this space. Beyond that, it's given birth to a vibrant new industry and one that's going to play a not insignificant role in the Chinese economy, particularly once 3G is rolled out. And it's done all this in just 18 short months."

"Prior to the Sydney Olympics, everything was just pitch black," says Jun Wu, CEO of Intrinsic Technology, a Shanghai-based wireless software company and one of the first Monternet participants. Jun Wu is describing the landscape in China at the dawn of the new millennium. The dot-com implosion that began in America had taken most Chinese content providers down with it. Although a number of companies were sniffing around the wireless data space, with complete control in the hands of China Mobile and the newly created China Unicom, no one even knew if a third-party data services industry was even a possibility.

Learning from Experience

But a few factors conspired to pave the way for Monternet's debut. The first was the fact that China Mobile had listed as a publicly traded company on the New York and Hong Kong stock exchanges in 1997. And for the first time, the former state-run monopoly was subject to the scrutiny of shareholders, who were questioning how it intended going to raise ARPUs. Particularly now that it had a serious competitor in the form of China Unicom, whose CDMA-based offerings were appealing to high-end users.

Meanwhile though WAP was turning out to be a worldwide fiasco, things were happening in Japan that were catching the attention of both Chinese government officials and wireless industry players. "It was a situation where most people were looking to Europe for early market movements as an indication of how they should move in the future, but in the case of wireless data, I'd have to say it's something that has been talked about quite a bit in Europe but never came onto the scene very strongly," says Intrinsic's Jun Wu. "All of a sudden in Japan we see that it's working out. So the attitude was - let's what we can learn. And what everyone noted was the difference between iMode and the European models, and why Imode took off, was because of the business model and not the technology."

And finally there was the Sydney Summer Games, which was predicted to pull in the Chinese largest audience for any sporting event in history. Given that it had a surefire test audience, China Mobile agreed to a trial run for an Olympics-based SMS service in the cities of Beijing, Shanghai and Guangdong. By the end of the experiment, the new service had generated 25 million messages in three weeks. At US$0.012 per message, that didn't exactly add a lot of meat to China Mobile's bottom line. But in a reality, it didn't matter.

"It gathered a lot of public support and the customer response was very good," explains Jun Wu. "The operator was seen as very innovative and, as a result, we started to see them taking a more proactive stance in leading the way for how the industry should be shaped. Before that it was - let's just see how the rest of the world does it and follow in their footsteps. But with the Olympics they were seen as taking more of an initiative to try something new and that gave them a lot of confidence to move ahead and establish a business model."

That business model, which was largely based on the iMode idea, was promulgated in a White Paper in November 2000. When China Mobile called together a group of 100 Internet Content Providers to announce their Monternet initiative, most couldn't believe what they were hearing. Here was a former state-owned monopoly with some 54 million subscribers announcing itself not as a competitor, but as a partner to companies of all sizes. Beyond that, after years of trying and failing to get consumers to pay for Web-based data services, it was telling these battle-scarred companies that it would not only give them 85 percent of the revenue for each SMS their services generated, but it would also take care of the billing.

"I don't think anywhere else in the world you have a system that is as convenient or efficient," says Mark Begert, CFO of Linktone. "Particularly in China where there's no credit card penetration. Which is why Monternet is such a perfect fit with this country, because it's very difficult to get users to pay for these type of services with any way other than their mobile phone bill."

An Industry Re-incarnated

In the 18 months since Monternet was launched, China has witnessed the birth of an entirely new industry whose players are now offering everything from stock market updates to location-based services to downloadable World Cup icons. In 2001, China's total SMS traffic amounted to 15.9 billion SMS messages, of which 10 percent were billable by MSPs. For 2002, the figure is expected to reach 30 billion, with MSPs share rising to 20-25 percent.

And as the industry grows, even greater changes are expected. Consolidations are already starting to happen and many small companies are barely hanging on. Rumors also abound of Monternet moving toward a self-branded iMode system replete with favored providers and, quite possibly, a much bigger slice of the revenues for Monternet itself. What makes MSPs particularly nervous is that Monternet is both a member of the value chain and the promulgator of the standards and practices for all players.

"You're going to see big changes, as you will in any industry that's gone through its initial growth spurt," says Arthur Wang of 698 Capital. "But let's not forget that this was a great idea to start with - that it not only enabled an entire data services industry to emerge in China, but that it's actually catalyzing the rollout of GPRS and 3G, which are going to take this industry to even greater heights. After all, if 3G is about anything it's data - and in that universe there's only one way for operators to differentiate themselves from their competitors, and that's with the quality and choice of services they offer."

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.