By Perry Wu
I am often still asked, rhetorically I imagine, if I believe the wireless value-added service sector in China has good short-term prospects. My answer is still, "No. Absolutely not."

Being a mobile value-added services provider, which usually means you provide news, games, or features on SMS, MMS, WAP, or IVR, means you gain nothing in China. Do the math. When you are a MVAS or WVAS firm, you still give a large percentage of your revenue over to others, like China Mobile. A few years ago, a content provider could walk away with a meager 10-20%, even though they did all the work. Now that figure has supposedly risen to as much as 40-50%. But that still means that you need to send millions and millions of messages to make decent money.

But then you say, "But I heard that there are billions of SMS messages sent in China, so making money should be easy!" This is true. However little of this money goes through mobile value-added service providers' pockets. Why? Well, according to Xinhua News Agency, let's look at these figures they posed for the Spring Festival holiday in 2006:

"China Mobile and China Unicom, the country's two major mobile service providers, users have sent about 12 billion greeting cellphone messages during the Spring Festival holiday. Every mobile phone user sent 30 messages on the average from January 28 to February 4, according to sources from the two companies. Calculating on the basis of 0.1 yuan (1.25 US cents) per short message, China Mobile raked in 950 million yuan (US$118.8 million) from this service, while China Unicom generated 310 million yuan (US$38.8 million). China Mobile alone sent 1.9 billion messages on January 28, or the eve of the Spring Festival, while China Unicom sent 1.4 billion on January 28-29. China Mobile alone sent 1.9 billion messages on January 28, or the eve of the Spring Festival, while China Unicom sent 1.4 billion on January 28-29."

Do you see? Those messages were sent from one user to another, without the help of a WVAS company. That means WVAS companies earned nothing, unless users wanted to use their services. China Mobile and China Unicom are the big brothers who earn all the money in China's WVAS space. If a half-smart investor wants to place their bets on mobile services in China, they should not invest in one of the thousands of fledgling WVAS companies in China. Instead they should buy shares in China Mobile or China Unicom.

And do users currently want to use those wireless value-added services? No. If you look at the financial statements from Internet portals like China.com, Sohu.com, Tom.com, Netease.com, you'll see they have all had sliding revenue on their wireless value-added services. Sina's MVAS revenue for the first quarter of 2007 was US$18.2 million, declining 20% from the same period last year and declining 5% from the previous quarter.

Tom.com's wireless Internet service revenue for the first quarter ended March 31, 2007 was US$31.82 million, representing a 28.4% decrease from the same period last year. Wireless Internet service revenues for Tom.com made up 90.6% of total quarterly revenues compared to 88.0% in the fourth quarter of last year. Yikes! They're really putting all their eggs in one clumsy basket!

And when you look at Chinese companies like Linktone, KongZhong, or Hurray, which are all purely focused on the Chinese wireless value-added services market, they too have sinking revenue.

For the first quarter of 2007, Linktone recorded revenues of US$14.2 million, compared with US$14.0 million in the fourth quarter of 2006, but a drop from US$23.0 million in the first quarter of 2006. It also had GAAP net loss of US$3.4 million, compared with net income of US$0.4 million in the fourth quarter of 2006 and US$2.3 million in the first quarter of 2006.

KongZhong's first quarter also showed the company's revenues decreased 48% from the same period in 2006 but increased 1% sequentially to US$9.22 million. Its WAP revenues in the first quarter of 2007 were US$4.40 million, a decrease of 50% from the same quarter of 2006 and a decrease of 9% sequentially.

There was no cheer for comrade Hurray, whose unaudited financial results for the first quarter still dipped, but exceeded guidance. It said total revenues hit US$16.6 million, a decline of 2.2% quarter-over-quarter and 0.9% year-over-year. Putting a good spin on the results, Chairman and CEO QD Wang said, "We are pleased to report a solid quarter which exceeded our previous estimate despite a challenging operating environment." Exceeding guidance is simple if you set very low standards for yourself.

True, all these companies used to have high wireless revenue, but they all made it via illegal means by adding users without their consent to their services. About five years ago, I think I was the first person to publicly point this out, because the Chief Technical Officer at my company at the time was complaining that Sohu.com added him to their wireless service and he could find no way to get himself removed–Sohu.com was billing my friend each month for services we did not want, did not need, and could not end. Franz Kafka would have appreciated the nonsense endemic at Sohu.com. Seriously, it was a sign at the time of irresponsible business practices.

Finally, a potential investor might say, "But surely eventually one of those fledgling WVAS companies in China will strike gold and make me billions of dollars!" I agree that if you are the founder of one of these companies, you might find someone more ignorant than you to buy your company–that is one way to cash out. But China Mobile and China Unicom are smart. Over the last few years, they graciously accepted third-party WVAS companies to use their networks to run various services. Then Mobile and Unicom co-opted those services as their own, leaving WVAS companies ruined and penniless. Look at the instant messaging sector: lots of WVAS companies crowded into the market to offer wireless IM services, but now both China Mobile and China Unicom have developed their own services which are better integrated into the services they provide. Therefore, the average mobile user in China is perhaps going to use Unicom or Mobile's services instead of a third-party's service. I see the same thing happening in wireless payments, mobile games, and mobile blogging.

How many intelligent people have come to China, started businesses, and failed? And then how many do that in the mobile value-added sector? Is there arsenic in the drinking water? What makes smart people together hurl themselves over the same road to nowhere and what causes people to see past reality? I think excessive use of mobile phones might indeed cause cranial troubles.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.