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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