By Perry Wu
On February 6, Chinese mobile service provider Linktone (LTON) dropped its financial expectations for its fourth quarter GAAP net income for the last period in 2005. Then last week, the company's CEO Raymond Yang resigned, ending a rollercoaster tenure. And with yesterday's poor earning announcement, we now know why he left.
Linktone's net income for the fourth quarter was US$1.5 million, or US$0.05 per fully diluted ADS, compared with US$4.1 million, or US$0.15 per ADS, for the third quarter of 2005. They registered US$1.9 million, or US$0.07 per fully diluted ADS, for the fourth quarter of 2004.
The company estimates that it averaged approximately 7.8 million paying users per month for the fourth quarter of 2005, down from 8.3 million in the third quarter.
Linktone attributes the decline in revenue to many factors including higher costs associated with the company's wireless value-added services. Primarily these are increased revenue share payments to content providers reflecting a greater percentage of its revenues derived from third party content-based services.
Well, why should anybody be surprised? Linktone has always had to make revenue share payments and it was only a matter of time that China Mobile started upping the ante.
As I wrote almost two years ago, Linktone's business model was created to die. I wrote in 2004, "It is easy to imagine a situation where China Mobile gets a little more greedy and decides to take a higher cut; in this situation Linktone would have little recourse. Even more ominously, China Mobile could provide similar services to Linktone's services, thereby cutting Linktone totally out of the picture."
And now we are seeing that not only can China Mobile plunder Linktone's resources, but just about every other website can offer similar services as those of Linktone.
The "Mobile Business Model" in China is one that I have peppered with scorn for at least four years. If you are Siemens and make mobile phones, then you have decent business prospects. If you are China Unicom and own the frequencies through which short messages are sent, then you can plan on being a going concern for quite some time. But the "Mobile Business Model" in China whereby investors provide millions of dollars to a wireless value-added startup so that the company can WAP-ify and mobilize content is a joke.
Linktone is not alone. Chinese companies like KongZhong and Hurray need to diversify into non-mobile businesses–soybeans, perhaps–if they hope to keep their respect intact.
There are many reasons why the "Mobile Business Model" in China was dead on arrival, but one short-lived company can best exemplify that of the entire industry. Almost four years ago there was a company called Peak Mobile that operated in Beijing and was funded by a mobile-only venture capital outfit called MINT. Peak Mobile was essentially a mobile messaging company focused solely on the enterprise segment. In layman's terms, they could help batch and send mass amounts of mobile text messages on behalf of clients. Whether your secretary wanted to send an SMS to all the people in the marketing department or your sales staff wanted to send a marketing message to 500 of your clients, Peak Mobile could provide that service.
But what the investors and staff at the company forgot was that China Mobile already had GPRS cards for laptop computers that could allow a secretary or sales team to send unlimited mobile text messages without buying the Peak Mobile service! Furthermore, there were already Windows-friendly software that could connect to a Nokia or Motorola phone that could easily and cheaply provide the same service.
Peak Mobile's business never seemed to get off the ground and the company withered away. Linktone, too, should have disappeared in 2002, but either through ignorance or fear of realizing the truth, Linktone plowed on, hoping that nobody would realize that a middleman for mobility in China was not really necessary.
And now we have the fourth quarter laid bare, and the truth written in the past is today fact. Sorry, but I told you so. The "Mobile Business Model" in China was wrong from the beginning and the company lacked all manner of business understanding. Witness this letter from Linktone's public relations department after one of my commentaries in 2004 and you understand that the company was rowing without oars.
The mobile phone industry is big in China, and China Mobile and China Unicom will continue to reap huge profits. But wireless value-added service (WVAS) companies are the middlemen that kowtow to big brothers like China Mobile and China Unicom to make their monthly staff wages.
These WVAS companies are staffed with talented, educated people and it is a shame they wasted their time building bridges to nowhere.
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.