China Mobile Turns Up VAS Heat

China Mobile Ltd. (NYSE: CHL) is still profitable, but a need to rekindle growth has executives planning to intensify the spotlight on value-added services (VAS).

The world's largest mobile operator by subscribers reported a 1.4 percent year-on-year increase in profits -- which is better than many companies are doing, but it's the smallest interim increase for China Mobile since it listed on the Hong Kong Stock Exchange in 1997. (See China Mobile Reports First Half.)

Hence, the interest in VAS, the continued rapid growth of which is "a prominent drive to our business," according to the company's chairman and CEO, Wang Jianzhou. This includes the committment of a portion of the telco's 133.9 billion China Yuan Renminbi (US$19.6 billion) capital expenditure budget, although the level of this investment has not been revealed.

The revenue China Mobile gets from its VAS business increased 13.7 percent from the previous year, to RMB59.891 billion ($8.77 billion) for the first half of 2009. The percentage of China Mobile's total revenue accounted for by those same services also rose, if only to 28.1 percent from 27.5 percent.

China Mobile's VAS comprises voice services, SMS, and non-SMS data. Not surprisingly, SMS revenue accounts for the largest share of this, at 44.1 percent for the first half of the year, but the non-SMS data is not that far behind, accounting for 38.1 percent.

What's more, of the company's RMB17.453 billion ($2.555 billion) rise in revenues in the first half, 24.7 percent came from data services other than SMS, considerably more than the 14.1 percent accounted for by texts. In total, non-SMS data created revenues of RMB22.799 billion ($3.337 billon) in the first half of 2009.

As examples of these data services, Wang singles out the company's wireless music club, which had just shy of 100 million members at the end of June 2009; Fetion, China Mobile's IM service that had 184 million customers at the same point; and the integration of both of these with 139 Mailbox, a unified messaging service.

In addition, he highlights revenue growth coming from the rapid development of mobile gaming, with over 7 million customers, and from machine-to-machine (M2M) services. The company's M2M activities have been expanded to the finance and power business sectors, and demand for M2M is "huge" says Wang.

Finally, Wang claims that China Mobile's recently launched Mobile Market makes China Mobile the first operator in the world to launch a mobile app store, and he promises application developers a one-stop shop for developing to multiple operating systems and multiple terminals. He also promised that the eagerly awaited arrival of the O-Phones, terminals based on China Mobile's enhanced Android platform, called Open Mobile System (OMS), would happen "soon." (See China Mobile's App Adventure and An O for an I?)

There is nothing disastrous in China Mobile's financial results; far from it. Profits for the first six months are up to RMB54.55 billion ($7.98 billion), and revenues increased 8.9 percent year-on-year to RMB212.913 billion ($31.16 billion).

However, the margins are being squeezed with the EBITDA margin falling from 53.2 percent to 51.6 percent and the net profit margin down 1.9 percent to 26 percent. And, Wang explains, the conditions in China for runaway growth are getting tougher.

Why? He points to the global economic slowdown; increased levels of penetration that mean new customers tend to be those with lower usage; the change in the competitive landscape of the telecom market after restructuring; and overcoming the difficulties of TD-SCDMA development.

— Catherine Haslam, Asia Editor, Light Reading

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