Ring-tone complaints cost millions in China

The latest financial data from companies offering ring-tone downloads, text information and other mobile services in China reveal sharp falls in revenue as new policies designed to protect consumers take effect.

Some service providers have lost more than a quarter of their anticipated revenue, totalling tens of millions of dollars, after the introduction of the new rules.

Earlier this year, China's two mobile phone network operators, the giant China Mobile and its smaller competitor China Unicom, changed the rules under which third-party providers can sell services over their networks. 

The changes were prompted by customer complaints and new government regulations.

Thousands of customers had complained that they were being billed for services and downloads to which they had not agreed, or were unable to cancel services from the so-called wireless value-added services providers.

With the introduction of the new rules, customers were first required to opt-in to continue receiving services to which they were already subscribed.

Subsequently, the new rules require that they receive clear, repeated notification of any new service when they sign up. Additional restrictions include a preset upper limit on monthly service fees.

Nasdaq-listed Tom Online and Kongzhong are among the largest of China's numerous wireless value-added services providers. 

These companies earn most of their income from mobile phone users who pay for ring-tone and desktop wallpaper downloads, information such as news, weather and stock market reports via SMS, and interactive voice response services.

Most services are paid through the customer's mobile phone bill, from which the network operator takes a percentage.

Tom Online announced a drop in total revenues to US$38.95 million for the third quarter, a fall of 22.3 percent from the previous quarter, and 15.2 percent lower the same period last year.

The company announced that the shortfall was almost entirely attributable to "wireless internet revenues", a term Tom Online uses to describe the various downloads and services it offers to mobile phone users. These services generate almost 90 percent of its revenue.

Similarly, Kongzhong saw its third-quarter revenue fall 16.6 percent quarter-on-quarter to US$25 million, and predicted a further fall to between US$20.5 million and US$21.5 million in the fourth quarter.

The company attributed the drop to the "continuing impact of regulatory changes introduced by telecoms operators and the Ministry of Information Industry".

"We see less risk for Tom Online on China Mobile taking more prudent steps to avoid 'monopoly' criticism and small service providers dropping out," said Deutsche Bank analyst William Bao Bean in a recent research note.

Deutsche Bank upgraded Tom Online to 'Buy', but maintained a 'Hold' rating on Kongzhong.

Analysts have long warned that, as well as being wounded by the new customer protection policies, China's wireless value-added services providers are threatened by direct competition from the network operators themselves.

Under this model, the stricter enforcement of regulations is seen as an additional weapon in an unequal battle between operators and service providers.

China Mobile and China Unicom have hitherto been content to expand revenues simply by signing up new subscribers but, faced with the impending arrival of competing 3G operators, are beginning to put more effort into additional services.

For example, both firms are introducing their own instant messaging services for mobile subscribers, challenging third-party mobile messaging providers such as market-leader Tencent and Microsoft's MSN Messenger.

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