Mobile Internet Trends

& Business Environment

in China

Bruno Bensaid @

25 Oct 2010

� About the Speaker & the Company

� China Internet & Mobile Industry Facts and

Trends

Agenda

Trends

� Investment Environment

� Go-to-Market Strategies

Bruno Bensaid

In Asia since 1997 (learned Chinese in Shanghai). Worked at

Cisco (APAC Finance division) in Singapore 1999-2002

2002-2006: Launched/managed the China operations of

French, UK and Japanese internet and mobile VC-backed

companies; also advised French Telcos on China investments

About the Speaker

Bruno Bensaid

Founder &

Partner,

Shanghaivest

Founder,

MobileMonday

Shanghai

Launched MobileMonday Shanghai in 2006 and started

advising VC/PE funds, small and large enterprises in

investment strategies in China

First China employee of Ventech (French VC) in 2007-2008.

2008: created Shanghaivest, an investment bank advisory

firm and started angel investing in several local startups

Regular speaker/moderator at China Technology, business

and investment conferences

Aerospace Engineer (SupAero) & INSEAD

Pioneering China-based investment bank advisory firm

focusing on cross-border M&A, investment and capital

raising strategies between China and Europe (and MENA).

Focused on building synergies between Europe and China in

IT, renewable energy, Cosmetics , Fashion & Luxury.

Advisor to several Chinese and European private and public

About Shanghaivest

Advisor to several Chinese and European private and public

companies on overseas expansion strategies.

Community role: Shanghaivest helps Chinese startups raise

financing and is involved in non-profit organizations like

AngelVest and Mobilemonday Shanghai (“MoMo Shanghai”,

created in 2006, has held more than 25 events and counts

3,000+ followers in China and overseas).

China Internet & Mobile Industry

Facts and TrendsFacts and Trends

Internet at a glance

� The largest internet population in the world, and

still growing: 420 mil internet users (June 2010,

source CNNIC), up 36 mil users from 2009, 31.8%

penetration rate.penetration rate.

� Broadband internet users reached 363.81 mil.

� Rural internet users reached 115.08 mil ie 27.4% of

all internet users, up 7.7% over the half-year period.

Internet Trends

� Some of the key drivers of China’s internet market are online

advertising (24.1%) and gaming (20%). In 2010, online

shopping and travel will show strong growth (iResearch).

� Online Gaming to reach $4-$4.5 Bil in 2010, with casual

games growing fast (but still small compared to MMORPG),

driven by social networks.driven by social networks.

� Social networking is dominated by local players Like QQ,

Kaixin001, RenRen, 51.com etc. Facebook, twitter are

blocked in China (but would be small even if unblocked).

Weibo (the local Twitter) reached 56 Mil subs August 2010.

� Kaixin001 (the fastest growing SNS) reached RMB 100 Mil in

revenue in H1 2010 (advertising: 80%), with 86 Mil users and

25 Mil unique users per day.

Mobile Telecom Trends (1)

� 833 mil mobile subscribers (Sept 2010, source MIIT), growing

15.85% on year. 65% penetration.

� 9-10 mil new mobile subscribers per month.

� 301 Mil fixed telecom subscribers networks (Sept 2010,

source MIIT), 22% penetration, and declining.source MIIT), 22% penetration, and declining.

� In Sept 2010, mobile subscribers sent 72.89 Bil SMS,

averaging 2.87 messages per phone number daily.

� Mobile internet users reached 292 mil (Sept 2010), 66% of

total internet users.

� Of the total mobile internet users, 11.7% had only their

mobile phone to access the internet

Mobile Telecom Trends (2)

� 3 Mobile Telecom Operators: China Mobile, China Unicom,

China Telecom. GSM > 90% market share.

� China Mobile is dominant operator with 70% Market share,

China Unicom 25% and China Telecom 5%.

� 3G: Fragmentation! 3 different technologies have been� 3G: Fragmentation! 3 different technologies have been

adopted (TD-SCDMA, WCDMA and CDMA 2000).

� ~44 Mil 3G users by end 2010. Take up slow due to lack of

attractive phones on the market (despite China Mobile’s

Ophone or Unicom’s Uphone newly released). Android and

Symbian-based smartphones will make the most of new 3G

subscribers in 2010-2011.

Mobile Value-Added Services Trends

• ~RMB 18 Bil is the size of the Chinese mobile internet market in 2010

(approx 10% of total internet market), +5.8% Y0Y. Source iResearch

• Mobile Newspaper is by far the most popular MVAS application by

Chinese telcos and all 3 operators are offering e-books/magazines on their

platforms (e-books, dominated by Shanda with 90% market share, is a 6

Bil RMB market with 3 mil units sold in 2010).

Mobile VAS at a glance

• Mobile Commerce: explosive growth is expected, starting with coupons

and tickets, and now extending to physical goods. Mobile Commerce

growth will be largely aided by LBS and local search growth.

• (Mobile) Search: China Mobile working on own search engine with Xinhua

News Agency. Largest Chinese portals to catch-up with Baidu and Google.

• Mobile Gaming and Apps: cumbersome process, skewed towards telcos,

but games growth compensates for slow MVAS (impacted by regulations).

• Mobile Advertising: still immature but will be pulled by search growth.

� Good buzz, but few $ available as industry is just starting.

Adoption impacted by low 3G penetration, high phone

fragmentation and already rampant piracy.

� China Mobile’s MobileMarket (launched 2009) claims 50,000+

developers, 40,000 apps and 25 Mil downloads (June 2010).

App Stores’ buzz…and reality

� China Unicom’s UniStore just launched, after faulty start

� China Telecom's E-Surfing Space App Market launched in

2010 and expected to reach 1 mil users by year end.

� Nokia’s first phone pre-loaded with MM-Ovi application store

(a combination of Mobile Market and Ovi).

� iTunes and Android App Market: many pirated apps via

jailbreaking and alternate app stores.

� Chinese e-commerce users reached 142 Mil (June 2010), up

31.4% in past 6 months.

� Online retail sales will reach $65.9 Billion in 2010 (source:

alibaba). It reached $35 Bil in 2009 and estimated to reach

$84 Bil in 2011 (CNNIC/I-Research).

E-Commerce

$84 Bil in 2011 (CNNIC/I-Research).

� Clothing #1 category in online retail (source: Alibaba).

� In 2009, Taobao (an Alibaba’s sub-company) commanded

about 77% of the total E-commerce (B-to-C, C-to-C) market.

� In 2009, C-to-C dominated the market with 93% of

transactions with Taobao representing 82% (Tencent’s paipai

10% and Tom-Ebay 8%).

� In 2009 alone, Taobao

wireless claimed 10 mil

active users & 2.5 mil daily

active users

� Taobao also claimed 302

Taobao, China’s E-Commerce leader, is bound to

dominate in M-commerce too

� Taobao also claimed 302

mil RMB in annual

transactions in 2009

� In the second half of 2009,

transactions increased 40%

Source: Taobao management

� With E-commerce explosive growth and progress in 3G

adoption (44 Mil users end 2010), M-Commerce is predicted

to increase 300% in 2010 (Experian Marketing Services)

� Union Mobile Pay (a joint-venture between China Mobile

and China Union Pay) is reporting m-commerce sales of $ 4.4

Bil (RMB 30Bil) in 2010 and 140 mil users (Payments Source).

M-Commerce at a glance

Bil (RMB 30Bil) in 2010 and 140 mil users (Payments Source).

� China’s largest e-commerce players (Taobao, Baidu, Tencent

etc) have developed native mobile offerings and will fuel the

growth. Online payment leaders (such as Alipay) also

launched their mobile versions to support their clients.

� Contactless payment coming into the picture too, via RF SIM

first (a SIM-based NFC-like system co-developed with China

Mobile), and via industry standards (Single wire protocol)

The Investment EnvironmentThe Investment Environment

Flushed with money, the China investment market

is dominated by late-stage Funds

� VC/PE investors are focused on larger, later-stage

opportunities and tend not to consider deals under

US $3 Mil.

� In H1’10 alone, $5.8 Bil (up 67% from H2’09) were

raised by funds for the Chinese market.

� 43% of funds raised were RMB-funds.

� In the same period, $1.587 Bil was actually invested

(down 10%, but overall up 30% y-o-y).

� “Too much money is chasing too few good deals”

Seed/Angel Financing still immature

� Tremendous demand for start-up capital in China in the sub-

$500K range.

� The Kauffman Foundation estimates that there are over 300

institutionalized angel groups in the US; but China had less

than 6 such angel groups end 2009.than 6 such angel groups end 2009.

� Traditionally, Chinese entrepreneurs have raised start-up

capital from friends and family.

� Some incubators / seed funds are emerging (Innovation

Works, China Founders Fund, China Venture Labs, Taishan,

DAD Asia etc), alongside committed angel organizations

(AngelVest in Shanghai etc).

� Group buying websites (Groupon model, 400 competitors

approximaltely) and E-commerce at large drew the most

internet investments in the past 6-9 months.

� We expect a spill over into mobile ventures (or mix

online/mobile) in the same sectors soon.

Mobile Internet Investment Trends

On the Mobile side:

� Growth capital injected into a select number of mobile

companies, with amounts ranging from $8 - $70 Mil. Sectors

covered: security, coupons, multiplayer or casual gaming,

entertainment and education.

� Much smaller investments are injected into android

developers, mobile marketing companies etc.

Some Recent Transactions (1)

Source: Skillnet

Some Recent Transactions (2)

Source: Skillnet

Go-To-Market StrategiesGo-To-Market Strategies

Holding Company

Foreign Investore.g.: BVI, Cayman etc.

Share disposalShare disposalCapital gains not taxable in China

or in Holding company jurisdiction.

Typical Investment/operations structure

Holding Company

China Operating Co.

WOFE

If shareholding < 25％％％％, capital gains not

taxable in China.Share disposalShare disposal

Chinese Company

different shareholder

Contractual relationship, but no official ownership

SP/CP LicenseSP/CP License Mobile Operator

China Mobile’s MVAS/App platforms

The “historical” (high traffic) MVAS platform,

compatible with all possible phones: offering

games (mostly freemium model),

Newspaper, TV, Streaming, Maps, CRBT,

ringtones, Instant Messaging, 2-D barcode,

Disney Channel etc.

China Mobile’s App Store, compatible mainly

with Ophones (China Mobile’s developed

phones) and Symbian phones. End Oct 2010:

6818 apps, 2483 games, 30314 theme-based

apps (wallpapers, pix etc)

� Selling on Monternet (China Mobile MVAS platform):

• Mainly for games (not apps) and all other China Mobile’s core MVAS,

such as instant messaging, mobile newspaper, search etc.

• Usually serves most phones and OS.

• Requires a Service Provider (SP) license, only granted to local

companies. Without a license, the vendor needs to go through an SP.

MVAS: a byzantine go-to-market Process (1)

companies. Without a license, the vendor needs to go through an SP.

• Typical revenue sharing scheme: 70% SP / 30% China Mobile.

• If vendor sells via an SP, both parties customarily split 50/50 of the net

proceeds (aka post telco split). Therefore, an app vendor would get

35% (or less) of total revenue in the end.

• Lengthy, cumbersome approval process (3-5 months), need to comply

with censorship criteria etc. Having “connections” helps expedite the

process, but does not guarantee good placement on the “deck”.

� Selling on MobileMarket (China Mobile apps platform):

• Mainly for apps, games and themes (wallpapers, b-day cards etc).

• Only Ophones (China Mobile’s phones) and Symbian supported.

• Does not require a Service Provider (SP) license, but vendor needs to

be a local company (foreign ownership <50%), be operating for more

than 2 years and with ~RMB 0.5 Mil in registered capital.

MVAS: a byzantine go-to-market Process (2)

than 2 years and with ~RMB 0.5 Mil in registered capital.

• Otherwise, vendor needs to go through an SP or CP (content

provider), like in the Monternet case.

• Typical revenue sharing scheme: 80% SP / 20% China Mobile (or 50-50

split on the 80% if the vendor is not an SP/CP itself).

• Uploading the app on the platform is easy, but the app requires

approx. 2 months of testing before being approved and published.

� Selling on Nokia Ovi China: similarly, the app vendor needs to go

through a 3rd party (Kong or Netease, 2 large players) to get published.

Thank You!

For more,

bruno.bensaid@shanghaivest.com

bruno@mobilemondayshanghai.net

China Cell: +86 13818184399

France Cell: +33 686056830

www.shanghaivest.com

www.mobilemondayshanghai.net

www.sh-angels.com