China mobile internet trends bruno bensaid @ momo belfast oct 25 2010

Mobile Internet Trends & Business Environment in China Bruno Bensaid @ 25 Oct 2010

Agenda About the Speaker & the Company China Internet & Mobile Industry Facts and Trends Investment Environment Go-to-Market Strategies

About the Speaker 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 Bruno Bensaid Launched MobileMonday Shanghai in 2006 and started Founder & advising VC/PE funds, small and large enterprises in Partner, investment strategies in China Shanghaivest First China employee of Ventech (French VC) in 2007-2008. Founder, 2008: created Shanghaivest, an investment bank advisory MobileMonday firm and started angel investing in several local startups Shanghai Regular speaker/moderator at China Technology, business and investment conferences Aerospace Engineer (SupAero) & INSEAD

About Shanghaivest 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 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 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. 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. 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. 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 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

Mobile VAS at a glance • ~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 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.

App Stores’ buzz…and reality 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). 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.

E-Commerce 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). 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%).

Taobao, China’s E-Commerce leader, is bound to dominate in M-commerce too In 2009 alone, Taobao wireless claimed 10 mil active users & 2.5 mil daily active users Taobao also claimed 302 mil RMB in annual transactions in 2009 In the second half of 2009, transactions increased 40% Source: Taobao management

M-Commerce at a glance 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). 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 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. 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).

Mobile Internet Investment Trends 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. 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 Strategies

Typical Investment/operations structure Foreign Investor e.g.: BVI, Cayman etc. Capital gains not taxable in China Share disposal or in Holding company jurisdiction. Holding Company Share disposal ％ If shareholding < 25％, capital gains not taxable in China. China Operating Co. WOFE Contractual relationship, but no official ownership Chinese Company SP/CP License Mobile Operator different shareholder

China Mobile’s MVAS/App platforms The “historical” (high traffic) MVAS platform, China Mobile’s App Store, compatible mainly compatible with all possible phones: offering with Ophones (China Mobile’s developed games (mostly freemium model), phones) and Symbian phones. End Oct 2010: Newspaper, TV, Streaming, Maps, CRBT, 6818 apps, 2483 games, 30314 theme-based ringtones, Instant Messaging, 2-D barcode, apps (wallpapers, pix etc) Disney Channel etc.

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

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

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China mobile internet trends bruno bensaid @ momo belfast oct 25 2010

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China mobile internet trends bruno bensaid @ momo belfast oct 25 2010 — Presentation Transcript