China’s evolving mobile landscape

Posted on March 24, 2014 by Eric Benjamin Seufert

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On March 20th, China Mobile – the world’s largest mobile carrier, with more than 770MM subscribers — released its annual results for 2013, revealing interesting trends in China that may indicate the emergence of a singular, unified distribution system for app developers.

One of the more interesting data points from the presentation related to the growth of China Mobile’s 4G business: by the end of February, the company had enlisted 1.34MM LTE subscribers, with around 1MM of those being iPhone subscribers.

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Source: China Mobile

While these iPhone sales figures are lower than had been anticipated – analysts expected that 15 to 20 million units would be sold in 2014 — these numbers represent a clear preference for iPhone at the higher end of the value chain in China. iOS market share declined by nearly a quarter over 2013 to 17.4%, and Apple’s deal with China Mobile is an important attempt to resuscitate its presence there. Thus far, the cooperation appears to be working at the higher end of the device spectrum.

Another interesting revelation in the report is the extent to which over-the-top (OTT) messaging apps are affecting China Mobile’s voice and messaging revenues: both shrank fairly significantly (-3.4% for voice and -6.5% for SMS and MMS) in 2013. Especially interesting here is the deterioration of SMS and MMS revenues, the implication of which is that messaging app usage in China continues to grow and evolve. Tencent’s WeChat, the second-largest OTT messaging app by worldwide user count, has approximately 300MM monthly active users, the majority of which are located in China.

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Source: China Mobile

The confluence of these two factors in China – a shifting preference to iPhone and the continued growth of OTT messaging apps – has broad implications for app distribution in the country. Historically, the difficulty for foreign companies in entering the Chinese market has been device and marketplace fragmentation. Foreign developers interested in entering the market must either adopt the overhead of regional expertise (country managers, business development personnel, etc.) or work with a local partner for distribution (with many such arrangements requiring a significant forfeiture of revenues).

But if Apple is able to reverse its decline in China and capture appreciable market share through its cooperation with China Mobile, the process of launching an app in China may become more attractive to smaller developers without the resources to staff a team dedicated to the Chinese market. Additionally, as OTT messaging apps continue to capture messaging traffic, distribution in China (especially for games) has the potential to become much more simple: advertise through WeChat.

Large Western brands like Pepsi and McDonald’s have recently begun advertising on WeChat to reach users in China (and Brazil, where WeChat is also popular), and Tencent is currently in the process of rolling out ad management tools to advertisers. WeChat may soon become an attractive marketing channel for app developers, which would significantly reduce the complexity of user acquisition in China for foreign developers.

The growth of iOS in China and the continued robustness of OTT messaging apps could potentially lower the bar for app distribution in China enough to create an opportunity for foreign developers to enter the market. Currently, entering China for foreign developers requires a dedicated strategy (“going to China”), which prices many small developers out of the market entirely. If the market dynamics continue to shift as indicated by China Mobile’s recent annual report, however, that may change.