China Mobile Gets Creative With Youku Tudou

China Mobile gets creative

I don’t usually have much praise these days for China Mobile (HKEx: 941; NYSE: CHL), which emerged as the world’s biggest crybaby last year after a high-profile spat with leading Internet firm Tencent (HKEx: 700) involving the latter’s popular WeChat mobile instant messaging service. But perhaps the world’s biggest mobile carrier is trying to put its crying in the past and start a new chapter in 2014 by innovating rather than complaining, which looks like the case with a lucrative and fast-growing tie-up with leading online video firm Youku Tudou (NYSE: YOKU).

China Mobile and its 2 smaller rivals have enjoyed a longtime monopoly in their home market, where Beijing has forbidden competition from domestic or foreign rivals. China Mobile has been the biggest beneficiary of that protection, using its early start as the country’s first mobile carrier to build a massive base of more than 750 million users — more than twice the size of the entire population of the US.

The company has enjoyed huge profits as a result of its dominant position. But despite all its advantages, it accused the privately owned Tencent of monopolistic behavior last year, saying WeChat’s was hogging up mobile bandwidth and unfairly dominated the mobile instant messaging space. China Mobile finally stopped its complaining after suffering negative public backlash, and is now focused on developing its own new products to compete with WeChat and other mobile Internet services.

In one of those initiatives, China Mobile and Youku Tudou are trumpeting the recent success of the latest edition of their jointly developed mobile video contest. (company announcement) Youku Tudou has hosted the “G Ke G Pai” contest each year on its site since 2010, with China Mobile promoting the competition over its mobile network. The competition allows people to enter their homemade videos, which can then be watched by mobile subscribers for 2 yuan each.

The latest edition of the competition generated a hefty 270 million yuan ($44 million) in revenue, quite a nice sum from Chinese Internet users who are famously stingy about paying for online entertainment. In this case, I suspect users were more willing to pay because they could easily do so on their monthly phone bills. China Mobile and Youku Tudou point out that more than 70,000 videos were submitted in this year’s contest, 7 times the amount during in the 2010 launch year, driven by the rapid rise of smartphones that allow for easy viewing of videos.

I would formally like to commend China Mobile for this partnership, which will only grow in the future as technology for making homemade videos becomes widespread and more people watch programs over their smartphones. Such partnerships are smart, because they allow both sides to leverage their strengths to generate major new business in an emerging area like the mobile Internet.

That approach is quite different from the Tencent spat last year, which carried a veiled threat that China Mobile might block WeChat on its network if Tencent refused to sign a revenue sharing agreement. In the end China Mobile quietly dropped its protests, and WeChat continues to remain free despite speculation Tencent might have to start charging fees for the service. After that conflict, China Mobile started taking a more constructive approach by seeking a private-sector partner to update its popular free Fetion messaging service to compete with WeChat.

China Mobile certainly has reason to be worried about threats to its protected position from a number of sources, since China is currently rolling out a new program that will create privately-owned virtual network operators (VNO) that can offer rival telecoms services. (previous post) But hopefully its recent actions, including the strong results for the Youku Tudou tie-up, show that China Mobile has put its crybaby days in the past and that it will become more innovative to compete in an increasingly competitive domestic mobile landscape.

Bottom line: The success of a tie-up with Youku Tudou looks like a good business development model for China Mobile, which needs to innovate more as competition grows in China’s telecoms landscape.

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