Recruiting in China

In July, reports surfaced that China's two mobile telecoms giants had hit upon a novel marketing strategy. In the east China city of Suqian, China Mobile and China Unicom were giving away cases of local beer to new subscribers.

An analyst quoted in the Financial Times noted that, although a duopoly, the two companies were competing to lure subscribers as though there were "10 competitors fighting it out."

As effective as beer-driven marketing may be during a sweltering summer, if this is what passes for innovation in mobile telecommunications then the nearly 500 million Chinese mobile phone users might want to reach for something stronger.

The problem is that while China's two mobile phone operators might market with a competitive verve, they behave like the government-managed duopoly they are when it comes to technical innovation.

Wireless value-added services (WVAS) are largely limited to the standard 2G diet of ring tones, ring back tones and text-based gimmicks. Many of these come from small, third-party providers over which the operators maintain rigid control. This has generated more controversy than innovation as WVAS providers have struggled with shady customer recruiting practices, the duopoly's financial demands and wide-ranging content restrictions. Revenues are declining across the board and many WVAS providers are teetering on the brink of failure, let alone dreaming up exciting new products.

As a result, the largest mobile telephone market in the world is a technological desert overshadowed by far more fertile territories in Korea and Japan.

A MISGUIDED STRATEGY
Don't be misled. China's telecommunications regulators are committed to domestic innovation. Unfortunately, they have chosen to focus on the development of a domestic 3G standard, TD-SCDMA, rather than using a foreign equivalent.

This is exactly the wrong the approach.

The lesson of the internet's success is that the underlying network is just the starting line. The great explosion in innovation and wealth creation has been in the services and applications that run on the network. That's why Google is worth US$160 billion less than 10 years after it was founded.

What is more, TD-SCDMA is stuck in the starting gate and China's telecoms regulator refuses to issue licenses for it or any other standard until it is ready. Licensing has slipped from 2004 to "early 2006" to "late 2006 or early 2007" to "before the Olympics" to "we'll get back to you."

For Chinese users, this means continued reliance on creaky "2.5G" data networks and the same moldy basket of uninspiring services.

What's heartbreaking is that in the years China has dawdled over TD-SCDMA, all the ingredients that would have enabled it to be a global leader in mobile applications have come together.

Global 3G standards and technologies have improved and are beginning to live up to early expectations. Handset technology has also matured to the point where real web browsing, IP telephony and even Chinese handwriting input are practical. Motorola's Ming and the turbo-hyped Apple iPhone, a sleek mobile PC cunningly disguised as a phone, are signposts to the future.

ENGINE FOR GROWTH
With the largest mobile user base in the world, China is in a perfect position to be the mobile application laboratory for Asia, if not the world.

While many of China's mobile phone users are low-revenue customers content with basic services, there is an increasingly affluent, mobile and internet-addicted youth generation already pushing the current services to the limit. Mobile internet access could have a much broader impact in China than PC-based access has ever had.

China could exploit this potential by swallowing its pride, accepting a proven global 3G standard and ordering mobile operators to open their networks and support third-party IP-based services. That could spur real innovation and make this the golden age of mobile services in China.

But as long as the state-owned enterprise mentality and top-down technical policy making prevail, that golden age will remain elusive. Instead of being the innovation leader it should be, China will remain the world's largest mobile telephony backwater and 500 million mobile phone users will be left treading water.