crazy-frog-wallpaper-1280x1024-small.jpgWestern companies are often accused of entering China with their eyes shut. Today's warning from Monstermob, the UK-listed mobile phone services company, confirms that lemming-like behaviour shows no signs of dying out.

China's mobile phone content market is potentially huge. And if you don't take a risk you cannot reap a reward.

But
only now is it becoming clear just what a huge risk Monstermob has been
running in China, where mobile content is still incipient and where the
rules of engagement can change overnight.

For some time,
investors suspected that all was not what it might appear with
Monstermob, which sells ring tones and games in China, the UK and other
markets. Even before today's warning, its share price had slumped 70%
over the past six months and last month its chief executive was
replaced.

Today's bombshell announcement to the LSE caused the price to lose another 60% as investors who still believed in Monstermob rushed for the exit door:

Monstermob
Group announces that it has become aware of upcoming policy changes
affecting all subscription services operated via China Mobile (China's
largest mobile operator)… In the short term, the new policies are
likely to impact the ability of our Chinese businesses to acquire and
retain new subscribers and may impact adversely upon their existing
subscriber bases.”

Put bluntly, China Mobile has
suddenly pulled the rug out from under its content providers. It will
now require their customers to confirm that they want to keep paying
monthly subscriptions for services they signed up for — perhaps on
impulse — but which they may no longer use. In addition, the free
trial period for new services is extended.

These changes,
introduced at the behest of China's ministry of information industry,
create a far tougher environment for content providers, as they can no
longer depend on consumer inertia to keep the monthly revenues rolling
in.

Monstermob says the short-term impact “could be substantial”
as around 40% of its net revenues in China are currently
subscription-based. Monstermob's China operations account for about 50%
of net revenues, and the company has made a big bet on China, buying
three Chinese companies in the past year.

Monstermob should have
seen this coming. It is hardly the first time that changes in the rules
have sent the share prices of China-focussed content companies reeling.
In the early years of their lives as Nasdaq-listed companies, China
content plays like Sohu and Sina were plagued by these issues. The
challenge, of course, is that China's content industry is growing up.

As
the market develops, the light-touch regulatory environment that has
served these content businesses so well cannot last forever. Greater
scrutiny is only to be expected as it mirrors what has happened in the
west.

In Ireland, for example, the opaque business practices of mobile content companies attracted a barrage of complaints last year, according to Electric News.
Customers who downloaded “Crazy Frog” and other popular ringtones found
that they had unknowingly signed up for long-term subscriptions, which
were then difficult to cancel.

At least one content company was
obliged by Ireland's director of consumer affairs to make refunds to
the affected customers. Monstermob admitted that the Crazy Frog
controversy had dampened enthusiasm for its own subscription services.

Content
companies know that if they want to work with mobile operators — in
Ireland, China or anywhere else — they must play by the rules, even if
those rules change.

IGM
is another LSE-listed mobile content company that is making a big bet
on China. It only listed in May and its share price also fell heavily
today. It gets 60% of its revenue from instant messaging and chat
services with China Mobile.

Meanwhile, Nasdaq-quoted Linktone put out a similar statement
warning of a likely “material negative impact” from China Mobile's
policy change. It also said China Unicom and China Telecom had
introduced rule changes on SMS services.

The warning by
Monstermob is particularly damaging, as the company has sought to
garner respectability with institutional investors and distance itself
from the fly-by-night image that plagues the ringtone business. Its big
coup came last year when it recruited Hans Snook, founder and former
chief executive of Orange, as its new chairman.

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