Western 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.
