Sky's the limit for mobile app company

Head-spinning phone ownership figures signal the way for continued expansion in market

A year ago, China's Internet users outnumbered the entire population of the United States, sending the world abuzz with the news.

Today, the most populated nation has achieved another feat, albeit within its own boundaries: It now has more mobile Internet users than desktop Internet users.

The number of mobile gamers in China is expected to reach 192 million by the end of this year, says the market researcher Niko Partners.

The sheer size of China's market means opportunities abound, including in mobile gaming.

For this reason, Carl Yeung, chief finance executive of Sky-mobi Ltd, which operates a mobile application store in China, moved to Asia after attending school in the United States since he was a child. A Hong Kong resident, he was drawn by the Chinese mainland's "exciting prospects".

"China is a unique country. It evolved from an economy with no communications devices to one that is populated with mobile users. We skipped PCs and went straight to mobile devices, either in the form of smartphones or tablets," says Yeung, a former Merrill Lynch investment banker who obtained his bachelor's degree in economics from the Wharton School of the University of Pennsylvania.

"In China alone, you can find 1.05 billion mobile users. The US population is only 300 million. So Asia is a bigger market and has better opportunities," he adds.

Based in Hangzhou, Zhejiang province, Sky-mobi's applications store allows mobile users in China to download, for a fee, games, e-books, videos, news and other types of content developed by individual developers and leading Chinese companies including Tencent, Sina, Qihoo and Baidu.

Sky-mobi is mainly focused on apps and content downloads and does not offer microblogging sites or messaging services. It has offices in Hangzhou, Shanghai, Beijing, Shenzhen and Jakarta, Indonesia. It has 600 employees, 400 of them at the Hangzhou headquarters.

The company's apps are usually preloaded in handsets developed by Sky-mobi's network of 200 manufacturers in China. While most of Sky-mobi's revenue comes from payments from users' downloads, advertisers who allow users to access its sponsored apps free also contribute to the revenue stream.

Although Sky-mobi's application store revenue dropped from 136 million yuan ($21 million) to 113 million yuan in the year to June, Yeung says the drop is largely due to users "transitioning from feature phones to smartphones". The company's business had relied on mostly feature phone users in the past.

"In the last six to 12 months, feature phone usage has decreased by 30 percent. That's why we have seen fewer downloads and a drop in the number of active users. But one prospect we see is that smartphone usage is growing very quickly," Yeung says.

"We predict smartphone sales to double between this year and next year. And we are very aggressive in deploying our smartphone products. We launched a smartphone product in May."

By June, Sky-mobi had signed agreements with 50 handset manufacturers. Yeung says the company adds about 25,000 smartphone users every day. The company's goal is to have 10 million by the end of the year. It now has 200 million feature phone users.

In China, 31.2 million smartphone devices were sold in the first quarter of this year, compared with 7.2 million in the fourth quarter of 2009, according to Analysys International, an advisory firm on Chinese technology, media and telecommunication industries.

This year China will account for more than one quarter of all smartphone shipments, according to data from International Data Corp, well ahead of the US market at 17.8 percent.

"The real market for China is smartphones priced below 1,000 yuan, and that's Android phones. We expect Android smartphones to outsell iPhones 9 to 1," Yeung says.

Sales of Google's Android smartphones soared from 47.6 percent market share in the second quarter of last year to 83 percent in the second quarter of 2012, according to Analysys. In contrast, Apple's iPhone has carved out only 6 percent of the Chinese market, mainly due to its high price.

The average consumer in China earns about 2,500 yuan a month. An iPhone costs as much as 5,000 yuan in China, compared with the cheapest Android smartphone at 400 yuan without a subsidy.

China's Internet users totaled 535 million in June, with mobile Internet users exceeding the number of PC Internet users, according to a report from China Internet Network Information Center, a nonprofit research group.

About 388 million Internet users access the Web from their mobile phones, and more than half of the year's new Internet users were from the rural countryside, according to CNNIC.

It isn't surprising to Yeung that rural Chinese are more active mobile Internet users. In fact, the rural community or the lower-income segment makes up the bulk of Sky-mobi's business.

"A lot of Internet mobile users live in second, third, or fourth-tier cities who do not own a computer or TV. Everyone wants a smartphone for its Internet, but its usage can be different," Yeung says.

"For lower-income people, they don't use the phone so much for information purposes but as an entertainment device, to watch movies and play games, etc. Everybody wants entertainment, even the poor."

About 70 percent of Sky-mobi's active users are male, and its main age bracket is 16 to 23. But Yeung thinks the popularity of its services has more to do with income than age.

"For example, the factory girl at Foxconn who works 12 to 16 hours a day. When she gets back to her dormitory, she doesn't have a PC or TV. She then spends time net chatting on her mobile phone, playing games or watching a video," he says.

Yeung expresses confidence that the company's revenue will pick up again when it has developed a stronger smartphone platform in the next two to three quarters.

He foresees a significant jump in smartphone use in China because "the Asian economy has a particularly strong interest in mobile devices".

"If you look at all the developed Asian economies like Japan, Hong Kong and South Korea, the mobile penetration there is more than 100 percent. There are people who own more than one phone."

According to Niko Partners, mobile game revenue in China is expected to grow six-fold from $600 million in 2011 to a few billion dollars in the next five years.

"For China, our projection is that mobile penetration will increase to 120 percent. So it's a much more exciting market," Yeung says.