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PE Interview With DUOGUO CEO Jonathan Serbin
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 Despite the difficulties China's third-party wireless value-added services providers have faced over the last few years, it is hard to argue with those excited about the potential for selling content to China's 575 million mobile phone subscribers. Shanghai-based DUOGUO, which sells mobile content through physical stores, is one of them.
The heavy-handed regulation of the industry and the tightening of control by mobile carriers have hurt independent service providers, but the clean-up of a chaotic and non-user-friendly sector is good for consumers and may eventually lead to a stronger mobile content market. However, while many of the spammers and dodgy service providers may be gone, there is still the problem of a cumbersome user experience and centrally controlled content platform that continues to hold back the growth of the mobile content industry.
To purchase mobile content today, most users go to China Mobile's Monternet site or another WAP site and search for content, then download it to their mobile phone over the GPRS network. While this in theory should be pretty easy to do, many Chinese consumers are wary of downloading mobile content for fear of being charged more than they expected or for something besides what they purchase. Also, users often are unaware if certain products will work on their specific phone.
Shanghai-based company DUOGUO is trying to tackle the problem of transparency and convenience in the mobile content space by setting up physical points of sale for mobile content. The company has developed an electronic kiosk, manned by real salespeople, that lets users browse mobile content and purchase products using cash. Content is beamed to their phone by Bluetooth. DUOGUO sets up stores in public transportation hubs and supermarkets like Wal-mart and Carrefour. DUOGUO also recently signed an agreement with Best Buy to enter the electronics retailer's locations in China (there is currently only one Best Buy in China). The user-experience seems pretty painless and straight forward, and DUOGUO says the proof that the model is working is the fact that over half of its customers are female in a market where young males are usually the core consumer demographic. DUOGUO is backed by US hedge fund Jana Partners.
DUOGUO will also be looking to expand to other types of digital content, such as e-tickets. DUOGUO recently partnered with Chinese ticketing agency Mypiao.com to serve as sales and pick-up points for Mypiao tickets.
Pacific Epoch recently spoke with DUOGUO CEO Jonathan Serbin about the mobile content industry in China, his view of competing with pirated content, and why he loves to see his kiosks in train stations.
Pacific Epoch: Can you tell us about how you started DUOGUO?
Jonathan Serbin: Before DUOGUO, I was part of the senior management team at EBT Mobile, which is one of China's largest mobile phone retail chains. We realized at EBT that there is a great opportunity for selling mobile content, applications and services at retail. People were excited about buying a phone—they had maybe just spent a month's salary on their phone—and they were saying, "Why don't you give us the opportunity right here, at retail, to buy this cool stuff rather than go home and have to search online [for it]." This is a great moment, when the customer is learning about their phone and is excited about it. We saw an opportunity to sell content in a very dynamic setting; to have a guided experience. The sales people help them find content and discover what is most appropriate for them. We also realized that to do this well, it required a new company to focus exclusively on doing this. We would need to go out and license all the content rather than offer pirated content. We founded the company in early January 2007. Right now we have 25 stores in Shanghai and are expanding to Jiangsu, Zhejiang and Beijing.
PE: The machine and system were all developed in-house?
Serbin: Yes. It is all proprietary and done in-house; we have a technology team here. We believe we have developed a pretty compelling user interface that is very accessible to customers. It is very visual; users can see how things look on their phone. Over half of our customers are female, which for me shows there may be some pent-up demand for these services. We hope we are expanding the potential customer base for mobile content to people who, for example, might be a little older and didn't know how to turn on the Bluetooth on their phone.
PE: How is the business going so far?
Serbin: Our monthly sales have been up dramatically. New stores are opening stronger and stronger, so it's been great. We just opened our largest store, in Zhongshan Park subway. Our retail partners include EBT Mobile. They know there is a great opportunity at retail but it is very difficult for them to focus on providing a great mobile content experience because their own business is growing so fast. Other partners also include Wal-Mart, TESCO, E-Mart, Shanghai Subway, places with high traffic and a great customer base. We have nationwide agreements with most of them.
PE: What are your expansion plans?
Serbin: Our central focus of last year and early this year is to build critical mass in the Shanghai market. We will begin to move out to secondary cities around Shanghai like Hangzhou, Suzhou, Nanjing, Ningbo and Wuxi. We look at where our partners have a strong presence; it is a very efficient way for us to enter a new market because our partners already have a customer base, traffic flow and locations. We hope by the end of this year to have 100 stores and by the end of next year to have about 500.
PE: Is the price similar to what is offered through WAP download?
Serbin: Yes, our price is very similar to what you will find from China Mobile or the WAP sites. We offer a range services that China Mobile and online services cannot offer. For instance, we serve as a customer acquisition service. There are a lot of interesting mobile content companies that have very few ways to introduce customers to their products and services. Our cost structure may be a little higher compared to buying online, but we have certain opportunities to generate revenue that the online service don't. For instance, we can collect fees from mobile application companies for introducing customers to their services.
Luckily, our retail partners are very anxious to have us in their stores because it drives in young and repeat customers. When you sell a phone, a customer usually disappears for 10 months. One of the biggest questions is how do you drive that customer back in every month or two weeks where they may buy something else. We update content every Friday, so there is new content for the weekend. Our cost structure has been extremely reasonable because people are anxious to have us in their stores.
We are rolling out ticketing sales [through partnership with Mypiao.com, .ed] for live events, concerts and sporting events in Shanghai. You can add value to the ticket—if you buy a ticket to a Celine Dion show, we can bundle that with the mobile phone wall paper and ring tones. It is things like that that you can't really do by other methods.
PE: What kind of content is the most popular?
Serbin: Games, especially casual games—it reflects the general market. Music is very big, as are wallpapers, and more and more you are seeing mobile applications. There are exciting and interesting applications like maps, English language and stock trading software.
PE: We have watched the ups and downs in the mobile games industry over the last few years, but you say it is the most popular content you offer. Why has the market struggled if consumers want this content?
Serbin: I think there was pent-up demand there that wasn't being met. From the customer side, people just wanted a really easy, transparent way to download games without worrying about everything working properly. From the content provider side, they sensed there was an opportunity there. China Mobile of course has terrific reach, but content providers were looking for way to reach customers in a more direct and pro-active manner than you could do with China Mobile. So I think the market was much bigger than people expected.
PE: So you are convinced that the mobile phone is a good platform for gaming?
Serbin: I think it is a good platform even I don't know if it is the best one. Also, we can download content not only to mobile phones but also to any handheld device. Once Sony's PSP is launched legitimately here, we can serve as a download platform for PSP games. To add a device to our inventory devices we service is very easy—we can essentially do it overnight.
Another function we serve as is a filter. We can help show a customer which game works best on their phone, thus minimizing the risk of having a bad customer experience.
PE: And all the products for different models prepared and ported by your content partners?
Serbin: The content is ported by the content provider but we do QA here in-house to make sure it works on everything. The customer experience is very important to us. One of the ways we differentiate ourselves is the focus on the customer experience. You can get a lot of the content elsewhere, so we provide that personal touch. We never want to be in the situation where something doesn't work. Sometimes the content provider gets it wrong, so we check everything on every phone.
PE: How you work with the operators?
Serbin: Right now we serve as a parallel platform to the operators. Going forward we think there are a lot of opportunities to work with them and are actively looking for ways to work together. The crack-down on mobile content and service providers over the last few years did not affect us at all. One of the reasons we are an attractive proposition for content providers is because we are an alternative, parallel channel; they aren't reliant on China Mobile. For example, they don't have to wait six months for content to go up on a WAP site.
PE: Do you have any exclusive content or is it things customers can find elsewhere?
Serbin: It is a balance. There is a level of basic content that everyone looks for—classic games and music that you can find other places. Every month we have an "artist of the month", where we pick a new local artist, feature them in our stores and actually give them a chance to monetize their work. We hope to increase the amount of exclusive content so that we have 50 percent original content and 50 percent basic content that everyone is looking for.
One reason our content partners want to work with us is because, unfortunately, there are a lot of ways to find pirated content. At the very least we provide a legitimate alternative sales platform that is easy and cheap. So I do hope we are helping train people to think that this is a great way to buy legitimate content.
PE: Do you have any direct contenders in this market?
Serbin: As far as I know, we have no legitimate, direct competitors. But we have seen people in Wuhan, Chengdu, and lots of cities where there will be a line of people paying 10 RMB for pirated content. There are people with a laptop in a large electronics store who go to a P2P site and start downloading content that is clearly not legitimate, and there is a line of people waiting to pay to get the content put on their phones. In Shanghai, most people have access to the Internet. But if you go to third- and fourth-tier cities, there is a huge gap between people with phones, which is everybody, and people with Internet, which is not everybody. There are these mom-and-pop competitors doing pirated content, but we have never seen anyone doing this in a legitmate, concerted, way. If you acknowledge that this is happening—people paying for pirated content—then it's in everyone's interest to provide an outlet for this content to customers who don't have internet access.
PE: So are you cautions about expanding to smaller cities?
Serbin: Actually I am in a rush to expand there because there is huge opportunity, the disparity between phone ownership and Internet access. Given the choice between a guy with a laptop downloading stuff from P2P sites and legitimate content that is part of a nice customer experience, if they are the same price, I would hope the customer is going to pick DUOGUO every time. The people doing pirated content can charge the China Mobile price—RMB 5 or RMB 8 for a game—because the customers there don't have access to the Internet.
PE What is your customer demographic?
Serbin: Not surprisingly, our core demographic is mostly 18-32 year-olds, slightly more female. We also interestingly have appealed to 30-45 year old business people who may be interested in an interesting application for the phone—a stock trading platform or traffic map. So there are two groups: the young casual gaming group but also business applications group. The third group is people taking trains. We are located in the Shanghai Railway Station. People go to take the train, and they have five or eight or ten hour rides in front of them. This spans every demographic. People are lining up for a game because it is pretty boring to be on a train that long. We found that it's a great place to have a store.
PE: How many employees do you have right now?
Serbin: We have about 65 staff total. Each store has 1-3 people on staff at a time. In the office here we have about 25 people, including the finance team, HR, training team, the content acquisition team, technology team, and the backend team that maintains the system in the stores.
PE: You've been in mobile phone business for a while. How did you get into the industry?
Serbin: My background was in media telecom. I was a media telecom lawyer, then a media telecom banker at Lehman Brothers. They sent me to Asia in 1999 and I started working on Asia deals and EBT Mobile was one of my clients. At the time, we were familiar with a company in Europe called Carphone Warehouse, which has 3,000 mobile phone stores in Europe and 3 billion dollar pound market cap. In the US, phones are sold through the operators' stores, but in China, like in Europe, there are independent third-party retailers. We knew there was definitely an opportunity here. The retail industry here is also developing very rapidly. The market is in flux and there are opportunities for firms that provide superior customer service. I eventually joined as CFO and took the company from 30 to a few hundred stores and went public on the London Stock Exchange's AIM market.
PE: The mobile phone retail market is pretty competitive; how did EBT Mobile manage to compete?
Serbin: Well, actually, five or six years ago, many of those competitors were lot smaller. I started advising EBT mobile in 2001, and that time Gome was not a big player in phone retail. EBT was one of the biggest at the time. The other guys have done a great job of growing their business. It is extremely difficult to differentiate yourself in that market. I am very happy to be on the content side instead of the hardware side now.
I think the mobile phone retailers are trying to find a mobile content solution, which presents opportunities for us. There are 5 or 6 large nationwide retailers, and then hundreds of smaller, regional chains with 50-80 stores, and these guys are very hungry for a mobile content solution.
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