China's handset manufacturers face a serious problem: making sense of their own retail channels. Keeping track of where and when handsets are sold and for how much is challenging in the chaos of China's handset retail market. Once mobile phones leave the manufacturers' hands, there is no reliable system in place to tell the manufacturers what happens to their products as they follow the distribution chain.

Hangzhou-based Easycomm has stepped into the breach, helping handset manufacturers begin to solve this problem with a pre-installed software product that notifies handset manufacturers when a SIM card is activated in a newly purchased mobile phone. The application also sends information about the handset owner's mobile carrier, the user's phone number and the handset model and operating system, among other data. This valuable information is controlled by Easycomm, which has created a system of value-added services that take advantage of this built-in user connection.

Pacific Epoch recently spoke with Easycomm CEO Zhou Wenwei about the circumstances that led to the development of Easycomm's flagship product, the company's shifting focus from handset makers to the end user, as well as the company's new consumer-targeted services.

PE: Can you give us a brief introduction to Easycomm's business?

Zhou Wenwei: We have only developed one core product, along with several applications based on the product. Our product is called CAIVS (Cell Automatic Identification and Value-Added Service System). The system is installed on new handsets in cooperation with handset manufacturers. Handsets embedded with CAIVS software send information about the purchase and use of the handset back to Easycomm.

We initially developed the product in order to tackletwo problems in the handset industry that have gone unsolved for a long time.

The first problem has to do with handset price protection. Handset prices typically drop very fast after a product is launched; mainstream handset prices drop an average of seven Yuan to eight Yuan per day. Handset distributors only make about 10 Yuan from selling a handset, which means distributors have to sell the handset in one day in order not to lose money.

Because of this, distributors ask handset manufacturers to provide a price protection scheme. For example, if a retailer purchases 5,000 handsets at 3,000 Yuan each and one week later only 1,000 handsets have been sold, the manufacturer will cut the price of each handset to 2,950 Yuan and return 20,000 Yuan (4,000 handsets multiplied by the 50 Yuan price drop) as a price protection measure. Almost all handset manufacturers in China, including Nokia and Motorola, provide price protection for distributors.

The only handsets that do not have this type of price protection mechanism are the handsets sold by China Mobile and China Unicom; the prices of these handsets are adjusted every one to two months. Handset manufacturers return several billion US dollars to retailers every year in this way, of which US$500million to US$1 billion turn out to be losses due to retailers misreporting how many handsets they have sold.

CAIVS can help solve this problem because Easycomm is notified whenever a SIM card is inserted into a handset with CAIVS. Users [almost always] install a SIM card into the handset soon after the purchase, so CAIVS is able to track handset purchases for handset manufacturers.

The other problem is the exploitation of manufacturers' warranties. Handsets normally have a one year warranty, which covers repairs. However, only one-fifth of repair shops are owned by manufacturers, with the rest run by independent operators. Independent repair shops are reimbursed by handset manufacturers for repair fees and parts. However, these independent shops will sometimes create fake receipts for handsets no longer under warranty as well as for repairs that we've never done. The handset manufacturers will then reimburse them with no way to know which repairs are genuine and which are fake.

The percentage of handsets repaired per year has increased dramatically over the past two years, and not because of declining handset quality but because of fraudulent repair shops. The normal percentage of repaired handsets within the warranty period is about 25 percent; however, the percentage has now reached 50 percent. The repair cost for each handset is about 200 Yuan. If 50 percent of the three million handsets sold every year are reported as being repaired, and half of those are illegitimate claims made by independent repair shops, then that is a 150 million annual loss for handset manufacturers. This problem is more serious for domestic handset brands than for foreign branded handsets.

CAIVS notifies our system when the handset is purchased. Data includes the date, time, and location that a SIM card is first inserted into the handset, the inserted SIM card's telecom operator, the handset's operating system, the handset model and phone number, and even the time when it is first turned on. Because some users may say this infringes on their privacy, we will make it clear that this information is considered registration of the phone, which is necessary to receive warranty coverage.

PE: How many handset manufacturers have you signed up to pre-install CAIVS?

Zhou: Through the end of 2005 we had signed with 15 handset manufacturers to pre-install our software on their handsets, accounting for 22 percent of handsets in China.

PE: Does Easycomm charge handset manufacturers to use CAIVS?

Zhou: We had initially planned to charge handset manufacturers US$1 million to set up the system and then charge royalties of about US$0.2 to US$0.25 per handset; however, we found it very difficult to charge the handset manufacturers. Therefore, we changed our business model so that now we charge both the handset manufacturer and handset user for services. We charge manufacturers reasonable fee to install our system and annual fee for maintenance.

PE: Since the royalty model did not work out, how has Easycomm adjusted its business model?

Zhou: Installation and maintenance revenue from CAIVS's will only account for a small proportion of total revenue in the future compared with revenue from value-added services for handset users. I expect 50 percent to 60 percent of newly released handsets to be preinstalled with CAIVS in two years. Every company that wants to provide valued added services will want to use Easycomm's system since we have information about handsets' operating systems and back-end systems for over 50 percent of all handsets in use.

Our business model has three stages and we are currently in the second stage. In the first stage, we only charged handset manufacturers. During the second stage, we are charging handset manufacturers less but also charging handset users. In the third stage, we will not charge handset users at all and will charge WVAS service providers, advertisers and product/service vendors.

PE: What services does Easycomm provide for handset users?

Zhou: CAIVS can provide various wireless value-added services (WVAS) for handset users. We designed a function for Haier that lets them identify the current users of their handsets, which allows them to offer more efficient after-sale service. The service notifies Haier when a new SIM card is put into a handset and was designed because many handset users will give their old handsets away or sell them. After developing the feature, we decided to offer a similar service to handset users as well. If a user loses their handset and another person finds it and puts a different SIM card into the handset, our system is able to tell where and when the new SIM card was inserted and which SIM card it is. We can then notify the handset owner that a new SIM card is being used in their phone. The service is called "Mobile Dog". About 32 percent of potential subscribers (or 160,000 handset users) have signed up for the service, which costs two Yuan per month.

Another service is called "Discount Dog". This service allows companies to send e-coupons and advertisements to handset users when they are near certain pre-determined locations. For example, a handset user will receive an e-coupon on his handset when he passes a KFC or movie theater that has signed up for the service with Easycomm. Or a high-end real estate vendor can send advertisements for its new developments to handset users when they are near the new developments. Easycomm would likely charge the real estate agent 0.5 Yuan to send this advertisement. Easycomm can charge handset users a subscription fee for the service and also charge advertisers and set up revenue share programs.

PE: Has Easycomm launched the "Discount Dog" service yet?

Zhou: No. We have completed development and testing of the service but we currently have too few users to attract advertisers. We expect to have three million CAIVS-installed handsets by April 2006 and plan to start commercial use then.

PE: Is Easycomm applying for an SP license?
Zhou: Yes. It is not difficult to get a local or provincial WVAS license, but it very hard to receive a nationwide license because the government has almost completely stopped issuing nationwide licenses. We plan to solve that problem by acquiring existing SPs.

PE: When was Easycomm established?

Zhou: Easycomm was established in 2003; however, we had begun applying for patents early in 2002. By the end of 2003, we had completed product development. In June 2004, we launched CAIVS. In August 2004, we signed our first client, PMC. Unfortunately, the company went bankrupt two months later, so we only received 300,000 Yuan from that deal.

PE: How many employees does Easycomm have?

Zhou: We have 50 employees, of which 25 are technology staff and more than ten are marketing staff. In addition to the Hangzhou headquarters, we have also set up a subsidiary in Beijing.

PE: What's your competitive edge over competitors already in the market or entering the market?

Zhou: This market has relatively high barriers to entry because of protection from our patents. I think Easycomm's largest competitors at the moment are telecom carriers. We need to establish a good relationship with the telecom carriers. We want our relationship to become mutually beneficial, which means helping telecom operators generate more WVAS revenue. I do not believe we will have any competitors in the next three to five years if we collaborate with the telecom operators.

Compared to other companies that provide mobile advertisements, our advantage is that we have basic information about handsets that allow our ads to reach the target audience. Nobody else has this resource.

PE: When will Easycomm become profitable?

Zhou: If you just consider current revenue generated from handset manufacturers and subscriptions to the "Mobile Dog" service by handset users, we could break even in April 2006 and generate a profit of US$2.5 million by the end of the year. However, if we begin developing the WVAS business in mid-2006, we would break even by late October 2006 and will only make a profit of US$2 million for 2006. However, our 2007 revenue will be substantially higher if we begin developing WVAS in mid-2006. I think Easycomm will have about 200 employees and annual revenue of around US$2 billion in 2008. We also plan to enter the overseas market in the future.

PE: What is Easycomm's shareholder structure and capital raising plan?

Zhou: The founding team still retains an approximately 85 percent stake in the company. We have closed a US$1.2 million round of capital raising in 2005 and are now preparing for a second round of about US$5 million. The next round of funding will be used to acquire SPs, develop new technology, improve marketing, recruit more distribution agents nationwide and apply for patents in other countries.