The Crazy Frog croaks - leaving Monstermob to face its demons

The chairman Hans Snook's emphasis on China has come back to haunt him

When the irritating Crazy Frog topped the pop charts last year, it appeared that mobile content had come of age. Going back to 2000, when mobile telecoms operators splashed out £22bn on licences to build and operate third-generation networks, the mobile industry has assumed that voracious demand for content such as music, ringtones, video downloads and mobile games would justify such massive investment. The Crazy Frog's rapid rise to international pop stardom showed that mobile content could generate substantial returns and even cross over from the small mobile screen to the television screen and beyond.

It was amidst this enthusiasm that Monstermob, a mobile ringtone and wallpaper specialist, came to market in 2003. Following the path of Jamdat and iTouch, rival mobile content companies that attracted top-price takeovers by larger media players, Monstermob's share price took off, reaching a peak of 462.5p last September. At that stage, Monstermob's founder and chief executive, Martin Higginson, dubbed Lord of the Ringtones, could do no wrong. The Barclay brothers, owners of the Telegraph newspaper group, took a 3 per cent stake in the mobile content company, and just like chairman Hans Snook's previous company, Orange, Monstermob's future looked bright.

Yet 2006 has proved a desperate year for the Lancashire company. It has suffered an alarming 87 per cent decline in its market value over the past year, and in June, Mr Higginson was sacked after disagreements over strategy. Mr Higginson was committed to investing heavily in fancy new services for the UK market to revive its fortunes in the region. Mr Snook and the Monstermob board decided that Mr Higginson's strategy was not appropriate given the company had invested heavily outside the UK and thus derived the majority of revenue from high-growth regions like China. The former JP Morgan banker Niccolo de Masi was appointed as chief executive.

Yet only a few weeks later, Mr Snook's emphasis on China has come back to haunt him. China Mobile, the world's largest mobile phone company by subscriber and China's dominant mobile phone operator, has changed its policy on mobile content subscription in response to regulatory concerns. Regulators in China have clamped down on a common industry practice of signing up customers to monthly contracts when the user only agreed to buy a single product. The move, which echoes regulatory action in the UK, will affect Monstermob and a host of other Chinese mobile phone content players listed in the UK and US.

IGM, which raised nearly £10m through a listing on London's Alternative Investment Market in May at 51p, is a Chinese mobile content specialist that derives 100 per cent of its revenue from the region. IGM's shares have collapsed to 16p after China Mobile's move. Nasdaq-listed Chinese content specialists such as Sina, Tom Online, KongZhong Corp and Linktone will also feel the heat as a result of China Mobile's crackdown.

After Mr Higginson's departure, Mr Snook talked of pushing the share price back above 300p, "where it belongs". Yet after the Chinese policy change, Monstermob's shares crashed a further 59 per cent to 56p. IGM, despite its smaller size and total reliance on the Chinese market, fell a more modest 28 per cent, to 15.5p.

Monstermob's broker, Investec, has now reduced its rating to "hold" from "buy". It said that between 20 per cent and 30 per cent of projected operating profit could be at risk.

China Mobile's new content policy looks like common sense. The operator will increase the free trial period for mobile content to one month from one week, and will send monthly text messages to users asking them whether they want to maintain their subscription.

Andrew Darley, a KBC Peel Hunt analyst, said: "The basis of these subscriptions appears to be that the customer either forgets about the subscription or does not even know they have been registered. All China Mobile is doing is reminding people they can easily cancel these subscriptions."

In the UK, Monstermob's home market, the telecoms regulator, Ofcom, acted after consumers, many of them children attracted to cartoon characters and pop ringtones, did not realise they had signed up to relatively expensive monthly subscription payments for content they did not want. Jamster's Crazy Frog, the mobile content golden goose, proved the worst offender, but all mobile operators were affected.

Understandably, the scandal left a bad taste in the public's mouth. Anecdotally, mobile content companies offering one-time downloads of content found that many users would text "stop" after each purchase even though it was not necessary to do so. Many ceased purchasing content for mobile phones altogether, while others steered clear of independent content producers such as Monstermob and Jamdat. Instead, consumers started using mobile phone company portals for mobile content, as well as other " trusted" brands like The Sun.

The move by the Chinese authorities suggests that similar problems have occurred in the Far East. Monstermob, which has bought a number of Chinese content developers over the past year, expects a significant short-term impact. About 50 per cent of its current net revenue has been derived from China, and about 40 per cent of that revenue is subscription-based. The company said that the regulatory intervention is likely to impair its ability to acquire and retain new subscribers, and it will take steps to migrate revenue to single-purchase sales.

Other Chinese operators, such as China Netcom, China Unicom and China Telecom, could also tighten content subscription guidelines. "It's a very bleak market to be operating in," Mr Darley said.

Mr de Masi said that although third-quarter results will suffer from the regulatory move, he expects Monstermob's revenue to start recovering in the fourth quarter. When the company reports results in September, it will provide more clarity about the specific impact of the Chinese situation.

Mr de Masi said that after some short-term pain as the market is restructured, Monstermob still expects to be a "top-four player" in Chinese mobile content. He said he expects to gain market share once smaller players have been weeded out.

If Monstermob does remain a key partner of China Mobile's over the coming years, it could recover some lost ground. Neighbouring Japan and South Korea have some of the highest mobile phone revenue per user rates in the world, driven by huge amounts of content and not just the Crazy Frog. Improving the Chinese market in the long-term could produce similar spending splurges as more Chinese people get hold of mobile phones.

But until the promise of legitimate mobile content has been proven to generate sustainable recurring revenue in a number of regions, Monstermob's message might be lost amidst a cacophony of bleeping "stop" text messages.