If good timing is crucial to success, Mark Begert and Derek Sulger have the luck of angels.

Two years ago, the Americans left their bright, airy offices at Merrill Lynch and Goldman Sachs in London to move to a dusty building at the foot of a noisy overpass in Shanghai. They traded their suits and black oxfords for khakis and loafers. They went to pan for gold in China. They had a hunch that trading information over Internet-ready mobile phones would strike a chord with the Chinese. It was a bold call — the average annual salary in China is less than the price of just three of these phones. And get this, Begert and Sulger didn’t speak a word of Chinese between them.

Their decision went from gutsy to insane within months. First, the dot.com bust hit, next WAP phones (offering instant Internet access) flopped in the U.S. and Europe. Telecom companies worldwide began to bleed red ink. Then, of course, economic gloom began to throttle every major economy in the world.

Every economy except one, that is. According to the Economist Intelligence Unit, China’s GDP will grow by 7.2 percent this year, and next year, 7.5 percent. And just as the two Americans figured, the young, urban population of China have become fixated with mobile phones as a totem of their new wealth. More than 125 million Chinese now have their own phones, making China the largest mobile phone market in the world. And they use those Nokias and Motorolas for more than phone calls.

Astrology-mad Chinese, for example, now check their horoscopes on the two-inch screens of their dot-matrix phones — not quite the Internet as we know it, but fun, cheap data without the need for desktop computers. Spending just a fraction of a renminbi (US$0.12), tens of thousands ring The Love Goddess for their daily horoscope. Others adopt a virtual pet or check emails. The result is an explosion in demand for short message services (SMS). Since January 2000, the number of messages exchanged on China Mobile’s network alone has grown 75 percent quarterly.

This trend hasn’t gone unnoticed. “China can leverage its huge potential base of mobile phone users and emerge as the largest wireless Internet market in the world,” predicts London-based consultancy Ovum, in a recent report. Moving data over mobile phones is not new, but making money out of it is unknown to any company outside Japan. Begert and Sulger are confident they can change that. But here’s the question: how can two Americans, both 29 years old, with no background in China, telecommunications or the running of a finance department, manage to grow and sustain a business beyond the comfort of China’s demographics — in a market virtually guaranteed to break hearts.

The Middle Earth

Sitting in his sixth-floor office in downtown Shanghai, Sulger, with a degree in government and economics from Harvard, is almost giddy about the challenge. “Doing business in China, as with most things in life, is a common- sense game,” says the CFO of Intrinsic Technology. Intrinsic makes iDAP, a software that allows mobile operators to receive and transmit data like The Love Goddess, and splits the revenues between operators and content providers. Next-door neighbor Begert, CFO at Linktone, which provides information-on-demand and enables peer-to-peer messaging, puts it this way: “The opportunities in China will either force a company to get up a curve in an incredibly quick way and develop a business scalable to any country in the world — or they will fail.”

This isn’t just talk. Although neither has ever run a finance department, the young investment bankers do know how to romance private investors. Since co-founding Linktone and Intrinsic as one company in December 1999, Sulger and Begert have raised US$21 million from the likes of Acer Technology Ventures, which runs a US$260 million technology fund; Fidelity Ventures, with US$500 million in assets under management; and Mitsubishi, one of Japan’s largest business groups. In December 2000, the two companies amicably parted company.

By then, Intrinsic had used a chunk of its venture capital to retire its PC servers and support iDAP with hulking IBM servers. This enables Linktone to send 1.25 million messages a day, from 10,000 a day last year. Business is so good that both start-ups are expecting sales of just under US$10 million this year. The CFOs claim that the two companies have just broken even and that they will post modest net profits by December — something two in three foreign-owned enterprises in China have yet to achieve.

In sharp contrast to the rest of the world, their sales forecasts now reach skyward — tenfold for Linktone, and fourfold for Intrinsic next year. Intrinsic now predicts revenues from mobile data, a value-added service, will reach US$6 billion in China by 2005.

If those numbers are accurate, it doesn’t take an astrologer to see what’s coming: competition, and lots of it. Begert recognizes the fight ahead. “Our aspiration in a young market, in a fairly nascent technology, is to grab as much land as possible,” he says.

It won’t be easy. As both companies are foreign-registered, the two CFOs are barred from listing their companies on local markets. They also have no access to mainland banks. At the same time, they face pricing pressure from state-owned clients and an extraordinarily unpredictable regulatory environment. Consider this: China has announced, withdrawn, and announced again, different plans for future mobile phone standards. And now, two incompatible platforms are on the way. China Mobile will roll out GPRS (general packet radio switching) by year-end, while China Unicom will implement CDMA (code division multiple access) in the indefinite future.

These advanced standards will run alongside the existing GSM (global system for mobile communications) platform. A slowpoke, GSM is just one generation away from analogue. It lacks the speed demanded by commercial applications like stock trading, but is sufficient for short message services such as email and simple graphics.

For now, the demand for GSM phones is enough to see Begert and Sulger through next year. But it’s only a matter of time before this relatively old technology fades out of the picture. And how do two young upstarts get the money and the know-how to keep up with the expensive new technology required by the world’s fastest moving industry?

Intrinsic Proposal

The answer is simple: from someone else. Alcatel, the US$29 billion-a-year French telecom giant, for example, was so eager to develop iDAP for GPRS that it’s funding Intrinsic’s US$4 million R&D project almost entirely. Intrinsic’s contribution: its engineers and iDAP technology. For Alcatel, it gets the opportunity to get on the inside track in China. “Alcatel wants to wheel [mobile operators] in and demonstrate to them the next generation, so it’s more likely they will get a GPRS contract,” Sulger says.

Finding Alcatel was not a matter of knocking on doors; Sulger knows how to network. “We ended up knowing about each other through social occasions and started talking,” says John Lipp, director for mobile Internet business development at Alcatel’s Asia Pacific headquarters. When AsiaInfo, a Nasdaq-listed, Beijing-based Internet infrastructure and software company, and Fidelity Ventures took a “significant minority” stake in Intrinsic in May, Lipp was ready to make the deal.

In fact, the company’s link with AsiaInfo is not just an endorsement and funding — it’s also providing Intrinsic with a distribution platform. The software company has offices in six major cities in China and is now using those offices to handle installation jobs for Intrinsic. “We’re happy to outsource iDAP installation to AsiaInfo, because we’d rather have [our] engineers making iDAP than flying around installing,” says Sulger.

Let Freebies Ring

This ability for tapping big companies for money and know-how is fast turning into an art form. For example, Intrinsic needs expensive servers to support the geometric rise in data flow between operators and content providers. But Sulger pays nothing for each of the humming, blinking machines hogging Intrinsic’s premises — they are loaned or provided for free by the likes of Hewlett-Packard, IBM, Sun Microsystems and Compaq.

He did it in much the same way he attracted Alcatel. “Why would Sun loan us half-a-million dollars worth of servers? Because Sun wants to sell hardware to mobile operators,” says Sulger, who pitched the idea with these companies as soon as Intrinsic signed its first revenue contract in August 2000. “If we make an iDAP sale, Sun gets dragged along. So Sun has been cheering us on,” he says. Investors are cheering too. “It’s an element of creativity,” says Daniel Auerbach, managing director at Fidelity Ventures in Hong Kong, of Sulger’s scheme.

With rivals starting to crowd into the market, however, cost saving won’t be enough to keep the young company viable. Sulger also needs to expand beyond China. No other country outside of China and Japan has adopted a third-party revenue-sharing scheme such as Monternet. That’s because most operators choose to provide their own content services. Newer players, however, are starting to outsource the billing software they need from Intrinsic. Last July, Sulger signed a contract with Virgin Mobile in Singapore, and he is expecting to announce a similar deal in Hong Kong. With Acer’s help, Taipei is targeted for Intrinsic’s third major installation.

“Instead of trying to sell to everyone, we will target one key player in each region,” Sulger says. “If we do well in Singapore, maybe Virgin will drag us [along] when they launch in Australia, United Kingdom, United States and Japan.” Intrinsic plans to establish seven international sales offices by April next year — from Hong Kong to Stockholm. The CFO is expecting big things from those offices — he wants 30 percent of the group’s revenues to come from abroad by the end of next year.

Reducing his exposure to China will help ease the company’s dependence on the Chinese duopoly of China Mobile and China Unicom. “Theoretically, it’s risky having just one or two customers,” says York Chen, managing director of Acer Technology Ventures, the venture capital arm of Taiwanese PC maker Acer.

For now, the risk is not palpable because the two big telecom companies run decentralized operations, and their provincial units develop their own purchasing decisions and management style. Currently, Intrinsic charges each of its 18 provincial clients per capacity upgrade. “If they want a configuration that supports 10,000 users, they pay $50,000; if they want 100,000 users, maybe US$700,000,” says Sulger.

The fee structure is perfect for a fast-growing market, but will last only as long as operations remain decentralized. In June, China Mobile formed a joint venture with Hewlett-Packard, called Aspire, to develop an in-house wireless engineering package similar to iDAP. They have not accomplished anything workable yet, says Chen of Acer, but it’s only a matter of time. “Global focus means that if we don’t get paid in China, we’re happy to get paid in Singapore and Hong Kong, and I think our company can support that kind of outlook,” Sulger says.

Even so, it’s hedging its bets. Apart from geographical diversification, Acer is helping Intrinsic get into wireless LAN (local area network), or wireless intranet, which promises to enable employees on the move access to information stored on company databases.

Toning Up

Over at Linktone, Begert’s challenges appear less daunting. Developing Internet-like content for mobile phones is largely “platform-agnostic,” which means most applications will work on any mobile standard — GSM, GPRS, CDMA or 3G. That said, the number of companies eager to supply China Mobile with content for their customers appears to be multiplying daily.

US$8 billion-a-year China Mobile unwittingly created a bonanza when it launched Monternet, a value-added service that enables end-users to exchange messages, download games and other content developed by third-party providers such as Linktone. Based on a revenue-sharing model, the system gives content providers 85 percent on each sale made to a customer. Not surprisingly, hundreds of young software engineers and computer geeks have rushed in, developing games and other applications aimed at teasing income out of China’s mobile phone owners. Linktone, with dozens of content gimmicks, is neck-and-neck in market share with Tencent, a local Chinese company whose IQQ chat, an instant messaging service, has as big a following — if not bigger — than Linktone’s instant messaging service, MQQ.

Begert, with his Merrill Lynch background, has a few cards up his sleeve. Like Sulger, he’s a networker and was able to land two important deals: one, with Finland’s Nokia, the other with Mitsubishi of Japan. As part of its deal with Nokia, one of the world’s largest handset makers, Linktone was able to offer Chinese customers Nokia’s extensive database of ring tones and screensavers — a constant hit.

Then, in July, Begert negotiated the sale of 5 percent of Linktone’s shares for $1 million with Mitsubishi and its unit Index, one of the leading content providers for i-mode, Japan’s mobile Internet leader. As befits a guy who takes off for China with no training, Begert sees the deal as bigger than the amount of money it brought in. “We see the partnership as more crucial than the investment. These guys are going to provide us with a lot of content, operational and product development skills that we cannot get from a purely financial investor,” Begert says.

In fact, The Love Goddess is the Chinese translation of an Index product in Japan. More content is likely to come, but just as crucial for Begert is the likelihood of Linktone’s products finding their way to Japan and other markets overseas. This will come in handy because, at the moment, the Chinese government still regulates the prices of content – downloads are capped at 2 renminbi (US 24 cents) each, says Duncan Clark, managing director of BDA in Beijing, which advises investors in China’s telecommunications sector.

Currently, Begert counts on his team of product developers to come up with popular applications, such as mobile pets which “grow” with proper attention. Subscribers pay Linktone for each downloaded pet. The most popular pet these days is a puppy. But Begert isn’t wedded to providing only homegrown products. Recently Linktone began carrying applications developed by other content providers, on a 75-25 revenue-sharing scheme in favor of Linktone. “The China user base has matured to a certain extent that they want more interactive applications,” he says. Designing this kind of sophisticated product requires a skill he can’t always buy in.

Brewing a Market

Unlike Sulger, Begert doesn’t worry