China licenses MVNOs, but China Mobile stays on sidelines

Private operators are finally set to enter China's telecom market following the issue of the first batch of MVNO licences.

After nearly a year of preparation, the Ministry for Industry and IT (MIIT) says it has approved trial licences for 11 companies who have signed wholesale agreements with China Telecom and China Unicom.

But missing from the fray is the market heavyweight, China Mobile, along with some of the country's biggest electronics retailers who had been expected to win MVNO licences.

Announcing the licences last Thursday, the MIIT said in a statement that China Mobile had identified a number of MVNO retail partners and was now in the “contract signing period.”  But the statement confirmed the MIIT had not received any licence applications from Mobile partners.

Other reports said that China Mobile, which has 62% of the market, feels it has the most to lose from the entry of the new players and fears a price war.

By comparison, the two smaller operators have decided that the MVNO market could open up new retail channels for them. China Telecom appears especially enthusiastic. Of the 11 who have been awarded licences, nine are with China Telecom. Reportedly, China Telecom has signed up 16 MVNO partners and China Unicom 14.

As for China Mobile, Sina Tech has pointed out that at the MIIT's quarterly briefing in October, a senior official sent what was seen as a wake-up call, remarking that MVNO progress among the operators “is not the same.”

Apart from China Mobile's absence, the failure of major appliance chains such as Suning, Gome and Aisidi to gain a licence has also raised eyebrows.  All of them have spoken enthusiastically about the MVNO business and are probably the strongest challengers to the cellcos. Suning, for example, has 8 million online customers, 1700 retail stores and a 3000-seat call centre.

The MIIT says all those who applied received a licence. Gome told Sina that its application was filed in December and the approval was now “advancing normally.”   Industry insiders and a good number of posters on bulletin boards suspect that the big retailers are being held back because they will compete on price.

However, several retailers did receive licences, as did a number of tech firms. (The full list: retail chains Telephone World, Funtalk, Digitone and Telling, online mall JD.com, OSS/BSS provider SoShare, Alibaba’s domain registrar and web hosting firm HiChina, Tsinghua University-owned Huaxiang Telecom, mobile VAS and platforms firm Bewinner, online mobile recharge service provider Lianlian, and Busap, which provides TV services to trains and buses.)

The other and perhaps even bigger absence here is a framework that will allow MVNOs to compete. The ministry has merely stipulated that the wholesale price must be lower than the lowest retail price in the same geographical market. That doesn’t leave much of a margin.

Under the rules, MVNOs must lease their backhaul as well as access networks from incumbents.

So the entry of virtual operators is hardly likely to upset the status quo, especially as it coincides with arrival of 4G in which China Mobile has almost a one-year break on its rivals.

The importance of privately-owned MVNOs is thus mostly symbolic. Given China’s desperate need for basic telecoms infrastructure, it is possible private firms may eventually be allowed to invest directly in networks. But the door remains firmly shut on foreign telcos.

China Mobile faces $2b bill over interconnect change: report

The MIIT is considering cutting the mobile interconnection fees for China's two smaller cellcos, China Telecom and China Unicom.

A ministry research report has recommended halving the fee Telecom and Unicom pay China Mobile because its dominance has “unbalanced” the market, ENN Weekly reports (in Chinese).

In return, the ban on China Mobile to entering fixed-line broadband should be lifted, the study suggests. China Mobile’s role in the market has been unclear since the prohibition formally ended in Dec. 2011.

Currently the three operators pay 6 fen (just under 1c) a minute to each other to deliver calls. MIIT recommends cutting that to 3 fen (still using calling party pays system).

ENN Weekly estimates that under the plan China Mobile’s mobile interconnection payments will increase by more than 12b yuan ($1.96b) a year.

The timing is interesting. Last financial year, China Mobile’s profit towered over its rivals, as it has every year for the past decade, posting 129b yuan in earnings, more than eight times the combined profit of the other two.  Yet it increased income by just 2.5% in the second quarter and is on track to post its first full-year decline in 14 years.

By contrast, thanks to the faster speed and quality of their networks, and the availability of the iPhone, China Telecom and China Unicom are in the mobile data sweet spot, knocking up profit gains of 21% and 41% respectively.

Next year the market will take a fresh turn when 4G comes to town. China Mobile has been the most aggressive in its rollout.

China Mobile’s stock price fell $1.46 to $55.14 in the wake of this news breaking last Thursday.

The ministry will hold hearing on the issue before it makes a decision.

Solving the WeChat problem

Once again, Tencent boss Pony Ma says he won’t be charging for WeChat, according to this Reuters report.  That’s been his stance ever since the story broke in February.

Ma might be in denial, he might be reassuring customers, or perhaps positioning himself ahead of the inevitable user backlash.

But his repeated claim that customers won’t be paying for apps may also points up to a solution - namely that Tencent, and not users, pays the fee to operators.

This is premised on the idea that the charge is necessary because of the extra network costs borne by the cellcos, and in particular China Mobile. When MIIT boss Miao Wei last week confirmed the charge was being planned, he explicitly couched it in those terms.

He certainly didn’t say it was because WeChat app was eroding traditional revenue source.

One reason he wouldn’t say that is because China Telecom and China Unicom have no issue with WeChat – it’s driving data traffic and China Mobile’s customers to them.

Another reason is that, like Ma, he could be trying to avoid the outcry when 300 million consumers discover they’ve lost a favourite service.

In this context it’s worth remembering that he has left it to the operators to work out the details of the charging scheme. A nice bit of footwork.

Of course, it may be that the MIIT is totally on-board with this and sees it as a means not just to shore up the operators’ businesses, but also of reining in other unruly apps.

If that is so it would certainly open up a fresh internet battlefront, but on what we know it seems unlkely.

The path of least resistance is for Tencent to pay a fee to help cover the network costs. This will hurt Tencent a little, but a paid-app arrangement will damage everyone.

The flaws in the MVNO plan

Who’s interested in China’s MVNO market? Mobile phone and electronics retailers, like D.Phone, Suning, Gome and Funtalk, according to this report at 21cbn.com.

That makes sense. MVNOs are about brand and customer service. Plus these guys are already in the mobile retailing game.

It makes sense too that they’ve already held preliminary talks with the MIIT via its research arm. The MIIT’s priority pretty clearly seems to be to seek out strong local brands to become MVNOs.

However, creating a competitive telecom landscape doesn’t appear to be a priority.

The concerns expressed by analysts and would-be licensees reflect this. They’re worried about the cost of resourcing an MVNO player, the lack of scale, the wholesale price and the availability of number portability,  none of which is satisfied by the MIIT’s vague stipulations.

For example, the wholesale price has to be lower than the operator’s lowest retail price. As one unnamed executive says, if the lowest price is 48 yuan and the wholesale is 50 yuan, “we still have no way of launching a service, because we still have site, customer service and operating costs.”

Once again China has managed to avoid a quarter of a century of telecoms regulatory experience. 

Elsewhere (including Hong Kong) successful regulation is about ensuring new players get access to infrastructure at a reasonable price and providing protection against predatory pricing and obstructionist behaviour.

The MVNO plan skips most of that. It may improve over the consultation period but basically we are stuck with the traditional post-hoc regulation. New entrants will run into trouble and the ministry will have to step in and broker an agreement. That could take up to a year.

With the spirit of reform pervading the country, perhaps now is the time to consider a dedicated telecom regulator. It can execute the detail of competition and allow the ministry to manage the big policy picture across its vast portfolio.

It can build up a body of competition expertise that will help consumers get a better deal and make the government look like it really cares. That’s a win all-round, but the probability of it comig to pass is close to zero.

The incoming players will need deep pockets and steady nerves.

China preps for private MVNOs

China is proposing to open up its tightly-controlled telecom market to privately-owned MVNOs.

A consultation paper issued by the MIIT yesterday sketched out some guidelines for MVNO trials, which would be the first voice or data service to open to privately-owned telecom firms.

But the lack of key details, such as interconnection pricing, and the two-year timeframe for the trials, once more suggests that China has little interest in allowing serious competition to the state-owned incumbents.

The move was foreshadowed last year as the MIIT explored ways of allowing private investment into value-added services, or Type 2 telecoms under Chinese law. Type 1 - or infrastructure ownership - remains exclusively in the hands of the three state-owned operators.

Although the MVNO concept is well-established, with 633 licensed operators worldwide, the paper did not explain why the ministry needs two years to evaluate the service. Essentially an MVNO player needs no more than a brand, a customer care platform, and a deal with an infrastructure owner. There isn't much to test.

Early MVNOs had a high failure rate, mostly because of the high wholesale prices charged by MNOs, but in recent years the market has blossomed. The MIIT paper makes no mention of interconnection pricing or framework, nor does it explain how it would protect incoming players from the incumbents – a glaring omission given the alleged abuses by China’s fixed-line players, and the lack of progress in resolving complaints.

The announcement of the trial, while no surprise, also underlines the MIIT’s disinterest in honouring China’s WTO telecom commitments. Foreign operators can only enter the China market in partnership with an existing operator and with a hefty capital base (some $150-$200 million). Only a small number of VAS areas are open to foreign investors, despite the huge range of VAS services offered domestically.

By contrast, major foreign markets are open to Chinese MVNOs. China Telecom last year won a UK MVNO licence and is planning to expand into other major EU markets.

The MIIT paper did specify that a would-be licensee must have a security management department and must build a “network and information security management system” and an emergency response system.

Chinese website Sohu has nominated internet firms such as Tencent, Baidu, Alibaba were potential licensees. This is pure speculation but, given the limited opportunities in China’s telecom services market, it is unlikely there will be a shortage of firms willing to take a punt on the market.

The MIIT said each individual trial would need to complete within a year. At the end of the trials it would draw its own conclusions and “conduct research into formal MVNO arrangements.”

The consultation period lasts until February 6.