Telecom innovation: China is not even in the race

This is what telecom innovation looks like.

A US startup, 2600hz Mobile, is ready to launch an MVNO with open access and APIs that will allow others to build apps to run on top of it. As the company blog says:

 ...we’re the first company to basically try to open-source cellular integration. We’re trying to encourage the hackers, the tinkerers, the enthusiasts out there in VoIP to get engaged in the next generation of networks - cellular. We’re trying to give you a way where you don’t have to spend $250,000 to just be able to play around with a test cell phone on your own little mobile network.

With this platform its customers can, for example, combine VoIP and cellular to offer a mobile/WiFi hybrid; create low-cost wireless and fixed VoIP bundles; or offer smart services that help users avoid roaming fees.

Today that's innovation. In five years it will be routine.

Here in China, all of that is impossible and will remain impossible. The idea of opening a  network to people without government sanction is a complete non-starter.

As it happens, China is right now trying to introduce an MVNO sector.

A genuinely competitive market would embrace the idea of a network as a giant apps platform. But that's not China. Instead, the new MVNO entrants will have the freedom to offer exactly the same services as the existing infrastructure owners.

For sure, those MVNOs will provide a touch of badly-needed extra competition. But even the most optimistic forecast doesn't expect them to grab more than 1% market share over the next three years.

That's assuming they're allowed to compete. From the limited information available, it looks like they will have to cope with a wholesale price as high as the lowest retail price.

The China Securities Journal reports that the licence shortlist will likely be finalised in October. Which means perhaps the first trials by year-end. We won't hold our breath.

As if to emphasise the air of unreality around China telecoms, a China Mobile honcho last week claimed that WeChat was more of a monopoly than the giant cellco. 

Li Zhengmao, a China Mobile vice-president, said that his company wasn’t a monopoly because it had a mere two-thirds of the market. Speaking at a conference, he said WeChat had much a bigger share of the audience in the room than China Mobile.

Peking University economist Zhang Weiying explained to Li that a monopoly is something which the government “allows some people to do, but doesn’t allow others to do."

At least there's no confusion about open access networks. They're off-limits to everyone.

China green-lights MVNO plan: foreigners need not apply

In a move more symbolic than substantive, China is to go ahead with an MVNO service pilot, allowing private players to enter its telecom market for the first time.

Participants must be at least 50% privately-owned and have no more than 10% foreign ownership, the MIIT stipulated in regulations posted to its website (here via C114.net) on Friday.

The three state-owned network operators – China Mobile, China Telecom and China Unicom – are barred from forging exclusive partnerships. They must sign up at least two MVNOs within four months of receiving the first application.

The long-awaited issue of regulations follows an unprecedented one-month industry consultation early this year. However, little if anything seems to have changed from the guidelines published in January.

The single biggest factor issue – the operators’ wholesale price – is still where it was: no lower than the operators’ lowest retail price.

This being China, MVNOs must also establish a network "security management system," even though they are barred from owning or operating a network. They are obliged to build billing and customer care systems and “appropriate” sales outlets and operational locations.

Industry websites have speculated that the first MVNOs could start as early as July, but given the preparation required, the first service is more likely to be at the end of the four-month window.

Although these are officially dubbed pilot services, it is very rare in Chinese telecoms for a large-scale trial not to be upgraded to full commercial level.

Dozens of firms are said to be interested in becoming MVNOs. However, the most likely new entrants are electronics retailers such as Suning, D.Phone and Gome, with established brands and handset distribution channels.

First MVNO licences could be in June

The move to spark competition by introducing MVNOs – albeit on a trial basis - is the biggest change in Chinese telecoms in the last five years. So no surprise there’s been a steady drip of reporting. 

In the last two days we have learned:

• The first trial licences are expected to be issued in June
• Details of Suning’s MVNO ambitions
• That at least Ericsson is prepared to cool expectations

The first licences could be issued as early as June, according to this Sina Tech report. That’s when Suning, one of the big electronic and appliance chainstores, hopes to receive its trial licence. Suning and rival retailers like D.Phone and Funtalk have emerged as the early favourites.

“The opportunity will lie with those who prepare,” CEO Jin Ming told Sina, explaining that the company has already restructured its existing communications and operator sales groups as its prepares  its application.

It is touting its 1700 nationwide stores, 8m online members and 3000-seat call centre and in the future, says the CEO, will go from offering customized handsets to delivering “customer experience” and “handset content service development.”

So far, so normal.

But you have to wonder how far Suning will get with its plan for “complete operator cooperation.”

While that’s a lot smarter than talking up competition with its future wholesale suppliers, it’s hard to see what advantage operators will get from forging ties with their rivals, especially as they are forbidden from striking exclusive deals.

Finally, for a more cautious perspective, Ericsson’s Chang Gang told the C114 website that he didn’t expect MVNOs to make much difference to the market.

"We haven’t seen a big change in other countries brought about by the arrival of MVNOs,” he said, and it wasn’t certain they would "cause any special change" in China, either.

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.