China takes creative routes to opening up mobile markets

Five years after China started to open the way for MVNOs, the Ministry of Industry and IT (MIIT) plans to expand this market.

The Ministry has launched a public consultation on its proposal to issue commercial MVNO licences to all qualified market players, including those backed by foreign investors or owners. The consultation will close on Thursday.

There have been four years of MVNO trials and some limited services, but the latest move could see the market explode. It also fits with another relatively new direction for the regulator – to encourage more foreign investment into Chinese telecoms, as well as more competition for the three established operators.

In 2013, the MIIT instructed those three operators to support multiple MVNOs for trials, and some of those trials have gone commercial to a limited extent. The new rules would enable them to acquire full commercial licences, but also potentially bring more players into the fray. All the current 42 triallists are Chinese, and they include handset maker Xiaomi as well as Alibaba, and Snail Mobile.

Even in the grey area between trial and full commercial licence status, China has acquired over 60m MVNO subscribers, the Ministry says, accounting for 4% of the total mobile subscriber base as of the end of 2017. The MVNO market has attracted private investment worth 3.2bn ($505m), the regulator added.

When MIIT announced plans to compel the MNOs to partner with virtual operators, China Unicom and China Telecom signed up about 15 firms apiece fairly rapidly, while China Mobile was initially hostile. However, it was converted during the course of 2014, and
Xu Gang, deputy general manager of marketing, said in that year that the three telcos could not reach every niche and said: “Content and service differentiation is also possible. MNOs do a single service. If you can find a better service then you can find another win-win scenario.”

One of the most closely watched MVNO in China is Ali Telecom, which was set up by HiChina, part of the Alibaba Group, and will push that retail giant’s services and devices. Its first decision was to forgo a fixed monthly fee, and charge customers based on the amount of data used, including voice and SMS. It is also expected to offer additional incentives when subscribers use Alibaba’s online shopping sites.

There are still challenges for MVNOs however. The three telcos are reported to be charging high fees, and there is no support for mobile number portability in China.

However, the market is opening up slowly but surely, as MIIT’s latest comments indicate. And last year, one of the most creative approaches to expanding an operator’s business model and sources of financing for new networks also came in China. Although the government had toyed with merging Telecom and Unicom together, partly to address the latter’s growing financial problems, the final decision was more innovative.

A 35% stake in Unicom was sold to a group of 14 strategic investors, including well-known Chinese Internet names such as Tencent, Baidu, and Alibaba Group, all of which have increasingly been extending their search, advertising, ecommerce and social media services to mobile platforms and seeking to drive the mobile experience in the same way that Google does in the west. Baidu and Alibaba have even experimented with their own devices and mobile operating systems, but having a close relationship with a carrier could help them to increase their collective influence over smartphone platforms and services, to a greater degree than with a simple MVNO alone.

This is part of a broader government plan of injecting new growth and innovation into state companies through outside investment and private capital. It was the biggest recent deal under Beijing’s ‘mixed ownership’ reforms, which mark a significant departure from the Communist managed economy of the past, but stop short of full private ownership and accountability.

In a statement, Unicom said the funds from its new investors will be used to upgrade 4G capabilities, develop 5G technologies and trials, and “develop innovative businesses” to enhance its “core competiveness … and speed up its strategic transformation”.

It said the investors, which also include industrial groups like Didi Chuxing and Suning Commerce Group, have very complementary businesses to Unicom’s own, and “strong fundamentals”.

It is right to say this. If the new ownership structure is well managed, Unicom could benefit not just from its backers’ money, but their understanding of the web and industrial worlds. That could help accelerate the process of getting new applications and user experiences out to Chinese consumers, giving Unicom the differentiation to make economic sense of its network expansion programs (it can be assumed some of its capex reductions will be reversed now it has these new funds, or at least there will be a bigger uptick in 2018).

More importantly, it could help it make a reality of the idea that 5G networks must support a wide range of vertical market, industrial and IoT services, in order to deliver ROI. That is a nice idea, but in many markets, industries like transport, manufacturing and energy complain that the MNOs do not understand their requirements, or do not build networks which are optimal for enterprise use. In future, network slicing should help provide optimal network connectivity for each sector, but in the near term, it is important that MNOs forge close, cooperative links with industry partners.

That could lead to a situation where there is shared investment in 5G networks. Rather than shouldering the entire burden of each new upgrade, the MNO could be the anchor partner. By investing themselves, industry partners would have a better ability to drive the way networks are planned and ensure their needs are met. Then all players could monetize the network in their particular sectors, whether for external services like MNOs, in-sector B2B services (as GE is doing for other manufacturers with its cloud platform), or purely for internal efficiencies.

Unicom could use its new structure to do just that, and start to win back ground lost to its rivals. It said key areas of cooperation will include big data analytics; payment and internet finance; IoT; content aggregation; and cloud computing. It has already been establishing ecommerce operating centers with Tencent and Alibaba, independently of the change of ownership.