Last week we examined the challenges facing the Chinese operators, as they cope with the dual pressures of meeting government expectations for accelerated 5G roll-out, and of financing 5G networks with no prospect of near-term revenue increases. Now the three main operators are responding to these pressures by seeking a far higher degree of infrastructure and investment sharing than the market has previously seen.
The three majors – China Mobile, Telecom and Unicom – already share a large proportion of their passive infrastructure via the vast and government-backed China Tower joint venture. There have been many reports that this structure might be applied to some active infrastructure and transport fiber over time. And now there is a new entrant to the mobile market, China Broadcasting Network (CBN) to add to the mix.
It is not clear whether CBN will have access to China Tower, though since the cable TV operator has virtually no mobile infrastructure of its own, the government may well insist on this to support its desire to increase competition and drive converged 5G/video services. And that would provide a useful extra source of revenue for the world’s largest towerco.
CBN, which was created five years ago from the consolidation of provincial cablecos, currently needs help, in the form of financing or access to low cost infrastructure, to make its 5G entry look at all realistic. The company is far smaller than the three telcos, with revenues last year of CNY77.9bn ($11.1bn) and paid-in capital of just CNY5.1bn ($720m). The smallest of the three main operators, China Unicom, made revenues of CNY275bn ($39.1bn) last year.
However, the cableco does have assets to trade, notably the spectrum it has been given, in the 700 MHz and 3.5 GHz bands, to support its 5G entry. The other three are launching 5G initially in the midband 3.5 GHz spectrum, which works well as long as they retain existing networks for coverage and deploy 5G for targeted capacity. Once they start to move to broad 5G coverage, and eventually some zones of 5G-only networks, they will need low-band spectrum to make that cost-effective in suburban and rural areas, and for superior indoor penetration.
The newcomer has 700 MHz spectrum because this was previously allocated for TV, and was in the gift of CBN’s regulator, the National Radio and TV Administration, rather than the Ministry of IT and Telecoms (MITT), which governs the telcos. It also has a more developed portfolio of TV and video content than the other operators, which might interest China Mobile in particular, given its enthusiastic recent moves into 5G-delivered TV.
If access to some of these assets could be exchanged for sharing of passive or active infrastructure, CBN’s financial position could improve. And it is already making some interesting moves in terms of attracting partners which might help finance its cloud infrastructure – notably online retailer and cloud giant Alibaba (plus Citic, a state-backed financial group).
The Alibaba connection is interesting for two reasons. One, the ecommerce company is also an investor in China Unicom, as part of a raft of industrial and web players which took stakes in the ailing operator as part of a creative government-directed scheme to boost Unicom’s finances and its ability to stay competitive in 5G. In return for their injections of capital, the partners – which also include JD.com, Baidu and others – will be able to influence the direction of Unicom’s build-out so that its resulting network is well-suited to support their own mobile services plans. As Unicom moves towards a cloud-based core and RAN, it is likely to be able to access infrastructure owned by some of its investors on good terms.
This may apply to CBN too. Like Rakuten in Japan, it is coming from the content and services world, into the very different environment of network deployment. That will give it the luxury of a greenfield approach, but also the financial imperative to be able to deploy cheaply and quickly. Both these factors point to a cloud-native network from day one, so that CBN can harness superior cost economics and flexibility compared to those of its competitors. But building cloud infrastructure, of a quality and reach to support a full coverage mobile network, is expensive in its own right, so the partnership with Alibaba could prove very important to CBN’s costs – while giving Alibaba additional 5G resources to support its own plans.
China Mobile is now reported to be seeking a partnership with CBN, to pool resources and costs in certain areas of network build-out and operation. Mobile’s chairman, Yang Jie, told the Chinese financial website Caixin: “A collaboration with CBN would give China Mobile access to one of the country’s biggest providers of programming via the former’s vast cable network.”
Nothing has been agreed, and Unicom and Telecom are opposing such an alliance loudly. Indeed, Wang Xiaochu, chairman of Unicom, said at the announcement of the firm’s most recent results: “I personally think that China Unicom is the best partner for CBN.” He argues that there are fewer conflicts of interest with Unicom than the other two, which are the largest broadband providers, and so compete head-on with CBN’s cable business, which has 215m customers.
“We hope to hold discussions and cooperation with CBN,” said Wang, adding that he believed the cableco was “willing to participate in our alliance”. But he also said his company was in talks with Telecom and Mobile about greater network sharing. Proposals include sharing many 4G base stations, in order to consolidate networks and reduce costs, freeing up sites, spectrum and budget for 5G (which would remain single-operator in the first phase). There is also discussion of sharing more optical networks, and of a roaming deal with Mobile to improve Unicom’s coverage.
Unicom already has a three-year-old agreement with China Telecom to share 4G base stations and optical networks.
“China Unicom will definitely work with one or more companies,” Wang said on the earnings call. A “co-build, co-share strategy could deliver material savings” in capex and opex.
It is estimated that, between them, China’s three established MNOs will deploy about one million 5G base stations during the first 18 months of the build-out, and will end up spending as much as $400m. All three looked, in their most recent quarterly results, ill-equipped to meet these demands. Unicom reported a 60% year-on-year drop in free cashflow for the first half of 2019, to CNY15.8bn ($2.3bn), which it blamed on a near-doubling of capex, year-on-year, in the same period, to CNY22bn ($3.1bn). It plans to spend CBNY58bn ($8.3bn) in total this year, up from RMB44.9bn ($6.4bn) in 2018.
In addition, Unicom has been seeking market share by cutting prices for high speed data and that saw mobile service revenues falling by 6.6% year-on-year, in the first half, to CNY78.7bn ($11.2bn), though the telco increased its mobile user base by 9.32m to top 320m. Total revenues fell by 2.8%, to CNY145bn ($20.7bn), though net profit rose 16%, to CNY6.9bn ($980m), but mainly as a result of an aggressive cost-cutting strategy which will not be sustainable in the first years of 5G, unless Unicom can gain the investment and infrastructure partners it wants.