MVNOs add to Chinese operators’ pressures, but may be essential to 5G

As if the Chinese MNOs did not have enough pressure from the costs of 5G and the pressure to accelerate roll-out (see previous item), they are also facing increased competition. For Mobile and Telecom, the most pressing concern may be the rejuvenation of Unicom, for several years a lame duck, which has been given new life by  the investments made by a group of large Chinese web and industrial players.

But the big three are also having to deal with a long-awaited emergence of viable competition from MVNOs, as well as a fourth 5G licence holder, the cable TV provider China Broadcasting Network.

The decision to increase competition, as well as to award the licences earlier than expected, is seen as part of the escalating trade war with the USA, with China hoping to accelerate the progress of its roll-outs, to support Huawei and to score bragging rights.

China Broadcasting Network was created by the country’s National Radio and Television Administration (NRTA) in 2016 and awarded a basic telecoms licence, but no mobile rights at that time. Now it will be able to offer quad-play bundles as well as delivering video over 5G as well as cable. From the NRTA’s perspective, that will strengthen it against over-the-top video services while also increasing competition in the mobile space and encouraging new 5G services.

However, it is questionable how far a new mobile entrant will have the resources and expertise to establish a significant mobile base, especially if it does not get access to shared infrastructure via the three MNOs’ China Tower venture. A greater pressure on ARPUs and profits may come from the MVNOs, though the long wait for them to make any real impact on the market demonstrates the powerful incumbency of the big three operators.

According to the China Communications Enterprise Association, MVNOs now have 110m users in the country and are adding about 10m per month. This equates to more than 5% of the national total of mobile subscribers and about 20% of all MVNO customers worldwide, said the body. MVNOs now collectively make monthly revenue of more than CNY300m ($42m), Tao Chengyi, a senior engineer at the government-run China Information and Communication Research Institute, told a recent event in Beijing.

However, it has taken five years and a difficult climb to get to this stage. Although the first MVNO licences were issued in 2014, and 40 companies acquired them, half of those did not launch commercial services as they faced high costs to use the MNO host networks, resulting in an ARPU margin as low as CNY3 (43 US cents).

The situation improved a bit when the government ruled that MNOs must set wholesale prices below their lowest retail prices, but the licences remained only semi-commercial – in the ‘experimental’ no-man’s land in which Chinese operators often do most of their investments before their licences are converted to full commercial franchises. That stage only came, for MVNOs, in May 2018, indicating a shortage of government confidence in the sector before then. However, at that point, major tech and web brands were prominent among the companies which were awarded commercial licences, and included Alibaba, Xiaomi, and Lenovo.

The MVNO’s belated flourishing has often come on the back of a major consumer Internet brand, or because a virtual operator has focused on a specialized, higher value target market such as an IoT service. For instance, handset maker Xiaomi is offering a consumer IoT platform which bundles devices and connectivity via its MVNO licence.

Others are addressing areas where the MNOs have traditionally been weak, such as content – Snail Mobile is bundling gaming subscriptions as well as international roaming allowances. And still others go after niches which are profitable, but too small for the big three, with Sharing Mobile being an example. Meanwhile, Lenovo has added connectivity to its platform-as-a-service and software-as-a-service offerings.

For the MNOs, there is a revenue upside from MVNO fees, though this is only attractive if the virtual partner wins customers that the MNO would not have gained otherwise, since the wholesale fees are lower. But the MNO does save on the costs of acquiring and supporting those users – Unicom, until its recent turnaround the most pressurized of the three operators, has seen the benefit of that most clearly, and now hosts 70% of all MVNO connections in China.

Tao believes the other two should take a more positive view too, with a view to reducing the cost of supporting lower value or niche users. “If the network operators want to achieve the goal of increasing revenue and reducing expenditures, they should strengthen cooperation with MVNOs,” he said.

The decision to promote MVNOs to full commercial operators last year was part of a bigger government push to encourage more foreign investment into Chinese telecoms, as well as more competition for the three established operators. Both of these goals may be hit by the US trade wars, which are likely to see China retreating into insularity again, but it seems any reversals in state policy may not halt the growth of the MVNOs now they have some momentum, and some bargaining power with the host operators.

In 2013, the Chinese Ministry of Industry and IT (MIIT) instructed the three operators to support multiple MVNOs for trials, and claimed at the start of 2018 that the sector had attracted private investment worth CNY3.2bn ($505m).

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 MVNOs in China has been Ali Telecom, which was set up by HiChina, part of the Alibaba Group, and is pushing 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 also offers additional incentives when subscribers use Alibaba’s online shopping sites.

The most interesting move to diversify investment in mobile services may result in a closer-knit breed of MVNO-MNO relationship. This is the investment in China Unicom by a number of web and industrial players, which are not just taking financial stakes, but are expecting to influence the priorities for its network build-out to support their own mobile aims. This has already driven a shift from price-cutting to quality differentiation and Internet services at the telco (see previous item).

Although the government had toyed with merging Telecom and Unicom together, partly to address the latter’s growing financial problems, the final decision in 2017 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, and that will be much-needed if they are to fulfil their 5G roll-out obligations while remaining profitable. 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 at the time, 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, 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.