China Mobile Blind To Own Monopoly

Includes: CHL, TCEHY
by: Doug Young

A simmering feud between leading wireless carrier China Mobile (HKEx: 941; NYSE: CHL) and top Internet firm Tencent (HKEx: 700, OTCPK:TCEHY) was back in the headlines last week, with new accusations by the former against the latter, drawing attention to the near monopoly status that many state-run firms often enjoy due to strong government protection. Beijing should be applauded for finally taking important steps over the last year to end that monopoly in the telecom space, which has sapped the sector of innovation. Now it needs to extend that approach to other sectors to create firms that can truly compete on the global stage.
In many ways, the feud between China Mobile and Tencent reflects the developing battle being fought by an older group of big state-run firms against a new generation of privately funded enterprises that have recently become big enough to pose a serious challenge. Tencent now boasts a market value of nearly $100 billion, an unthinkable amount for any private Chinese firm just 2 or 3 years ago, and about the same as global social networking giant Facebook (Nasdaq: FB).

Tencent has risen on the strength of its popular gaming and social networking services, including WeChat, its mobile instant messaging app that boasts more than 300 million users just 3 years after its launch. WeChat's rapid rise has raised the ire of China Mobile, which started complaining last year that Tencent was a de facto wireless carrier due to the huge amount of time that WeChat users spent on the mobile Internet.

That feud eventually subsided after China Mobile unsuccessfully tried to use its government connections to seek intervention by the telecoms regulator, the Ministry of Industry and Information Technology (MIIT). In the latest twist to the story, China Mobile Vice President Li Zhengmao lashed out once again at Tencent last week, accusing WeChat of monopoly status in the mobile instant messaging market during an industry forum. (English article; Chinese article)

Many were quick to note the irony and hypocrisy in Li's remarks, since China Mobile itself has become one of the country's richest and most valuable companies due to its highly protected status in the wireless communications sector. The company now controls nearly two-thirds of China's mobile market, and faces only limited competition from the nation's other 2 carriers that are also state-owned.

Li's complaints and his lack of awareness of his company's own privileged position underscore the fact that China Mobile and other big state-run firms often take their protected status for granted, even as they rely heavily on that protection to thrive and stifle competition. In a bid to boost competition and innovation in the sector, the MIIT has finally begun taking steps to loosen the grip of the big state-run carriers on the market.

The regulator did the right thing by refusing to intervene in the initial China Mobile-Tencent dispute earlier this year, and has taken more steps to boost competition by reportedly preparing to issue licenses to new virtual network operators (VNOs) that lease capacity from existing carriers. Other regulators in areas like banking and energy should follow with similar steps to end the state-run monopolies in these important sectors, adding innovation and helping to create companies that can truly compete in the global marketplace.

Bottom line: Beijing needs to continue opening markets like telecoms, banking and energy to private companies to end state-run monopolies and spur innovation.