Telco Execs Flock To VNOs

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by: Doug Young

A new report about a sudden exodus of middle- and top-level executives from China's big 3 telcos is forcing me to rethink my earlier assertion about the relationship between those carriers and a group of new competitors called virtual network operators (VNOs). Earlier reports about the defection of a top executive from one of the big telcos to a new VNO had prompted me to declare the big 3 state-run carriers were trying to sabotage the new VNO scheme to quash any new competition. But now this new report reveals that similar defections at all levels of management are becoming widespread, indicating perhaps that market economics really are at work here.

If that's really true, then the growing wave of defections would indeed be a positive development for this new group of VNOs, which provide telecoms services under their own brands while leasing network capacity from the big state-run carriers. It would mean that experienced executives who once had little incentive to excel in jobs at their big state-owned employers are now being lured away by these VNOs, most of which are privately owned, with big salaries and other incentives. Their expertise and industry connections, combined with big investment dollars at some of the VNOs, could give these companies a much better chance of success.

According to the report in the China Daily, which isn't available online, a growing tide of executives have been leaving China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) since the telecoms regulator began awarding VNO licenses at the end of last year. Much of the media attention has focused on Li Gang, a top Unicom executive whose recent resignation to reportedly join a VNO prompted my earlier prediction that the big state-run telcos were meddling in a bid to quash competition from these newer, private companies. (previous post)

But this new report cites a growing number of similar cases, including the departure of Unicom's marketing chief to Shenzhen-based Aisidi, which was one of the first companies to receive a license under the new VNO scheme. While it's still possible that the telcos are trying to interfere in the VNO process, the report points out that money could be a bigger factor in luring these executives away from their longtime state-run employers.

It says the average salary at the Beijing branch of China Mobile has remained relatively stable at about 125,000 yuan per year, or about $21,000, over the last decade. Higher level executives would obviously make a bit more than that, but are probably being lured away with much higher offers from the new VNOs. Many of the new licensees are being funded by wealthy parents like retailing giant Suning and e-commerce leader Alibaba. One of my good friends was in a similar situation recently, leaving a prestigious but low paying position at a major state-run employer for a more exciting prospect at a fast-growing start-up.

All of this looks like an important positive development for the VNO sector, in contrast with a series of more negative moves that I previously wrote about. Most of the negative news came from a growing series of restrictions on the VNOs by the telecoms regulator, the Ministry of Industry and Information Technology. After placing geographical limitations on the VNOs, the MIIT also recently said the new companies couldn't build their own telecoms infrastructure, both moves that could seriously undermine their competitiveness. (previous post)

We'll have to wait and see how the new VNOs do when they start offering service, probably around May. But at least this latest wave of executive defections looks like a more positive sign that the new companies could get the expertise they need to offer some truly competitive alternatives to products now only available through the big 3 state-run telcos.

Bottom line: A growing wave of defections by top telco executives to new VNOs is a positive development for competition in the telecoms services sector, improving the chances for the VNOs to succeed.

Disclosure: None