New Licenses, Price Wars Coming For VNOs

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Includes: BABA, CHA, CHL, CHU, JD, TCEHY, VNET
by: Doug Young

Last month's launch of China's first new mobile services in a decade is showing early signs of shaking up the market, with competition likely to intensify as more licenses are awarded to a new generation of privately owned virtual network operators (VNOs). According to the latest headlines, the Ministry of Industry and Information Technology (MIIT) is getting ready to issue its third round of VNO licenses, which allow private companies to sell telecoms services under their own brands by leasing network capacity from the nation's three existing state-run telcos.

At the same time, other media are citing an industry executive saying a fierce round of price wars is inevitable for the entire sector, as new players fight for market share and the three state-run telcos fight back. This kind of prediction isn't surprising, and I fully expect we could see some very cheap service plans come into the market toward the end of this year. At the end of the day, the big losers could be China's three big telcos, since they depend on revenue from service plans for the vast majority of their business.

The latest headlines say the MIIT, China's telecoms regulator, is preparing to hand out another 7-8 VNO licenses in the next 1-2 months in what would be its third batch since it launched the program late last year. (English article) The field of companies mentioned as probable awardees includes telecoms equipment giant ZTE as well as US-listed data center operator 21Vianet (NASDAQ:VNET).

The MIIT handed out its first batch of 11 VNO licenses in December, and then issued another seven about a month later. That means this latest addition will bring the total number of new operators to about 25. Many licensees from the first two rounds began launching service last month, with e-commerce companies Alibaba (ABABA), Suning and JD.com (NASDAQ:JD) all rolling out competitive plans aimed at different kinds of subscribers. (previous post)

Meantime, other media reports are quoting one of the chairmen of a VNO licensee saying that price wars among the new operators are inevitable as each tries to quickly gain new business. The prediction came from Wang Xianshu, chairman of Bus-Online,speaking at a major industry show in Shanghai last week. (Chinese article)

Wang talks quite a bit about the eventuality of a price war among VNOs, though there's nothing particularly insightful about the rest of his discussion. I firmly believe he's correct, based on the past behavior of Chinese companies in this kind of emerging sector. Unlike more mature markets where companies are more driven by the bottom line, Chinese companies often have an obsession with gaining market share at any cost, leading to bloody price wars and big losses.

Most recently we've seen two of China's wealthiest tech names, Alibaba and Tencent (OTCPK:TCEHY), engage in a stiff round of price wars in the emerging market for taxi apps by providing generous subsidies that have cost them millions of yuan. Such price wars look inevitable for these new VNOs since many are backed by cash-rich names like Alibaba and JD.com, which won't be afraid to spend money and incur big losses to gain market share.

Making the situation worse, China's big three state-run telcos are likely to become alarmed by these aggressive new VNOs and quickly jump in with their own competitive price plans. That means that many users of China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) could switch over to cheaper pricing plans, also undercutting those companies' profits. At the end of the day, the next 12 months could be an exciting but also difficult time for the telecoms services sector, as this welcome injection of new competition shakes up the stodgy industry.

Bottom line: Competition in the telecoms services sector is quickly heating up with the arrival of more than 20 VNO operators, with a round of bloody price wars likely over the next 12 months.

Disclosure: None.

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