China Mobile Surrenders To WeChat, Youku

| About: China Mobile (CHL)

Bottom line: China Mobile’s retirement of its Internet-based texting and video services reflect its inability to compete with private providers of such services, and underscores its growing position as a slow-growth network operator.

In a move that was long overdue, leading wireless carrier China Mobile (NYSE:CHL) has thrown up the white flag with a symbolic surrender to WeChat, Youku (NYSE:YOKU) and the many other private companies that have steadily stolen its new business opportunities. In this case the surrender comes in the form of formal retirements for China Mobile’s Internet-based Fetion texting service, and also its lesser known mobile video product.

Fetion was once hugely popular in China, allowing users to send SMS text messages for free by routing them over the Internet. China Mobile was an early innovator in creating that kind of “over the top” (OTT) service that took advantage of the mobile Internet. But more recently it has rapidly lost that position to more nimble private companies like Tencent (OTCPK:TCEHY) and Youku.

Fetion has been rapidly fading since its heyday about 5 years ago, and I doubt very many people will even notice its retirement on June 30, according to a new announcement by China Mobile. (Chinese article) A separate but probably related move also has China Mobile saying it will formally retire its video service on the same date. (Chinese article)

The Fetion announcement calls the move a business adjustment, and indeed it’s quite common for companies to constantly tweak their product lineups in line with rising and falling demand. Fetion was a cutting-edge service in the early days of 3G service, which popularized use of the mobile Internet.

China Mobile launched the service on its network in 2007, and subscribers sent more than 270 million Fetion messages at the product’s height in 2011. But since then usage has fallen rapidly and by 2013 less than 100 million messages were sent over the service. I suspect the number last year was close to zero, which is why it’s not that difficult for China Mobile to shutter the service.

The rapid decline of Fetion parallels a slower but similar decline for China Mobile’s traditional SMS text messaging service, which fell 2.3 percent in the company’s latest reporting quarter but is still quite significant at 130 billion messages for the 3 months. Fetion’s defeat came largely at the hands of Tencent’s WeChat, which takes advantage of the mobile Internet to offer far more functions beyond simple texting.

Outdated Video Service

While few people will notice the disappearance of Fetion, even fewer are likely to notice the formal retirement of China Mobile’s video service. That service was developed in the 2G era and was designed to offer stable signals at a time when lack of bandwidth made such viewing difficult over the regular mobile Internet.

But the advent of 3G and more recently 4G services has paved the way for a wide array of privately run services to enter the market. Those include services from a crowded field of companies like Youku, LeEco and iQiyi, many of which are backed by big Internet names like Alibaba (NYSE:BABA), Baidu (Nasdaq: BIDU) and Tencent.

China Mobile and its 2 state-run peers, China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), haven’t exactly just sat back and let these private companies steal all the new business opportunities. China Mobile tried unsuccessfully to find a new partner to reinvigorate Fetion, and China Telecom tried to challenge WeChat by launching a rival service in partnership with top game operator NetEase (NASDAQ:NTES).

But in all of those cases the challenges were too little too late, proving that early arrival to new product areas is critical to success. I’ve long argued that China’ big telcos are unlikely to ever become major innovators in new OTT products and services due to their big bureaucracy and slow-moving nature. This latest surrender by China Mobile supports that view, and shows the 3 big telcos are likely to ultimately become simple infrastructure operators with stable revenue but limited growth potential.

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