Seeking Alpha
Long only, foreign companies, tech
Profile| Send Message|
( followers)  

The Chinese government has finally announced the broad strokes of the long-anticipated plan for the restructuring of the telecom industry, and a quasi-definitive time frame for the government to finally issue the coveted 3G licenses. The business and industry media are having a field day with it, arguing about what it will mean for everyone in the industry, from China Mobile (NYSE:CHL) to Cisco (NASDAQ:CSCO) to Nokia (NYSE:NOK) and, yes, even to Apple (NASDAQ:AAPL).

Here is what it really means: 

Nothing.

Oh, don’t get me wrong. This edict, which treats some of the world’s largest telecommunications operators like so many LEGO sets, is going to have some major short-term repercussions. Analysts and investors will spend the next 18 months figuring out what effect all of this has on the valuations of the carriers, opportunities for equipment vendors, and challenges for management consultants. Economists, for their part, will nod sagely about the creation of “more competitive entities,” “a more rational industry,” and so on. 

But in the end, these changes aren’t going to amount to much. And here is why.

First, the changes do nothing to alter the fundamentals of the market. No matter what sort of beasts this process creates, consumers and businesses are going to continue to suck up bandwidth, cellphones, and services about as quickly as they can be delivered. Wireline will continue to be a tougher business than wireless. None of the three merged firms are going to get instantly smarter about expanding overseas. Efficiency will continue to be a less important issue that keeping up with demand. The managers of these companies won’t automatically get wiser about delivering services. 

Second, the changes do not address any of the really pressing issues the industry faces. How do we deliver more services for less money? How do we get mobile phones to the billion or so Chinese who have yet to place a call, much less buy and own a mobile phone? How do we make money on IPTV? What role do cable operators have to play in delivering telecommunications services? How do we connect the unconnected? How do we deal with the growing pile of e-waste coming from the industry?

Third, the mergers are taking place in complete disregard for the customer, the consumers and businesses who depend on these carriers to provide the communications infrastructure of their lives and livelihoods. Apart from the fact that these changes will cause a disruption that will throw the customer into fourth place behind the government, employees, and investors for the foreseeable future, aspects of the industry plan look to be designed - if not to make life tougher on consumers - at least to ensure that they reap as few benefits from the changes as possible.

Just one example: we will not only have three different mobile carriers, we will also have three wireless networks operating on incompatible technologies - one on WCDMA, one on CDMA-1X, and one on TD-SCDMA. Such incompatibility not only means that roaming across networks will be more difficult - if possible at all - it also substantially negates the potential benefits to the consumer of competition among three carriers. If everybody offered the same network, switching would be easy. This raises churn for the operators, but it also forces them to be more customer-focused. Now, buying a phone locks you into a carrier for as long as you carry that device. 

Nothing in the mergers is designed - or intended - to improve customer service, to lower rates, drop costs, or broaden the scope of services available to consumers or business. Now, it is conceivable that one or more of the companies will come across opportunities to improve service. But for the foreseeable future, each company will be engrossed in the simple effort of completing these disruptive changes without having the wheels fall off.

The fundamentals don’t change. No major problems are addressed. Not only are these changes not market-driven, they ignore customers completely. 

At best, things are going to look a bit tidier as the Minister of the reorganized MII looks out his window.

Source: China's Telecom Reform: The Sound and the Fury