MIIT Surprises Market With VNO Licenses

by: Doug Young

After moving extremely slowly throughout the year, the telecoms regulator is suddenly surprising everyone with a flurry of major new announcements in the final weeks of 2013. First the Ministry of Industry and Information Technology (MIIT) issued long-awaited 4G wireless licenses earlier this month, and now we’re learning that it has just issued its first batch of virtual network operator (VNO) licenses. This sudden issue of VNO licenses comes as a bit of a surprise, since there were no advance indications for the timing and many believed the MIIT wouldn’t make the move until next spring.

I’m mostly encouraged by the MIIT’s sudden flurry of activity, though also just a tiny bit worried that its sudden quick movement may be aimed at meeting a year-end deadline. Such deadlines are generally good, since they make slow-moving bureaucratic agencies like the MIIT a bit more efficient. But this sudden movement could also be a bad thing for such a new area like VNOs, where it’s important to move in a rational, well-planned manner to avoid chaos in the market.

VNOs are present in the west, but are a new phenomenon to China. Such operators typically lease network capacity from existing telcos, and then offer telecoms services under their own brands. In the case of China this development is extremely significant, as it could effectively break the 3-way monopoly on the market held by the current trio of state-run behemoths, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA).

All that said, let’s look more closely at the news that has the MIIT awarding 11 VNO licenses in its first batch of awards. (Chinese article) The only 2 immediately identifiable big names were units of China’s top 2 e-commerce companies, Alibaba (English article) and Jingdong. (English article) The reports say that the award of licenses is just the first step in a longer process, and that each recipient must now sign a final capacity-leasing deal with one of the big telcos. The MIIT must then approve the final deal, which will presumably prepare the way for service to begin.

The reports also specify that the MIIT won’t limit the number of licenses it gives out under this trial program, and that applications will be accepted through July of next year. The MIIT’s VNO trial program first made headlines about a year ago, and has been in the news periodically for much of this year. Many had originally expected both 4G and VNO licenses to be awarded in October. But the overly cautious and bureaucratic MIIT was silent that month and now appears to be hurrying on both fronts.

It’s hard to know what is happening inside the agency, in particular why the 4G and VNO licenses were both suddenly awarded with little advance warning. I suspect that perhaps strong industry lobbying, combined with pressure from the central government, may have prompted the MIIT to speed up its bureaucracy and make the awards before the end of the year. That would give everyone time to prepare for new service launches in the first half of 2014 after the Chinese New Year.

So what can we expect from these new VNOs? My guess is that we could ultimately see quite a few licensees, perhaps as many as 20 or 30, including other previous applicants like electronics retailing giants Suning and Gome (OTC:GMELF). My main concern is that the MIIT may suddenly be moving too quickly and issuing too many licenses, with the result that the early market could be thrown into chaos and confusion for both consumers and the new VNOs. But this initial round of licenses shows the regulator intends to move ahead more quickly than before, meaning 2014 could be an exciting but also chaotic year for telecoms services sector.

Bottom line: The MIIT’s sudden granting of VNO licenses shows it plans to move aggressively with its plan to add competition to the telecoms services sector in 2014, which could result in early chaos and confusion.