Regulator Sets Modest VNO Target

by: Doug Young

I have to admit I was quite disappointed to read that China’s regulator has set an extremely modest target for a new group of virtual network operators (VNOs) that will finally break the telecoms services monopoly held by China’s big 3 state-run telcos. I wasn’t expecting huge things from this new group of operators, who will lease network capacity from the trio of existing telcos and then sell telecoms services under their own brands. But the Ministry of Industry and Information Technology’s goal of just 50 million VNO mobile service subscribers by the end of next year looks ridiculously low to me and hints of worries that this new pilot program could be plagued with problems. (English article)

I’ve never been a strong supporter of the aggressive targets often set by Beijing for its new programs, mostly because such aggressive planning often leads to bad business decisions as everyone races to simply meet their targets. But this latest goal by the MIIT looks far too modest to me, and perhaps is recognition of the fact that China’s big 3 telcos may do everything they can to prevent these new competitors from gaining subscribers.

There’s not any explanation on how the MIIT set its target, though one report cites some of the new VNO licensees saying they won’t engage in price wars with China’s 3 existing telcos, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA).

To put things in perspective, China’s 3 mobile carriers now have a combined 1.2 billion subscribers, led by China Mobile which has about two-thirds of the total. That means the 50 million subscriber target for the new VNOs would account for just 4 percent of the current market. That’s quite a small figure when one considers the MIIT issued its first 11 VNO licenses late last month (previous post), and is likely to triple the total number of licensees this year. A little math will show that if we really do see 30 VNOs emerge, the MIIT’s 50 million subscriber target would average less than 2 million subscribers per VNO.

I suspect the MIIT is being conservative for a number of reasons, all of which are certainly valid. Starting a new company is never easy, and all of these new licensees will have little or no experience in telecoms services because China has strictly forbidden any participation by private operators in the past. Thus all the new licensees, which include names like e-commerce giants Alibaba and Jingdong, will have a steep learning curve and may not be able to offer serious products until the second half of this year at earliest.

The MIIT is also limiting new licensees to specific geographic areas, meaning they can’t offer national service that can truly compete with the big 3 telcos. Such conditions could seriously limit the attractiveness of these new services for customers, since all VNO operators would have to look for partners to provide service throughout China.

Lastly, and perhaps most important, is the potential for obstructionism by the telcos themselves. We got a hint of the kind of potential meddling we might see last week when a top Unicom executive took the helm at one of the new licensees, Huanxiang Linanxin, leading me to speculate about inside collusion between the pair. (previous post) At the end of the day, all of these factors could create serious problems for the VNO program, and this latest modest target from the MIIT is the latest signal that we shouldn’t expect these new service providers to pose any real serious challenge for at least the next 3 years.

Bottom line: The MIIT’s modest 2-year target for new VNO subscribers hints at problems ahead for the pilot program, which won’t pose a challenge to existing telcos for at least 3 years.

Disclosure: None