China’s three mobile operators, China Mobile Ltd. (ADR) (NYSE:CHL), China Telecom Corporation Limited (ADR) (NYSE:CHA), and China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU), may not only have to start gearing up for more competition, but also provide the network capacity for their new rivals.
Last January, the Chinese Ministry of Industry and Information, or MIIT, sought public comments on its plans to encourage more mobile competition by allowing mobile virtual network operators, or MVNOs, access to the country’s already installed wireless network infrastructure.
The window for that input closed on Feb. 6, and “as soon as in May,” according to media reports repeated by ShanghaiDaily.com, the MIIT will allow MVNO applicants to begin operating.
An MVNO buys network access from an established mobile operator and resells wireless services under its own brand. In the U.S., MVNOs include brands such as Virgin Mobile, which leases service from Sprint Nextel Corporation (NYSE:S), and TracFone, which gets wireless access from AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), as well as Sprint.
The government’s proposal states any private Chinese company with telecom experience and employing over 50 people can apply for the two-year MVNO trial, according to ShanghaiDaily.com. The MIIT plan is for the wireless operators to provide the MVNOs use of their networks at “fair or favorable” prices, according to the draft proposal. The software company Ufida told ShanghaiDaily.com it had applied to become an MVNO.
Rumors of China allowing MVNOs to operate have been swirling around for at least 10 years, according to informa writer Tony Brown. He described an encounter back in October 2003 when a loose-tongued telecom industry executive told him about a done-deal in the strictest of secrecy: “Virgin Mobile is going to launch as an MVNO in Shanghai,” he told Brown.
That sure thing never happened, of course, but the MIIT call for input in January reminded Brown of that encounter and had him speculating on what companies would be likely MVNO candidates — and what that would mean for the actual operators that would have to service them.
If the mobile operators bring in lightweight companies just to meet the two-MVNO per operator mandate from the MIIT, the threat of serious competition is lessened. Those minor MVNOs could include electronics retailers who already sell handsets for the operators. That type of MVNO partner wouldn’t be a threat, but would not offer any — please excuse this overused word — synergy to the relationship.
On the other hand, partnering with a popular over-the-top, or OTT, company that provides broadband content delivery, such as audio and video, outside the control of an Internet service provider, could bring more subscribers to the network — but at some risk, depending on which direction the revenue from that increased traffic would flow.
Popular Chinese messaging service operator Tencent, and Chinese search engine Baidu.com, Inc. (ADR) (NASDAQ:BIDU) , according to Brown, would be able to use being an MVNO to their own advantage, as well as providing upside to the mobile network they would use.
The OTTs would gain from not having to rely on advertising revenue in an industry seeing expanding OTT competition for that advertising money, and would directly benefit from subscription fees.
As for the operators, with the increasing content delivery speeds offered by the Chinese operators’ future LTE networks, having a good working relationship with the major OTT companies and their content, especially video content, will become critical.
China Mobile has over 720 million wireless subscribers, a huge lead over No. 2 China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) with 239 million, and No. 3 China Telecom with 162 million. It is possible the addition of MVNOs into the mobile marketplace has the potential for shaking up the wireless status quo in China.
However, that is not a view that Fitch Ratings took last January. It felt that the MVNO business model has had only limited success globally, and that its introduction into China would have little effect of competition. But, Fitch cautioned, forcing the Chinese incumbent mobile operators to open up their networks to MVNOs would put those operators at risk of more government regulation.
The article More Wireless Competition in China? originally appeared on Fool.com and is written by Dan Radovsky.
Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu, China Mobile, and Google.
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