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China Mobile to Form Content JV

Robert Clark
News Analysis
Robert Clark
8/27/2014
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China Mobile is planning to spin off its content businesses into a new joint venture (JV) partnership with a private company, signalling the latest in a series of changes to the country's tightly controlled telecom sector.

It's not the first such "hybrid" JV in Chinese telecoms -- China Telecom Corp. Ltd. (NYSE: CHA) established one with Netease a year ago -- but it's the first for the giant China Mobile Ltd. (NYSE: CHL), which now has more than 790 million customers, making it a bellwether for the Chinese industry.

China Mobile will tip its reading, games, video, animation and location-based services into the new entity once it has found a partner. Combined, these yielded more than 1 billion Yuan Renminbi (US$162 million) in revenues in 2013.

While that's just a fraction of the company's total business -- it generated RMB325 billion ($52.8 billion) in revenue in the first six months of this year -- the move is just one more sign of reform of non-core telecom services in China.

China has just three state-owned operators to serve its 1.3 billion population. The government holds them close -- senior executives are Communist Party appointees and hold the equivalent rank of vice-minister. Since taking office nearly two years ago, the Xi Jinping administration has set about making the state sector more efficient, while still maintaining ownership and control.

The biggest telecom reform has been the issue of 25 MVNO licenses to private companies, including online retailers Alibaba, Gome and JD.com. Despite high wholesale rates and stringent targets, there's no shortage of enthusiasm, with 200 companies applying for licenses.

The industry regulator, the Ministry for Industry and IT (MIIT), has also talked of introducing private investment into wireline broadband access, though so far it has made no firm decisions on the matter.

The MIIT has also persuaded the three operators to put their mobile basestations into a single company, a cost-saving move for telcos facing revenue erosion and rising network costs. (See Chinese Operators Form Tower JV.)

Additionally, the MIIT has relinquished control over retail pricing. It will still hold the final say, but operators will be allowed to adjust prices without first needing permission.

While these moves are unremarkable elsewhere in the world, they amount to a minor industrial earthquake in China, where consumers complain frequently about high prices, slow data speeds and the generous salary packages of telco executives.

Despite the reforms, there is no sign that authorities will lift the effective ban on foreign direct investment. Rather, the current scare over NSA snooping, and the apparent targeting of US IT firms by regulatory agencies, make such a move even less likely.

But China Mobile will be hoping that its public-private JV will be more successful than China Telecom's effort. Its partnership with Netease to offer an OTT-style messaging service has had no success at all in stemming the loss of business to WeChat. (See China Catches OTT Fever.)

— Robert Clark, contributing editor, special to Light Reading

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