China's MVNOs Hit the Wall

It didn't take long: The wheels have already fallen off China's new MVNO sector, which was intended to spark competition and innovation in the sluggish state-dominated industry. (See Year of the Horse: Can China Telecoms Break Into a Gallop?)

The dozen MVNOs that have started service since March have signed up just 400,000 customers -- a rounding error in the massive 1.28 billion-subscriber market and well short of the government's own projections of 1 million by year-end.

Nearly four-fifths of these customers have signed with just four players.

The newcomers' main problem is one that has afflicted MVNOs in many other markets -- high wholesale prices.

According to Zou Xueyong, the head of China's MVNO Industry Alliance, the mobile virtual operators, which offer their services using the infrastructure of one of the country's three major carriers, are being offered a wholesale tariff equivalent to a 35-40% discount to the standard retail price. But the new operators themselves say that in order to at least break even, they need a wholesale price of around 60% below retail.

For those familiar with deregulation in other markets, the MVNOs' woes come as no surprise. There is no industry regulator to protect them, no interconnection regime, and no rules against bundling or cross-subsidies.

The three main mobile network operators -- China Mobile Ltd., China Telecom Corp. Ltd. and China Unicom Ltd. -- are compelled to sign partnerships with at least two MVNOs, but there is nothing to require them to offer viable prices.

The network operators all "see MVNOs as a threat instead of as a partner," said Guang Yang, senior analyst at the global wireless practice of Strategy Analytics Inc. As a result, "they are reluctant to open their networks to MVNOs, even though it is a regulatory requirement."

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It's a far cry from the enthusiasm early this year, as the 40-odd new players collected their licenses and managed to attract some senior talent from the big three.

But in a resignation letter leaked to telecom website C114, an unnamed MVNO executive complained about a lack of realistic planning and of constantly changing objectives.

The letter said some MVNOs' skill seems to be "in getting licence and access to capital" rather than developing a business with paying subscribers. The departing executive added that they could not "see a hope of success."

Yang points out that the newcomers' problems have been exacerbated by the introduction of 4G competition during the past six months. China Mobile in particular has been aggressive in rolling out its LTE TDD-based network. "Their 4G retail prices are even lower than wholesale price to MVNOs," Yang notes. (See China Mobile Adds 9M 4G Customers in August and Nokia Networks Unveils $970M 4G Deal With China Mobile.)

The MVNOs are lobbying the government to regulate the wholesale market, but this will take some time, he adds. "Until the wholesale price reaches a reasonable level, we perhaps can't see real growth of Chinese MVNOs."

— Robert Clark, contributing editor, special to Light Reading

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mendyk 10/27/2014 | 11:12:33 AM
Can't spell MVNO without NO Maybe MVNOs aren't succeeding in China because there doesn't seem to be a reason for them to exist.
[email protected] 10/27/2014 | 1:23:59 PM
Re: Can't spell MVNO without NO The main reasons for MVNOs to exist is to provide competition into a market, is it not? 

The choice of 3 operators in a country with about 15% of the world's population would suggest there is every reasons for them to exist -- what might not exist is the political/incumbent will for them to exist. 
mendyk 10/27/2014 | 1:29:45 PM
Re: Can't spell MVNO without NO The competition comes from (a) requiring a facilities-based operator to sell at a significantly reduced price and (b) reselling that service at a discount that's based on the forced price reduction. It's not real competition.
Liz Greenberg 10/27/2014 | 9:38:41 PM
Re: Can't spell MVNO without NO "what might not exist is the political/incumbent will for them to exist"

Well said Ray.  In order for an MVNO to exist in China, the government must do more than just give the concept lip service.  If they truly want competition, like in countries with capitalism, then they must embrace it full on.  If they want the appearances of competition/capitalism, then since they control the networks and the pricing they should be able to reduce the wholesale prices to whatever the "market" needs to promote "competition". 
R Clark 10/28/2014 | 2:58:30 AM
Re: Can't spell MVNO without NO The idea that a new player is expected to 'negotiate' a price with an incumbent does suggest a lack of political will. But the minister is going to get marked on how well the MVNOs perform, so most likely after lots of huffing and puffing eventually some kind of interconnect deal will emerge that allows the more determined MVNOs to survive. 

It's all a huge amount of effort for little return, which pretty much sums up how Chinese telecoms is organised.
mendyk 10/28/2014 | 8:32:29 AM
Re: Can't spell MVNO without NO Liz -- What you describe doesn't sound like capitalism to me. When companies are forced to sell their products to competitors at government-mandated prices, that's more of a "planned" economic system -- one in which the government intervenes to achieve certain outcomes. The fundamental problem with MVNOs in this context is that the facilities-based operator has little or no incentive to have the MVNO as a customer.
James_B_Crawshaw 10/28/2014 | 10:44:49 AM
Re: Can't spell MVNO without NO Yes, just 3 operators for 1.4bn people to choose between seems quite few in comparison with over 100 in the UK (including MVNOs), a small island of just 64m. But then they only have one political party so it's all relative. On a related note China split its largest train manufacturer into 2 companies a decade ago to promote competition. Now they are being merged back into 1 by the government so they can compete more effectively in the international market. 
Liz Greenberg 10/28/2014 | 12:23:51 PM
Re: Can't spell MVNO without NO MendyK the part that is capitalistic is the notion that they are really trying to embrace competition within a market or heck, even market forces or pricing.  Based on negotiating with a government entity that controls everything anyway there is no real possibility for MVNOs at all in China.  Even if they were to negotiate prices that enable them to somewhat compete, what can they tack on for services without the government saying NO?  Basically, there is NO in MVNO in China...no real possibility for success.
smkinoshita 10/28/2014 | 12:29:04 PM
Re: Can't spell MVNO without NO "...what can they tack on for services without the government saying NO?  Basically, there is NO in MVNO in China...no real possibility for success."

Liz, that sums it all up right there.  I'd ask "What were they thinking?" but one of the reasons why people dislike regimes is that it's very easy to push through mistakes and let others play the price.  There's a lot more culturual changes that needs to take place at the very top before we'll see changes to the situation in regards MVNO.
Liz Greenberg 10/28/2014 | 12:59:37 PM
Re: Can't spell MVNO without NO Exactly, it is a cultural, political, etc. situation in China that literally governs the outcome of anything in China.  Time will tell what will happen but it all strongly relates to the Great Firewall of China - if it comes down like the Berlin Wall then change will happen, without it, not much will change.
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