OTT fever has struck China's telecom operators, with China Mobile Ltd. (NYSE: CHL) and its two rivals having all rolled out new or refreshed over-the-top messaging services during the past two months.
While some Chinese analysts regard it as a sign of innovation, others believe it underlines the limited competition in the heavily sheltered market.
The background is a standoff early this year between China Mobile and Nasdaq-listed Tencent Inc. , the Internet and games company behind the WeChat messaging app, which has more than 300 million users. (See OTT Charges: The China Syndrome.)
China Mobile chairman Xi Guohua described OTT services as a bigger threat than other telcos and complained about the level of network resource occupied by the always-on WeChat app. After some sympathetic remarks from senior officials, online forums lit up with rumors of a "WeChat fee."
That didn't happen, however, and China Mobile turned to rebuilding its moribund instant messaging app Fetion, putting it in the hands of its most successful provincial unit, Guangdong Mobile.
Six-year-old Fetion was a pioneer of its time, but the emergence of WeChat and other apps meant that virtually all of its 90 million users had become inactive. The new-look version released in July includes free SMS, voice, and photo sharing.
Less successfully, China Mobile also brought to market a VoIP app, Jego. Embarrassingly, it was forced to withdraw it after three weeks because mobile VoIP (as distinct from VoIP calls within apps) is still illegal in China, although it is still offered as a service to customers roaming outside China.
But while China Mobile is going it alone, rivals China Unicom Ltd. (NYSE: CHU) and China Telecom Corp. Ltd. (NYSE: CHA) have both hooked up with big domestic Web companies firms to offer OTT-style messaging apps, also through their Guangdong units.
China Unicom has forged a partnership with Tencent, reportedly signing nearly 1 million users during the its first month of operation. Packages vary, but a typical one provides 500MB of free data in addition to the regular 800MB allowance for 96 yuan (US$15.68) a month. One of its attractions is the ability to sign up without having to be a Unicom customer.
China Telecom's Yichat (Yixin in Chinese), the result of a joint venture with Netease, offers almost exactly the same features. Its big selling point is that users can send messages to subscribers on all networks at no extra cost.
These weren't the first such deals in Asia/Pacific. Hong Kong operator Hutchison has been offering a WeChat bundle for the past 12 months. That includes a local package for around HK$1 with no limits on WeChat-related data, and a roaming bundle for HK$48 (US$6.19) a day. PCCW Mobile has teamed up with WeChat to provide a local all-you-can-eat service also for HK$1 a month. Neither company will disclose the level of takeup or use.
For the Internet players, these deals are an opportunity to target the huge mobile customer base, as the country is rapidly buying smartphones and preparing to migrate to 4G.
But their strategies differ. Netease is taking a cut of the Yichat business, while Tencent, which has also forged relationships with PT Telekomunikasi Selular (Telkomsel) and PT XL Axiata in Indonesia, says it does not share revenue in any of its operator partnerships.
"We do not have revenue sharing from subscription fee or data charge. We believe that our focus is to keep improving user experience," it said in an emailed statement.
Tencent is right now China's hottest Internet stock, with a market value of around US$100 billion and ambitions to expand beyond China. A third of its 300 million users are non-Chinese.
The OTT experiment
For the operators, analysts see the OTT services as more experimental than as commercial ventures. One IT analyst in China, who declined to be identified, describes the services as typical moves by monopolists: putting resources into a new product with the aim of learning about it, and then either moving into the market or persuading the regulator to block it.
Bryan Wang, a principal analyst for Forrester Research Inc. in China, says the partnerships are "very basic collaborations. Operators have been thinking about other forms of partnerships," including those that would strengthen their positions in "content such as video and gaming," he said in an email.
"But they want to learn from these early trials and see how they can extend partnerships with OTTs in the future, in terms of revenue models [and] value propositions for telcos (either focusing on attracting new subscribers, reduce churn, or new revenue opportunities)," he added.
One commentator on the Sina website, Yong Zhong Wei, caustically contrasted China's static telecom market with the innovation and M&A activity in Europe and North America. "China is a market with some policies limiting the development of a VoIP service market, yet VoIP hasn't defeated European and American operators," he wrote. "OTT services haven't struck them down either. But in China, VoIP and OTT are regarded by operators as a scourge."
— Robert Clark, contributing editor, special to Light Reading