IPTV Gets Boost, VNOs Coming Soon

SMG’s BesTV links with CCTV in IPTV tie-up

China’s sluggish media and telecoms sectors are getting a couple of new boosts from different directions, as part of Beijing’s bid to breathe new life into a space now dominated by slow-moving state-run behemoths. The first of those boosts has one such behemoth, CCTV, in a new joint venture to promote Internet protocol television (IPTV) with Shanghai Media Group (SMG), China’s second largest media company. The second is a bit more incremental, with media reporting that Beijing has just issued a formal pilot plan for setting up the nation’s first batch of virtual network operators (VNO).China has built up state-of-the-art telecoms networks over the last decade, on the correct realization that communications and information sharing will be critical to its future development. Yet despite the huge investment, the range of services offered over those networks are still quite limited, largely due to lack of innovation from big state-owned broadcasters and telcos that own and operate the systems. Against that backdrop, Beijing has been trying to breathe new life into the space by encouraging more participation by private sector and entrepreneurial state-run companies.

All of that said, let’s take a look at the newest IPTV development, which will see CCTV and SMG form a joint venture between their respective IPTV arms, CNTV and BestTV (Shanghai: 600637). (English article) CCTV will own 55 percent of the venture, while SMG will hold the remainder. Investors certainly seemed to like the deal, with BesTV shares rallying 16 percent in the last 2 days on the news.

I also think this looks like a relatively good partnership, as it will bring together a stodgy but well connected CCTV with the more entrepreneurial SMG to develop an area full of potential. IPTV essentially allow customers to use the broadband networks they normally use to surf the Internet to watch TV or other video streaming products.

In this case, CCTV operates China’s only national Internet-based TV station, which will become the central platform for the new joint venture. Despite its state ownership, SMG is a much more entrepreneurial company that has also tried to develop IPTV through its BesTV unit. But it has seen little success so far because it is largely limited to its home Shanghai market. Thus this new pairing could bring some of SMG’s innovative spirit to CCTV’s connections to create a strong product with a national audience.

From IPTV, let’s look quickly at the latest reports that say China’s telecoms regulator, the Ministry of Industry and Information Technology (MIIT), should issue VNO licenses by October. (Chinese article) The reports cite analysts making the prediction, based on the MIIT’s issuing of guidelines over the weekend for a highly anticipated pilot VNO program. VNOs are already quite common outside China, allowing companies to set up telecoms carriers and Internet service providers by leasing capacity from existing networking operators. That approach allows such VNOs to quickly enter the business by avoiding the huge expense of building and operating their own networks.

As I’ve said above, this latest news is really incremental since the MIIT has been talking about the VNO plan since late last year. Previous reports have indicated that the pilot program will see each of China’s 3 major telcos paired with 2 new VNO licensees. That means we should theoretically see 6 new VNOs by the end of this year if everything goes according to the plan.

Another report indicates that candidates under the pilot VNO program will all be domestic firms, with strict limitations on foreign ownership. That could severely limit participation by Chinese Internet giants like Tencent (HKEx: 700), Baidu (Nasdaq: BIDU) and Alibaba, since most have big foreign ownership either through their overseas public listings or investments by other foreign entities, one of the reports points out. (Chinese article)

Such a restriction would indeed be slightly disappointing, since these Internet firms are some of China’s more innovative companies in the media and telecoms space. Still, the entry of any new players to compete with the big state-run firms should come as a welcome breath of new life into the sector. Accordingly, I’d expect to see more competition and interesting new products coming into the market next year as both the IPTV and VNO plans move forward.

Bottom line: A new joint IPTV joint venture between SMG and CCTV and the issue of new VNO guidelines should help to boost China’s underutilized telecoms networks.

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