After a low-key awarding of licenses last last year, the first batch of new virtual network operator (VNO) mobile carriers are quietly coming into the market this month in a move aimed at shaking up the industry dominated by 3 big state-run telcos. In one of the most anticipated launches, e-commerce giant JD.com has just announced its first mobile packages that show how it plans to compete with the trio of China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA).
Quite simply, JD is targeting its product at shoppers who use its e-commerce services. That’s probably a wise strategy, since the company could never really expect to compete on price with the big 3 telcos, which are aggressively promoting their new 4G services. JD and other VNO operators will offer service under their own brand names, but will lease actual network capacity from the big 3 state-run telcos.
JD’s new approach looks smart, since it currently has a sizable 47 million users. It will also soon have direct access to another 400 million users of Tencent’s (HKEx: 700) popular WeChat mobile messaging service, following a strategic tie-up between the pair in March. (previous post) If JD can covert just a tenth of those users to its mobile service in its first year, that would equate to a sizable subscriber base of around 10 million users.
All that said, let’s take a closer look at the details behind JD’s new VNO service, which is officially being branded as JD Mobile. (English article; Chinese article) Terms for the plan look quite ordinary, with users paying 0.15 yuan per minute for voice, 0.15 yuan per megabyte of data and 0.10 yuan per text message. Those rates are roughly comparable to what the big 3 telcos offer.
But users of JD’s e-commerce services will be able to get special discounts based on their online shopping, much the way that airlines give free trips for frequent flyers. In this case, JD’s e-commerce customers will get 1 minute of free voice service and 1 megabyte of data for every 2 yuan that they spend online. So someone who spends a relatively modest 1,000 yuan per month would get 500 voice minutes and 500 megabytes of data, more than enough for most people’s needs.
One report points out that such offers may only be introductory and may not last for too long if JD really hopes to earn a profit from the mobile service. But I would argue that JD may not really care if the service is profitable if it can significantly boost traffic for its core e-commerce products. Such loss-leading products are quite common in the west, and can last indefinitely as long as they create big new business opportunities for the company.
We’ll have to wait and see what other licensees do, but I expect we may see a similar strategy from e-commerce leader Alibaba, which was also one of the first companies to win a VNO license. We’ll also have to see how a wide range of restrictions affects new licensees, including limits on their geographical range and their ability to build infrastructure. The regulator has said it is aiming for about 50 million VNO users by the end of this year. (previous post)
I previously said the regulator’s target looked a bit modest, but perhaps it’s more realistic due to the newness of these services and other limitations. I doubt the big 3 telcos will need to worry too much about the new VNO challenge this year. But it’s quite possible we could start to see the VNOs start to steal higher-end customers from the traditional telcos, since e-commerce shoppers tend to be better educated than average consumers.
Bottom line: JD.com’s strategy of targeting its new VNO service at online shoppers looks like a smart way to quickly build the business while boosting revenue for its core e-commerce business.