Regulator Backs Down On WeChat

MIIT steps out of WeChat debate

In what looks like a major development in the ongoing feud between China Mobile (HKEx: 941; NYSE: CHL) and Tencent (HKEx: 700) over the latter’s popular WeChat service, China’s telecoms regulator has said it will no longer play the role of mediator in the issue and instead will let the market resolve the matter. I have to commend the Ministry of Information and Industry Technology (MIIT) for its decision, as I’ve previously said a regulator’s job is to maintain order in the industry and not to get involved in commercial disputes. This interesting turn of events could also signal that China Mobile itself may be preparing to back down in this case, following widespread criticism that it’s trying to blame others like Tencent for its own lackluster performance.The latest media reports cite Zhang Feng, who heads the MIIT’s communications development department, saying the ministry will no longer play any role in resolving the dispute, which began late last year. (Chinese article) China Mobile is unhappy because many of its subscribers are heavy users of WeChat, a free Internet-based mobile messaging product. China Mobile argues that heavy WeChat use puts a heavy burden on its network, and that therefore Tencent should charge for the service and share the revenue.

China Mobile used its industry clout to convince the MIIT to step in to mediate the dispute, and the regulator in turn also dragged the nation’s other 2 telcos, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), into the discussions. The MIIT openly talked about the dispute, and appeared to favor China Mobile in the matter. At one an MIIT official was even quoted  saying it was “inevitable” that Tencent would charge fees for WeChat, even as Tencent publicly insisted the service would remain free.

Now it appears that either public pressure or perhaps intervention by higher officials has made the MIIT change its stance and exit from any role in resolving the dispute. Furthermore, the MIIT has also backed down from its previous assertion that fees were inevitable for WeChat, known in Chinese as Weixin. The ministry now says the decision on whether to charge fees is a commercial one, and Tencent has the right to decide for itself how it wants to proceed.

From my perspective, the MIIT’s latest decision is not only a good one for business, but is also good for the ministry’s own reputation. By mediating the dispute and appearing to favor China Mobile, the MIIT was hurting its own image as an impartial overseer of the telecoms sector. Its new move to the sidelines will help to restore some of its credibility, though many will still believe the ministry is biased towards the nation’s 3 big state-run telcos, especially China Mobile.

This latest development could also hint that China Mobile itself is preparing to back down in the dispute and will stop pressuring Tencent to charge fees for WeChat. China Mobile already counts mobile Internet service as one of its fastest growing revenue sources, and just reported its mobile data revenue rose 15 percent in the first quarter. (previous post) Much of the exploding demand for mobile Internet service is coming from popular apps like WeChat; so it seems a bit hypocritical for China Mobile to benefit from additional demand for data services created by WeChat, but also to criticize WeChat for using too much of its network capacity.

At the end of the day, China Mobile should quietly let this dispute disappear and try to develop a more constructive relationship with Tencent that could potentially evolve into a friendly revenue-sharing deal in the future. In the meantime, China Mobile could also try to develop its own popular apps to compete with WeChat, and signaled earlier this month it may be getting ready to try that route through an overhaul of its own rival service called Fetion.

Bottom line: The MIIT’s withdrawal from mediating a dispute between Tencent and China Mobile over WeChat signals the regulator plans to let the market resolve the matter.

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