Regulator Vigilance Needed As More VNOs Launch

Suning launches VNO

After more than a year of preparation, China’s newly licensed virtual network operators (VNOs) began launching mobile service last week, as part of Beijing’s drive to invigorate the stodgy telecoms services sector long dominated by 3 state-run carriers. The launch of VNOs by e-commerce giant JD.com and leading electronics chain Suning (Shenzhen: 002024) both look well-conceived by targeting specific groups of consumers who are both relatively affluent and big users of mobile services.
JD and Suning also have deep financial resources and their own national business networks, which should give their new services the support they need for success. The main obstacles they might face are excessive regulation and potential sabotage by the big 3 state-run carriers. Accordingly, the Ministry of Industry and Information Technology (MIIT), which regulates the sector, should watch the situation carefully to prevent either outcome from happening.

VNOs look like regular mobile carriers to consumers, offering service under their own brands with pricing plans like those from the current 3 carriers, China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NSYE: CHA). But unlike the big-state run companies, the new VNOs won’t actually own any telecoms infrastructure and instead will lease network capacity from the big 3 carriers.

The new VNOs also differ from the 3 existing carriers because nearly all are run by private companies that are more market oriented and profit driven. Their introduction is part of a broader drive by Beijing to open up sectors that were traditionally dominated by state-run companies, such as telecoms, banking and energy, to private investment that could foster more innovation and competition.

After more than a year of preparation, the MIIT formally began designating new VNO operators last December, and to date has licensed 19 companies to offer service. Some of China’s biggest private companies are among the new licensees, including the trio of traditional and Internet retailing giants Alibaba, JD.com and Suning.

Last week, JD was the first of the major licensees to announce a formal launch of its service, to be called JD Mobile. (previous post) Pricing was similar to plans currently offered from the big 3 telcos, including 0.15 yuan per voice minute, 0.15 yuan per megabyte of data and 0.1 yuan for traditional text messages.

But JD’s service differentiated itself by targeting users of its e-commerce services, offering them heavy discounts as a reward for their online shopping. The company offered 1 minute of free voice service and 1 megabyte of data for every 20 yuan spent shopping on its website. That meant anyone who spent 1,000 yuan per month online could get 500 free voice minutes and 500 megabytes of data, or more than enough for the needs of many mobile subscribers.

A day after JD’s announcement, Suning rolled out its own service in a branding partnership with the FC Barcelona soccer club, targeting sports fans and physical fitness buffs. (Chinese article) Suning will initially launch its service in the top-tier cities of Beijing, Shanghai and Guangzhou with 18 pricing plans, including ones that offer access to some of the company’s other products such as cloud computing services.

Both the JD and Suning plans look well conceived, targeting groups of customers that are both relatively affluent and likely to use other services offered by each company. But strong early gains for their new services could easily raise the ire of the big 3 state-run carriers, who might worry over losing some of their most lucrative subscribers and create technical obstacles to try and thwart their new challengers.

The carriers would be quite well positioned to erect such obstacles, such as slower or limited coverage, since they control the actual infrastructure that delivers service to new VNO subscribers. China Mobile showed its willingness to use such tactics last year, when it made veiled threats to limit access to its subscribers who used Tencent’s (HKEx: 700) popular WeChat mobile messaging service.

The MIIT itself has also erected a few regulatory obstacles, including the limitation of new VNOs to specific geographical areas and a ban on any infrastructure building by these new operators. While those limitations may be designed to ensure the market’s orderly development, the MIIT should take care not to burden the new VNOs with too many restrictions. It should also be on the watch for obstructionist moves by the big 3 carriers to give the new program the best chances of success.

Bottom line: New VNOs could stand a good chance of success if they target niche audiences, but the regulator needs to be vigilant to prevent sabotage by the big 3 state-run telcos.

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