TELECOMS – Broadband To Open To Private Competition

Bottom line: China’s plan to allow private competition in the wire-line broadband sector will move forward slowly, but should provide needed competition for Unicom and China Telecom within the next 3-5 years. 

China opens broadband to private investment

China’s drive to open up its telecoms services sector to more competition could soon gain some new momentum, with word that the telecoms regulator is crafting a plan that would let private companies offer wire-line broadband services. This particular move looks like an extension of a campaign that launched earlier this year, allowing private companies to offer traditional mobile service through the creation of virtual network operators (VNOs).

This new campaign would also come as China works to break the current monopoly in the wire-line broadband sector held by China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (NYSE: CHU; NYSE: CHA), which previously were probed for monopolistic practices. It would also come as Beijing assembles a new national wire-line broadband company through consolidation of the nation’s dozens of cable TV operators.

This latest development looks particularly exciting because it would finally offer consumers and businesses an alternative to China Telecom and Unicom for their wire-line broadband services. In reality, most people in China have only one choice for such service since China Telecom and Unicom don’t compete directly in most markets. The result is that these 2 state-run behemoths have little incentive to improve their broadband services or offer lower pricing plans, even though both promised to do so after an anti-monopoly probe 2 years ago.

According to the latest headlines, the Ministry of Industry and Information Technology (MIIT), China’s telecoms regulator, has formally announced its intent to open the wire-line broadband sector to private competition and will soon start to seek public comment on the matter. (English article) The program will initially be limited to a group of trial cities including Shanghai, Nanjing and Qingdao. It will also have a relatively long testing period of 3 years, reflecting the MIIT’s conservative approach to this kind of matter.

The program would allow private companies to engage in an array of activities, from building new wire-line networks to simply leasing capacity from existing network operators like China Telecom and Unicom. That’s significantly different from the earlier VNO program, which has seen more than 30 companies licensed to offer mobile service since it launched at the start of this year. VNO operators can offer service under their own brands, but they can’t actually own any network infrastructure and instead must lease capacity from one of the big 3 existing state-run telcos.

The regulator seems to be easing its restriction on the sensitive issue of network ownership with this new broadband liberalization. It’s a bit unclear just how much infrastructure it will allow private companies to build, and one report is speculating that new operators will only be allowed to build supporting infrastructure while still relying on the big state-run telcos for most of their network capacity.

In this instance I have to commend the MIIT, as it looks like it has learned some important lessons from the VNO program and is trying to apply them to this new broadband liberalization effort. This latest program is probably designed at least partly to give some business to the new national cable TV operator, whose formation through a consolidation of regional companies is happening much slower than many originally hoped.

It’s just slightly frustrating that the MIIT is being so conservative in its timing for the program. But that said, its decision to focus initially on several key cities looks like a logical first step for such a major program, and I do expect we could start to see some new services become available in cities like Shanghai as soon as the end of next year. The move probably won’t have much impact on Unicom and China Telecom in the near-term, but it could ultimately inject some needed competition into the market over the next 3-5 years.

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