TELECOMS: Laggard China Telcos Forced to Lower Data Costs

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Bottom line: A new plan allowing customers of China’s 3 telcos to roll over unused data is being forced upon them by Beijing, and once again underscores the regulators’ frustration at their inability to innovate.

Telcos launch data roll-over policy

In the latest signal of just how uncreative China’s big 3 telcos are, the trio have all just simultaneously announced a major new move to boost data usage on their networks by lowering costs for consumers. It will come as no surprise that none of the 3 carriers are taking this step voluntarily, and instead are being forced into the move by the telecoms regulator. But that’s quite common for the uninspired trio of China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 763; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA).

Instead, it’s more interesting to note that this new move may represent the latest signal of Beijing’s growing frustration with a trio of companies that have become global laggards despite having a state-granted monopoly over the world’s largest telecoms market. That frustration could see Beijing soon decide to end the state-run monopoly, in an overhaul that would allow privately funded players into the market and perhaps even see a merger for 2 of the current big 3 telcos.

The latest move will see China Mobile, Unicom and China Telecom all allow subscribers to roll over their unused data minutes each month into the next 2 months. (China Mobile announcment; Chinese article) Thus, for example, if someone gets 100 GB of monthly data on his plan but only uses 80 GB in one particular month, he will have 2 more months to use the remaining 20 GB. The new plan will go into effect on the October 1 National Day holiday.

It’s not too difficult to see why the 3 telcos might not like this plan too much. Data traffic accounts for a growing amount of their business, with revenue from traditional voice and short messaging services contracting. China Mobile is representative of the group, reporting its data revenue rose 24 percent in the first half of the year to 151 billion yuan ($24 billion), accounting for half of its telecoms services revenue. By comparison, its traditional voice services revenue actually fell 16 percent to 139 billion yuan.

I haven’t seen anyone try to quantify the impact of this new data policy, but I expect it will significantly dampen data revenue growth over the short term, perhaps reducing the figure by up to 10 percentage points. While this new roll-over policy won’t help the telcos’ top or bottom lines immediately, it should ultimately benefit them by encouraging subscribers to use even more data for functions like video and music streaming. It should also encourage innovation by spurring creation of more apps that rely on data streaming.

Love Affair With Status Quo

But China’s telcos don’t think about things like the future, and instead tend to keep their old business models indefinitely until the Ministry of Industry and Information Technology (MIIT) tells them to do otherwise. Fixed-line broadband is a similar example, with China Telecom and Unicom doing little to change or upgrade their systems or service over the last decade under their state-granted monopoly.

The regulator’s growing frustration with the big 3 telcos is becoming increasingly apparent in a number of new pilot programs aimed at bringing more innovative private capital into the sector. The oldest of those is a 2-year-old program allowing private companies to become virtual network operators (VNOs) by offering their own branded mobile and broadband service using network capacity leased from the big 3 telcos. More recently, the MIIT has also said it will launch another program allowing private companies to build their own networking infrastructure.

In yet another sign that a big shake-up could be coming, one analyst last week interpreted a recent leadership shuffle at the big 3 telcos as a sign that the MIIT might be preparing to merge Unicom and China Telecom. (previous post) Such a prediction seems slightly premature since we haven’t seen any other signals yet of such a major move. But a merger of the pair could certainly be under consideration, signaling Beijing’s determination to make China’s telecoms service sector a global leader rather than perpetual follower.

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