TELECOMS – VNOs Show New Signs Of Life

Bottom line: After a slow start, China’s VNO program is picking up momentum, with new operators poised to sign up a collective 50 million in total subscribers as soon as the middle of next year.

VNOs gain momentum

After a decidedly slow start in their first half year of life, China’s young crop of virtual network operators (VNOs) are starting to show some new signs of momentum, including a boost with the new awards of licenses to leading online video site Youku Tudou (NYSE: YOKU) and fast-rising smartphone maker Xiaomi. The VNO program is part of Beijing’s efforts to breathe new life into the telecoms services sector by opening it up to new private operators that can compete with the big 3 state-run telcos. But the program has been plagued with glitches since the first new services launched in the spring, with the result that progress has been slower than expected.

The program is still limping along to some extent, but media are reporting the group has achieved a somewhat significant milestone by officially surpassing the 1 million mark in total subscribers. (Chinese article) Of course it’s worth pointing out that the telecoms regulator, the Ministry of Industry and Information Technology, had previously set a far more ambitious target for 50 million VNO subscribers by end of this year. Clearly there’s no way that target will be met, but it’s still quite possible we could see 2-3 million VNO accounts by the end of 2014.

The latest news on the VNO front saw Youku Tudou and Xiaomi each receive VNO licenses late last week, in the 4th round of new license awards that began early this year. (Chinese article) Eight companies received licenses in that round, bringing the total number of companies allowed to offer VNO services to more than 30. Other major firms to receive licenses include e-commerce giants Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD) and electronics retailer Suning (Shenzhen: 002024).

VNO license holders can offer mobile service under their own brand names, which can compete directly with services currently offered by the nation’s big 3 telcos, China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 763; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA). But the VNOs aren’t allowed to build their own networks, and instead must lease capacity from any of the big 3 telcos.

The latest reports cite an anonymous industry source saying the total number of VNO subscribers now stands at about 1.2 million, and the biggest individual operators now have anywhere from 180,000 to 200,000 users. Among the big 3 telcos, Unicom appears to be the best partner so far, accounting for some 800,000 of the total VNO subscribers, or two-thirds of the total.

I’m not usually a big fan of Unicom, as I think the company isn’t very well managed. But in this case I have to commend it for its cooperative stance to implementing the VNO program. That stance is at least partly self-serving, since the VNOs will provide Unicom with an easy source of new income in the years ahead.

The latest reports point out that VNO operators are probably less interested in earning profits initially, and are more interested in using telecoms services to lure new customers for their parent companies’ core business. Thus names like Alibaba and JD.com are probably losing money on their mobile calling plans, and instead are trying to use those plans to get more people to use their core e-commerce services.

The VNO program was initially plagued with problems, led by a rigid pricing structure that made it difficult for new operators to offer competitive products. But the regulator has taken steps to address some of those issues, and new operators have also shown they will move aggressively to offer new products even if they can’t find profits in the short-term. If those current trends continue, we could see the program pick up a bit of momentum next year, and perhaps even reach the 50 million target by mid 2015.

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