VNO, Number Portability Programs Limp Ahead

China telcos obstruct competition

Two news stories in the telecoms space reflect the obstructionist role that the country’s big 3 telcos often play when it comes to boosting competition in their tightly regulated sector. The first story involves moves by the regulator to revive its sputtering program to juice up the sector with competitive products offered by dozens of recently licensed virtual network operators (VNOs). The second story involves the glacially slow progress in “number portability” — a years-old initiative that would encourage more competition by allowing consumers to keep their old mobile phone numbers when changing carriers.

I’ve written about both of these stories in the past, and had particularly high hopes for the VNO initiative when it was first discussed more than a year ago. Under the initiative, the Ministry of Industry and Information Technology (MIIT) has licensed 2 dozen private companies to offer telecoms services that compete directly with those currently provided by the big 3 state-owned trio of China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (NYSE: 728; NYSE: CHA). But unlike the big 3 telcos, these new VNOs don’t own any actual infrastructure and instead simply lease network capacity from the state-run carriers.

That arrangement was destined to create problems, since the MIIT simply told the new VNO operators to directly negotiate their own leasing deals with any of the 3 telcos. That meant the telcos could charge whatever they wanted, and offered little or no flexibility in leasing rates to reflect their own changing costs and new pricing plans.

Now media are reporting that 6 of the new VNOs, some of which began operations this spring, have signed new amended agreements that make their network leasing rates more flexible to reflect changes in the market. (Chinese article) That move seems to reflect the fact that all 3 of the state-run telcos have recently rolled out steeply discounted plans to attract customers to their new 4G services. Those discounts have drawn big complaints from the VNOs, which said they were locked into high, inflexible leasing rates negotiated in the pre-4G era, making it impossible for them to profitably offer competitive products.

Many of us previously predicted this kind of problem would occur, and I do have to commend the MIIT for taking this step to breathe new life into the VNO program. But that said, I’m also quite familiar with how these big 3 telcos do business, and am fairly certain the trio will make other obstructionist moves to make sure the new VNOs can never become a competitive threat.

Meantime, other media are reporting that China’s years-old “number portability” trial program has moved into a new phase, with word that China Mobile has officially extended its own program into 5 provinces. (Chinese article) The concept behind number portability is quite simple. It says that such portability boosts competition in the market by allowing consumers to keep their same phone numbers even when they switch carriers. The current inability to keep their old numbers often makes many consumers reluctant to change their carrier, even though many may want to do so.

Number portability is already common in most developed markets and has been around for nearly 2 decades. China only began experimenting with the process, which isn’t very technologically complex, about 5 or 6 years ago and progress has been glacially slow since then. (previous post) I have little doubt that the snail’s pace of progress is the result of foot-dragging and other obstuctionism by the big telcos. I would expect them to continue such practices to stifle competition for at least the next 5 years, despite all the MIIT’s efforts to liberalize the market.

Bottom line: A new effort to revive struggling VNOs looks commendable but is likely to fail due to obstructionism by the big state-run telcos, which are intent on squashing any regulatory efforts at promoting new competition.

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