China’s Ministry of Industry and Information Technology has announced a draft proposal to allow mobile virtual network operator (MVNOs) to operate in Mainland China. This could be a potential game changer for the Chinese wireless market which has so far experienced a triopoly among China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA). The world’s largest wireless market will now experience increased competition for an estimated 1.1 billion users, that is only expected to grow.
What is MVNO?
A mobile virtual network operator is one who buys bandwidth in bulk from an existing carrier and then uses it to run its own carrier service. According to MVNO Directory in October 2012, there were 603 active operations owned by 503 companies. MVNO is an extremely popular and fast growing segment in the wireless industry. TheU.S. has over 40 voice and data mobile virtual network operators, and governments around the world tend to favor this model to break the stronghold and lower the barriers to entry in a capital intensive sector.
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Why Would China Want To Undermine State Controlled Corporations?
Allowing MVNO is a strategic move on China’s part to increase market competition. According to a story in Hong Kong based South China Morning Post,  this will position premier-in-waiting Mr. Li Keqiang, who is considered as reform-minded, to push forward with such policies. However, we feel this policy will benefit state-owned Chinese companies (China Mobile, China Unicom and China Telecom), as they can pass on users in non lucrative provinces to these new operators while benefiting from huge margins that wholesalers enjoy. Among the three operators, China Mobile with 707+ million users (as of Nov, 2012), will significantly benefit as it can afford to sell bandwidth in non lucrative circles while retaining its market share. This would allow China Mobile to stem its declining margins and potentially allow it to move overseas through MVNO.
Who Will Benefit From This?
China Telecom will benefit from this new policy as it expands its international presence through the MVNO route. At present it operates in the U.K. and has plans to move to France and other European nations from this year. Its U.K. launch named CTEcelbiz, has been popular among Chinese residents and tourists. (See China Telecom Launches U.K. Mobile Venture To Diversify Business) We feel China Telecom will be able to replicate this success in other markets. This new policy will allow to stem any criticism regarding trade practices in these local markets, thus allowing China Telecom to aggressively expand in European markets with large ethnic Chinese population.
We feel the next big push for China Telecom is the United States as over 2.5 million Chinese-Americans and a large number of non-English speakers will benefit from China Telecom’s current MVNO strategy of providing services in Chinese languages. This group of potential customers are concentrated in New York and San Francisco, where MVNO models already exist and have proven to be popular. Any opposition to China Telecom from U.S. policy makers would be moot, as U.S. companies are likely to take this opportunity to enter into mainland China. (See China Telecom to Enter U.S. Wireless Market in 2012)
When Can We Expect This To Happen?
According to the Ministry of Industry and Information Technology, it is inviting public feedback through February 6th. We believe this initiative will be pushed through and approved by mid-2013. This policy will boost the new administration’s credentials as pro-reform while allowing state-controlled telecom companies to benefit domestically and internationally.Notes:
- Mainland to open up telecoms market to local private sector, South China Morning Post, 10th January 2013 [↩]