China’s oligopolistic state-controlled wireless industry could become a lot more competitive in the coming years. The country’s Ministry of Industry and Information (MIIT) seems to have finally taken the decision to let domestic companies operate as mobile virtual network operators, or MVNOs, on home soil. A MVNO is a third-party service provider which leases network access from an existing wireless carrier and resells the service under its own brand. The decision to let MVNOs operate for a trial period of two years was reached after considering public inputs on the plan, which mandates that existing wireless carriers, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), provide access to their network infrastructure at fair and reasonable prices to at least two MVNOs each. Multiple media reports have claimed that MVNOs could be given the go-ahead to start operations as soon as May. 
If true, the ministry’s move can be seen as a way of shaking things up in an industry that currently has only three players operating, with one (China Mobile) controlling almost two-thirds of the market. With 3G penetration still in the low-20s and China looking to drive data demand, adding MVNOs to the mobile market will definitely offer consumers more choice and incentivize them to switch to 3G. It will also offer the smaller wireless carriers an opportunity to attract more subscribers to their underused networks and recoup their huge CapEx costs through network access fees. China Mobile will feel most threatened by this and will therefore be watching the MVNO space very closely in the coming years.
MVNOs have not been very successful
However, while the ministry’s decision will undoubtedly encourage competition, the MVNO business model has had limited success globally and it is difficult to see why the scenario would play out any different in China. In the U.S., for example, there are quite a few MVNOs such as TracFone, Republic Wireless, FreedomPop and Ting, but the top three wireless carriers still control almost three-fourths of the market. MVNOs account for only about 10% of the U.S. wireless subscriber base despite being around for over a decade now. It is therefore tough to wager that the Chinese market will be disrupted any faster considering that the incumbent Chinese carriers will try their best to ward off competition from the new upstarts. But allowing MVNOs access to their wireless networks does leave the incumbent carriers open to more government regulation in the future.
Therefore, in order to meet the two-MVNO-per-carrier mandate, the three wireless carriers may just look to bring in companies that are reliant on the carriers themselves and would therefore not risk that relationship. For example, the carriers could choose some of the major local electronic retailers who already sell handsets for the mobile operators as MVNO partners. In such a scenario, the risk of serious competition is minimized.
OTT players could find support from smaller carriers
Where the carriers will be truly challenged is in countering the threat from over-the-top (OTT) players such as messaging service provider Tencent and web giant Baidu, both of which have grounds for MVNO aspirations.  OTT players use the Internet to provide end users with services and content such as audio and video – which are outside the control of broadband service providers. Launching an MVNO will not only help these OTT players monetize their currently free services through subscriber fees but also diversify their revenue streams away from the highly competitive ad business. It will also give them a chance to guarantee quality of service and start charging for premium services since being an MVNO gives them some amount of control over the network.
Proliferation of OTT services is a big threat to the carriers since these services are not only eating away at the carriers’ high-margin messaging revenues but also endangering their voice business. Embracing such players as MVNOs will therefore give the carriers some pause. However, since the OTT services have become widely popular is a short period of time, it may not be a bad idea for the smaller carriers to try to differentiate from the industry behemoth China Mobile by partnering with OTT players and leveraging their popularity. China Mobile, being a market giant, has the resources to invest in the content business with its wireless music base doing well and rumors of an in-the-works mobile instant-messaging app, Fetion, doing the rounds. If MVNOs are allowed to enter the market, the other wireless carriers, China Unicom and China Telecom, could also partake in the growing demand for content, especially video, by allowing OTT players to lease their network for MVNO purposes.
However, partnering with MVNOs will pressurize ARPUs since the carriers will only get a cut of subscriber fees, with MVNOs pocketing the rest. If we look at Sprint, which is the most friendly of the top three when it comes to MVNO partnerships in the U.S., wholesale ARPUs are almost a fifth of the average retail ARPUs. Since the Chinese government will prevent any restrictive network lease pricing on part of the carriers, there will be little pricing upside to the carriers if MVNOs proliferate. Therefore, while the carriers may eventually warm up to MVNOs as subscriber growth decelerates and content becomes an important differentiating factor, the same is likely to not happen any time soon.Notes:
- Private firms may provide mobile services directly, ShanghaiDaily.com [↩]
- Green light for MVNOs opens Chinese mobile market for OTT giants, Informa [↩]