Laggard Telcos Blame WeChat For Woes 落后的电信公司将困境归咎于微信
The ongoing showdown between Internet titan Tencent (HKEx: 700) and China’s 3 major wireless carriers has been in the headlines nonstop these last few days, spotlighting the backward state of China’s mobile sector whose monopolization by massive state-run companies has stifled innovation. The original spat began late last year, when dominant mobile carrier China Mobile (HKEx: 941; NYSE: CHL) complained it was losing traditional text messaging business to Tencent’s popular WeChat mobile messaging service. (previous post) WeChat, known in Chinese as Weixin, allows users to send instant messages to each other for free by letting them communicate over the Internet.
Now media are reporting the nation’s other 2 wireless carriers, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), have also started sparring with Tencent over their own similar complaints. The reports say the 3 telcos took their complaints to China’s telecoms regulator, which is now brokering negotiations for potential revenue sharing agreements between the carriers and Tencent. (Chinese article)
Adding to the intrigue, some media reported that Tencent was planning to start charging fees to users of WeChat, which is currently a free service. (Chinese article) But Tencent quickly replied that talk of such fees was only rumors, though it didn’t specifically deny the reports. (English article)
So now that we’ve reviewed all the developments, let’s take a look at what it all means. From my perspective, this kind of conflict never would have happened in a developed market like the US or Western Europe. Competition in those markets is fierce, and wireless carriers are always looking to innovate by developing products and services like WeChat either by themselves or in partnership with private companies.
But China is not the west, and the market is dominated by 3 massive state-run telcos that have a strong track record for late adoption of new technologies and inability to innovate with strong new products. China Mobile actually did form a partnership several years ago with a company called Ultrapower (Shenzhen: 300002), which successfully developed a popular Internet-based short-messaging service called Fetion or Feixing in Chinese. But Fetion was a very basic service, and China Mobile and its 2 rivals failed to develop any new products like WeChat that could take advantage of the many multimedia applications made possible by their 3G high-speed wireless networks.
Somewhat ironically, China Mobile announced its 2012 results on Thursday and cited rapidly climbing mobile Internet use as one of its biggest growth areas. (results announcement) Of course the growing demand for mobile Internet service is being driven by applications like WeChat, meaning companies like Tencent are directly fueling the fast growth for the telcos’ mobile Internet revenue.
So it seems a big hypocritical that the telcos are enjoying a boom in revenue from mobile Internet service, but at the same time are also complaining about companies like Tencent that are fueling that demand. At the end of the day, I suspect the telecoms regulator will side with the telcos, whose Beijing connections are much stronger than Tencent’s. As a result, we will probably see Tencent and probably other popular mobile app makers forced to enter revenue sharing agreements with the telcos. That could end up stifling innovation, and also dampen demand from consumers who may end up having to pay for many of the services they now get for free.
Bottom line: Conflicts like the ongoing clash between China’s telcos and Tencent will end in revenue sharing agreements that will ultimately stifle innovation and dampen consumer demand.
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