TELECOMS: China Mobile, Alibaba Take Hit in Phone Fraud Fight

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Bottom line: China Mobile and its peers could take a big hit to their voice call revenues as they roll-out anti-fraud systems to counter negative publicity, while Alibaba could suffer similar but smaller impact to its pre-paid phone card business.

China Mobile cracks down on phone conmen

The same week it officially lost its crown as China’s most valuable listed company, China Mobile (HKEx: 941; NYSE: CHL) is back in the headlines with more bad news related to a swell of publicity involving the nation’s rampant phone fraud. Normally I might dismiss this story, since phone fraud has been common in China for years and is really nothing new. But another similar case this year ended up becoming a huge headache Baidu (Nasdaq: BIDU), and cost the online search giant huge sums in both market value and lost revenue.

This type of “scandal”, which is also having a smaller impact on other companies like e-commerce giant Alibaba (NYSE: BABA), is quite typical but also relatively unique to China. Such scandals typically involve unscrupulous business practices that are well known and tolerated for years. But then the issue suddenly snowballs into a scandal when an individual case goes viral on the Internet and invokes public outrage.

The phenomenon behind this latest scandal is phone fraud, which has been a problem in China for more than a decade. What’s more, many accuse China Mobile and its 2 peers, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), of passively allowing the problem to persist and grow to protect the big revenue they get from fraud calls and scam text messages.

The case was similar with Baidu earlier this year, when it found itself embroiled in a scandal involving misleading high placement of paid results in its core search business. Baidu had engaged for years in the practice, which was widely known to Internet watchers. But then the public suddenly became outraged when one particular case gained national attention involving a young man who lost his life partly due to misleading search results.

Something similar seems to be happening now with phone scams, which have been common in China for years and typically see fraudsters bilk people out of their money by posing as officials over the phone and through text messages. Two recent cases seem to be fueling the latest public outrage, one involving a poverty-stricken student who was defrauded of her college tuition, and the other involving a college professor who was duped out of millions of yuan.

Fraud Alerts

Now China Mobile is finally taking action by doing something it could have done long ago, with word that it has rolled out a phone fraud alarm system in Inner Mongolia, one of China’s most thinly populated regions with just 25 million people. (Chinese article) Despite those small numbers, media reports are saying the fraud system sent out a staggering 400 million warnings in its initial weeks, equivalent to about 23 million per day.

Obviously not all those warnings are for scams, and many are probably simply pesky sales calls that are more nuisance than dangerous. Other reports say that Alibaba has also announced it will stop the sale of all prepaid phone cards on its popular Taobao platform. (Chinese article) Such cards usually don’t require the buyer to give his or her real name, and thus they’re often used by fraudsters who desire such anonymity.

This isn’t the first time China Mobile or Alibaba has landed at the middle of this kind of conflict. China Mobile previously got in a high-profile tussle with Tencent (HKEx: 700) when the former began losing SMS traffic to the latter’s wildly popular WeChat. Alibaba also profited for years from massive trafficking in pirated goods on its popular e-commerce platforms, before the problem was finally “exposed” last year in a government report.

The bottom line is that China Mobile and its 2 peers may finally be forced to crack down on phone fraudsters and unwanted sales calls, in a move that’s long overdue. If the Inner Mongolia numbers are reliable, that could cost the telcos billions of yuan in lost revenue if people refuse to answer calls each time they receive a warning. Alibaba will also probably lose some revenue from the ban on prepaid card sales on its Taobao mall, though the impact will probably be relatively minor.

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