Telecoms: VNO Licenses, More Corruption
A couple of interesting news bits are in the headlines from the telecoms sector, led by word that the regulator could issue a highly anticipated plan later this month that would pave the way for formation of virtual network operators or VNOs. At the same time, leading wireless carrier China Mobile (HKEx: 941) is also in the news with reports that one of its top officials is under investigation for corruption, in the latest of a series of similar investigations of executives from the nation’s 3 major telcos. The biggest themes in these news bits is the lack of competition that has stifled development of China’s telecoms services industry, which has been dominated by massive state-run firms since Beijing began upgrading the sector in the 1990s. That kind of quasi-monopoly status has led not only to lack of innovation, but also the kinds of systemic corruption that has dogged China Mobile and its 2 rivals, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHL). After all, when you have little or no competition its easy to become corrupt, since anyone who wants telecoms service must come to you.
All that said, let’s take a look at the first major news bit, which has Beijing trying to breathe new life into the telecoms sector by licensing a new group of VNOs. Such operators would offer telecoms services under their own brands; but they would lease actual network capacity from China’s 3 existing telcos, which have spent billions of dollars over the past decade to build out their vast national networks.
Reports that the Ministry of Industry and Information Technology (MIIT) would introduce a VNO liberalization plan first emerged late last year (previous post), and a slow but steady trickle of updates have come out since then. In the latest of those, media are reporting that the MIIT could issue its draft VNO plan as soon as this month, and that some 60 companies have already expressed an interest in applying for licenses. (Chinese article)
According to some of the previous reports, the MIIT’s plan would begin with a pilot program that would see each of the country’s 3 current telcos sign deals with 2 new VNO licensees. Names that have appeared in media reports as potentially interested licensees include Internet giant Tencent (HKEx: 700) and Citic Telecom (HKEx: 1883), though Tencent has publicly said it isn’t interested in applying for a license.
From my perspective, this plan looks like a good one and the MIIT should work hard to make sure it moves ahead in a timely fashion so the first VNOs can launch service by the end of this year. Selection of licensees for the pilot program will be critical, as only a limited field of companies have the background and resources to mount serious challenges to the big 3 state telcos.
I would expect to see at least 2 major Internet companies among the final field of license recipients, and perhaps 1 or 2 cellphone makers. Big banks and insurers could also be potential candidates, since many already have experience operating large national networks to serve their consumer and business customers.
From the VNO plan, let’s look quickly at the latest corruption scandal at China Mobile, which has media reporting the company’s Guangdong general manager Li Xinze was detained on April 27. The reports note that it’s still not clear why Li was detained, though speculation is rampant that the move is related to corruption allegations. The reports say that 2 other China Mobile officials from Guangdong were also recently detained.
Li’s detention follows the equally high-profile downfall of a former China Mobile top executive Zhang Chunjiang on corruption charges in 2010. These kinds of corruption cases aren’t all that surprising at a company of China Mobile’s size, especially since the company is the industry’s dominant mobile carrier with around two-thirds of the market. The new VNO plan should help to bring some new competition into the market over the longer term, though it’s unlikely to stop the corruption at the big 3 telcos anytime soon.
Bottom line: The MIIT’s release of a VNO plan could bring new competition to the telecoms space as soon as year end, helping to energize the sector.
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