TELECOMS: VNOs Show Slow, Steady Momentum
Bottom line: After a slow start, China’s VNO program is showing signs of starting to gain momentum and could start to pose a meaningful challenge to the country’s big 3 mobile carriers by the end of next year.
China telecoms regulator has just released some new data on the country’s virtual network operator (VNO) program a year after the first service launched, aimed at providing some competition for the country’s big 3 state-run telcos. While some observers are saying they’re disappointed at the data that shows China had 8.2 million VNO subscribers at the end of last month, I would actually take a contrarian view and say I find the figures somewhat encouraging.
Frankly speaking, I wasn’t at all confident that the VNO program would attract many subscribers at all. That’s because the program relied on cooperation from China’s big 3 telcos, which were required to sell capacity on their networks to these virtual operators, who would then sell service under their own brand names. The big and obvious problem lies in conflict of interest, since the big state-run telcos would hardly want to support these private companies that could quickly become major new competitors.
But contrary to expectation, at least one of the 3 telcos, China Unicom (HKEx: 762; NYSE: CHU), seems to have embraced the program and is giving its VNO partners the network capacity they need at reasonable prices. I suspect the Ministry of Industry and Information Technology (MIIT) is also pushing strongly for the other 2 big carriers, China Mobile (HKEx: 941; NYSE: CHL) and China Telecom (HKEx: 728; NYSE: CHA) to play the VNO game, which is helping the program gain some momentum.
In another act to pressure the big telcos to cooperate with the program, the MIIT also announced in May it would let the VNOs and other private companies build their own network infrastructure. That move ended a decades-old monopoly held by the big state-run companies, and could potentially threaten the billions of dollars they have spent in recent years to build state-of-the-art 3G and 4G telecoms networks.
The latest report contains the headline figure of 8.2 million total VNO customers at the end of July, representing just a tiny fraction of the 1.3 billion total mobile subscribers in China. (Chinese article) The MIIT awarded 42 VNO licenses in several batches last year, and recipients included many of the country’s biggest retailers and e-commerce names like Alibaba (NYSE: BABA), JD.com (Nasdaq: JD) and Suning (Shenzhen: 002024).
Becoming More Aggressive
The current total would average to just 200,000 subscribers for each VNO licensee, but clearly some of the companies are being more aggressive than others. The report points out that one VNO called Snail Mobile already has nearly 3 million subscribers, or more than a third of the total, and is ramping up its operations with a target of 10 million users over the next few months.
The report also points out that none of the companies is currently on track to meet their previously announced targets. But that’s not unexpected for young Chinese companies that tend to be overly bullish with this kind of new business. The fact of the matter is that any new business takes time to work out early issues, both technological and financial, and the ground-breaking nature of this particular program meant that many such issues were inevitably likely to occur.
The MIIT had initially said it aimed to have about 50 million VNO subscribers by the end of this year — a figure that I called quite modest when it was announced back in early 2014. (previous post) The regulator was probably being quite conservative, knowing the program would need some time to gain traction and work out problems, including resistance from the big telcos.
I was previously quite skeptical of the VNO program, mostly because I thought the big telcos would try to sabotage it to avoid new private sector competition. But China’s regulator seemed quite determined to make the program work, and many of the new VNOs are also quite cash-rich and equally determined to develop the business. We’ll have to wait and see how things go from here, but based on current trends I wouldn’t be surprised to see VNO subscriber growth start to accelerating sharply and possibly even reach the 50 million target by the end of this year.
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