People like myself who were holding out big hopes for a new crop of private firms challenging the three big state telcos will be disappointed to learn that the group of virtual network operators (VNOs) are off to a glacially slow start, boding poorly for the program.
It’s obviously way too early to call the program a failure, since it’s only three months since the first private VNOs were launched.
To consumers these VNOs look the same and offer similar services to the three existing state-run telcos. But the VNOs don’t actually own any telecoms networks, and instead must lease network capacity from the traditional carriers.
Since the VNOs started offering their services, they’ve attracted a meager 200,000 subscribers, according to the latest reports. A wide range of well-funded companies were among the first licensees, including the likes of electronics retailing giants Gome (00493.HK) and Suning (002024.CN), as well as JD.com (JD.US), China’s second largest e-commerce company.
The latest figures appear to be coming from the telecoms regulator, the Ministry of Industry and Information Technology (MIIT), with an unnamed official citing extra “caution” by the three telcos for the slow progress so far.
To me, that looks like a polite way of blaming the trio of China Mobile (00941.HK, CHL.US), China Unicom (00762.HK, CHU.US) and China Telecom (00728.HK, CHA.US) for the slow start.
The official cited Unicom as an example of the extreme caution being exercised by the telcos. He said Unicom has officially opened 64 of its various provincial and metropolitan networks to its VNO partners.
But the reality is far different, with Unicom’s VNO partners only able to operate in eight cities, including Beijing and Shanghai, so far.
The official also noted that the VNOs were having difficulty competing with the older telcos on price. That’s because the state-run carriers have all been slashing prices lately as they roll out new 4G services and offer bargain-basement plans to quickly sign up lots of new subscribers.
But the VNOs can only offer service based on relatively high network rental rates that they previously negotiated with the telcos, giving them very little margin to match the carriers’ price cuts.
At the beginning of this year, the MIIT laid out a target of signing up 50 million VNO subscribers by the end of 2014, a goal that I called disappointing as it represented just a tiny fraction of China’s more than one billion mobile users.
But in light of these pathetic totals from the first three months of the program, that figure now looks huge. To reach it, the new VNOs would have to sign up more than 10 million new users each month for the rest of the year, more than even the big three telcos usually sign up collectively.
None of this comes as a huge surprise to me, as I’ve been warning all along that the regulator was creating a system that heavily favored the big three telcos. That trio is well connected in Beijing, and workers and executives often move freely between the telcos and the regulator.
Accordingly, it’s not surprising that the telcos used their political clout to try to hobble the competition — made up of private firms with far fewer government connections — as much as they could before the program even began.
The MIIT’s biggest mistake was forcing the VNOs to directly negotiate with the big telcos, which could then afford to charge whatever they wanted for use of their networks.
The ministry also put geographic limitations on the VNOs, meaning none could offer national service, and also forbid them from building their own supporting infrastructure.
This highly disappointing progress report comes as the MIIT just released its third batch of VNO licenses to six more companies last week, bringing the total number of licensees to 24 since the program began late last year.
Rather than keep awarding new licenses, perhaps the regulator should take a step back and consider some changes that could breathe some life into the program. Otherwise all of the licenses could end up as useless pieces of paper.
Bottom line: The telecoms regulator needs to take new steps to create a more competitive environment for new VNO service providers, or risk seeing the program languish into failure.
The writer is a commentator on China company news and associate professor in journalism
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