Big brands on MVNO alert in China

OVUM VIEW

Summary

The Chinese Ministry of Industry and Information Technology (MITT) recently announced that it has opened a consultation period to gauge whether mobile virtual network operators (MVNOs) should be allowed into the Chinese market. It has proposed a two-year trial period in which the three mobile operators have to take on at least two MVNOs each. The consultation period is 30 days and closes on February 6, 2012. The MITT hopes that the existence of MVNOs will increase private investment in the Chinese telecoms industry. Ovum believes that the existing Chinese mobile operators will be resistant to allowing new entrants into the market, but that there are good opportunities for MVNOs and mobile virtual network enablers (MVNEs) that can strike up mutually beneficial agreements.

Regulatory intervention doesn’t always equal immediate success

While the MITT is proposing that each network operator has at least two resellers on its network, it hasn’t set out any details on how it will enforce this. In our experience, most regulators/government bodies step back from setting wholesale prices, which means that MVNOs and network operators are able to negotiate wholesale rates and any additional support services. However, these types of commercial negotiations can often be very lengthy. In addition, operators that are facing possible regulatory action can state that they are in negotiations with MVNOs, thus complying with the regulator’s conditions, when in reality they are stalling the process to delay further competition. The MITT has stated that network operators must offer a service that is at least as good as that which it offers to its own customers. However, MVNO contracts are so detailed that it is not sufficient to merely state that an operator must offer the same services to its wholesale customers as it does to its retail arm as proving and enforcing breaches can be difficult if an operator is uncooperative.

China presents a huge opportunity for the right partner

The size of the Chinese market makes it attractive to any potential MVNO, whether they are a local or foreign brand. There are over 1 billion mobile connections in the country and it is heavily prepaid (approximately 80%), which means that it is a highly lucrative market for a company looking to set up traditional prepaid MVNO services. However, we doubt that there will be an influx of the price-focused MVNOs that have flooded European markets as Chinese network operators are unlikely to sign an MVNO agreement with any operator that is focused on price alone. Any potential MVNO will have to bring something new to the table for its host. This could be a new distribution channel (Chinese retail brands may be the first to launch), access to a new segment in the market (a service focused on youth or a particular ethnic group), or some other kind of expertise (such as a European brand that can bring something to the Chinese market that has never been explored before). The network operators are going to be able to choose which third-party companies that they work with, which means that any potential MVNO will need to have a compelling business case.

MVNEs should be talking to the Chinese operators now

If the network operators do agree to offer wholesale airtime and services, a partnership with a MVNE could be the best way for them to start. China represents a significant potential opportunity for MVNEs, and the best strategy is for a MVNE to get an exclusive agreement with one of the network operators. As the Chinese operators have no experience hosting third-party partners, there will be huge systems integration issues. Integrating billing systems, provisioning, and ratings will be an extremely difficult task for the operators, but a MVNE will be able to alleviate some of the strain on host providers. Given that the government has only proposed a two-year trial, operators are not going to want to invest in expensive new hosting platforms for MVNOs. In our experience, MVNEs allow MVNOs to come to market much quicker and at a lower cost than through a direct MVNO/host agreement. A good MVNE partner will offer its own hosting platform, provide all the systems integration services, and bring its previous MVNO technical expertise. This lowers the investment required for both the MVNO and the host provider and allows small-scale MVNOs to launch in the market, supporting them while they grow. The MVNE strategy is the best to pursue in a new and immature MVNO market such as China.

Don’t expect a positive welcome from everyone

We anticipate that the two largest network operators, China Mobile and China Unicom, will be resistant to MVNOs entering the market and will respond negatively to the consultation. However, it is likely that China Telecom, the third and smallest operator in the market, will be more open to providing wholesale access. This is due to three key reasons. Firstly, China Telecom is the smallest mobile network operator with a 14% market share, compared to China Mobile’s 65% share and China Unicom’s 21% share. Typically, the smallest player in a market is the most willing and is the first mover in partnering with MVNOs. This is because they want to grow their market share and reach new segments that their current brand does not resonate with. Secondly, China Telecom has recently launched its own MVNO operations in Europe in an effort to tap into the large Chinese expatriate community. While its operations in the UK and Germany are still relatively small, it has aspirations to launch in other European markets. By offering wholesale capacity to European operators, it could look to strike reciprocal deals. While this is unusual, it is not impossible. Lastly, as China Telecom has looked to expand outside of China via MVNOs, it is the most knowledgeable of the three operators about how the MVNO/host operator relationship works. As a result, China Telecom is more likely to understand the benefits that an MVNO can bring to its host provider.

APPENDIX

Author

Carrie Pawsey, Senior Analyst, Telco Strategy

carrie.pawsey@ovum.com

Further reading

“China Telecom dips its toe in European waters” (January 2012)

“MVNOs: friend or foe?” (November 2011)

Mobile Wholesalers Pursue New Opportunity as MVNO Enablers (January 2013)

Partnering for Wholesale Success (June 2012)

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