China’s green light for MVNO’s opens market for OTT giants

By Tony Brown

I was in a hotel bar in Hong Kong when I got one of my first major tipoffs as a budding telecoms journalist. It came from a well-lubricated telecoms-industry executive whom I never saw again.

“Look, I shouldn’t really be telling you this, but something big is about to happen in China,” he said. “Can you keep a secret?”

“Yes, sure,” I replied.

“Well, this really is top secret, but the deal is almost done so it can’t do much harm now,” he said. “Virgin Mobile is going to launch as an MVNO in Shanghai. Unbelievable, isn’t it?”

That was way back on Oct. 11, 2003 and Virgin Mobile never did get to launch as an MVNO in China – and nor did anyone else for that matter.

MIIT green-lights MVNOs
In the years since that boozy exchange took place, I never thought much about MVNOs entering China until last week – nearly a decade later – when reports claimed that the Ministry of Industry and Information Technology (MIIT) was finally considering allowing them into the market.

The reports claimed that proposed MVNO trials would take place over two years, with mobile operators having to take on at least two MVNOs each, though MVNOs would be restricted to domestic companies only.

The MVNO trials are the latest attempt by the MIIT to bring greater private investment and more competition to the telecoms market. But, as is always the case with China, there are plenty more questions than answers.

For example, will the MIIT be involved in setting wholesale prices between operators and MVNOs? If not, what will the MIIT do if operators play hardball and don’t strike reasonable deals with MVNOs? There is little point allowing MVNOs into the market if operators don’t offer them viable wholesale prices.

In addition, how will the MIIT ensure a proper distribution of MVNOs? Potential MVNOs will be champing at the bit to get into wealthy markets, such as Shanghai, Beijing, Shenzhen and Guanzhou. But how will the MIIT persuade them to launch services in the less attractive western provinces far from the prosperous eastern seaboard?

Never a good time for more competition
Being frank about it, from a mobile operator perspective there is rarely going to be a good time to allow MVNOs into the market, and the Chinese market is no different.

Although the entry of MVNOs seems at first to be bad news for mobile operators, they will have to try to make their choice of MVNO partners a strategic plus. But this in itself brings a tough choice.

Chinese mobile operators could easily take the safe route and choose any number of major local retailers as MVNO partners, especially electronics retailers with whom they already have commercial relationships in the device market. And these retailers don’t really bring any new magic to the table.

Where operators’ real problems exist is in the content-and-applications market, where they are – like their counterparts in Western markets – facing the rising threat of OTT players, which are chipping away at their messaging revenues and will be an increasing drain on their voice revenues too.

Major Chinese OTT player Tencent – which runs popular messaging services such as QQ and WeChat – has already been strongly linked with a possible move into the mobile market as an MVNO, while Web giant Baidu also has grounds for MVNO aspirations, given its well-publicized desire to increase its presence in the mobile market.

What’s to gain and lose?
The bottom line, then, is simple: What do the mobile operators get out of bringing the OTT players into the tent as MVNOs? And what do the OTT players get by leaving their comfortable spot free-riding on telecoms networks and becoming service providers themselves?

From a mobile-operator perspective, inviting OTT players into the market seems counterintuitive but also gives smaller operators, such as China Unicom and China Telecom, a useful point of differentiation with market giant China Mobile by bringing these brands onto their underused networks as MVNOs.

Although China’s mobile operators have had their successes in the content market – just look at how China Mobile-owned Wireless Music Base is generating over US$3 billion a year from music downloads – there are clouds above their heads.

There is little doubt that the OTT players, ranging from Tencent’s messaging services – WeChat already has 300 million users – to the OTT video offered by Tudou-Youku, have become a force to be reckoned with, especially among younger users.

From an operator perspective, bringing the OTT players into the tent as MVNOs could be a good way to start building long-term relationships with them – after all, these guys aren’t going away anytime soon – and to look for ways to leverage the pulling power they bring.

For the OTT players, entering the market as MVNOs might seem at first glance to be a case of the poacher turning gatekeeper. But the truth is that the OTT players are not generating money directly from their users but from advertisers, and that is an increasingly tough market, given the number of OTT players fighting for ad spend.

Having the ability to launch as MVNOs finally gives the OTT players the ability to directly monetize their relationships with subscribers for the first time without necessarily charging for their currently free OTT services.

In addition, getting into the market as MVNOs would give the OTT players a chance to finally consider charging for some of their premium services, because they could – for the first time – really be able to guarantee quality of service to users, something that would be of particular use for video-based services.

There might still be a long way to go before we see MVNOs enter China – rushed and reckless policy making is something the MIIT can seldom be accused of – but if operators and OTT players can get over their mutual distrust, this development could ultimately benefit both parties.