Competition in the Pipeline

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The Chinese Ministry of Industry and Information Technology （MIIT） on January 29 granted the second batch of mobile virtual network operation （MVNO） licenses to eight private enterprises， including home appliance giants Gome and Suning， both of which are close partners of the country’s largest carrier China Mobile.

The move came about one month after the MIIT issued the first batch of licenses to another 11 private enterprises， permitting them to sell own-brand telecom services using bandwidth rented or purchased from China’s three State-owned telecom carriers， China Mobile， China Unicom and China Telecom.

While on the surface， the move looked like a blow to the three SOEs’ （State-owned enterprises） longstanding monopoly of the telecom market， analysts have called it a strategic move to defend their profits from the onslaught of Internet service providers （SPs） led by the “BAT” （Baidu， Alibaba and Tencent） companies， with their rapidly diversifying range of free OTT （over the top） smartphone applications those that provide Internet services directly to end users， bypassing telecom carriers.

Pipeline

According to MIIT statistics， China saw about 120 million more cell phone users in 2013， a 10.5 percent growth on 2012. This growth， however， brought little in the way of revenue to carriers， with their MOU （average communication time per month per user） values for local and long-distance calls dropping by 6.4 and 5.4 percent respectively.

Worst hit were traditional text messaging services， which according to official data were mostly used by enterprises， with messages sent by individual users seeing a significant drop to only two or three per capita per day.

During the 2014 Chinese New Year holiday， a time in which text messages have become a popular method of exchanging greetings in recent years， China’s cell phone users sent a total of 18.2 billion messages， 43 percent less than over the 2013 holiday period. Meanwhile， data traffic via the mobile Internet grew by 86 percent over the same period， according to MIIT.

“The pace of transformation in the telecom industry is quickening， with volume in the voice [call] business continuing to decline， and that in the non-voice business [data usage] continuing to rise，” concluded MIIT in its 2013 report on the telecom industry.

Thanks to the explosive growth in mobile Internet users， Tencent’s market value has risen to over three times that of China Unicom and China Telecom. In the first three quarters of 2013， both Baidu and Tencent exceeded China Unicom in net profit， with figures approaching those of China Telecom.

“OTT services are playing an increasingly large role in replacing traditional telecom businesses， pushing the industry’s value to move from ‘pipeline’ to ‘content，’ from telecom networks to Internet， and from voice [call] services to information services. For telecom carriers， the competition with Internet enterprises is much fiercer than that with their counterparts，” Xi Guohua， chairman of the board of China Mobile， warned at the MWC 2013（Mobile World Congress）.

In an attempt to help the telecom carriers out， MIIT in 2013 organized two industrial conferences to discuss whether or not telecom carriers should impose charges on OTT applications， particularly the hugely popular instant messaging app WeChat， only to find that the discussion triggered strong opposition from both the public and the SPs， who argued that the telecom carriers had no grounds on which to levy additional charges on top of the data traffic fee.

Now， the telecom carriers have， according to China Telecom’s chief engineer Wei Leping， fallen to the lowest end of the industrial chain， whose profit only takes up six to seven percent of the total， leading analysts to predict that they might become little more than pipelines through which information flows.

Big Data， Big Pipe

China’s State-owned telecom giants are unlikely to accept their fate without a fight. They have proposed to “‘intelligentize’ the pipeline，”meaning setting up a broader and more multi-functional data channel that can provide individualized services to a variety of users.

“China Telecom will gradually ‘intelligentize’ its pipeline in the next three to five years， which focuses on dynamically distributing network resources and optimizing data management based on cloud computing technology，” Zhao Huiling， an industrial research director at China Telecom， told the media in 2011.

This objective will require a faster network， which has pressed the telecom carriers to rapidly develop their 3G （third-generation） and 4G （fourth-generation） mobile telecom technology.

According to MIIT， China Unicom and China Telecom， both of whom operate on the global 3G technology standard， enjoyed manifold growth in their data usage in 2012. China Mobile， though adopting the less widely accepted TD-SCDMA technology standard， also saw a 19 percent growth in data usage over the same period.

This did not mean equal growth in revenue， however. The pace of technical development Chinese telecom carriers spent only five years developing 3G and 4G technology， reportedly half the time it took their counterparts in the US has overloaded carriers with huge infrastructure building costs that are difficult to recoup merely through expanded data usage.

In early February 2014， two months after the three telecom carriers received 4G licenses， China Mobile took the lead in publishing their 4G usage tariffs， only to find themselves under fire.

“Given that 4G technology is said to enable a maximum speed of 100 megabits per second， and China Mobile charges 40 yuan for 300 megabytes of data [the lowest tier of its 4G package]， a user would reach their limit in three seconds， and if he or she were to forget to shut off the service before going to sleep， the 4G costs for one night would add up to the price of a house，” said Li Guoqing， CEO of ecommerce platform ， in a post that was retweeted over 30，000 times within an hour on Weibo， China’s Twitter equivalent.

Although Li’s calculation mistakenly equated “megabit” with“megabyte” and confused the maximum download speed for an average speed， the public still agreed that 4G service was not economical for ordinary people， especially with the rapid spread of free Wi-fi coverage.

“The high charges， the limited coverage and the inadequate supporting services have dampened people’s desire to use 4G services，”Zhang Yi， CEO of iiMedia Research， a research firm specializing in mobile Internet， told the China Youth Daily. “4G technology cannot put the telecom carriers at an advantage in mobile Internet if it remains nothing more than an ‘expressway，’” he added.

De-telecom

Zhang Yi’s opinion is shared by Wu Hequan， director of the Internet Society of China， who told NewsChina that the “intelligence” of telecom pipelines lies in their capacity to provide value-added services based on their fast networks. Within the telecom industry， this has also been called “de-telecommunication，” a popular new concept encouraging the telecom carriers to abandon their comparatively rigid methods of operation， and abandon the practice of building closedoff networks.

This is why the three carriers have rushed to launch their own applications or platforms for smartphones， such as China Mobile’s online music base， China’s largest platform for music downloads， and China Unicom’s Wo Market， an open platform for app downloads. In August 2013， China Telecom and the Web portal NetEase jointly launched the instant messaging tool Yixin， reportedly attracting over one million users on its first day with free text and voice messaging between smartphone users， regardless of whether or not the sender and recipient were on the same telecom network. By the beginning of 2014， Yixin had accumulated more than 10 million users.

These user numbers， however， are still far from shaking the dominance of Tencent’s WeChat， whose user numbers have reportedly exceeded 600 million. According to analysts and the media， the telecom giants’ bureaucratic thinking and lack of creativity， both chronic SOE problems， are the main reasons why their Internet services are no match for BAT apps， despite the rising sales volumes in the three’s fiscal reports.

The telecom carriers then began to rethink “de-telecommunication，”with the intention， in their words， of making full use of their existing advantages in hardware， their biggest competitive edge on the SPs.

“‘De-telecommunication’ requires the telecom carriers to extend and expand the industrial value of their own businesses， not to try to become pure SPs，” said an industrial analysis report by the telecom department of the Selection Market Research Group.

Such conclusions are vindicated by the China Telecom research director Zhao Huiling’s emphasis on cloud computing， a technology the future of which will likely be heavily integrated with the development of mobile Internet， requiring a safe， stable and high-speed network for the processing of data.

That is also why Lü Tingjie， a professor from the Beijing University of Post and Telecommunications suggested in a public speech about de-telecommunication that carriers set up an open platform based on their fundamental facilities and technology. “Carriers should be wholesalers， opening their services and resources to re-development and re-packaging by others，” he said.

MVNO licenses are being touted as a win-win move towards detelecommunication， through which both the MVNO and telecom carriers are given a chance to compete with each other. For example， Suning will benefit from China Mobile’s technology in the market for“cloud commerce，” a new concept aiming to integrate real and virtual malls. China Mobile， for its part， will enjoy increased promotion of its new technology among users thanks to Suning’s relatively flexible and economical sales mode.

“The future telecom industry will reject the old polarized system neither the pipeline nor content providers would be the dominant power. Instead， it will support varied collaboration between carriers and providers to optimize the division of labor in society and the distribution of industrial values，” said Yang Peifang， director of the China Information Economic Society.

This vision for the future seems to tally with China Telecom’s new strategy： to be “an intelligent pipeline， an integrated platform and a participant in Internet content and services.” But in the fast-evolving Internet industry， even the best laid pipelines often go wrong.