Monday, August 4, 2014

China’s MNOs Aim To Save US $6.5 billion in Reduced Capital Spending

China’s three MNOs, China Mobile, China Unicom and China Telecom, have formed a new company—the China Communications Facilities Services —tasked with the construction, maintenance and operation of wireless towers in the country. Despite the MNOs’ major differences in size (China Mobile has 787 million subscribers compared with 293 million for China Unicom and 182 million for China Telecom), the ownership of the new entity is divided relatively equally. China Mobile will control 40 percent, China Unicom 30.1 percent and China Telecom 29.9 percent. The deal has been in discussions since April but took several months to finalize.

At first glance this deal would appear to significantly disadvantage China Mobile. The company currently has around 350,000 telecom towers, which is 40 percent more than both of its rivals combined. This network advantage, which the company built through years of investment, has been a driving reason for its dominant position in the market. Why would the operator not try to continue the strategy that has worked so well by increasing this network supremacy through the construction of additional towers?
We suspect China Mobile’s reasons are twofold. First, Chinese regulators looking to increase competition have been penalizing the company and forcing it to accept lower interconnection rates from the other operators. Setting up a joint venture that will expand the coverage of all MNOs—and likely open the door for new MVNOs—is a strong way to demonstrate to regulators a commitment to open participation and market access. Second, and more important, this decision is likely a reaction to a major shift in the dynamics of the mobile marketplace. China has been at the forefront of OTT usage. MNOs have seen their ARPUs decline as massive numbers of users turn to messaging apps like WeChat, reducing their consumption of minutes and SMS. Compared with this new threat, other MNOs may appear to be not so much rivals as fellow combatants in the same struggle for survival. It is estimated that the three companies will save as much as CNY 40 billion (US $6.5 billion) per year in reduced capital spending, savings that become more critical if revenues are permanently deflated by the likes of WeChat. Given that the Chinese market has represented the tip of the spear for OTT adoption, MNOs worldwide would do well to monitor this new venture in assessing their own strategies to combat OTTs.

 The above item appeared in a recent issue of The Tarifica Alert, a weekly resource that analyzes noteworthy developments in the telecoms industry from around the world. To access all of the latest articles and issues:

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