New approaches for MVNOs Caixin, 8 May

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1 i n t h e n e w s Telco and Media New approaches for MVNOs Caixin, 8 May A large number of MVNOs (mobile virtual network operators) are poised to emerge in the Chinese market this May. Operators such as Jingdong and So Share Suning are set to provide users with voice, text, data and value-added services that are similar to the current offerings of the three mobile operators (China Mobile, China Telecom and China Unicom) in China. "MVNOs" purchase access to network services from current mobile operators and repackage the services with their own brand to sell on to end users. The Ministry of Industry and Information Technology in China (MIIT) terms the business activity of MVNOs as "Mobile Resale Business." The "Mobile Resale Business Pilot Program was launched by the MITT in May 2013 and since then, two waves of MVNO licenses have been issued. In mid-december 2013, So Share, Alibaba, Jingdong, D Phone, Bus Online and other six companies were granted the first round of licenses while in early February 2014, Suning, Gome, Suzhou Snail and five other companies were granted licenses as part of the second wave. "In the coming two months, the Ministry will continue to issue a number of licenses" reporters were told by insiders of the current mobile operators. "I thought that only six virtual operating licenses would be issued at first, and MVNOs would value the scarce resources; but, now more than twenty licenses have been issued, the license itself is no longer valuable and those companies that were granted the licenses should take a hard look at the current competitive landscape." The communications market is a sizeable market in China. According to the "2013 Communications Operation Industry Statistical Bulletin" issued by MIIT, China s telecommunications industry turned a profit of ~1.17 trillion RMB in 2013, an increase of 8.7% year on year. The profit growth of this industry has been higher than that of GDP growth for the last three consecutive years. In order to gain a larger share of the market, the competition between the three existing Mobile Network Operators (MNOs) has been intense. Hence for the new MVNOs that are joining this competitive market, they must first find new ways to grow the market further and thereafter gain a piece of the pie. Innovation in all areas Many MVNOs senior managers that were interviewed agreed that although the current three MNOs and MVNOs are in a competitive relationship, there are however certain areas where their services are complementary points. The key to success for MVNOs is not through a price war, but rather through true innovation.

2 In March this, MVNOs began to publicize their own brands and began designing their own SIM cards. Most of them have tried to tackle long standing issues such as tariff design, handling of unused data and complexity of current bundled plans, and have made these the focal point in trying to find an angle to break into the market. Jingdong branded it MVNO "Jingdong Communications". It released its brand logo and a sample SIM card at the end of March though services would only begin in May. Su Xianglong, Jingdong mobile resale business unit s director told Caixin that all Jingdong Communications products and services were designed with the user in mind. The focus once the services come online is to provide simple and transparent communications products and services for its users. In the pre-launch stage, Jingdong has plans to launch a truly Zero Yuan Phone Purchase Service derived from the combination of its current plan to launch a JDPhone and the financial services that Jingdong is currently providing. The plan also aims to provide users flexibility around the unused data that they accumulate, even having the ability to share it with their friends and family if they choose to do so. In addition, Jingdong would build upon their current existing customer service and support resources, to create a "24 hours customer service network". Another MVNO, Suzhou Snail, not only put forward plans to allow users to keep unused data, and has also launched a "Free" card that does away with the concept of monthly subscription. Users of the "Free" card get 6 months worth of local calls and also enjoy 3G data. In the first phase, Snail Mobile plans to launch 100,000 of these Free cards at a pre-sale price of 399 Yuan, therefore providing a cheaper package than the current three MNOs. "We want to do it in a more thoroughly, like when you take a taxi, i.e. according to the actual usage per month, providing users with the most affordable solution." noted General Manager of Alibaba Group Communications virtual operator brand Gideon, specifying that a tariff plan with the above in mind would soon be announced. To support this innovative billing method, Ali Communications has completed the construction of an independent business operation support system. In the future, Ali communications would strive to continue to introduce a variety of innovative value-added services given that Ali s users would continue to show greater desire and ability to consume such services and that the continued expansion e-commerce ecosystem and Internet services chain as well as the proliferation and growth of cloud OS mobile operating systems, cloud computing and big data would give it a suitable environment to do so Suning, T World and other MVNOs with traditional sales channels are also making changes to the current packaged offerings. For example, mobile packages that can be freely designed by the user have been introduced. In addition, 9.9 Yuan packages, that though provide little in terms of price differences to current offerings from the MNOS, provide a lower entry level for monthly consumption and also increase flexibility for users. According to Chengfen Hou, Associate Principal at Value Partners, Most MVNOs in China have experimented with different approaches in terms of their business model, customer services, and marketing strategy. However, other than some new promotional tactics, we haven t seen any disruptive innovations for the fundamental tariff system. The current MVNO-MNO partnership model and the limited accessibility to the fundamental telecom system restrict the MVNOs potential in terms of tariff innovation. Currently, China Telecom only allows its MVNO partners sell its existing plans and stackable packages; while though China Unicom puts no restrictions in terms of structuring a mobile plan, it charges its MVNO partners a much higher price to assess their network services -- however, MVNOs are unable to support such a level of pricing in the long run as they are barely able to turn a profit at the current price levels that China Unicom charges. 2

3 While seeking a breakthrough in terms of services, MVNOs with certain resources are also focusing on changes within the business model. Kang Zhibin, CEO of SoShare told reporters that the company would place an emphasis on the integration of their communication business with their current business. As part of this integration, they are looking to release four product sub-brands -- "Green", "Business", "Enjoy", "Premium", respectively for schoolchildren, enterprise group customers, the masses and VIP customers. SoShare Communications is SoShare s MVNO brand. SoShare was founded in Beijing in 2006, operating in the call center and information services business areas. Currently it has branches in 31 provinces throughout China, with network-based communication technologies in education and the finance industry. They have accumulated over 70 industry leading customers such as China Mobile, China Unicom, China Telecom, ICBC and Bank of China. "The 'Green' and the 'Business' brand would be our leading products." Kang Zhibin shared, stating that as the company has in the past provided online support services for the MNOs to their clients in the education and finance industry, hence they have accumulated experience and contacts within the education field that enable them to target this sector. Based on the understanding of user needs, the "Green" brand aims to improve upon the traditional "home school" service, providing students with customized mobile solutions, including Green Internet(a child-safe internet service), a safe online social portal, access to materials from renowned teachers and other integrated services. The "Business" brand aims to target the current geographically fragmented marketplace by providing nationwide mobile communications solutions for the enterprise group, including business process management, cloud address book, and security management. Strictly speaking, the "Green" and "Business" brand are B2B business, which leverage upon the company s online expertise. Being the only MVNO with a license for public transport media, Bus-Online plans to integrate mobile offerings with existing in-vehicle WiFi, television and other public transport services together, in order to build a mobile application distribution platform for bus services. Bo Yuan, vice president of Bus Online states that currently the company s offering covers 50,000 buses in 22 provinces, covering a total of 40% -50% of the buses in these provinces. This year Bus Online will expand the scope of their business to the country's 30 provincial capitals, increasing the coverage to 150,000 buses, thereby covering almost all public-run bus services in those areas. Users of the Bus Online services can therby gain access to free mobile WiFi services on buses in as well as other value added services such as bus service information as well as TV screen-based media content relating to dining, theater, KTV, supermarkets and other daily consumer information. "MVNOs should base their thinking on the logic of the evolution of the internet, where post-charge services would be gradually introduced and business collaboration platform services will become a trend." Kang Zhibing said. For example provision of a designated data volume service for training institutions where users can use our services to watch a free video from training institutions, download the courses as well as gain access to real-time practice listening courses. Thereafter profits can be shared with the training institutions. However, the three MNOs are also confident that they can defend their market share as the key to the designated data volume service market is having access to the user. All three operators have a huge user base and as long as they are willing to do so, their prices for these services would be lower than that of MVNOs." And if the MVNOs position themselves as a mobile application distribution platform, they will face competition from the likes of Baidu, Tencent, and internet companies." an operator insider commented. "I do not see them having an unique advantage. And as far as I know, Guangdong Unicom has been in cooperation with more than a dozen major Internet companies in terms of providing designated data volume" 3

4 Bottlenecks still exist Currently, all of the virtual operators have not officially started offering their services. A number of MVNOs officials have stated that they have activated the 170 numbers that they are allocated and have started initial tests with China Unicom that include testing of data and voice services as well as ordering of products. These tests have all entered the final stages and subsequently, the testing and finalization of the websites, client system and other channel developments are expected to be conducted as well. Though the MVNOs have all put on a brave front, they all understand that they face numerous obstacles before a successful launch of their services can be done. According to sources within the MIIT, MNOs and MVNOs were divided on many core issues during a recent conference held by the MIIT. "They stood their ground, bickered with each other, with little headway gained in terms of a solution." The most critical issue is how to ensure that the MNOs are offering a fair price for access to their services. According to the provisions of the MIIT, the wholesale price level that MNOs provide to MVNOs should be below that of the lowest retail price they are current offering in the local market for the service. However, such a definition is not concrete enough as often a MNO s product offerings and prices are highly complex. In addition questions such as which packages should be based on to calculate the wholesale price, how to calculate the prices of data and talking minutes separately, and whether the lowest prices should based on the promotional price or actual prices have arose. Therefore, since there are no specific rules to these pricing calculations, MNOs have plenty of room in terms of setting prices. Therefore if MVNOs do no operate within the scope of what the MNOs deem to be appropriate, the MNOs can easily price out MVNOs, or provide other MVNOs that have better relationships with them favorable pricing. The pricing issue has been highlighted by a conference. Some parties have proposed the establishment of a floating pricing mechanism, whilst others have suggested a uniform pricing principle, with MVNOs accepting a fixed discount rate for all packages, instead of negotiating with each individual MNO. However it remain inconclusive what method should be used to ensure that the pricing mechanism is fair stated an insider on the current situation. The MIIT has always leaned towards having the market solve the pricing issues on its own. However, since the MVNO market has yet to be fully commercialized, MVNOs do not have much leverage when negotiating with MNOs and hence relying solely on the market to solve the issue is not a simple task. Insiders from MNOs also believe that issue of pricing would determine the fate of the MVNO market. If a rational pricing model or regulatory mechanism cannot be established in the early stages, the performance of the MVNOs in the pilot phases are hard to predict. MIIT also needs to clearly define the status of MVNOs. Currently, it is difficult to ascertain if MVNOs have the same standing as MNOs. For example, currently all cell phone numbers starting with 186 are China Unicom s and 139 are China Mobile. However it is hard to ascertain which 170 number belongs to which MVNO. According to current regulations from the MIIT, 170- number is to give exclusively to MVNOs. 1705, 1700 and 1709 are the resale numbers of China Mobile, China Telecom and China Unicom separately with the subsequent numbering system allocated according to the needs of the MVNOs. Hence the MVNOs suffer from low brand awareness and status in terms of number recognition. 4

5 Operators insiders said that the rights and obligations have a reciprocal relationship. If MVNOs were to be given the same status as that of MNOs, would MVNOs thereby have to incur direct costs for number resources, usage of the wireless spectrum and be governed under the same set of regulations as MNOs? Currently, MIIT has given in a little on the issue of number resources. An insider present at the conferences revealed that the MIIT has indicated that the larger MVNOs will get the independent number resources shortly after the pilot phase ends. In addition, the issue of payment for usage of the MNO s customer service system, billing system and other system resources by the MVNOs has also been a sticking point. MNOs insist that they have invested a lot in the building and maintaining of their customer service systems. Taking China Mobile as an example, the composite customer service cost is 0.6 RMB/Min. They insist that MVNOs need to pay this service costs as though MVNOs have their own customer service and network system support, when they gain access to the MNOs resources they have in part have taken away some resources from the MNOs. MVNOs also need to pay for the system transformation fee of the billing system and the fee for the interface test. It is a question about how much to pay and not if there is a need to pay. Insiders from MVNOs believes that since MVNOs are renting network resources from the MNOs, the MNOs should bear the cost of the basic system fees by themselves, including items such as the system improvement fee and the customer service costs. Chengfen Hou believes that the emergence of MVNO will inevitably bring about both greater competition and cooperation between MNOs and MVNOs and the regulators should thereby continue to optimize their regulation policies as this relationship evolves. Overseas telecom regulators have already applied certain measures to address the many thorny issues between MNOs and MVNOs. Chengfen Hou further adds that the Korean Communications Commission have requested that the three Korean MNOs keep their wholesale prices to MVNO s at 31% to 44% lower than its retail price; the telecom regulator in Spain has also warned Moviles, Vodafon, and A-mena that if they still stalling on the price negotiation with their MVNO partners, the government would step in and force them to sell their network capacity at a fixed price; Hong Kong Communications Authority has requested that the MNOs share 30% of their resources with their MVNO partners, including number and network resources. Although telecom regulators in different countries have adopted different approaches, they all have been trying to protect the MVNO s rights to ensure fairness, transparency, and non-discrimination. "Regulatory mechanisms in the pilot process will continue to evolve and improve." An industry analyst believes that the biggest challenge facing MVNOs is that they need to be clear what business model they wish to adopt and thereafter how to market and promote their services. Currently most MVNOs do not have a clear idea about their business model, whereas a handful of MVNOs are "imagining the best, but unable to face the cruel reality." 5