Virtual networks coming in 2013

PUBLISHED : Thursday, 27 December, 2012, 11:03am
UPDATED : Thursday, 27 December, 2012, 11:03am

The Chinese media have been buzzing these last few days with word that the telecoms regulator will soon roll out a highly anticipated plan to allow virtual network operators (VNOs) into China in 2013, finally breaking the monopoly on telecoms services held by the nation's 3 major telcos. Such a move could suddenly open the door for homegrown companies like Tencent (0700.HK) and Sina (Nasdaq: SINA) to offer specialised services over their own privately branded virtual networks, but would also open the door for bigger global names like France Telecom (Paris: FTE) and AT&T (NYSE: T) to enter the long-closed market.

I've been writing about this kind of development for much of the last year, which is part of the Ministry of Industry and Information Technology's (MIIT) plan to energize China's uncreative telecoms sector, where innovation has been hindered due to the monopolisation of the industry by 3 massive telcos, China Mobile (0941.HK; NYSE: CHL), China Unicom (0762.HK; NYSE: CHU) and China Telecom (0728.HK; NYSE: CHA).

By letting these 3 slow-moving, state-run firms dominate the market for so long, China has lost an important opportunity to become a global leader in telecoms services by drawing on its huge population of more than 1 billion users of mobile and fixed-line services. Instead, the 3 big telcos have largely become followers of other global trends, banking on their status as a protected monopoly to take few risks in developing innovative new products and services to offer over their state-of-the-art networks.

Now that I've looked at the bigger picture, let's take a look at the latest reports that say the MIIT is close to finalising a plan to allow virtual network operators (VNOs) to operate in China and could issue its first licences by the middle of next year.  Such a plan would allow companies to lease network capacity from the 3 big telcos, and then offer their own brand of service to consumers in the market.

Such a plan could result in a sudden explosion of new service providers, since any company could start offering its own brand of service simply by leasing network capacity from China Mobile, China Telecom or Unicom. The latest reports don't have much detail, citing unnamed industry sources for the information. But based on past experience in other emerging sectors, I would expect to see licences awarded first to around 10-20 domestic companies in the middle of next year. That could then be followed by more licences for few international players 6 months to 1 year later.

Such a development means we could theoretically see something like a Tencent Mobile service offered by the end of next year, although Tencent itself has specifically denied rumours that it plans to enter the VNO space. If it comes, this latest move to allow VNOs would be part of the MIIT's broader liberalisation of China's telecoms service space over the past year. 

As part of that liberalisation, China has allowed foreign names like IBM (NYSE: IBM) and Microsoft (Nasdaq: MSFT) to invest and participate in the construction of new domestic cloud computing centres, which allow for computing and data storage to be done remotely rather than on individual computers and cellphones. A number of foreign telcos have expressed an interest over the years in entering China's telecoms services market, with names like France Telecom and South Korea's SK Telecom (Seoul: 017670) as 2 players that have repeatedly made moves indicating a strong interest.

We'll have to wait a while longer for the MIIT to detail its actual roadmap for VNO, which could happen in the first quarter of next year. If and when the announcement comes, look for it to kick off the start of an exciting new era in the China telecoms services market, with the first VNO products likely to reach consumers by as early as the end of 2013.

Bottom line: China is likely to allow virtual network operators to enter the telecoms services market next year, continuing its ongoing bid to invigorate the market by allowing more competition.