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China Mobile muscles Tencent into revenue sharing talks
China's telecoms regulator should step in to forbid China Mobile from using its market dominance to win a revenue-sharing deal with Tencent
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Just a couple of weeks after telecoms heavyweight China Mobile (0941.HK; NYSE: CHL) complained that Internet giant Tencent (0700.HK) was stealing its text messaging business, we're getting word that the two companies may have started talks for a revenue sharing agreement to resolve the dispute. China Mobile's discontent involves Tencent's popular mobile instant messaging service WeChat, better known by its Chinese name Weixin, which has soared to prominence in the last two years and recently passed the 300 million registered users mark. The service allows people to send text messages back and forth over the Internet, letting them circumvent traditional text messaging that is one of the biggest revenue sources for China Mobile and the nation's other two big telcos.
While I sympathise with China Mobile, I would also say this is a rare case where the telecoms regulator should step in and clarify the situation rather than letting China Mobile use its dominant market position to force Tencent into this kind of revenue sharing arrangement.
Before I go any further, let's take a look at the actual news, which has an official from the industry regulator, the Ministry of Industry and Information Technology (MIIT), saying the two companies have recently entered talks to resolve China Mobile's dissatisfaction with the current situation. The official goes on to explain that Tencent now only provides a small percentage of China Mobile's revenue, but that users of Tencent applications such as WeChat now account for 40 per cent of data traffic over China Mobile's network.
If those numbers are really accurate, it's no surprise that China Mobile isn't happy about the fact that its mobile Internet network is being used so heavily by Tencent. But someone should also point out to China Mobile that it's not the only company whose networks are being heavily used by Tencent, and that the nation's other two telcos, China Unicom (0762.HK; NYSE: CHU) and China Telecom (0728.HK; NYSE: CHA), are probably seeing similar usage patterns.
All of this underscores the fact that Tencent is very successful at developing popular Internet products, especially in the social networking space, which is the reason why it has become China's dominant Internet company in the last five years. It's no coincidence that Tencent's market value now stands at nearly US$60 billion, roughly equal to all of the country's other Internet companies combined. It's also no coincidence that Tencent is currently being sued in a Guangdong court over its increasingly monopoly-like status by Internet security software maker Qihoo 360 (NYSE: QIHU).
So now let's return to the original point, which was whether or not China Mobile should be able to bully Tencent into a revenue sharing agreement. That's essentially what China Mobile is trying to do by implicitly threatening to block WeChat and other Tencent applications from its mobile network used by two-thirds of China's mobile subscribers.
I'm sure that other similar revenue sharing agreements exist in the world, and China Mobile already had one such agreement with a third-party company to offer similar text messaging services over a platform called Fetion, or Feixing in Chinese. But this kind of threatening to block a service operator just because that operator is so successful seems more like anti-competitive behaviour, and I would strongly suggest that the MIIT quickly step in to clarify the situation so that these two sides can work out their differences. I would suggest the regulator formally forbid telcos like China Mobile from blocking Internet sites that are doing nothing illegal. That way, China Mobile may still be able to get the deal it wants, but it will have to pursue its negotiations by offering incentives to Tencent rather than making threats.
Bottom line: The telecoms regulator should step in to forbid China Mobile from using its market dominance to win a revenue-sharing deal with Tencent.