SMS at start of long decline for China telcos
The stalling growth in SMS will turn into a rapid decline starting this year, forcing China's three telcos into alliances with private message service providers like Sina and Tencent.
New government data on mobile text messaging, also known as SMS, is underscoring how this former cash cow for China's telcos is quickly losing its audience, forcing the carriers to quickly look for replacement revenue sources. The new data also adds some new perspective to the high-profile clash between leading telco China Mobile (0941.HK; NYSE: CHL) and top Internet player Tencent (0700.HK) that erupted last month, as the former accused the latter of stealing its SMS business.
Before we go any further, let's step back and take a look at the latest data, which show the number of SMS messages sent by Chinese mobile users rose a scant 2 per cent last year to nearly 900 billion. Within that figure, the average number of text messages sent per person actually fell about 9 per cent, according to one report, which made its calculation based on the fact that China's total mobile user base grew 11 per cent last year.
In fact, this particular trend has been happening for at least the last two years for the nation's three major telcos, China Mobile, China Unicom (0762.HK; NYSE: CHU) and China Telecom (0728.HK; NYSE: CHA). After posting strong double-digit growth for much of the last decade, China Mobile's SMS message volume grew only slightly in 2011, and I wouldn't be at all surprised if the company's SMS volume actually fell when it reports its 2012 financial results in March. From a revenue perspective, SMS revenue is still quite substantial, accounting for about 9 per cent of China Mobile's 528 billion yuan (HK$657 billion) in revenue last year.
Industry watchers will know that the culprits stealing away the SMS business are a new generation of mobile apps, most notably Sina's (Nasdaq: SINA) popular Weibo microblogging service and Tencent's equally fast-rising WeChat, a mobile instant messaging service. Sina Weibo now boasts over 350 million registered users, many of whom access the service over their mobile phones, and WeChat also has around 300 million users just two years after its launch.
Speaking from personal experience, I am probably a good example of what is happening in the industry and why the telcos are increasingly worried. After installing WeChat on my mobile phone earlier this year and another similar app called WhatsApp a year earlier, I now send about half of my text messages over these two platforms. Both platforms, which use Internet air time to send messages, are not only much cheaper than traditional SMS, but also offer much better functionality, allowing me to track historical chats and also attach items like photos and video to my messages.
This mass migration of users from traditional SMS to other platforms represents a huge lost business opportunity for the three big Chinese telcos. In many ways, the loss of this business also reflects a broader culture of slow movement and lack of innovation at this bureaucratic, state-run trio, which were basically given a monopoly on the lucrative telecoms services market by Beijing for the last 15 years.
China Mobile's realisation that it was quickly losing this important revenue source led it to accuse Tencent of behaving like a telco last month, and for the companies to quietly open talks that I suspect will end in a revenue-sharing agreement. Look for the decline of SMS to accelerate quickly in the next two years, with the result that such revenue may only make up 5 per cent or less of China Mobile's total in 2015. In the meantime, look for innovative companies like Tencent and Sina Weibo to take a bigger piece of this lucrative market, though not without some strong resistance from the big three telcos.
Bottom line: The stalling growth in SMS will turn into a rapid decline starting this year, forcing China's three telcos into alliances with private message service providers like Sina and Tencent.
To read more commentaries from Doug Young, visit youngchinabiz.com