China Mobile hit by bad Wi-fi bet
China Mobile's poorly performing Wi-fi business appears to be a big factor eroding its profits, and the service could quietly be retired in the next few years
I was a bit surprised by the just-released latest quarterly results from cellular crybaby China Mobile (0941.HK; NYSE: CHL), which I expected to contain abundant evidence supporting its grievances in an ongoing battle with Internet giant Tencent (0700.HK). China Mobile complains that Tencent's popular WeChat mobile instant messaging service is hogging up capacity on its network, and is pressuring Tencent to start charging fees for the service so that both companies can share that revenue. At the same time, China Mobile is also complaining that WeChat helps mobile subscribers circumvent traditional SMS services by routing messages over the Internet, robbing China Mobile of an important revenue source.
Against that backdrop, I was expecting China Mobile's latest quarterly results to show stagnant or falling profits and revenues per user, reflecting falling SMS use as subscribers flocked to cheaper equivalents like WeChat. The latest results do indeed show weak profits and falling user revenues, but the culprits don't appear to be related to the WeChat dispute. Instead, a major factor behind the company's earnings woes appears to be its struggling Wi-fi service that is starting to look like a dud despite massive investment over the last two years.
All that said, let's take a look at the headline numbers, which show that China Mobile's profit for the first quarter of 2013 was largely unchanged, rising an anemic 0.3 per cent to 27.9 billion yuan, or about US$4.5 billion. Revenue rose by a healthier six per cent, driven largely by an increase in new customers and growth in its mobile data business driven by popular services like WeChat.
A closer look at some of the more detailed figures showed that average revenue per user (ARPU), a widely watched industry metric, dropped to about 10 per cent from last year to 63 yuan per month. But this drop in ARPU has been happening for years now as mobile technology matures and becomes more widespread, so it seems a bit unfair to suddenly start blaming Tencent and WeChat for the problem.
China Mobile's SMS traffic actually rose about 5.5 per cent during the quarter, which was more than double the growth rate for the company's subscriber base. That fact would seem to discredit China Mobile's claims that WeChat is hurting its SMS business, even though the broader trends for SMS have been less positive over the last two years. Mobile Internet use also rose a healthy 14 per cent, as more people accessed the Internet over their smartphones.
While SMS and mobile Internet use both look healthy in this report, the one area that looks particularly vulnerable is China Mobile's WLAN service, most of which presumably refers to its extensive Wi-fi network. China Mobile embarked on the aggressive Wi-fi building spree about two years ago, announcing plans to construct a national network of one million Wi-fi hotspots by 2014 as it bet on strong demand for short-distance Internet services.
But this latest report appears to show that the wi-fi program isn't doing so well, and may ultimately be a dud. China Mobile said its WLAN traffic actually fell about 14 per cent for the quarter, even though it's technically still building up the Wi-fi network. As a regular mobile user, I can verify that China Mobile's Wi-fi network is indeed quite extensive, with service accessible nearly everywhere in Shanghai. But I can also testify that I don't know anyone who actually subscribes to China Mobile's Wi-fi service, despite the huge investments the company has made.
It's too bad that few people are pointing out this disappointing performance of Wi-fi, and are instead helping China Mobile by broadcasting reports of its ongoing feud with Tencent. At the end of the day, I suspect that China Mobile may quietly retire its Wi-fi network as the technology becomes outdated, and take an equally write-off for the business. In the meantime, it will probably continue to blame outsiders like Tencent for its slow-growth woes.
Bottom line: China Mobile's poorly performing Wi-fi business appears to be a big factor eroding its profits, and the service could quietly be retired in the next few years.
To read more commentaries from Doug Young, visit youngchinabiz.com