Corporate China
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October looks golden with VNO potential

China could issue VNO licenses next month, paving the way for the launch of up to six new virtual telcos by the Chinese New Year.

PUBLISHED : Thursday, 19 September, 2013, 8:47am
UPDATED : Thursday, 19 September, 2013, 8:48am

October is quickly shaping up as a Golden Telecoms Month for China, with a growing number of major events looking set to take place in the month that starts off with the October 1 Golden Week holiday. Major developments that look likely to occur next month include the long-awaited awarding of 4G mobile licenses, and the announcement of another highly-anticipated deal that would see dominant telco China Mobile (0941.HK; NYSE: CHL) finally offer an Apple (Nasdaq: AAPL) iPhone on its network. But perhaps the biggest development for the month could see China's telecoms regulator announce its first round of highly anticipated licenses for up to six new "virtual telcos", known in the industry as virtual network operators (VNOs).

Buzz about these new VNOs first emerged early this year, and now media are citing at least one unnamed applicant saying the licenses will be issued sometime next month. I'll admit the sourcing on this report isn't the most reliable, as applicants for new licenses can often be overly aggressive in their interpretation of signals from China's slow-moving regulator, the Ministry of Industry and Information Technology (MIIT).

But that said, an October award of VNO licenses would certainly be consistent with previous signals coming from various industry sources, including the MIIT itself. What's more, an October award of licenses would give the new licensees around three months to prepare for service launches before or around the important Chinese New Year holiday, which falls in late January next year.

According to the latest reports, a number of applicants for the licenses have been negotiating with China's three major telcos since July. Under the pilot program, each of those telcos will be required to sign deals with two VNO partners. Those partners would then be allowed to offer mobile service under their own brands, effectively tripling the number of carriers in China from the current three big state-run firms to nine telcos. But rather than build their own networks, which costs billions of dollars and can take years, each of the VNOs will simply lease network capacity from its telco partner, meaning they could offer service almost immediately.

The reports cite one of the applicants saying it is in final negotiations with its potential telco partner, and expects the licenses to be awarded no later than October. Previous media reports have named some of the final applicants, which include electronics retailing giants Gome (0493.HK) and Suning (Shenzhen: 002024). Interestingly, none of the reports include any of China's major Internet companies, even though some had speculated that Tencent (0700.HK) might apply -- rumors that Tencent denied.

From the perspective of someone who has followed China's telecoms sector for more than a decade, I can't emphasize enough how much this kind of change is needed to breathe new life into the industry. China has invested billions of dollars over that period to build up networks for the three major carriers, China Mobile, Unicom (0762.HK; NYSE: CHU) and China Telecom (0728.HK; NYSE: CHA). And yet despite all that spending and the world's largest base of mobile subscribers, China is one of the world's slowest and least innovative global telecoms markets due to the dominance of these three slow-moving state-run behemoths.

It's still too early to say if this plan will succeed, as I suspect the three state-run telcos may try to put up obstacles to undermine their new VNO partners and stifle competition. But I'm cautiously optimistic that some of the better-connected players, especially big names like Suning, have the resources and determination to make a serious effort at becoming major VNOs. So while a China Mobile iPhone deal or 4G licenses may be the biggest headline grabbers in October, my personal prize for telecoms news of the month will go to the VNO license awards if and when they come.

Bottom line: China could issue VNO licenses next month, paving the way for the launch of up to six new virtual telcos by the Chinese New Year.