On May 24, the long-awaited bombshell finally exploded. Three Chinese government ministries issued a statement “encouraging” (read: commanding) the major telecommunications carriers to reorganize. No one was surprised.
The reorganization is a central planner’s fantasy. It will profoundly reshape the world’s largest national telecom market and affect the fortunes of firms accounting for a breathtaking 1 billion fixed and mobile subscriptions.
But dramatic as it is, the reorganization leaves the reform of China’s creaking telecom industry only half done. The second bombshell of 3G licensing remains stubbornly airborne, and the ponderous, state-managed approach spares little thought for customers.
Buyers and sellers
There are three headline transactions. China Mobile will acquire landline also-ran China Tietong, also known as Railcom. China Unicom, the second-placed mobile operator, will keep a GSM network, but sell a smaller CDMA network to landline colossus China Telecom. Separately, Unicom will buy landline and internet number-two, China Netcom.
At first glance, China Mobile has got the booby prize. The company will face renewed competition from its rivals and has just tiny Tietong to show for the restructuring. China Mobile will also someday receive a license for TD-SCDMA, China’s shaky domestic 3G standard. With average per capita revenues already declining in the 2G market as subscriber growth shifts to thrifty rural customers, this seems a poisoned chalice.
Nevertheless, China Mobile still has 400 million subscribers, five times that of its nearest post-reorganization competitor. This makes it the only operator with a chance of taking TD-SCDMA mainstream, a calculation that will not have escaped TD-obsessed mandarins.
China Unicom breaks even. It gives up a CDMA network and in return gets China Netcom, which boasts 108 million landline and data subscribers. Of all the major deals, this one looks the most complementary, potentially creating a balanced company with real opportunities to cross-market and bundle services.
China Telecom looks like the big winner. Although it may be overpaying for Unicom’s CDMA network, China Telecom is planning the kind of CDMA marketing drive that Unicom never bothered with, and its huge landline subscriber base will be a good foundation.
The outlook is hazier for investors. China Mobile, China Telecom and China Unicom are all listed in New York and success will ultimately hinge on how they manage complex mergers and capitalize on new opportunities. Worryingly, the reorganization does little to improve the carriers’ abilities to expand overseas, where the best growth potential may lie.
Also in limbo are the most important but often overlooked parties to the reorganization: China’s telecom consumers. Although better than many state-owned operators elsewhere in the world – service is cheap and accessible, handsets are not locked to specific carriers – China’s telecom giants still lack innovation and trail international standards. 3G is limited to demonstration networks and licensing remains “a few months away,” as it has been for years.
No sea change
In the best central planning tradition, the reorganization was really undertaken for the benefit of the carriers and regulators. It re-consolidates companies spun off in prior reorganizations done between 1998 and 2002. Competition is only marginally increased. Three landline and two mobile operators will become three combination landline and mobile operators. This is not a revolution in choice.
The most certain beneficiaries will be China’s domestic network equipment makers, ZTE and Huawei. They will profit as the reorganized carriers upgrade networks and eventually shift to 3G. As with every gold rush, the shovel salesmen do best.
A simpler way to ignite real progress and spread the benefits to the dialing masses would be to issue 3G licenses to both the incumbents and a few new competitors, including foreign ones. Forcing the major mobile operators to license capacity to mobile virtual network operators might also help. Unfortunately, such a wide-open approach still terrifies China’s regulators.
On the bright side, you can expect another centrally planned reorganization five or six years hence.