Billionaires Jack Ma and electronics retailer Zhang Jindong may get licenses this month to start phone companies in China, fueling government efforts to cut prices and promote high-speed networks in the world’s largest wireless market.
Chinese leaders this year proposed allowing private companies to use the networks of state-owned carriers China Mobile Ltd. (941), China Unicom (Hong Kong) Ltd. and China Telecom Corp. The potential gains from access to a $213 billion industry prompted Zhang’s Suning Commerce Group Co. (002024) to partner with China Unicom; billionaire Jack Ma’s Alibaba Group to seek a license; and Gome Electrical Appliances Holding Ltd. (493) to discuss leases with state carriers.
As China pushes consumers to upgrade to faster networks, President Xi Jinping has turned to private-sector companies to shoulder some of the marketing and promotional burden of luring new users. Allowing challenges to state carriers may lead to price cuts, more choices in service plans and better customer service for users of China’s 1.2 billion wireless accounts.
“The benefits could come on the front end, that is, through better service and an increased range of options for consumers,” said Bertram Lai, a Hong Kong-based analyst with CIMB Securities Ltd. “Consumers may benefit from being able to have their phone service from a more proactive organization that caters specifically to their needs.”
For example, a user could buy a wireless package from an e-commerce company that offers free voice minutes in exchange for spending a certain amount of money on their website, Lai said.
New entrants will capture about 10 percent of China’s mobile-phone connections by 2018, said Nicole McCormick, an analyst at researcher Ovum. Retailers selling phones could lease spectrum and package the handsets with wireless services to target the millions of migrant workers who crisscross the country every year between factories and their rural homes, McCormick said.
The Ministry of Industry and Information Technology said in May that private companies could submit applications for a two-year trial ending in December 2015. Licenses to resell wireless capacity to consumers may be issued as soon as this month, though the government hasn’t released a timeline or specified the rates carriers can charge to lease spectrum.
The ministry on Dec. 4 issued 4G licenses to the three state carriers.
Miao Wei, head of the ministry, told government leaders Nov. 12 that a “deepening of telecommunication reform” was planned. Issuing licenses for mobile virtual network operators, or MVNOs, is one of those reforms.
Prices for wireless services in China already are lower than many Asian markets, said Christopher Lane, a Hong Kong-based analyst with Sanford C. Bernstein. One measure of affordability -- mobile service revenue as a percentage of gross domestic product -- is equal to or less than that in Japan, South Korea, India, Thailand and Malaysia, he said.
Bills may decrease by a maximum of 3 percent, and consumers may benefit if the new operators package services with hardware, Ricky Lai, a Hong Kong-based analyst at Guotai Junan International Holdings Ltd., said in a phone interview.
China wants more wireless users to switch their voice and data packages to higher-priced 3G and 4G services as the vast majority of Chinese subscribers still use 2G. The MVNOs would use existing networks, and their licensing fees would help pay for network maintenance and expansion.
Marketing and subsidy costs to lure users, combined with the expenses of building out a 4G network, have China Mobile on pace to report a 3 percent decline in net income this year, its largest decrease in 14 years. China Mobile’s 759 million subscribers as of Oct. 31 make it the world’s biggest phone company, though only a quarter of them use 3G.
“The introduction of MVNO in China will further promote mobile usage in China,” Cynthia Meng, a Hong Kong-based analyst with Jefferies Group LLC, said in a Nov. 21 report.
The reforms limit foreign investors to less than 10 percent ownership. That rules out Asia technology giants like Japan’s SoftBank Corp. (9983) and hinders China’s largest Internet companies, including closely held Alibaba, Baidu Inc. (BIDU) and Tencent Holdings Ltd. (700), all of which have international shareholder stakes exceeding the limit.
Alibaba Group is applying for a license, said Florence Shih, a spokeswoman for the company. Ma, a former teacher, built a $3.7 billion fortune from creating China’s largest e-commerce company, according to the Bloomberg Billionaires Index.
“The precedent that may have some appeal to Jack Ma and the others is Richard Branson,” said Duncan Clark, chairman of Beijing-based BDA China Ltd., which advises technology companies. “With Alibaba, Jack could promote aggressively online and perhaps do bundling with an operating system or apps.”
Branson’s Virgin Mobile, started in 1999 in the U.K., also offers no-contract phones to prepaid users. Its U.S. service is part of Sprint Corp., which was acquired by SoftBank in July.
“Virgin Mobile has studied the Chinese market extensively but at the moment we are not actively pursuing an opportunity,” Nick Fox, a London-based spokesman for Virgin Mobile, said in an e-mail.
Suning, whose founder Zhang has a fortune estimated at $4.9 billion according to the Bloomberg index, reached an agreement with China Unicom for a partnership on the resale of mobile service, the electronics retailer said in an October filing with the Shenzhen Stock Exchange. Suning spokeswoman Ge Shuang said she wasn’t aware of any change in the situation.
Gome could get a virtual telecommunications operator license next year, President Wang Junzhou said Nov. 19 in Beijing. Anita Sun, an investor relations officer at Gome, said nothing has changed since then.
State carriers declined to identify potential leasing partners. The program will foster competition and enhance the development of mobile services, Jacky Yung, a Hong Kong-based spokesman for China Telecom, said in an e-mail. China Mobile and China Unicom declined to comment.
“As a strategic sector, companies will still be tightly controlled by the government,” said Neil Juggins, a Hong Kong-based analyst at JI Asia Research Ltd. “That’s an immovable assumption.”
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