WeChat became the bane of the Big Three for slashing their profits, but a pilot program involving China Unicom may transform enemies into partners

08.06.2013 17:17

Popular Messaging App, Telecoms Operator Trying to Play Nice

WeChat became the bane of the Big Three for slashing their profits, but a pilot program involving China Unicom may transform enemies into partners

By staff reporters Qin Min and Wang Shanshan

(Beijing) — A special subscription plan offered by China Unicom’s Guangdong branch to users of the popular messaging application WeChat opened to online reservations on August 5. Official sales were to start three days later. The plan, which includes a new SIM card, has attracted great attention from the market because it is the first attempt at cooperation between a telecoms operator and Tencent Holding’s WeChat. Early indications are that the pilot program is flying high. The two companies say that as of 11 a.m. on August 6, the number of online reservation surpassed 933,000.Many expected the new partnership to break the ice between the rising over-the-top (OTT) services– mobile Internet services offered through telecom networks such as WeChat – and traditional telecom service providers.

Indeed, the growing popularity of WeChat has eroded the business of the country’s Big Three telecom operators.  The Ministry of Industry and Information Technology has said that the number of ordinary text message fell 10.6 percent in the first two months of the year compared to the same period last year.

Around the world, wireless telecom providers are coming to grips with the threat the mobile Internet sector poses. Its rise benefits telecoms because customers rack up data charges by playing games, browsing the Net, watching videos and using social networks. But apps like Skype and WeChat that allow users to talk and send messages at virtually no cost are cutting into the telecoms’ core business of charging for traditional calls and text messages.

Over the past several months, there have been debates over whether telecom operators should charge WeChat for its services. There have been reports that Tencent and the telecoms firms were negotiating. Hence, the partnership between Guangdong Unicom and WeChat is seen as a breakthrough.

Based on the plan, subscribers will pay 10 yuan for every 300 megabits of data they use on the WeChat. They will also pay only 98.5 yuan for 100 yuan of credit. The subscription will also give WeChat users an expanded group chat function and special emoticons.

But the special package will only be offered in Guangdong Province to start and is aimed at China Unicom’s existing 3G subscribers. A source from Tencent said opinions inside China Unicom differed regarding the relationship with WeChat. Therefore, the partnership is best seen as a test, and will be expand only if it succeeds.

A Winner?

Launched in January 2011, WeChat’s growth has been explosive, reaching 300 million registered users in January and roughly 400 million users by the end of April. Most users are in China, where it is known as Weixin, but Tencent is promoting the app overseas.

However, the relationship between WeChat and telecom operators has grown increasingly complicated. On the one hand, WeChat relies on telecom operators to offer services while it generates data traffic for the telecoms. But on the other, the fast growing WeChat business is reducing profits for telecom operators.

Li Yun, the CEO of China Mobile, the country’s largest wireless telecom operator with 740 million customers, admitted that WeChat and other OTT apps are threatening to cut off traditional revenue streams from text messages, voice and even international calls. An HSBC report says text messages (or SMS) as a share of China Mobile’s revenue fell from 8.8 in 2011 to 7.9 percent in 2012, and the decline is likely to continue, by about one percent per year.

Earlier this year, China Mobile led a group to lobby government regulators, trying to convince them to charge Tencent for the WeChat service. No decision has been made.

China Unicom is seeking ways to narrow the gap with rival China Mobile before the launch of fourth generation (4G) wireless services, something that is expected to start as early as October. Inside the company, some say a partnership with WeChat can help the company win more users, but this is not a unanimous view. Nevertheless, under the rising pressure of competition with China Mobile, China Unicom is “more willingly to offer WeChat a chance,” a Tencent executive said.

“Both sides are eager to build up the cooperation framework first, so the talks went very quickly,” a source from China Unicom said.

Guangdong Unicom has cooperated with WeChat since 2011 by offering data packages to WeChat users and opening an official account on WeChat, a source close to the company said.

“Guangdong Unicom has done the best in data operation among all of China Unicom’s branches,” the source said. “The company reported profits from data business last year.”

Guangdong Unicom is interested not only in WeChat, but also Tencent’s marketing platforms that support WeChat, for instance the e-commerce site Yixun.com. The company is expecting to expand its sales network through such platforms and WeChat.

Wang Lixin, a professor at Beijing University of Posts and Telecommunications, predicted Guangdong Unicom would benefit from the partnership. Cooperation with the popular app would make full use of China Unicom’s network resources and could result in more value-added services, Wang said.

App Attitudes

The Big Three telecoms hold differing views regarding WeChat. The largest and strongest, China Mobile, has the toughest attitude, so much so that it decided to develop its existing online messaging service, Feixin, to compete with WeChat.

China Telecom is more moderate. It has been exploring possible cooperation with WeChat for some time, but it is also developing its own services. China Telecom is working with Internet firm Netease to develop similar apps that are being tested. The two formed a joint venture in which China Telecom holds the controlling stake.

China Unicom is the most eager to form a partnership. A source close to the company said it decided to give up app development as early as 2011. China Unicom is unique among the Big Three in that it revised its networks to more precisely monitor data flows, a move that can facilitate partnerships with OTTs.

“Transforming the network is a complicated project, and China Unicom is one step ahead,” a telecoms analyst said. “China Unicom will try to get as much of the market share as possible before China Mobile launches the 4G services. So it is eager to cooperate with OTTs.”

Not all OTT apps replace the core functions of telecom companies. Video streaming, for example, generates high data usage without cutting into existing revenue streams.

“But for free instant messaging apps like WeChat, we are still studying whether their impact on telecom operators is negative or positive,” said a source from China Unicom Research Institute.

Wei Leping, director of the Ministry of Industry and Information Technology’s Communications Science & Technology Commission, said the fact WeChat is basically free is key.

“This creates challenges for telecom operators,” he said. “Operators must adapt to it and decide whether to cooperate with the free service or cut their own service prices and pay more attention to operating data business.”
Indeed, in many developed markets, telecoms operators have switched their focus from traditional services to Internet data operations. But for China’s Big Three, traditional voice and text messages are still the key profit sources.

There are signs a transformation is in progress. For instance, China Mobile has launched more diversified data packages, and China Unicom has offered users special data plans for using specific OTT apps.

Xi Guohua, chairman of China Mobile, said at an industry conference in June that the company will transform from traditional voice service business to data business. If this happens, OTT apps will no longer be the enemies of telecom operators, but potential partners. The ministry said that in the first half of 2013, WeChat has driven up mobile Internet traffic by 56.8 percent compared to the same period last year. Telecom operators with more WeChat services naturally had more traffic.

Mobile data usage rates in China are relatively low and have room to grow. Analysts say Chinese users average about 100 to 200 megabytes of data per month. By comparison, North American smartphone users averaged close to 800 megabytes per month in 2012, a Cisco report said.

“What telecom operators should do now is consider how to encourage users to use more data and improve their pricing model to expand their data business,” said Hou Chengfen, deputy chairman of Value Partners Management Consulting. But he added that the profit margin of data business will be smaller than voice and SMS businesses, which means the high profit era of the 2G network is ending for telecom operators.

HSBC predicts that in 2013, both China Unicom and China Mobile would see data business account more than 50 percent of their total wireless-related revenue.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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