i n t h e n e w s Telecom Operators Risk Management: The Key to Successful MVNO Markets Communications World, November 2013 Guest: Jane Hou Associate Principle of Value Partners Management Consulting Chunsheng Gao Project Director of HCR In the past few days, two major telecom operators China Telecom and China Unicom have signed agreement with several companies that applied to be virtual network operators. The firms that entered the business of MVNO include Suning, Gome, Dphone, FunTalk, Aisidi, Telling, Alibaba, and JD.com. This move demonstrates the great progress achieved in the license application of MVNO. The telecom market is also excited about the outcome of this new business relationship as the scale and number of chosen future partners is unprecedented. <Communication World>: How would you evaluate the cooperation between telecom operators and virtual network operators? Jane Hou: Telecom operators hold a positive attitude on the outlook of the cooperation, and is even more positive than the market s expectation. First of all, China Telecom and China Unicom each have chosen around 15 companies as their future partners. Second, as all these future partners are large firms with outstanding performance in the industry, we expect to see their impacts on market structure once the partnerships kick in. Unlike foreign telecom operators, who are relatively cautious, or even hold a passive attitude about building relationships with virtual network operators, Chinese telecom operators are much more responsive after regulators cleared the policy on MVNO, and there are over a hundred companies applying to be MVNO. China Telecom and China Unicom see strategic complementarity in the cooperation with top electrics retailers like Gome, Suning and Dphone as they provide diversified distribution channels for the business. Gome and Suning can take advantages of their wide product range and customer base in marketing innovation of mobile communication products and services in the future, and the partnership also follows the trend of Smart Home. The partnership with JD.com and Alibaba represents the
future form of distribution channels. Further, telecom operators seek to build dynamic partnership. For instance, China Unicom not only allows its future partners to build their own system, but also grants them the power to set retail price through wholesale of data, voice, and text. <Communication World>: According to the announcement, channel players are the majority of firms that were chosen. What is the reason behind it? Jane Hou: Distribution channel is the most important factor in the Telecommunication industry. Convenient distribution channels allow telecom operators to increase customer base and to provide better services to clients. The concept of channels now includes online, offline and clients as the Internet continues to sustain growth and innovation. With the demand on offsetting the weakness in distribution channels and on expanding market shares, China Telecom and China Unicom prefer to cooperate with companies that have experience as telecommunication services agency and can rapidly switch to the MVNO business. Channels players happen to have all the characteristic that telecom operators require, and this is also why channels claim victory in the first round of the battle. Channels are also preferred by foreign telecom operators when they were choosing the virtual network operators. Among all 1,100 MVNOs in the world, except for virtual operators that were originated from telecom operators (approximately 64 percent), retailers are second major players and accounts for about 13 percent of the business. Retailers such as Carrefour, TESCO, and 7-11 run as MVNOs globally. It is noteworthy that this is the first time telecom operators choose E-commerce giants as the virtual network operators around the world. In the past decade, Chinese E-commerce and mobile E-commerce business have delivered extraordinary development in size, growth, innovation, and market position. The innovative partnership with E-commerce giants like Alibaba and JD.com caught our eyes because of their enormous customer base and the strength in product portfolios and brand recognition. We are looking forwards to seeing changes in business models, products and services, and customer experience provided by these E-commerce giants once they receive the MVNO license. Chunsheng Gao: Telecom operators prefer channel players for the following reasons. First, channel players have long-term and stable relationship with clients as well as brand influence. Second, most channel players maintain their market leading positions by providing unique services to differentiate themselves from peers, and these unique services have impact on the market under certain circumstance. Although channel players have competitive advantages in the business of virtual network operators, they still face obstacles in the operation of this new business. We see both opportunities and challenges along the way. 2
Overall, in the short term MVNOs probably will not have huge impact on the market structure. As they lack experience in telecom operations, they may first concentrate on how to increase user stickiness by developing unique services after they receive the license. Communication World: What moves the companies that are on the list would make, and what are the following impacts on the market? Chunsheng Gao: Gome and Suning are leading electronics appliance retailers in China. However, their revenues and profits suffered a continuous decline in recent years. Both companies intend to integrate their online/offline resources by entering the MVNO field. They will provide their clients with new mobile accounts, in order to get more client exposure and gather client information for cross sales. Furthermore, Gome and Suning may use this opportunity to optimize their value chains, providing better services and resources to their business partners. Pure cellphone retailers such as Dphone and Telling are forced to change their business model, because telecom operators have significantly larger power on sales of cellphones. Dphone and Telling are not able to implement cross marketing strategies like Gome and Suning. Becoming MVNOs and provide differential after-sales services seem like the only possible strategy. E-commerce companies such as Alibaba and JD.com are not aiming for cross sales, at least for the moment. They intend to make online shopping experience more convenient and enjoyable for their clients. The MVNO business enables them to integrate clients mobile accounts and shopping accounts for online shopping. Communication World: Are MVNOs potential competitors to the traditional operators? How should the traditional operators respond to it? Jane Hou: Traditional operators need to balance their relations with the MVNO partners to create a win-win situation. They considered the following three key points when choosing their MVNO partners: strategic resource complementation, response to competition, and risk management. As for risk management, traditional retailers and small CPs are relatively easier to control. The potential threats come from E-commerce companies and internet companies. However, through thoroughly designed partnership strategy, traditional operators can enjoy the E-commerce and internet companies strength in creativity, E-commerce, big data, etc. to strengthen their core competency, streamline their user experience; and leverage their market share. In fact, traditional operators have already taken full consideration on future risk control. For example, China Telecom only allows MVNO partners to rent their systems and also set up several limitations on partners products. China Unicom offers their partners some discretion 3
in system and product design but offers low discount rate to avoid potential price war. While China Mobile still staggers to release any substantial information, it is widely seen as the most conservative one among the three operators. Chunsheng Gao: MVNO currently will not generate large impact on traditional operators, because they both will focus on their own field in the short term - the essence for introducing MVNO to the market is to create a win-win situation and enhance both sides core businesses. Besides, system development for MVNO and MVNE is a continuous complicated work. However, we have to admit that MVNO s introduction will have impacts on traditional operators to some extent. From other countries experience, we can tell that price will be first impacted; but if MVNOs only rely on low prices they will end up bankrupt in the end. 4
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