China restarts telecom industry reform

China's telecom industry has undergone a total of four large-scale restructurings since 1999.

During this time, the industry has evolved from an administrative monopoly to the current oligopoly market structure dominated by the "Big Three," i.e., China Mobile, China Unicom and China Telecom. Competition, which sprang up out of nowhere, can be intense in some parts of the industry. But compared with foreign markets in an open environment, competition in the Chinese telecom sector is still far from inadequate, and numerous vested interest groups remain deeply entrenched.

Since last year, decision makers have issued mobile virtual network operator licenses, relaxed restrictions on private investment in broadband access networks, and announced the establishment of a national tower company. These recent moves indicate the launch of a new round of telecom reform and signal the government's intention to break up the industry monopoly and allow the market to play a decisive role. Compared the simple government-led reform in the past, the new round of reform is unfolding in the background of a technological revolution. Facing the risk of marginalization, the three telecom giants recognize the importance of reform.

Caijing learned that the State-owned Assets Supervision and Administration Commission (SASAC) plans to allocate 49 percent of the national tower company's shares to private investment. The company will become the SASAC's first mixed-ownership company in the field of telecommunications infrastructure, which is a move forward after the mobile resale business was opened up to private capital (virtual operators).

Communication towers are an important part of base stations. The cost to construct each tower is generally around 200,000 yuan, and the overall construction costs and land siting costs account for about one-third of telecommunications operators' capital expenditures. According to the plan, the national tower company, the name of which is likely to be "National Tower Co., Ltd.", will begin its business registration process soon and be fully incorporated by September of this year.

However, the company's business scope is limited to towers and surrounding facilities, which is the result of the need to balance of the interests of the three operators. And although the entrance of private capital is encouraged, it cannot lead market competition and instead will only play a complementary role in resale resources opened up bythe national tower company and operators. Meanwhile, a national tower company with exclusive resources is likely to form a new monopoly.

Infrastructure networks not only include the mobile Internet (base stations, towers), but also the backbone network which restricts the further development of the Internet industry. The monopoly problem of the latter has been a nagging issue. For more than 10 years, Internet companies have been forced to pay high leasing costs to operators on the backbone network. Liu Dele, president of Youku Tudou Inc., said the bandwidth costs for Chinese online video companies are four times higher than YouTube's.

At least so far, the Chinese government has not yet truly opened up competition in telecom network infrastructure and operations. The so-called "network service separation" (i.e., separate operations for infrastructure networks and telecommunications services) is actually still dominated by the three operators, and the role of the three operators as both player and referee has not been fundamentally changed.

As a result, a strange phenomenon has appeared in the Chinese telecom market: the three operators which have a monopoly on resourcesare trapped in the system and cannot achieve rapid development. Meanwhile, the development of Internet companies, which have flexible market mechanisms, has been suppressed by monopoly resources.

As for the prospects of China's telecom industry, two outcomes are possible. The optimistic forecast is that decision makers transcend the restraints of vested interests, completely breaking the monopoly, promoting the prosperity of the whole industry chain, and allowing operators to become true market players.

The less optimistic outcome is that a portion of monopolized resources are opened to social capital, further entangling the market with administrative power, restricting the new technological revolution, and widening the gap between Chinese telecom and Internet-related industries and their foreign counterparts. In this scenario, operators would be unable to rid themselves of their dependency on monopolistic power.