Telecom giants challenged by smartphone messaging apps

China's telecommunications operators are being squeezed by messaging applications installed in the smartphones they encouraged users to buy, which depend on the networks that operators spent pretty pennies to build.

Yang Yifan, a clerk for the Chinese branch of ITOCHU Corporation, now uses Weixin, or WeChat, a WhatsApp-like messaging service, to contact clients and chat with friends on his new Android phone.

"It has all the functions of short messaging service (SMS) and is basically free, except for some minor charges for network flow," Yang said. "Anyone with a handset can download it and get registered for free."

The application, developed by one of China's largest information technology (IT) companies, Tencent Holdings Ltd., also offers voice messaging and photo transfers. The app's low-cost and convenience has earned it a huge user base this year.

Weixin was followed by many other IT firms that rushed to launch their own instant messaging (IM) services, including Sina Weibo, China's most popular Twitter-like platform, and messaging applications Mi Talk and Momo.

As these apps have become more popular, however, telecom operators have noticed a drop in business.

The number of traditional text messages sent by individual users declined 10.6 percent year on year in the first two months of 2013, a report from the Ministry of Industry and Information Technology (MIIT) showed last week.

Meanwhile, the growth rate of messages sent via telecom networks slowed to 0.7 percent, markedly lower than 5.7 percent and 7.6 percent in the same period of 2011 and 2012, respectively, according to the report.

The sluggish SMS business was also confirmed in a recent survey conducted by the Data Center of China Internet, which showed that the message volume handled by telecom operators dropped 20 percent in 2012 from that of the previous year, while telephone services fell 5 percent.

He Huajie, a senior manager of China's second largest telecom operator, China Unicom, joked that the company may have to cede its rank to Tencent if the calculations were based only on the number of users.

Li Yue, president of China Mobile, China's biggest telecom company, also admitted that the old telecom service providers have taken a hit from emerging and fast-developing IT firms that used existing networks to expand their businesses, much of which overlapped that of the telecom giants.

In contrast, Tencent witnessed its income in telecom value-added services grew 13.8 percent year on year to 3.72 billion yuan (593.2 million U.S. dollars) last year.

Although messaging applications in mobile services weighed on traditional services, they also boosted network flows, indicating major potential business for telecom companies, said an industrial insider who declined to be named.

His words were echoed by Yan Xiaojia, an analyst with Internet solution company Analysys International, who advised telecom companies to tap their profit potential by improving their bandwidth and establishing more Wi-Fi hotspots, although this could dramatically drive up operating costs.

To improve the lackluster performance, the country's three dominating telecom operators have launched their own mobile apps, but these are only taking a small market share compared with major software applications.

Fetion, an IM service available for mobile devices promoted by China Mobile, once enjoyed great popularity, but faded out recently, when the company confirmed that its targeted customers are phone users who already have a China Mobile SIM card.

Recently, Ma Huateng, chairman of Tencent, expressed his hope for cooperation, saying operators and IT firms should seek a relationship featuring multiple beneficiaries and win-win results.

His telecom counterpart Li said he was not concerned about contracting profits in messaging services, which were offset by booming network flows, stressing that it is an inevitable trend in technological advancement.

But the insider held a more gloomy outlook, as the conflict of interests showed no signs of easing in the short term without the interference of a third party. In terms of "a third party," he hinted that the MIIT could mediate in the event of a dispute.

In 2010, the ministry facilitated the reconciliation between Tencent and China's most popular security software developer, QIHU 360, as their heated competition in pursuing users triggered numerous complaints from netizens on deteriorating user experience.

Dong Xu, an analyst with Analysys International, said operators have no reason to worry so much, as trends in tech fields often change, suggesting that even die-hard fans of Weixin will have a new favorite sooner or later.

Even Yang, who has purchased three cell phones since he started working two years ago, has already lost count of the number of apps he has used.