China’s telcos find themselves going sideways at best, with little or no top-line growth.
However, they are required by the government to invest, invest, invest to bring higher speed internet to all of in China as fast as possible. Yet of course, the bulk of the value created from a higher speed Internet will accrue to the Internet companies themselves, not the telcos.
In one sense, the telcos are providing an enormous social good, and so it makes a lot of sense that the government should own most, if not all, of their shares. It also makes sense that the discussion about reconsolidating China’s telcos is gaining traction. Creating a single company to build and operate shared infrastructure should reduce wasted investment. Combining other parts of their operation may also make sense.
To quantify the performance challenges, in the first half of 2015, revenue and customer numbers were down, while usage volumes continued to rise.
Here are some stats that paint a picture of where the telco industry stands today:
- Industry revenue was USD 119 billion, down 1.2% year-on-year.
- Capital expenditure was USD 23 billion, up 5.6% year-on-year. This represents a very high percentage of revenue by international benchmarks, reflecting Li Keqiang’s demands to bring high speed internet to more of the population.
- Total subscribers decreased 0.6 million in June to 1.54 billion. Mobile subscribers increased 0.6 million to 1.29 billion. Fixed-line subscribers decreased by 1.2 million to 241 million.
- Broadband subscribers increased by 1.5 million in June, raising the total to 207 million.
- Mobile internet subscribers saw a net increase of 35 million in June, bringing the total to 905 million.
- Mobile internet data traffic reached 1.68 billion GB in June, up 93.6% year-on-year. Average monthly mobile data traffic usage per mobile subscriber reached 321 MB, up 83.7% year-on-year. The transition to China becoming a mobile dominated Internet is still underway, but with little benefit to the network operators.
- 360 billion SMS messages were sent between January and June, a 4.7% decrease year-on-year. Not a key metric anymore, and if my phone is in any way representative, the bulk of these SMS are junk promotions, largely for investment products that are alternatives to buying shares.
However much their share price fluctuates in Shanghai, the operation of China’s telcos seems to be tightly constrained. While it has always been incredibly tough to be the CEO of a Chinese state-owned enterprise, being a leader in the telecom sector today seems particularly challenging: enormous political pressures to improve the quality of the network nationwide almost instantly; almost no ability to raise prices; much mid-level talent leaving to Internet companies; thousands of retail outlets that are becoming obsolete; pressure to keep hiring even if there is limited need; and finally, an expectation to grow profits.
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