Broadband Access Opens to Private Firms, May Trigger a New Round of Price War

On December 25, the MIIT officially issued the "Notice on Opening the Broadband Access Market to Private Capital" (hereinafter referred to as the "Notice"), encouraging private capital to enter the broadband access market through multiple models, including building infrastructure required for broadband access network services, cooperating with basic enterprises and sharing revenues, and leasing access network resources from basic telecommunications enterprises, so as to provide users with more choices and better services. 　　**Currently, in addition to the three major telecom operators and radio and television providers offering broadband access services in China's broadband market, private enterprises such as Dr. Peng (with its products: Broadband Connect and Great Wall Broadband) and Founder Broadband are also promoting low-price broadband. Moreover, they have raised the slogan of low-price 100M fiber access. Low price and high speed—this is the most ideal broadband for ordinary people.** 　　**In fact, the difficulty of "last mile" access in the broadband market and insufficient broadband construction funds are also major problems troubling operators. Discussions such as how large the profit margin of broadband is and whether 100M/1000M broadband can deliver real value have never ceased.** 　　What impact does this MIIT "Notice" have on the entire communications market? Communications Life News (WeChat: maoqiying2008) conducted exchanges with basic operators, leading figures from private enterprises, and relevant experts. The following is a summary of the information: 　　**I. Current Status:** 　　**A comparison between "Dr. Peng" (which owns Broadband Connect and Great Wall Broadband), China's largest private broadband operator, and the three major telecom operators.** 　　**1. Price Comparison: Private Broadband Is Much Cheaper** 　　This is the tariff standard published on the official website of Broadband Connect under Dr. Peng: 　　As can be seen from the chart, **the minimum annual package for Broadband Connect's 50M broadband is RMB 1,080, and a 3-year package is RMB 2,999; while the 100M broadband is RMB 2,180 for 2 years and only RMB 3,599 for 4 years.** 　　Beijing Unicom launched 100M and 50M broadband services on January 1 this year, with tariffs showing that if 100M broadband is purchased separately, the annual package is RMB 3,280, but joining the "Wo Freedom" family package is equivalent to RMB 110 per month; Beijing Telecom has also released standard tariffs for 100M products, with unlimited monthly usage at RMB 280 per month, and the annual package after discount is also RMB 2,800 per year. 　　From the price comparison in the Beijing area, using Broadband Connect's 50M broadband for 4 years is equivalent to the price of using Telecom or Unicom broadband for 1 year. 　　**2. Users: Telecom Operators Hold 90% Market Share** 　　Currently, Dr. Peng (including Broadband Connect and Great Wall Broadband) covers 81 cities with 60 million users and 8 million paying users, of which 50M and 100M broadband users exceed 2 million; Wu Shaoyan, Executive Vice President of Dr. Peng, said in an exclusive interview with Communications Life News that it is expected that by the end of 2017, Dr. Peng will achieve 100 million household network coverage nationwide, with paying users reaching 15 million, focusing on business development in first- and second-tier cities nationwide, and gradually covering second- and third-tier cities. 　　In the domestic market, in addition to China Unicom, China Telecom, China Tietong, and China Mobile (which obtained a fixed-line license this year), there are also private broadband service providers such as Dr. Peng (Great Wall Broadband and Broadband Connect). **According to MIIT data, among approximately 200 million fixed broadband access users nationwide, China Telecom's publicly disclosed broadband users are 106.17 million, and China Unicom's are 68.742 million. It can thus be seen that users of China Mobile, Gehua Cable, Broadband Connect, Great Wall Broadband, etc., total only over 30 million. Excluding China Mobile, private enterprise broadband access holds less than 10% of the market share.** 　　From the data, telecom operators' broadband access holds more than 90% of the market share. Professor Zeng Jianqiu from Beijing University of Posts and Telecommunications analyzed that due to the development of mobile internet, the broadband market is still unsaturated, and competition for users will become more intense in the future. 　　**3. Capital Investment: Operators Shift Focus to 4G Wireless Networks** 　　The MIIT requires that enterprises engaged in broadband operations should have corresponding funds, with a minimum registered capital of RMB 20 million. According to incomplete statistics, regulatory authorities and telecom operators have frozen or collected more than RMB 10 million from enterprises applying for virtual operator status. Zou Xueyong, Secretary-General of the China Virtual Operator Industry Alliance, told this reporter that virtual operators generally invest more than RMB 20 million themselves. Therefore, enterprises that obtain virtual operator licenses all have the opportunity to enter the broadband field. 　　**The entry of virtual operators is an effective supplement to the shortage of broadband funds.** All three major telecom operators need to devote part of their efforts to 4G network construction. **Wei Leping, Executive Deputy Director of the MIIT Communications Science and Technology Committee, predicted that China Telecom may cut 50% of its broadband budget to subsidize LTE, and perhaps "even a penny can stump a hero—operators may reconsider copper cable once they feel the pain."** 　　**4. Operating Models Follow Operators' Mature "Playbook"** 　　Currently, Dr. Peng promotes broadband by bundling "Damei Box," 4K TV, etc., while the three major telecom operators bundle mobile phone numbers and fixed landlines (recently, China Telecom has launched the "Yueme" solution). After the issuance of virtual operator licenses, private broadband providers can also bundle mobile phone packages and application products. 　　In this regard, telecom operators already have well-established operating models, and private broadband enterprises only need to apply for a virtual operator license and then replicate them. 　　Thus, it is not difficult to see that private enterprises dare to launch low-price broadband mainly because their market operating costs are relatively low (low labor costs, little burden from offline channels, fewer users, and low service costs). At the same time, there are mature operating models to copy without investing in trial-and-error costs. 　　**II. Why Do Private Enterprises Want to Enter the Broadband Market?** 　　**According to Professor Zeng Jianqiu's analysis, the main reasons are as follows:** 　　1. The "National Broadband Strategy" has opened up to private enterprises. In the construction of broadband (backbone networks), with the "national team" (the three major telecom operators as the main body) supplemented by private capital, development can proceed faster; 　　2. Market demand and technology drivers. Currently, China's broadband market is not saturated, and broadband development still struggles to meet people's demand for information consumption. For example, ADSL broadband can hardly satisfy people's desire for internet video quality, so "fiber-to-the-x, copper retirement" has become a technological driver, and traditional operators need a process to "turn around." Private enterprises (Dr. Peng) started with 50M broadband from the very beginning, which precisely compensates for the shortcomings of operators. 　　3. Private enterprises' own profit needs. Like virtual operators, telecom value-added service enterprises use lower costs to provide more internet applications. For example, through "living room services," there is also considerable profit space. Currently, the internet application products provided by Dr. Peng, such as Damei Box and 4K TV, have already shown results. 　　**III. Challenges Facing Private Enterprises Entering the Broadband Market** 　　Like traditional telecom operators, Dr. Peng, which has basic network construction, also faces high "last mile" property fees and increasingly demanding users. More challenges come from the following aspects: 　　**1. Brand building for private enterprise broadband.** Staff from the marketing department of Great Wall Broadband complained to Communications Life News that Great Wall Broadband and Broadband Connect provide 50M fiber access, but because the price is too low, they are mistaken for "fake broadband" (in fact, the speed meets the standards stipulated by the MIIT). To change users' "perception" of Broadband Connect and Great Wall Broadband, they must provide better services than traditional telecom operators (for example, installation within 3 hours after receiving an order, while telecom operators install within 2 working days). 　　**2. With rapid user growth, can "offline services" keep up with market pace?** 　　There are 16 pilot cities in the first batch: Taiyuan, Shenyang, Harbin, Shanghai, Nanjing, Hangzhou, Ningbo, Xiamen, Qingdao, Zhengzhou, Wuhan, Changsha, Guangzhou, Shenzhen, Chongqing, and Chengdu. The pilot period is 3 years, and the "Pilot Plan" will be implemented from March 1, 2015. 　　Currently, China Telecom, China Unicom, and China Mobile each have more than 500,000 employees, and their business offices nationwide have reached counties, townships, and even administrative villages. Public data shows that Dr. Peng currently has 1,600 business outlets nationwide, covering 58 cities, with more than 35,000 employees, over 360 senior communications management personnel, and more than 4,200 communications technology professionals. 　　**It is unrealistic for private enterprises to set up branch companies and offline business offices nationwide like basic operators. In the internet era, operators are all cutting offline channel stores.** In addition, with only 16 pilot cities, is the service scope somewhat narrow? Therefore, how to effectively use online channels to expand more markets and users is a problem that private broadband operators need to solve. 　　3. **Interconnection settlement: how to coordinate relationships with operators?** This is a very realistic issue. Dr. Peng cooperates with CITIC to operate backbone networks, but it also leases part of operators' networks for interconnection settlement. In Zeng Jianqiu's words, they are moving "from competitive cooperation to cooperative competition."