Let’s imagine you are a cashed-up investor looking to park your money someplace you can get a decent return and during your daily reading you read about a minor broadband operator that says it will quintuple its current market share over the next three years and reach 50 million subscribers by end-2015.
If you read that as an investor you would be straight on the phone to try and grab a piece of the action, more than likely fighting off competition from bankers lining up wanting to talk about future IPO’s and private equity firms jostling to buy into this amazing operator.
Well, just this last week a minor broadband player did have those exact claims made on its behalf – and yet the likelihood is that only a very small number of people even read about it.
Why? Well the operator in question is China Radio and Television Network (CRTN), China’s soon to be established national cable operator, which is in the process of consolidating all of the country’s provincial and local cable operators under its single umbrella – and nothing flies under the radar better than the Chinese cable market.
The extraordinary claims about CRTN’s growth prospects came from the government as it announced details of its Broadband China Project via which it will award cable network operators fixed-line broadband operator licenses and provide subsidies to enable them to perform the network upgrades that will allow them to offer nationwide broadband services to subscribers.
As part of the announcement the government claimed that the Broadband China Project will allow the country’s cable operators to grab a 20 per cent share of the broadband market by 2015 – which would mean a quintupling of their 3.9 per cent share of the total 148 million subscriber broadband market at end-2011.
With Informa Telecoms & Media forecasting that China’s total fixed-broadband market will have increased to an eye-watering 255 million homes by end-2015, then a 20 per cent broadband market share for CRTN would mean the firm having more than 50 million cable modem subscribers.
That would be one hell of a return on investment for any investor, the only problem being of course that the Chinese government would sooner put an outsized Ronald Reagan portrait up in Tiananmen Square than allow foreign investors to get their hands on its cable network infrastructure.
Pipe dream or reality?
The first question that comes to mind is whether it is a realistic prospect for China’s newly consolidated cable network operators to get anywhere near the government target of 20 per cent broadband market share by 2015, and the initial reaction of most people familiar with the Chinese telecom market would be firmly negative.
The fixed broadband market remains dominated by China Telecom and China Unicom, who are deploying increasingly high-quality networks and also launching more bundled services into the market, factors which make it tough for CRTN to win market share amongst existing subscribers.
Moreover, the majority of cable operators in the Chinese market remain a long way from being able to even offer broadband services, for both technical and operational reasons.
From a technical viewpoint, even if all of the proposed government subsidies could cover the entire expense of upgrading the country’s cable networks to be able to deliver nationwide broadband – an unlikely scenario – then it would still take considerable time for those upgrades to be carried out.
Therefore, even if the government began allocating subsidies immediately it is unlikely that many cable operators would even be in a position to begin retailing cable modem services until deep into 2013 at the very earliest, a time-frame which puts huge pressure on the government’s 20 per cent market share target by 2015.
In addition, the fact remains that even if China’s cable operators were handed shiny, new Docsis 3.0 enabled digital cable networks tomorrow that this would still not be enough to make them a serious competitor to China Telecom and China Unicom on a truly national scale.
Outside of the major cities such as Shanghai, Beijing and Shenzhen, where cable operators have already gotten serious about delivering broadband services, the vast majority of cable operators remain basically TV transmission companies – they could barely sell a kebab to a late night drunkard.
The government is effectively asking these local cable operators to change their entire operational model and go from being a middle-man who collects mandatory cable TV fees from subscribers to an active telecom company which needs to actually market and sell products to subscribers.
China Mobile to the rescue…
This transformation is likely to be far too big a leap for many operators, especially those outside the major eastern seaboard cities, and this is where the possible role of mobile market leader China Mobile really comes to the fore.
It is the worst kept secret in the telecom market that China Mobile has been in lengthy negotiations with CRTN to discuss partnership opportunities – with sources close to the negotiations telling Informa Telecoms & Media that the parties are close to securing a deal.
Some local press reports have even claimed that China Mobile has already signed a three-year deal with CRTN to co-operate on cable broadband services, with the firms reportedly now discussing how to formalise their partnership, particularly with regard to finance.
You don’t exactly need to be Warren Buffett to work out how powerful a combined China Mobile – CRTN partnership could be given the huge synergies that the partnership would create but there are still serious questions about how the partnership might work in practice.
For instance, how will China Mobile decide on which cable network operators to first deploy services with – and what say will the government have in these kinds of decisions?
From a commercial perspective China Mobile would probably prefer to launch initial partnerships with cable operators in more advanced eastern seaboard cities where it will be more likely to be able to recoup its investments.
However, given that many cable operators in these wealthy eastern seaboard markets have already launched services China Mobile might well be pressurised by the government to launch initial partnerships in less developed provinces where cable operators are in greater need of the company’s expertise.
In addition, although China Mobile might be excited about the prospect of launching fixed-broadband services in cities like Shanghai, Beijing and Shenzhen it remains to be seen how the firms involvement will be treated by the management of cable operators in those cities.
Moreover, we know from recent press reports that China Mobile has established an R&D group to explore IPTV opportunities across multiple access platforms, a development which poses the obvious question of how China Mobile’s IPTV ambitions will combine with cable operators existing cable TV offerings?
There can be little doubt that a CRTN – China Mobile partnership provides many exciting possibilities for both partners but it is probably ill advised for the government to be claiming that China’s cable operators can grab 20 per cent of the broadband market by 2015 when there are so many questions still to be answered about the strategy for the operators to do so.