Independent Content Business To Ease Cost Burdens

BMI View: The partial spin-off of its media services business is a good move for China Mobile. Separating the content business from the core voice service and infrastructure operations will reduce operating costs and allow greater room for innovation in product development in a field increasingly dominated by third-party applications and content.

China Mobile has outlined plans to set up a 'mixed-capital' company that will be responsible for developing and managing its non-voice mobile data services and applications. The as-yet unnamed business will cover mobile music, gaming, video, reading and comics/animation content, services and applications and, although it will continue to be overseen by China Mobile management, private investors will be inducted to bring additional expertise, creativity and financing to the business.

Although the new company will serve China Mobile, BMI believes it could also function as a one-stop shop for MVNOs looking to build their own content-based platforms. More significantly, the business could also serve content - such as games, music and video - to rivals China Telecom and China Unicom. Although the three network operators compete for customers, they are increasingly looking to collaborate in order to achieve cost savings ( see 'Towers Joint Venture: Winners And Losers', July 24 2014) and to develop compelling new services that either complement or compete with third parties' over-the-top (OTT) messaging and social networking offerings such as Tencent-owned WeChat and QQ.

Pressure On Profits
China Mobile Financial Indicators (CNYmn)

BMI View: The partial spin-off of its media services business is a good move for China Mobile. Separating the content business from the core voice service and infrastructure operations will reduce operating costs and allow greater room for innovation in product development in a field increasingly dominated by third-party applications and content.

China Mobile has outlined plans to set up a 'mixed-capital' company that will be responsible for developing and managing its non-voice mobile data services and applications. The as-yet unnamed business will cover mobile music, gaming, video, reading and comics/animation content, services and applications and, although it will continue to be overseen by China Mobile management, private investors will be inducted to bring additional expertise, creativity and financing to the business.

Pressure On Profits
China Mobile Financial Indicators (CNYmn)

Although the new company will serve China Mobile, BMI believes it could also function as a one-stop shop for MVNOs looking to build their own content-based platforms. More significantly, the business could also serve content - such as games, music and video - to rivals China Telecom and China Unicom. Although the three network operators compete for customers, they are increasingly looking to collaborate in order to achieve cost savings ( see 'Towers Joint Venture: Winners And Losers', July 24 2014) and to develop compelling new services that either complement or compete with third parties' over-the-top (OTT) messaging and social networking offerings such as Tencent-owned WeChat and QQ.

Revenue from operator-billed messaging services is falling and, although China Mobile and its peers benefit indirectly from OTT traffic flowing over their networks, this does weigh on their operating costs and, ultimately net profit. China Mobile's net profit has fallen in each of the last three quarters, reaching CNY57.789bn in Q214. Although increased investment in 3G/4G infrastructure has impacted profits, the weakening billable voice and data revenue picture is also contributing to profit erosion; messaging revenue declined to CNY18.212bn in Q214 while application and information revenue showed only modest growth to CNY31.578bn. Wireless data traffic, however, recorded 16.1% quarterly growth to CNY72.094bn.

Although China Mobile has developed a comprehensive suite of non-voice services, including its own e-commerce, music and multimedia offerings, these have suffered from a lack of innovation and relevance relative to third-party offerings such as those developed by Tencent and Alibaba, for example. BMI believes that by moving these products to a semi-independent business, product developers will have greater latitude to create more attractive products and find new ways of surfacing this content on China Mobile subscribers' devices. The development of the new operator-developed computer operating system represents a good opportunity in this respect, particularly as the capabilities of popular local handset brands such as ZTE, Huawei and Xiaomi can be leveraged.

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