How will the broadband market change after private enterprises withdraw? Mergers and reorganizations may be inevitable

Recently, the former fourth largest broadband access network operator and the largest private broadband operator "cheaply sold" its assets for RMB 1 million, which caused heated discussions in the communications circle. With the reduction of its stake in Great Wall Broadband, Dr. Peng is exiting the broadband market in its own unique way. With Dr. Peng's exit, how will the broadband market change in the future?

1. Great Wall Broadband had a glorious past

According to the announcement released by Dr. Peng, as of the end of June 2011, Great Wall Broadband had a network covering nearly 12 million users and more than 2.2 million paying users. From 2013 to 2016, the annual profit exceeded 200 million yuan, and the cumulative net profit in the past few years was 1.454 billion yuan. However, since 2017, although Great Wall Broadband's revenue was 3.46 billion yuan, 2.782 billion yuan, and 2.08 billion yuan respectively, its net profit was -90.86 million yuan, -269 million yuan, and -2.639 billion yuan respectively.

All the accumulated profits of the past nine years were eaten up by the losses in 2019. Why did Great Wall Broadband have such a big turn in 2017? This has to start with the naked competition among the three major operators. China Mobile, which obtained the fixed-line license at the end of 2013, officially entered the broadband market. From then on, the broadband market bid farewell to the monopoly of China Unicom and China Telecom in the past.

China Mobile's "free" broadband policy directly enabled it to surpass China Unicom and China Telecom in 2017 and 2018 respectively. By the end of 2020, its users had exceeded 200 million, and it successfully secured its position as the leader in broadband. China Mobile's "free" broadband policy directly pulled China Unicom and China Telecom out of the game, and further narrowed the development space for private broadband companies.

In fact, in addition to the direct impact on the development of private broadband enterprises by the three major operators, the scale of broadband users of China Radio and Television has also been affected. Public reports show that the number of broadband users of China Radio and Television has also been reduced on a large scale, and this trend has not yet been reversed. Although we are not sure about the future broadband strategy of China Radio and Television, the outcome of Great Wall Broadband is worth studying by China Radio and Television.

2. Further concentration of the broadband market is inevitable

After the ultra-high-speed growth in 2017, 2018, and 2019, China Mobile's broadband users also achieved development results that exceeded the annual plan in 2020. Data shows that China Mobile completed the annual broadband development goal of 12 million households by the end of September 2020, and this high-speed development trend is still continuing. Driven by China Mobile, China Unicom and China Telecom also achieved positive growth in broadband users.

Public data shows that as of the end of November 2020, the three major basic telecommunications operators represented by China Mobile have developed more than 30 million broadband users. Where do these users come from? Obviously, there are both users from private broadband companies and users with new ID cards. As for the ratio between the two, we cannot make an inference. You can use your imagination to combine the leakage of broadband brands in daily life.

The total population of our country has exceeded 14 million households. Based on the 3:1 ratio of households, we estimate that the total number of households in the country is about 470 million. At present, the total number of broadband users of China Mobile, China Unicom and China Telecom has exceeded 460 million. If the users of private enterprises are also included, and all broadband users are added together, the ceiling of the broadband market has actually been punctured. This is the reality of the current broadband market.

If we extrapolate the broadband development trend in 2020, the three major operators will develop more than 20 million users in 2021. So where will these new users of the three major operators come from? Obviously, they will be achieved by tapping into the users of other small and medium-sized broadband companies including China Radio and Television. Because the user scale and cost advantages of the three major basic telecommunications operators are too obvious, so that other companies have no room for survival.

In fact, not only is the development space of small and medium-sized broadband enterprises limited, but the development situation of China Unicom is also not optimistic. Although China Unicom is a veteran broadband operator and the first full-license operator, China Unicom has shown obvious lack of competitiveness or even decline in all communication markets including the broadband market. Is there a possibility of being eaten up in the future?

3. Will the regulatory authorities intervene in the broadband market through policies?

Friends who are familiar with the communications industry know that the operators' revenue showed a significant negative growth around the second quarter of 2019. Although the full-year revenue in 2019 finally achieved positive growth, this positive growth would have been difficult to achieve without the strong intervention of the regulators. The most obvious sign of this is that the three major operators simultaneously removed unlimited data packages from their shelves.

Will regulators intervene in the broadband market? We believe that this is likely to happen, and the possibility is very high. There are many reasons for this. Among them, there is the problem of generally low value due to excessive competition in the broadband market, which may involve the loss of state-owned assets; there is also the suspicion or possibility of monopoly reappearing after the broadband market is too concentrated.

What is more noteworthy is that China Unicom's top management has repeatedly denied rumors of a merger with China Telecom. If the result is that the three companies continue to operate separately, then China Unicom's production environment will hardly be better than it is now. The business model of the communications industry is to highlight or tap into the scale advantage of users, and China Unicom is precisely drifting away from China Mobile and China Telecom in this regard.

If the factor of keeping China Unicom alive is not enough, then focusing construction funds for 5G networks through broadband is also a very realistic factor. After all, operators' traffic operations have less and less room for value expansion. The future business focus is to further tap the value of fixed-line communication services, of which broadband is naturally the first.

Before the regulators officially intervene, China Mobile's crazy development model in the broadband market will be even more extreme. After all, China Mobile must make full use of the very limited time window for free development in the future. Of course, how long this time window can last depends on the development of China Unicom in the next few months and whether China Mobile's broadband impact is obviously in violation of legal regulations.

4. Deepening the value of broadband users will become the focus of business operations

Operators can increase the value of broadband users by extending broadband services. According to data released by the Ministry of Industry and Information Technology, as of the end of November 2020, the total number of IPTV (Internet TV) users in my country reached 314 million, a year-on-year increase of 6.6%, a net increase of 19.76 million households compared with the end of last year. Equivalent to the total number of broadband users of 483 million, the IPTV user penetration rate has just exceeded 65%, and there is huge room for improvement.

Here we need to point out a problem, that is, not all newly developed broadband users have become IPTV users at the same time. According to the data from the Ministry of Industry and Information Technology, in the first 11 months of last year, the number of broadband users developed by operators was 33.49 million, while the number of IPTV users in the same period was only 19.76 million, a difference of 13.73 million households.

Effectively extending the broadband value chain has long been the pursuit of operators, but judging from the development in 2020, the development of IPTV has not met expectations, and IPTV is still an extended service that is more easily accepted by current broadband users. This also shows from another aspect that operators' operation of smart home portals around broadband is far from successful, and there is huge room for further expansion.

After Great Wall Broadband exits the market, how will other small and medium-sized broadband companies such as Gehua Cable and China Broadcasting Corporation continue to operate their broadband businesses? We do not have the ability to accurately predict the future, but the current and future development trends of the broadband market will provide effective support for our analysis and judgment. Mergers and reorganizations will be inevitable and likely events. Whether it is China Mobile or China Telecom, the real king will continue to grow until regulatory policies do not allow it.