How much room do operators have for increasing speed and reducing fees?

The "Economic Operation of the Communications Industry in the First Three Quarters of 2019" released by the Ministry of Industry and Information Technology shows that after a short period of slight negative growth, the telecommunications business revenue in the first three quarters totaled 991.4 billion yuan, the same as the same period last year; in September, it totaled 103.4 billion yuan, the same as the same period last year. How much room do operators with revenue hovering around zero growth have for speeding up and reducing fees in the future?

1. Traffic growth is gradually slowing down, and value contribution is getting lower and lower

Although traffic continues to grow at a high speed, the growth rate has been declining month by month. From January to September 2019, the cumulative access traffic of mobile Internet increased by only 90.4% year-on-year, compared with a year-on-year increase of 201.9% in the same period last year. In the first nine months of this year, the year-on-year growth rate of mobile Internet traffic dropped to 92.6%, and the average mobile Internet access traffic (DOU) per household in September reached 8.39GB.

The insufficient growth rate of traffic has directly led to the gradual entry of traffic revenue into a micro-growth channel. In the first three quarters of this year, the three major operators achieved mobile data and Internet business revenue of 454.6 billion yuan, a year-on-year decrease of -0.65%. In the same period of 2018, the three basic telecommunications companies achieved mobile data and mobile Internet business revenue of 457.6 billion yuan, a year-on-year increase of 10.9%.

In fact, at the end of the second quarter of 2019, the revenue of mobile data and Internet business was 308.6 billion yuan, a year-on-year increase of 0.7%, and the growth rate fell by 1.5 and 9.5 percentage points respectively compared with the first quarter and the whole year of 2018. At the end of the second quarter of this year, the year-on-year growth rate of mobile Internet traffic dropped from 129.1% at the end of the first quarter to 107.3%; among them, the year-on-year growth rate of traffic through mobile Internet dropped from 133.2% in the first quarter to 110.2%.

Although the traffic growth rate is getting lower and lower, traffic revenue has dropped from double-digit growth in the same period last year to less than 1% at the end of the second quarter, and then to a revised -0.65% at the end of the third quarter. In the era of mobile Internet, as the main source of revenue, if the traffic management strategy is not changed, there is little room for speed increase and fee reduction in the future.

2. Negative growth in traffic revenue drags down the growth of main business revenue

In the first three quarters of 2019, the communication service revenues of China Mobile and China Unicom were RMB 513.0 billion and RMB 198.532 billion, respectively, down 1.0% and 0.7% year-on-year, respectively.

When analyzing the reasons for the decline in revenue, China Mobile and China Unicom both mentioned the "fading of traffic dividend" in their Q3 2019 financial reports. China Mobile said in its announcement: "The traffic dividend is fading rapidly, coupled with the tail effect of the complete cancellation of domestic traffic "roaming" fees in July 2018." China Unicom said in its announcement: "It is affected by the increase in speed and reduction in fees, market saturation, fierce market competition and the gradual fading of 4G traffic dividend."

Analysts in the communications industry have analyzed in detail the impact of traffic unit prices on revenue growth. In September 2018, traffic revenue was 47 billion yuan, and the total volume of business was 7.05 billion GB. After simple calculation, the average traffic revenue per GB was 6.67 yuan. In the same period of 2019, traffic revenue was 46.8 billion yuan, and the traffic volume was 11.02 billion GB. After calculation, the average traffic revenue per GB was 4.25 yuan, a year-on-year decrease of 36%. Although it is lower than the 60% decrease in 2018, it is still declining rapidly.

Voice and data traffic are both declining. The SMS business volume has grown by 40%, but the SMS revenue has only grown by 3.6%. The SMS business was originally small, so the 3.6% growth has little impact on the overall revenue. If the fees continue to fall in the future, mobile communications services will inevitably become a burden for operators.

3. Although the number of customers has increased, the contribution to revenue growth needs to be re-evaluated

Data from the Ministry of Industry and Information Technology show that the scale of mobile phone users continues to grow, and the proportion of 4G users has steadily increased. As of the end of September, the total number of mobile phone users of the three basic telecommunications companies reached 1.598 billion, a year-on-year increase of 3.3%, and a net increase of 32.26 million from the end of last year. Among them, the scale of 4G users is 1.264 billion, accounting for 79.1% of mobile phone users, an increase of 4.7 percentage points from the end of last year.

Although the number of mobile phone users and 4G users has increased significantly, the number of mobile Internet users has remained stagnant for a long time, and the penetration rate of mobile Internet users has also declined significantly. As of the end of September, the three basic telecommunications companies had developed 1.304 billion mobile Internet users, with a penetration rate of 81.6% of mobile phone users.

China Unicom's announcement showed that mobile service revenue in the first three quarters of 2019 fell 6.1% year-on-year to RMB 117.733 billion, and the ARPU of mobile bill users was RMB 40.6. Although the specific changes in mobile business revenue were not announced, data released by China Mobile showed that the mobile ARPU in the first three quarters was RMB 50.2, lower than RMB 52.2 at the end of the second quarter, a decrease of 3.83%.

Operators are working hard to attract new users, even giving them away for free at the cost of negative benefits. After the fierce competition, users attracted by fee reductions have a negative impact on the growth of operators, except for "fleecing the operators". From this point of view, fee reductions, in addition to lowering the consumption threshold, do not "make small profits but quick turnover".

4. Operators’ profitability declined and total profits decreased

China Mobile announced a profit attributable to shareholders of RMB 81.8 billion, down 13.9% from the same period last year. China Unicom's net profit was RMB 9.823 billion, up 11.9% from the same period last year. Although China Telecom has not yet released its third quarter operating report, the combined net profit of China Mobile and China Unicom is still lower than the same period last year.

Although China Unicom's net profit has increased, its overall scale is relatively small, so its impact on the overall communications industry is relatively small. Data released by China Mobile shows that its profit margin has dropped from 16.7% in the same period last year to 14.4% now, which is also lower than 15.9% at the end of 2018.

Although China Telecom has not yet released its quarterly operating report, even if its net profit has increased significantly, it is difficult to offset the impact of China Mobile's net profit decline on the industry. From this point of view, the overall profitability of operators is definitely declining.

If we look at it from the perspective that operators need to continue to release funds to support the development of the Internet economy, there is still room for operators to further reduce their double-digit net profit margins. However, in the face of the huge amount of funds required for large-scale 5G construction, will operators' continued bleeding ultimately benefit the growth of the overall strength of the social economy?

Under the requirement of continuous speed increase and fee reduction, on one hand, the Ministry of Industry and Information Technology requires large-scale network construction including 5G, and on the other hand, the State-owned Assets Supervision and Administration Commission strongly requires net profit growth (China Mobile has signed a net profit growth responsibility letter). Although these requirements of the regulatory authorities are very high-level and have a certain correctness, for operators, these requirements are non-negotiable, so apart from continuing to practice internal skills and save money, other options are very limited. After all, open source requires the stimulation of new technologies and new applications to achieve.

Will there be speed increases and fee reductions in 2020? What do readers think of this issue? Shifting from speed increases and fee reductions to speed increases and quality improvements may be more in line with future social and economic development requirements. After all, seizing the global lead in 5G requires operators to fight on the front line of spending money.