From "eating meat" to "drinking soup": the difficult transformation of telecom operators

According to the established plan, the three major basic communication service providers, China Mobile, China Telecom and China Unicom, will cancel "Internet data roaming" from July 1, 2018. This is undoubtedly a great thing for the majority of users (especially those who travel frequently across provinces).

This also means that the three major telecom operators will see greater changes in their entire internal operations and management in terms of traffic management.

The three major operators' move to cancel "Internet data roaming" has brought users a profit of tens of billions of yuan. Although each user may not feel much, it is indeed a move to further make profits. Therefore, we still give it a general approval.

Operators' sigh: the change from a bowl of meat to a bowl of soup

At the 2018 Mobile World Congress Shanghai (MWC Shanghai) conference, Mr. Liu Aili, General Manager of China Telecom Group, used a vivid metaphor for the value of the basic telecommunications industry in his speech (a bowl of soup, a bowl of soup, it jingles when you turn it over, it jingles when you turn it over, it's still the same bowl of soup, but every time it is poured, the value of the industry decreases). This metaphor not only received warm applause from the audience, but also won strong resonance among operators as the live video and text content spread quickly. It has been a long time since I heard such down-to-earth content.

The fact that it has triggered such widespread recognition and emotion just reflects the general helplessness of operators at present, especially when the bowls of soup may become smaller and smaller, and the three major operators will continue to engage in fierce competition. The more fierce the competition is, the more likely it is to get out of control and have no bottom line.

This has made more and more operators feel increasingly helpless, and some have even fled the operators as a result.

From the "pot of meat" in the voice era to the "bowl of soup" in the 4G and even the upcoming 5G data era, what is the reason for such a drastic change?

Telecom operators’ right to distribute the value of information consumption has weakened

1. The country's development plan for information consumption and the role of operators

Information consumption covers areas such as production consumption, life consumption, and management consumption, and covers information services such as voice communications, Internet data and access services, information content and application services, software and other service forms; covers a variety of information products such as mobile phones, tablets, and smart TVs; and also includes new information service models such as e-commerce and cloud services based on information platforms that indirectly drive consumption.

On August 13, 2017, the State Council’s Guiding Opinions on Further Expanding and Upgrading Information Consumption and Continuously Unleashing Domestic Demand Potential (Guofa [2017] No. 40) clearly stated:

my country's information consumption is developing rapidly, and is accelerating its transformation from an online-oriented to a new form of online and offline integration. Network speed increase and fee reduction are being deepened, the number of consumer entities is increasing, the boundaries are gradually expanding, and the model is undergoing profound adjustments, driving rapid growth in consumption in other areas. It has become one of the most innovative, fastest growing, and most widely radiating economic fields, playing an important role in stimulating domestic demand, promoting employment, and leading industrial upgrading.

Promote the deep integration of information consumption with mass entrepreneurship and innovation, and "Internet +", encourage core technology research and development and service model innovation, promote the widespread penetration of new generation information technology into the consumer field, create more effective supply to adapt to consumption upgrades, and drive the development of multi-level and personalized information consumption.

By 2020, the scale of information consumption is expected to reach 6 trillion yuan, with an average annual growth rate of more than 11%; the driving role of information technology in the consumer field will be significantly enhanced, the boundaries of information products will be deeply expanded, and information service capabilities will be significantly improved, driving the output of related fields to 15 trillion yuan, and information consumption will benefit the general public.

The information infrastructure has reached the world's leading level, the strategic goal of "Broadband China" has been fully achieved, a new generation of high-speed, mobile, secure and ubiquitous information infrastructure has been built, and significant results have been achieved in network speed increase and fee reduction. New types of consumption based on network platforms have grown rapidly, and a new consumption ecology of online and offline collaborative interaction has developed and grown.

Increase investment in information infrastructure construction, further expand the depth and breadth of fiber-optic broadband and fourth-generation mobile communication (4G) network coverage, and promote network interconnection. Actively participate in the network construction of important countries and node cities along the "Belt and Road". Accelerate the research, technical trials and industrial promotion of the fifth-generation mobile communication (5G) standards, and strive to start commercial use in 2020. Accelerate the deployment of Internet of Things infrastructure. Coordinate the development of the industrial Internet and carry out pilot demonstrations to promote the industrial Internet industry.

Promote the reduction of costs in the entire process of information consumption. Focus on comprehensively improving efficiency and reducing costs in key links such as communications, logistics, credit, payment, and after-sales service. Deeply tap the potential for network fee reduction, accelerate the realization of reasonable reduction in network fees, fully release the reform dividends of speed increase and fee reduction, and support the development of information consumption.

Establish a standardized and information-based modern logistics service system to promote information consumption in the logistics industry to reduce costs and increase efficiency. Encourage financial institutions to develop more financial products and services suitable for information consumption, promote small, fast and convenient micro-payment methods, and reduce the cost of information consumption financial services.

Improve information access capabilities in rural areas. Deepen the pilot of universal telecommunications services, assist in network poverty alleviation and rural informatization, organize and implement demonstration projects such as "100-megabit villages", guide social capital to increase investment, focus on supporting broadband construction in rural and remote areas such as central and western provinces, poverty-stricken areas, old revolutionary bases, and ethnic minority areas, and achieve fiber optic access in 98% of administrative villages by 2020.

We will fully implement the project of bringing information into villages and households, carry out demonstration projects throughout the province, and strive to achieve an 80% coverage rate of village-level information service stations by 2020. There is broad room for growth in my country's information consumption.

From the guidelines, if we carefully read the content related to basic telecommunications services, we can see at least three key points: the task of strengthening network infrastructure is heavy; the requirements for reducing the cost of information consumption by increasing speed and reducing fees are very clear; and the basic telecommunications industry is only a small part of the areas covered by information services.

2. Telecom operators’ right to distribute information consumption value will be further weakened

We say that the only constant in this world is change itself. From the perspective of the development and changes in the industrial chain, telecom operators have gone from being a "one pot of meat" in the past to being in a "one bowl of soup" dilemma now. If we look back in time, we can start with the issuance of 3G business licenses in 2008 (the State Council's executive meeting on December 31, 2008 agreed to start the issuance of third-generation mobile communication licenses).

In October 2008, China Telecom also officially completed the acquisition of CDMA network from China Unicom and officially entered the field of mobile communication services. Since then, the three major operators have generally begun to compete around full business operations.

The 3G era ushered in the transition from the voice era to the data traffic management era. With the emergence of more mobile Internet applications, the contradiction between users' growing demand for mobile Internet applications and telecom operators' high data traffic charges has become increasingly prominent.

In response to the increasingly strong calls, the State Council's executive meeting on May 13, 2015 clearly proposed five specific measures to promote speed increase and fee reduction. These measures include encouraging telecom companies to release speed increase and fee reduction plans as soon as possible, increasing the average broadband access rate in cities by more than 40%, and launching services such as non-zero traffic and traffic transfer.

Since then, the government has repeatedly clarified the requirements of the three major operators to "increase speed and reduce fees" on various occasions. On the one hand, it provides lower-fee packages for users to better enjoy mobile Internet services, so-called small profits but quick turnover.

On the other hand, under the "Internet Plus" action plan and the trend of mass innovation and entrepreneurship, telecom operators should provide lower access thresholds for mass innovation and entrepreneurship and reduce the access costs for entrepreneurs.

As a result, the traffic management business that telecom operators had been looking forward to lost its basic support in the short term due to the rapid decline in traffic prices. As a result, there was a situation where the increase in traffic management did not increase revenue or increased revenue only slightly.

While traffic services have replaced traditional voice services to become the main source of revenue, telecom operators, which are still in the price decline channel, are seeing a rapid decline in the proportion of value distribution of information consumption that they can obtain by virtue of their pipeline advantages.

Therefore, fundamentally speaking, the difficulties currently faced by telecom operators are caused by the fact that as state-owned enterprises, telecom operators have assumed the weakening of their voice in the distribution of information consumption value in the process of vigorously developing information consumption, which is granted by the government.

Although telecom operators also have other problems in their actual operations, the main problem is the weakening of value distribution rights.

We might as well take a look at some relevant data to intuitively see the weakening of telecom operators' power to distribute the value of information consumption.

On May 4, 2018, WeChat Pai, the official all-product release platform of the WeChat team, published an article titled "WeChat drove information consumption of 209.7 billion yuan in 2017, and doubled employment in four years". The article cited data from the report "Innovation Ecological Community Promotes New Economic Momentum - 2017 WeChat Economic and Social Impact Research" released by the Industry and Planning Institute of the China Academy of Information and Communications Technology: WeChat directly drove information consumption of 209.7 billion yuan in 2017, with an average annual growth of more than 30% since 2014; it drove traffic consumption of 191.1 billion and drove industry traffic revenue by 34%; it drove social employment to 20.3 million people, doubling in four years.

According to data from this caliber, the total scale of my country's information consumption in the four years from 2014 to 2017 was 2.8 trillion, 3.21 trillion, 3.87 trillion and 4.46 trillion yuan respectively.

At this growth rate, it is expected to be higher than the 6 trillion yuan estimated by the State Council for information consumption in 2020. Referring to the above data, we calculate it based on the communication industry data released by the official website of the Ministry of Industry and Information Technology, and the results are as follows:

Judging from the above calculation data, the proportion of telecommunications business revenue in information consumption will drop from 41.2% in 2014 to 23.4% in 2020.

If we follow the current positioning of telecom operators and the rapid growth of the entire information consumption scale, the pessimistic view predicts that the actual revenue share in the future may be even lower.

If we look back to before 2014, the proportion was more than half. The change in this data fully shows that the voice of telecom operators in the distribution of information consumption value is rapidly weakening. This is the root cause of the change from "eating meat" to "drinking soup".

How to improve the value distribution rights of information consumption

For telecom operators, the value of pipelines may become even more severe due to positioning issues and the rapid OTT market development. When the growth of telecom business revenue may not outpace CPI, the situation they face may become even more severe.

Compared with the booming information consumption market represented by the Internet, the primary issue to be solved is how to improve the right to distribute the value of information consumption. How to improve it? I personally think there are several directions:

1. The second half of the Internet competition

In the first half of the Internet, which emerged in the PC Internet era, although telecom operators had the natural advantage as network access providers and had strong strength at that time, they led and participated from the beginning, but they were ultimately defeated due to their unclear understanding and contempt for the development of Internet business and their lack of flexibility in operating Internet business.

China Telecom announced the closure of the influential website Bi Hai Yin Sha in the third quarter of last year. In general, telecom operators have been completely defeated in the first half of the Internet.

Competition in the first half of the Internet was characterized by wild growth. The corporate identity of operators also determined that they were not suitable for the game. However, the experience of nearly 20 years has allowed telecom operators to have enough experience and lessons in Internet applications.

As standardized network management is strengthened in the second half of the Internet, telecom operators may usher in new development opportunities.

For example, in the video content field, new opportunities have emerged amid the chaos. This is a new opportunity for services such as Migu Video and Tianyi Video. Mobile Internet security issues are based on mobile authentication login, which is a new opportunity for China Telecom Tianyi Account and China Mobile Unified Authentication.

China Telecom Wing Payment, China Mobile and Wallet are also new opportunities in the still volatile competition in mobile payments.

In the competition for the second half of the Internet, can telecom operators adjust properly and provide sufficient resources to hold on?

2. Seize diversified strategic investment opportunities

For telecom operators, the common question is still the genetic constraints of their teams in engaging in Internet business. Although operators may not believe in genetic determinism, the actual results have proved the credibility of this judgment time and time again.

Therefore, for telecom operators, diversified strategic investment is an effective way to seize new development opportunities and obtain more information consumption value distribution.

This was the case in the past when China Mobile invested in Phoenix Satellite Television and Pudong Development Bank, and it is also the case now that China Mobile is participating in Xiaomi's IPO as a cornerstone investor.

We can also see that the three major operators have strengthened the power of their investment companies and begun to actively seek new opportunities through diversified strategic investments.

The direction is well grasped, and it all depends on the actual implementation results.

3. Deepen the mixed ownership reform of state-owned enterprises

In 2017, China Unicom became the first central enterprise group to carry out a pilot mixed-ownership reform, which shouldered the mission of exploring new paths and accumulating experience for mixed-ownership reform.

However, I personally believe that this type of mixed-ownership reform of an entire enterprise can provide experience for other industries, but it will be more difficult to get China Mobile and China Telecom to follow this path.

China Mobile and China Telecom, from group companies to joint-stock companies and provincial companies, as well as related industrial tertiary industry companies, all use mixed ownership reform as the basic idea to deepen the broad field of state-owned enterprise reform.

Therefore, through more diverse mixed-ownership reforms, we can further mobilize our resources, and by introducing external diversified shareholders, we can obtain more development opportunities, thereby being able to participate more in the distribution of information consumption value.

Difficulties in Improving the Right to Distribute the Value of Information Consumption

The direction of improving the right to distribute the value of information consumption is very clear, and there are many specific ways to do it in practice. However, for telecom operators, which have a strong inertia of traditional management thinking, it is easy to imagine how difficult it is to effectively improve. The main difficulties are:

1. It is very difficult to transmit change from top to bottom . The difficulty lies in the long management chain and the great loss of efficiency. From the group to the provincial companies, the situation in each province varies greatly, and the unloading effect is obvious.

2. The traditional thinking on the development of telecommunications business is too heavy . The setting of assessment indicators and the allocation of resources are still concentrated on traditional pipeline business.

The adjustment of the system and mechanism is fraught with difficulties. Although the proportion of traditional pipeline business in information consumption is decreasing, it is still the most dependent income for telecom operators. Therefore, the development of innovative business is constrained by traditional business and is too heavily bundled. This thinking is still too heavy.

For example, from Migu Video’s World Cup promotion, it can be clearly seen that Migu Video has made obvious progress in stimulating the use of mobile phones, broadband numbers, or data traffic.

As a result, the actual competition results are, in my opinion, worse than Youku, and even worse than the operation of Tencent Video which has not obtained the live broadcast copyright.

3. Talent team.

There are three aspects to analyze. First, the talent team that has been cultivated for a long time in the past is leaving quickly. This is not only due to the problem of high salary compared with other industries, but more importantly, it is a problem of developing work space.

Second, there are problems with recruiting new talent, and telecom operators are no longer the first choice for college graduates.

The third is the labor cost policy that is closely related to telecom operators. Due to the existence of salary caps and other issues, coupled with past inertia, telecom operators generally use a large number of personnel outsourcing or business outsourcing methods. The biggest harm of this method is that the core technical capabilities are always dependent on the outsourcing party, and they lack the ability to build a team with core technical capabilities.

No matter how much recognition the operator gives to outsourcing, it is not their own talent pool. How many talents can telecom operators have in each field that represents the direction of industry development, such as AI, cloud computing, big data, blockchain, etc.?

In summary, there are still many factors that affect the improvement of telecom operators' information consumption value distribution rights. This article mentions the above important ones as a starting point.

Outlook: Will things get better after the bad times?

What will be the future development prospects of operators? This is what telecom operators are most concerned about. At present, there is indeed a pessimistic and low morale spreading.

However, we must also realize that the value of telecom operators as basic pipelines and as providers of connection services is still a key industry that plays a fundamental role in the national information consumption economy and is still moving forward, but the pace of development and growth is slower than that of other industries.

Therefore, for telecom operators who are still holding on, they should realize that the current difficulties are determined by the special mission given to telecom operators by the government. Therefore, this is also temporary.

Missions and tasks are constantly being adjusted. At the same time, we should also see that telecom operators have the potential to participate in the distribution of information consumption value through mixed ownership reform, strategic investment and new efforts in Internet operations. The situation forces operators to make more reforms.

In short, those who stick to it should believe in the truth that "good times will come after bad times" and keep working hard before they come. What's more, practitioners in other industries are indeed more hardworking than operators.