Telecoms

Time to change channel

China’s newest 5G firm is a ‘Divine Network’ on a broadcasting mission

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Alibaba and State Grid have joined forces with China Broadcasting Network Corp

China Mobile, then known as China Telecom, went public in Hong Kong in October 1997. Braving a market meltdown amid the Asian financial crisis, the state-owned enterprise dipped below its HK$10.8 offering price on its trading debut, but still commanded a market capitalisation of more than HK$120 billion ($15.9 billion).

It was a superb opportunity to buy into what grew to become the world’s biggest telecom carrier. The telco’s mobile subscribers surged to 547 million from 10 million over the next decade, ballooning its share price past HK$150 by October 2007. A year later the Chinese government gave China Mobile one of a trio of 3G licences, raising the possibility that the state heavyweight would make as much profit from the internet sector as it had from 2G telephony. But it turned out to be a peak moment for its shares, which never broke through to the next level. As of this week they were trading at less than HK$50 each.

Instead, the lion’s share of profits from China’s booming internet market would be reaped by private sector firms such as Alibaba, which launched its Tmall e-commerce site in 2008, and Tencent, whose shares would spike from HK$50 that same year to more than HK$2,500 (on a pro-forma basis) within a decade (see WiC367).

China is now embarking on the 5G era, opening up the potential for a huge range of new products and applications. This time around, will private sector firms capture most of the profits again or could more traditional state enterprises stage a comeback?

Step forward a new champion, the ‘Divine Network’

The Chinese government has pushed for megamergers among a number of its biggest state-owned enterprises (SOEs) in some of the economy’s key sectors. When these deals happen, the Chinese media often describes them with the colloquial nickname of shen, which translates as ‘divine’, denoting the scale and power of the new combinations.

For instance, China Energy Investment Corp, created by the merger of Shenhua and Guodian, was labelled the ‘Divine Power’ (see WiC379) and similar tie-ups have created the ‘Divine Ship’ and the ‘Divine Train’ in the shipping and railway sectors. A combination of SinoChem and ChemChina is on the cards to create something comparable in the chemicals industry.

Another newly formed SOE that is meriting mention in the telecoms sector is shenwang, or ‘Divine Network’.

The name began to crop up on social media when China Broadcasting Network Corp (CBNC) was given one of four 5G licences in June last year alongside the telecoms trio of China Mobile, China Unicom and China Telecom. Outsiders wondered how CBNC – effectively a unit of the state’s media regulator – had the know-how to build a 5G operation, as well as the resources to pay for the rollout. Then in May it signed a 10-year deal for a shared 5G network with China Mobile and last month it announced the set-up of another new unit with a formidable-looking name – the Unified National Network (UNN).

Essentially the business arm of CBNC’s 5G business, UNN immediately drew Rmb100 billion ($14.5 billion) in investment from 46 strategic investors including 11 listed firms and various provincial TV network operators. The financial conglomerate Citic Group (which has interests in China’s satellite network) and the Xinjiang Production and Construction Corps (see WiC192) have also invested, alongside State Grid and Alibaba, which operate China’s quasi-monopoly power network and the nation’s largest e-commerce platform respectively. The pair are chipping in about Rmb10 billion each, taking 9.8% stakes in the new firm, but CBNC stays on as the biggest shareholder with 51% of the register.

What is the plan for CBNC?

It was set up in 2014 as a ‘central cultural enterprise’ under the media regulator National Radio and Television Administration (NRTA). Its primary objective – reflected in the naming of UNN, its new subsidiary – is to bring together China’s cable TV operators into a single network.

The cable networks were once lucrative businesses dominated by SOEs prior to the smartphone era. In many provinces households were required to pay one-off fees before they could install their TV sets, in a situation that has parallels with Microsoft’s so-called ‘Windows tax’ on computer users. With last-mile access to millions of homes, China’s cable operators could collect monthly fees as well.

That market has subsequently fragmented, with the traditional operators losing share to a new breed of satellite broadcasters, and more recently to the online video streamers, which are internet-based. In response the NRTA has been pushing harder for consolidation across the cable sector, although until recently the best it had achieved was more typically “one unified network per province”, Caixin Weekly says.

In fact, the rise of the internet and newer, smartphone-based applications had already rendered many of the provincial TV operators less relevant in the 4G era. Cable operators still accounted for about 46% of China’s TV audience last year, but that was down dramatically from 64% in 2016, as customers flocked to streaming platforms like Baidu-backed iQiyi, Tencent Video and Alibaba’s Youku.

With 5G set to unleash a new round of frenetic competition, the cable sector’s decline seemed set to deepen, unless more direct action was taken. The commercial rationale is that CBNC – through its subsidiary UNN – will wrest back some of the initiative through a newly bundled offering of 5G wireless, broadband and paid TV, bringing together the best of the content from the provincial operators for its new customers.

There is another policy angle too, recognising that the TV stations are the weakest link in the central government’s long-standing goal of “converging the three networks”, i.e. television, telecoms and the internet. The government first flaunted this idea as far back as 2001 (perhaps inspired by the merger of AOL and Time Warner). Ten years later the broadcast regulator put forward a fuller proposal to capitalise a newly created national operator at Rmb200 billion, but the idea didn’t get enough traction from senior decisionmakers. Now it is trying again, this time against the backdrop of the country’s 5G rollout.

Part of the rationale is job protection (the provincial cable operators employ at least a million people, according to the state media) but there are other undertones. The government knows that state-controlled broadcasters have lost much of their audience to newer, more customer-focused channels. It wants to reverse some of that trend through the launch of a new national network under UNN, recovering some of the state media’s access to millions of households.

What are the roles for China Mobile and State Grid in the plan?

The four 5G licence holders are expected to invest up to Rmb1.2 trillion in the next five years in taking the new network live. The scale of that funding is daunting – enough to persuade China Unicom and China Telecom to forge an infrastructure sharing deal in September last year. As yet, the carriers aren’t generating the new revenues that they will need to offset their investment either. China Mobile reported last month it had nearly 100 million ‘5G package customers’ by the end of August, while China Telecom said it had just over 57 million 5G subscribers. China Unicom says it won’t disclose its own numbers until its new business is more mature.

Until it found its new shareholders for UNN in August, it wasn’t clear how CBNC was going to compete financially. Trials for deployment of its own 5G services had moved forward rather slowly in a few cities. However, it has been granted 80MHz of the 700MHz frequency bandwidth, which is described in the local media as the “golden band” because it can be deployed across wider areas at relatively cheaper cost.

An agreement between CBNC and China Mobile in May stipulated that the duo will share a network operating on CBNC’s attractive spectrum with the costs to be evenly split. That means that China Mobile will be able to quickly expand its own coverage to more remote regions.

As for State Grid, the power utility had initially wanted to take a controlling stake in UNN, Caixin Weekly suggests. These ambitions were tempered when the grid operator came to a better understanding of the costs of building a 5G business. All the same, it is bringing almost three million transmission towers in its electricity network that could house base stations for 5G. Perhaps more importantly, it could help sell CBNC’s 5G applications to its vast corporate and household customer bases. A tie-up with the grid giant might help CBNC cut down on its power bills too.

“CBNC and State Grid are taking what they need from each other,” the magazine reports. “CBNC desperately needs a strategic partner with cash and infrastructure, while State Grid also wants to expand into the Internet of Things.”

And how about Alibaba?

Alibaba had forged a strategic alliance with CBNC before the announcement on the 5G licences last year. Citic Group signed the same pact, which promised to upgrade China’s cable stations into “a new network for integrated media transmission and digital cultural dissemination”, Xinhua said at the time.

Speaking at the signing ceremony, Nie Chenzi, head of the NRTA, said the plan was to reinvigorate the cable TV networks through the introduction of next-generation TV infrastructure, incorporating new technologies such as 4K, 5G, AI, and quantum communications.

Acquiring a sizable stake in UNN looks like a natural extension to the alliance for Alibaba (Citic Group made a small investment too through its digital media unit). The internet firm will get new access to more than 200 million households, Caixin Weekly forecasts, providing another avenue for expanding its reach into new businesses such as ‘smart home’ applications and the IoT.

The introduction of Alibaba as a key shareholder also allows for talk of “mixed ownership reform” at CBNC, diluting the impression that the ‘Divine Network’ is another state-backed monopoly in the making.

Policy support, cash, a national TV network, and content: CBNC seems to be gathering the attributes that it needs to emerge as a game-changer in its own right.

Yet ultimately its fortunes still hinge on an ability to innovate, a skill set that may not come naturally to its controlling shareholder.

The decline of China Mobile as an investor darling – compared to the stellar performance of Tencent since 2008 – is a telling example of how state-favoured giants aren’t the best places to nurture high-growth, fast-changing businesses.

It remains to be seen whether the ‘Divine Network’ will rise above the fray, becoming a genuinely transformational force in China’s 5G landscape and recovering some of the ground it has lost to others in broadcasting. Much will depend on how it maneouvres against the country’s private sector internet firms in exploiting its state-backed privileges. The challenge is that the tech titans so often seem to be a step ahead of their rivals.

And in this particular case it’s not much different: Alibaba, for one, may have hedged its bets, keeping a foot in the CBNC camp with its shareholding but retaining too the capacity to still grow its own already formidable ecosystem.


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