Innovation or Stagnation in the Chinese Mobile Market?

Chinese cellular service providers are not happy with competition, and they've enlisted the help of a government ministry to help find a solution. However, this kind of state intervention against new technologies could set a tone for the future of Chinese innovation, and could base investing in China much more on government policy than a company's merits.

The disruption
With the rise in popularity of Tencent's WeChat application, which subverts the mobile companies' usual text and multimedia message plans, China Mobile (NYSE: CHL  ) , China Unicom (NYSE: CHU  ) , and China Telecom (NYSE: CHA  ) have been talking with the Ministry of Industry and Information Technology to look into ways to charge for the free application. Because of WeChat and similar services, the telecom companies not only get stung by a drop in traditional messaging, but typically provide location services used by the app for no charge. Because of the potential hit to revenue, China Unicom CEO Chang Xiaobing hopes that services like WeChat will be "free today, for-pay tomorrow."

For an example of the slowing text use, take China Mobile. Even though its users still sent 8 billion more text messages in 2012 compared to 2011, that growth amounted to a little over 1%. However, the newer messaging services like WeChat require data usage, and China Mobile's wireless data traffic increased over 280% from 2011 to 2012. While WeChat's 300 million users use fewer conventional texts, they continue to gobble up data.

Globally, the volume of texts is expected to increase nearly 60% by 2016, but during the same time, instant messaging will more than quadruple and double its share of the messaging market to about 35%.

Users of WeChat have expressed their rage over any plans to charge for the service, but if the MIIT obliges the phone companies and implements new fees, it's likely another free service will take WeChat's place. Investors in Tencent also lost some faith when the MIIT hinted at such a charging scheme for the application, sending the stock down over 1.5%. In the meantime, the dispute raises many questions for business in China. Will the government hamper new business at the expense of innovation to enrich established corporations? How much control can the government wield over new services, and is it possible to regulate every new threat? How can investors protect themselves from such unforeseen regulatory action?

On the other hand
The MIIT is also opening up competition in China's mobile industry, allowing mobile virtual network operators to begin leasing network access from current network operators and reselling it to consumers. This could allow Tencent to run its own wireless service, although it would still have to come to an agreement with current network providers. The mobile Chinese market remains a dynamic and quickly changing story.

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