MADISON, Wis. — Niklas Zennström, Skype's co-founder, predicted in a 2005 interview with EE Times that telephones would eventually become just an app. He foresaw a doomsday scenario for phone companies in the era of free phone calls. Though things didn't quite pan out that way (at least, not yet) in the West, we're seeing the inkling of such a phenomenon in China Mobile's latest financial results.
On Tuesday, China Mobile, the world's largest carrier by subscribers, reported a 9.5% profit decline from a year earlier to a five-year low of 25.24 billion yuan ($4.05 billion). The decline was China Mobile's third straight.
Given the operator's aggressive moves in recent months -- building LTE networks in China and adding Apple's iPhone to its product lineup -- the 64,000-yuan question is when it will reap bigger profits from its growing data-plan offerings.
China Mobile became China's first 4G operator in December, when the Beijing government awarded TD-LTE licenses to the nation's three telecom carriers. China Mobile built about 200,000 base stations in advance of the launch. Its network covers as many as 500 million people in big cities on the country's east coast.
Where is China Mobile's ARPU growth?
The conventional wisdom says that operators' average revenue per user (ARPU) grows as they pick up more 3G and 4G subscribers, thanks to their heavier use of Internet data. What's happening in China, though, defies that wisdom. Mobile apps are creating new headaches for operators.
In recent months, Chinese consumers, en masse, have become more enamored with popular mobile apps like WeChat. Good news for China Mobile, right? Well, not so much, because people are accessing WeChat via free WiFi, rather than using operators' 3G or 4G data plans. By enabling a substantial share of texts and video calls, WeChat has been eating into traditional operator revenue from voice calls and short messaging services.
Owned by the Chinese Internet company Tencent, WeChat, whose services began Oct. 17, 2012, offers free texting, voice messaging, and video calls.
As I wrote last month, WeChat is essentially SMS on steroids -- combined with call services similar to Skype. It functions as Twitter, LinkedIn, Facebook, Foursquare, and Instagram all rolled into one. Plus, it's tied to users' credit cards. WeChat lets you shop, play games, and even bank.
Data plans are designed to entice consumers on to the mobile Internet. They have provided a template for success that motivated many Western operators to build 3G and 4G networks.
But things are happening in reverse order in China. Consumers now come already hooked on the mobile Internet. Moreover, they've already figured out that they can get on the mobile Internet without signing on to operator data plans. Even with the proliferation of 4G base stations in China, "they are often concentrated in big cities, and big cities are where it's easy to find free WiFi," a friend in China told me last month.
Further, data plans are expensive, period, in China and everywhere else in the world. My Chinese friend in Shenzhen pays 288 yuan ($46.60) a month for her China Mobile 4G subscription. She has a good job. "But even for me, that's way too expensive." An engineer by education, she's currently working in the high-tech industry. She said she signed up for the job because she wanted to gain firsthand experience with 4G.
China Mobile's 4G subscriptions come in at a broad range of prices, though. Its cheapest data plan is offered at 58 yuan per month ($9.39). But again, consumers living in the cities need no convincing to use the mobile Internet. They already get it.
I'm not knocking China Mobile's aggressive 3G/4G network expansion. It has helped the company pick up more 3G subscribers in recent months. Those who were previously skeptical of buying China Mobile's proprietary 3G TD-SCDMA network subscriptions now feel more reassured, since China Mobile is now requiring its TD-LTE devices to also support W-CDMA and FDD-LTE. It's a good business practice, and it puts the operator on the right trajectory.
However, China Mobile acknowledged Tuesday, "In the first quarter of 2014, the Group experienced severe challenges in its operations and development as the impact of mobile Internet on the traditional communications business became more evident."
So I wonder how China Mobile will respond to a popular mobile app outpacing and likely pre-empting its mobile Internet rollout. Although Zennström anticipated that free VOIP services like Skype would eventually affect phone operators' revenue, we've yet to hear any mobile operators in the West complain that their traditional communication business has been damaged by the mobile Internet.