MVNOs face pressure to comply with identity rules

China's mobile virtual network operators (MVNOs), which were introduced in late 2013 to inject vitality into the telecom sector, have been making headlines this year due to their role in a series of telecom scams. About 43 percent of the crimes between November 2015 and April 2016 involved mobile numbers provided by domestic MVNOs. Experts attributed this fact to lax oversight by the MVNOs. Following the government's stricter regulations and the recent telecom scam deaths, the MVNOs will face a tougher business environment, and many might go extinct.

A mobile phone user holds up his identification card and SIM card on May 25. The Ministry of Industry and Information Technology on May 24 announced rules that require China's telecoms to verify the identities of all of their users by June 30, 2017. Photo: CFP

Two years ago, consumers applauded the introduction of mobile virtual network operators (MVNOs) to China's telecom sector, which has long been dominated by three traditional carriers. But now the MVNOs have become the subject of more jeers than cheers.

In 2013, the government opened the door to the MVNO business by allowing third-party providers to purchase telecom services in bulk from the three network operators, China Mobile, China Unicom and China Telecom, and then resell the services to customers.

However, the business has not done much to invigorate the telecom sector, experts said over the weekend. Instead, the MVNOs became fertile ground for telecom scammers.

The comments followed the death of Xu Yuyu, a college-bound student in Linyi, East China's Shandong Province, who suffered a heart attack in August after a telephone scammer swindled her out of nearly 10,000 yuan ($1,498) that her family had raised for her college tuition.

The scammers called her from a number starting with 171 - which was provided by virtual telecom server.

The tragedy was just one of many resulting from the recent spate of telecom scams in China.

From November 2015 through April 2016, 140,000 mobile numbers were found to be involved in criminal cases of telecom fraud, according to data from the Ministry of Industry and Information Technology (MIIT). Among them, 60,000 were run by MVNOs in China.

Lax oversight

In China, it is commonplace for MVNOs, in pursuit of sales, to sell SIM cards to users without identification, said an executive surnamed Wang with a Beijing-based MVNO.

While traditional telecom carriers have been aggressively pushing for real-name registration through frequent short message notifications, MVNOs do not appear to have been trying very hard to implement the rules, which are widely seen as an effective way to track scammers.

"Earlier this year, the MIIT, the country's telecom watchdog, arranged a meeting with one of China's MVNOs to push the implementation of its real-identity registration scheme. But the head of the MVNO did not show up," Xiang Ligang, a Beijing-based independent telecom expert, told the Global Times on Sunday. Xiang refused to disclose the name of the company.

According to a report in an MIIT-affiliated newspaper in May, 92 percent of the country's mobile users have registered their real names with their telecom carriers. However, that still leaves nearly 100 million users who haven't been registered under a real name.

Not enough money

According to Xiang, many MVNOs would like to follow the regulations to ensure all of their customers are registered under their real names, but they just don't have the money.

Wang noted that none of China's 42 licensed MVNOs have be able to turn a profit because they don't have a suitable business model.

"It is very hard for MVNOs to make money by just reselling telecom services from China's traditional carriers," Wang said. "The wholesale prices we obtained from the carriers usually aren't much cheaper than the service packages promoted by carriers' branches in provinces and cities."

The MVNO business model has been around for a while in the rest of the world. It has proven to be a promising business, which has reportedly attracted about 1,000 foreign companies, including Tesco and Wal-Mart.

Lycamobile, a UK-headquartered MVNO founded in 2006, exists in 21 countries. It operates on 15 networks supported by carriers including Vodafone, O2 and T-Mobile.

But things are different in China.

"MVNOs were introduced into China too late," Xiang said. "By the time they arrived, the three telecom carriers had already divvied up most of the market, leaving little behind for the MVNOs."

In 2015, domestic MVNOs had 20.5 million subscribers, or about 1.5 percent of the total mobile phone users in China, the domestic IT news portal reported in January, citing MIIT data.

After the first MVNOs were licensed in late 2013, only seven had amassed more than 1 million users by 2015, according to the report. That's nothing compared with the 200 million users of China Telecom, which has the smallest number of subscribers among the nation's major operators.

Few will survive

Under the current regulations, China's major telecoms have until June 30, 2017, to verify the identities of all of their users. Users who don't provide identification to prove their identity by that date, the operators will suspend their services.

To further tighten control over MVNOs, the MIIT on August 26 announced that it would stop granting licenses to MVNOs that failed to strictly follow the real-name registration rules.

In addition, the sales channels have narrowed for SIM cards that don't require real-name registration. Alibaba Group Holding's Taobao, China's largest online marketplace, on Wednesday banned vendors on its platform from selling SIM cards from both MVNOs and the traditional telecoms.

A public relations representative with Alibaba told the Global Times that this ban is in line with the MIIT's  tightening control over the telecom sector.

Citing an unprofitable business model and stricter regulations, Xiang predicted that about 90 percent of current MVNOs will end up getting sifted out of the business, leaving behind only three to five survivors.

MVNO executives including Wang were also concerned about the prospects for MVNOs, admitting that the Xu case has made it harder for them to do businesses in China.

Over the past few weeks, some media outlets including China Central Television have warned consumers not to answer phone calls starting with 170 or 171, which are numbers provided by MVNOs.

"After the telecom scam death in Shandong, several of our enterprise-level clients may not keep working with us. The reason is simple. They do not want be seen as swindlers who use phone numbers starting with 17," Jiang Zhixiang, CEO of Beijing-based MVNO Sharing Mobile was quoted by The Economic Observer on Saturday as saying.

However, Wang believes that his boss has no intention to withdraw from the sector thanks to its original user base.

"The company will strictly follow the rules even though it amounts to a large cost increase. We do not rely on the virtual network business to generate profits, but consider such service as a way to enhance our users' experiences and loyalty," Wang said.

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