China’s mobile operators struggle to protect revenues against disruptive mobile technologies like Tencent’s WeChat

In March, Miao Wei of the Ministry of Industry and Information Technology (MIIT) surprised WeChat fans everywhere when he said that China’s big three telecom operators might put pressure on Tencent to start charging for WeChat because of its heavy use of bandwidth. China’s three telecom companies were clearly behind the statement, trying to regain lost ground.

The telecom companies were flexing their muscles to protect their business, as the shift from mobile network-based text messaging to free internet-based messaging applications like WeChat takes a serious bite out of their revenues. Online chatting applications like WhatsApp, WeChat and Vox are making text messaging obsolete in the same way internet-calling application Skype led to a sharp decline in international calling volume. The MIIT announced that the number of point-to-point text messages fell 10.6% in the first two months of 2013 compared with the same period last year.

But WeChat users were outraged by the prospect of a payment. Consumers complained they already pay mobile companies for internet-based services in data fees. But mobile operators argue these revenues don’t account for the strain on their signaling networks. WeChat has a heavy location-based aspect, for example a shake function that lets one identify other WeChat users nearby, says Mark Natkin of Marbridge. Because the application is essentially always online, it has near-constant interaction between a phone and a base station. China Mobile asserts that WeChat accounts for only 10% of its mobile data traffic but uses roughly 60% of its signaling resources.

Even so, mandating WeChat and other apps pay set fees to mobile operators could weigh heavily on mobile start-ups, harming innovation. “It would send a very bad signal,” says Michael Clendenin of RedTech Advisors. “It implies that a start-up cannot grow to scale without having to incur heavy cost. Obviously Tencent is no start-up, but there are a host of small companies out there that are trying and hoping to have a similar hit on their hands.”

Recognizing the impact, the MIIT conceded that forcing fees could set a harmful precedent. In April, ministry spokesperson Zhang Feng said the market should decide whether WeChat has to pay. To support innovation in the industry, the ministry would not intervene in the conflict, Zhang said. Without MIIT on their side, China’s telecom operators may just have to face the music.

For an in-depth look at the Freemium model in China, check tomorrow’s article: The Future of Freemium

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