Major carriers turn to Internet innovation

China Telecom is producing online start-ups as rivals also work to boost shrinking revenue

Liang Duguo always knew he could return to his old job when he first launched Shanghai Yi Xing Information Technology Co Ltd in 2013.

The 47-year-old was a senior product manager at China Telecom Corp Ltd, the country's third-largest carrier by number of subscribers with 194 million customers.

But the chance to branch out on his own and turn an entrepreneurial dream into reality proved too alluring. He was also cushioned by the promise that he could go back to his old position at the state-owned telecom giant if his venture failed.

"They said I could return and take up a position at the same level," Liang, who had spent 20 years at China Telecom, says. "That special policy gave me the courage to think about operating my own business."

So far, his decision to set up Shanghai Yi Xing has proved successful. The company offers real-time traffic information to firms specializing in mapping and navigational services, as well as government agencies, by using mobile signals generated by China Telecom customers. It says it does not compromise personal data.

"We raised about 10 million yuan ($1.56 million) from investors earlier this year and now we are serving several enterprises," Liang says, without disclosing further details. "We are quite optimistic about our business."

But he could not have achieved this without the help of China Telecom.

During the past three years, Liang has been just one of up to 5,000 employees at the behemoth who have taken advantage of this safety net to roll out their own businesses or join start-up teams.

By cultivating a pool of online-savvy people, the company hopes to create new revenue streams.

The first steps were taken in 2012 when China Telecom unveiled a 10,000-square-meter innovation center in Shanghai, the first of its kind among SOEs.

This has allowed employees to work on new projects until they grow into independent companies. If they fail, they can return to their old jobs.

In addition to the normal start-up services such as office space, financial incentives and mentoring classes, the group's staff can also access telecommunication network resources and tap into the technology support system and marketing network operations.

A fund of up to 200 million yuan has been put aside to invest in these start-ups.

"We are sparing no efforts to learn from Internet companies about how to inspire innovation," says Li Anmin, general manager of the innovation business department at China Telecom.

With a workforce of 450,000, China Telecom also has the luxury of numbers on its side. But there are other down-to-earth business reasons behind the decision.

As the country's "big three" carriers struggle with declining revenue from text messaging and voice calls, they are coming up with new ways to push growth.

One solution has been to awaken the entrepreneurial spirit in employees, illustrated by China Telecom's policy.

"Rising competition from Internet firms that offer instant messaging services has eaten into the revenue of text messaging and voice calls", says Xiang Ligang, an independent telecom analyst and founder of the industry website cctime.com.

"These were two major revenue sources, so the telecom companies are now looking at other ways to make money by encouraging innovation."

Overhauling the existing business model had to happen, according to Xi Guohua, former chairman at China Mobile Ltd, the largest telecom carrier in China with 823 million subscribers.

He said in August that revenue from text messaging and voice calls had been declining at an annual rate of between 15 and 20 percent in the past several years.

Although the figures were slightly better in the first nine months of 2015, China Mobile still reported that "voice call duration" shrank by 1.2 percent and text messaging declined by 6.4 percent.

It was a similar story at China Telecom and China Unicom (Hong Kong) Ltd.

Naturally, the big three players have been moving into other areas to stem the tide, including what is known as Internet-enabled services, which involve online music streaming and gaming.

Last month, China Unicom announced it would invest 3.3 billion yuan in a 110,000-square-meter innovation center in Guangzhou, Guangdong province. The aim is to help nurture Internet-enabled companies. "We will offer storage services, big data analysis, marketing and channel resources as well as financial investment," says Li Han, who is in charge of the Internet business at China Unicom's Guangdong branch.

China Mobile is also moving in the same direction. In May, it established a 2.55 billion yuan fund with State Development and Investment Corp and a fund management firm. The new company will invest in rapidly growing or mature mobile Internet businesses. China Mobile has pumped 1.5 billion yuan into the venture.

"Telecom operators are investing in start-ups because they need to innovate," Xiang at cctime.com says. "They hope to do that by funding enterprises in this mobile era."

China Mobile is also refining its existing operation. Earlier this month, it set up an Internet division, China Mobile Internet Co.

The plan appears to involve integrating the company's nine Internet business centers across China, which are involved in gaming, music streaming and online reading material.

Analysts are not convinced if this is the right road to take.

"The new branch is a baby born late," Fu Liang, a longtime independent telecom expert, says, adding that China Mobile announced as early as 2012 that it would set up a special Internet unit.

"In fact, China Mobile missed a golden opportunity back then to promote a mobile Internet business. But it still has a chance to rectify that," he adds.

"In the past, its Internet centers were run separately. Now the new branch will coordinate this operation."

Yet it is uncertain whether telecom carriers will be able to compete with leading Internet companies when it comes to specialized content.

"A better way is for Internet companies to work with carriers by setting up premium services for customers," says Gene Cao, a senior analyst at consultancy Forrester Research Inc.

"They would pay, say, a 15 yuan membership fee, to enjoy free data traffic, while listening to songs which are unavailable to normal users.

"The combination will enhance the appeal of premium services to customers. In this way, Internet companies can boost their revenues by offering more value-added services, and telecom carriers can also increase data traffic," Cao adds.

Fu says he agrees, and that the strength of the big three carriers is their sprawling infrastructure network and massive customer base.

"They are equipped with resources, which will give them a larger say in partnerships with Internet companies," he says.

In September last year, China Mobile reported that it had 823 million customers, while Tencent Holdings Ltd's WeChat, the most popular instant messaging platform in China, had 650 million users.

But turning those strengths into lucrative revenue streams will not be easy. "The lack of Internet talent at SOEs' corporate governance structure is a bottleneck to growth," Fu says.

Still, progress is being made. China Telecom, for example, has shaken up its management structure for its Shanghai innovation center.

As of November, the carrier had invested 50 million yuan in start-ups and 162 related projects. Four of them - the one set up by Liang Duguo, Shanghai Changshi Network Technology Co Ltd, woyoushi.com and Shanghai Zewei Information Technology Co Ltd - have received funding from venture capital firms.

"The innovation business is the fastest-growing department at China Telecom, with an annual growth rate of 50 percent," says Li Anmin, who is in charge of the division. "We also plan to establish 10 more incubators across China and open the innovation ecosystem to all startups."

masi@chinadaily.com.cn

(China Daily Africa Weekly 11/27/2015 page21)