Pilot Program for Mobile Communications Resale Business

On May 17, 2013, the Ministry of Industry and Information Technology (“MIIT”) published the Notice of the Ministry of Industry and Information Technology on Launching the Pilot Program for Mobile Communications Resale Business (MIIT Notice No.[2013]191) (“Notice”) with two attachments, i.e., the Pilot Program for Mobile Communications Resale Business (“Pilot Program”) and the Application Documents and Examination Procedures with respect to the Pilot Program for Mobile Communication Resale Business (“Examination Procedures”).  This heralds the formal launch of mobile communications resale, after soliciting public opinions for a period of four months.

Main Content of Pilot Program

1. Definition and Classification of Mobile Communications Resale Business

As defined under the Pilot Program, Mobile communications resale business (“Resale Business”) refers to such business activities that a reseller purchases mobile communications services from a basic telecommunications business operator who owns a mobile network, repackages the services with its own brand and then sells same to end users.  The Resale Business does not include the resale of mobile satellite communications service.Different from the basic telecommunications business operators, the mobile communications resale enterprises running the Resale Business (“Resale Enterprises”) do not build their own wireless networks, core networks, transmission networks and other mobile communications network infrastructures, instead they must build their customer service systems and may build their business management platforms as well as billing, accounting and other business supporting systems as needed.

The Resale Business is classified as Class II basic telecommunications business in the Pilot Program, and will be monitored by reference to the provisions on value-added telecommunications business.

2. Qualifications for Resale Enterprises

Pursuant to the Pilot Program, the Resale Enterprises shall first meet the requirements for operating value-added telecommunications business set out in the Telecommunications Regulations of the People’s Republic of China and the Administrative Measures for Telecommunications Service Licensing. In addition, the Resale Enterprises also need to satisfy the following requirements: (1) the Resale Enterprises shall be privately-owned (as opposed to state-owned) enterprises established in accordance with laws. The registered capital contributed by private investors must account for not less than 50% of the total registered capital of such Resale Enterprises and the single largest shareholder of each of such Resale Enterprises shall be a privately-owned enterprise (excluding foreign-invested enterprises as well as enterprises established by investors from Taiwan, Hong Kong and Macau. For a domestic privately-owned enterprise listed overseas, the percentage of equity held by the enterprise’s foreign investors shall be less than 10% and its single largest shareholder shall be a Chinese investor); (2) the Resale Enterprises shall have professional staff corresponding to their needs of the business operations; (3) the Resale Enterprises shall have the capacity to provide long-term services to users; (4) the Resale Enterprises shall have necessary premises and facilities; (5) the Resale Enterprises shall have the capability to ensure the security of their networks and information; (6) the Resale Enterprises shall enter into commercial contracts for the Resale Business with basic telecommunications business operators.

The Examination Procedures further specifies the detailed criteria of above requirements illustrated in the Pilot Program.

3. Procedures of Application, Examination and Approval

Under the Pilot Program and the Examination Procedures, the application, examination and approval procedures for the Resale Business are substantially the same as those for the value-added telecommunications business.  Specifically, the Resale Enterprises applying for cross-region Resale Business shall submit their applications to the MIIT and those applying for inner-province Resale Business shall submit their applications to provincial administrations of communications.  The Resale Enterprises applying for cross-region Resale Business also need to complete filing procedures with local administrations of telecommunications located in all relevant regions before conducting their business in such region.

4. Other Rules

In order to ensure the successful implementation of the Pilot Program, it also sets forth the following provisions for the Resale Enterprises, the basic telecommunications business operators and the MIIT:

(1) The Resale Enterprises shall satisfy certain requirements if they propose to conduct pre-paid Resale Business, and the period of the pre-paid fees shall be no more than two years.  All service quality claims brought by the Resale Enterprises’ users as well as all business disputes between the Resale Enterprises and basic telecommunications business operators shall be resolved by telecommunication authorities or their affiliated agencies.

(2) A basic telecommunications business operator shall enter into cooperation agreements with more than two Resale Enterprises in conducting the Resale Business, and such agreements shall not include any exclusivity clause.  The quality of the services sold by basic telecommunications business operators to the Resale Enterprises may not be lower than the quality of their own business services. The wholesale prices of the services offered by a basic telecommunications business operator to the Resale Enterprises shall be lower than the lowest retail prices of the same types of service offered by such basic telecommunications business operator in the public market.

(3) The MIIT will determine and assign the range of telephone numbers to basic telecommunications business operators for use in the Resale Business, and will allocate short telephone number resources to the Resale Enterprises for their client service.

5. Time Schedule for Pilot Program

As provided under the Notice, the candidates of the Pilot Program may apply to participate in the pilot business during May 17, 2013 to July 1, 2014, and the Pilot Program will end at December 31, 2015.

Brief Comments on Pilot Program

1. Facilitate Emergence of Chinese Virtual Operators

The launch of the Pilot Program changes the MIIT’s long-time held negative attitude toward virtual operators.  The Resale Business is actually not a new concept.  It was initially appeared in the Telecommunications Regulations of the People’s Republic of China issued in 2000 and many foreign countries have established a mature business model for virtual operators.  However, the Resale Business was deleted from the Classified Catalogue of Telecommunications Business revised in 2003, which meant that the telecommunication business operators cannot apply to conduct the Resale Business.  Therefore, before the issuance of the Pilot Program, the virtual operators did not have a legitimate status to conduct the Resale Business.

The Pilot Program provides virtual operators with legitimate market status.  Pursuant to the Pilot Program, the Resale Enterprises only purchase relevant mobile communication service from basic telecommunication business operators.  They do not actually operate any mobile communication service or possess any basic network facilities and infrastructures such as wireless networks, core networks and transmission networks.  Therefore, the Pilot Program is actually a pilot arrangement for virtual operators and provides a good opportunity for the emergence of Chinese virtual operators.  It is predictable that the MIIT may open more resale business relating to other types of telecommunication business in the future and benefited from this, the business of Chinese virtual operators will be further developed and expanded.

2. Promoting Marketing Competition but Its Actual Effect Remains to be Seen

It is well-known that the mobile communication business is currently monopolized by three largest basic telecommunications operators, namely China Mobile, China Unicom and China Telecom.  The Pilot Program allows the Resale Enterprises to participate in the operation of mobile communications business as virtual operators, which apparently encourages the competition in the mobile telecommunications market.  Although the Pilot Program sets forth some mandatory regulations on the cooperation between basic telecommunications operators and the Resale Enterprises, the eventual market effect of the Pilot Program still depend on the details of the resale contracts entered into between the Resale Enterprises and basic telecommunications operators.  Currently, the attitude of the three largest basic telecommunications operators toward the Pilot Program is still unclear.  Therefore, the potential market effect coming from the entry of privately-owned enterprises into mobile telecommunications market still remains to be seen.

3. Foreign Investors’ Participation Subject to Limitations

Although the Pilot Program classifies the Resale Business as the Class II basic telecommunications business which will be monitored by reference to the provisions on value-added telecommunications business, foreign investors’ participation into the Resale Business is still subject to limitations due to the qualification requirements for the enterprises applying to conduct the pilot business set forth in the Pilot Program.  As required by the Pilot Program, a qualified Resale Enterprises shall be privately-owned enterprise of which not less than 50% of the registered capital is contributed by private investors.  In addition, the single largest shareholder of each of such Resale Enterprises shall be a privately-owned enterprise funded by private investors, and both foreign-invested enterprises and enterprises established by investors from Taiwan, Hong Kong and Macau are generally excluded.  For privately-owned enterprises listed overseas, the percentage of equity held by their foreign investors must be less than 10%.  It can be seen that the MIIT currently does not allow any foreign investor to directly invest in enterprises conducting the Resale Business.  What is unclear is whether the MIIT shall put the same strict limitations on foreign investors’ indirect participation in the Resale Business such as via VIE.  Answering this question requires further analysis on the background of those approved Resale Enterprises.