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PROSPECTS FOR MOBILE NUMBER PORTABILITY IN CHINA: WILL IT SUCCEED?

Chun Liu Associate Professor, School of Economics and Management, Southwest Jiaotong University, People's Republic of China

Miao Miao Lecturer, School of Economics and Management, Southwest Jiaotong University and, Visiting Scholar, College of Communication, Pennsylvania State University, USA

In order to check the feasibility of mobile number portability (MNP), China has set up a trial run in Tianjin and Hainan province since 2010. The governments MNP rules were set up asymmetrically, to help weaker carriers compete more effectively with the market leader. But after two years of the trial run, surprisingly, the number of applicants is very small (210 thousand out of 20 million subscribers, roughly 1%), and the successful switching ratio is low (70 thousand out of 210 thousand, roughly 33.3%), which is far from the governments initial expectation, and dramatically different from the situation in other countries where MNP has been implemented. This paper found that despite the governments efforts to promote MNP, switching is impossible for most subscribers because of the rigorous barriers imposed by the carriers. The paper found that some of the barriers are very specific in the Chinese context, for example, the lack of credit monitoring system, local culture, and the carriers local marketing strategies. The paper concludes with lessons for other countries seeking to implement MNP.

1 INTRODUCTION

Since its initial implementation in Singapore in 1997, mobile number portability (MNP) has been found to bring considerable benefits to consumers, such as lower prices, greater choice, higher quality, broader social networks and a larger range of services (Lee et al. 2006; Atiya,2010) In addition, MNP has been argued by many to be an effective policy instrument for creating a more competitive market, specifically by giving new entrants an important competitive opportunity (Viard,2007; Khan, 2010). Many countries, such as USA and Korea, are currently implementing MNP, though the specific rules vary. In effect, there are three types of MNP adopted over the world.

These may be illustrated as follows.

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Local number portability (Thomas, 1998). Consumers are allowed to move between different local service areas of the same carrier without changing their mobile numbers. The customer is still served by the same operator but within a different service area. For example, a China Mobile customer moving from Beijing to Shanghai remains a subscriber of China Mobile without changing the mobile number, while switching the local operator from Beijing to Shanghai.

Cross-carrier portability (Xuan, 2010). Consumers are allowed to switch their telephone service to another provider in the same local area, usually the same city, who offers less expensive or better service plans while retaining their telephone numbers. For example, the customer stays in Beijing, but changes his/her operator from China Mobile to China Unicom, without changing his/her mobile number.

Hybrid portability (Xuan, 2010). Both the local area and carrier are changed simultaneously, which is a combination of the two above cases. For example, the customer moves from Beijing to Shanghai, and switches the operator from Beijing local service area of China Mobile to the Shanghai local service area of China Unicom.

China, the world's largest mobile phone market, saw a 1.14 percent monthly increase in mobile subscribers to 1.05 billion in June 2012 (Reuters, 2012). However, Chinese mobile market is dominated by China Mobile for many years, while China Telecom and China Union were very weak competitors before the 2008 restructuring and the 2009 3G rollout. Even now, China Mobile has about 700 million subscribers, twice of the sum of the other two. One of the objectives of the Chinese government in implementing MNP was to study experimentally how this competitive imbalance could be redressed. Accordingly, somewhat different plans were implemented in the two locations where MNP trials were begun in December 2010. In Tianjin city, users were free to take their numbers to any other carriers with no restrictions, while in Hainan province, an asymmetric one-way number portability plan was adopted: China Mobiles 2G users were allowed to port their numbers to the other two operators, but not on the opposite direction. Clearly, this reflected a preferential policy to help China Unicom and China Telecom to catch up with the market leader. However, surprisingly, MNP has met with a cold reception. According to public published data, the number of applicants is very small, 210 thousand out of 20 million subscribers, roughly 1%, and the successful switching ratio is low, 70 thousand out of 210 thousand, roughly 33.3% ( Han, 2012; Wang, 2011; Kang, 2012). Therefore, it is important to understand the reasons for the low switching ratio of the MNP in China.

In the context of the above, this study has three main goals. The first is to comprehensively discuss MNP implementation in China. Second, since policy-making is

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considered an essential factor of successful promotion of MNP in the telecommunication industry (Reinke, 1998), we analyze the possible impact of asymmetrical regulation on the observed results of the MNP trials. Finally, the third goal is to provide recommendation for MNP regulation in China. Furthermore, these suggestions might be useful to other developing countries that plan to implement MNP. To the best of our knowledge, this is the first research investigating Chinese MNP trial running. The paper is organized as following. Section 2 reviewed research related to MNP by focusing on its benefits to customers and the market, and why the MNP might be helpful for the Chinese telecommunication market. Section 3 then follows the development of MNP in different countries. The MNP trial in China is described and analyzed in details in Section 4. Conclusions follow in Section 5; we draw the conclusion that the low switch ratio cannot be attributed to faulty regulatory rules, but that the barriers erected by the carriers, and situational factors prevented the customers from switching. Section 5 also suggests future directions for research.

2 LITERATURE REVIEW Since its initial implementation in Singapore in 1997, mobile number portability (MNP) has been found to bring considerable benefits to consumers, such as lower prices, greater choice, higher quality, broader social networks and a larger range of services (Shin, 2007). In addition, many have argued that MNP is an effective policy instrument for creating a more competitive market, specifically by giving new entrants an important competitive opportunity (Reinke, 1998; Gans et al., 2001). The sections below elaborate on these benefits separately.

2.1 DECREASING THE SWITCHING COST

The implementation of MNP is intended to decrease the consumers switching costs. Lee et al. (2006) proposed that MNP would minimize inconvenience and porting costs for consumers, allowing them to choose the provider that best meets their needs without being encumbered with unfair switching costs. Klemperer (1995) has identified three main types of switching costs: compatibility, loss of long term contract discounts, and transaction costs. The National Economic Research Associates [NERA] (2003) also described a similar list of four main switch costs in the mobile telecommunications industry: compatibility, transaction costs, contractual costs; and search costs. In these papers, compatibility in MNP might refer to network compatibility and device compatibility. Network compatibility implies compatibility between the different providers networks, to enable the transmission of messages without delay, and the compatibility of client service applications. Device compatibility means the ability of the consumer to

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use handsets with multiple provider networks. Loss of long-term contract discounts implies the cost of abandoning customer credits, and other benefits of a long-standing relationship with the original carrier. In terms of transaction costs, a consumer wanting to change his/her service provider may need to pay a fee for the new number and an early termination fee to his/her original carrier. Transaction costs are also created by the consumers need to investigate the service quality and network coverage of the new carrier.

Identity switching costs arise because a mobile phone number represents a persons identity, and called parties can recognize calls and texts by the callers phone number identity. There are also instant messaging (IM) applications that use the current phone number, so mobile numbers are of great value to customers as identifiers (Cho, Ferreira & Telang, 2012). More recently, some mobile applications in smart phones directly use the cell phone number as an identifier, to connect with their social network service. Given these multiple uses of cell phone numbers, changing an existing number is indeed accompanied by significant effort and cost to consumers. Unless the benefits of moving to another mobile operator are significantly more than the costs of abandoning the current number, consumers would not cancel their current subscription at any time.

Not all of these switching costs of might be expected to be mitigated by MNP. For example, consumers may still be expected to spend considerable time and effort investigating the fee structure, bundling plans, call quality and coverage area of the new carrier. However, by making it easier for consumers to port their numbers, MNP reduces many of the other switching costs, including the identity switching cost. The widespread implementation of MNP implies that barriers due to the mutual incompatibility of mobile applications would need to be removed. Similarly, device compatibility should also need to be addressed by limiting the ability of providers to lock a handset. Several papers have empirically examined the impact of MNP. Daegon et al.(2012) found in an analysis of 47 mobile carriers quarterly data from 15 European countries from 1999 to 2006 that MNP decreased prices by 7.6 percent. This is because, without MNP, firms are better able to follow a strategy of bargain then rip-off they initially offer attractive terms in terms of device discounts and usage pricing to attract the new consumers, and then charge a higher price taking advantage of the lock-in effect. Operators usually give a discounted handset to users, especially for first-time clients, and make up the loss through subsequent revenues got from consumers monthly spending (Tokio & Hitoshi, 2012). However, Viard (2007) pointed out that with MNP, this business model is no longer as profitable as before because the lock-in effect is weakened. Prices as a consequence have declined. Sutherland (2007) presents a review of the experiences with the implementation of MNP. He finds that results of the implementation of MNP have been disappointing, apparently arising from complex

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regulatory processes and sub-optimal implementation. In Hong Kong, nearly 30 percent of mobile users switched their carrier in the year after the introduction of MNP in 1999 and after the deployment of MNP; Hong Kong carrier started a fierce price war (Madhani,2009). Operators who provide the best quality of service and biggest range of coverage, and best value-for-money will benefit because consumers will prefer to begin service with them and will no longer hesitate to leave existing inefficient service providers. Buehler et al. (2006) and Park (2011) even thought that MNP could eliminate switching costs. In terms of the economic analysis of number portability, Aoki and Small (2000) through the establish Aoki-Small model, research relationship of reducing switching costs of number portability, increase social welfare and implementation numbers carry itself cost. The paper found that consumer surplus or total surplus will increase when switching costs reduce, which demonstrated that the implementation of number portability can bring benefits for consumers. However, if the implementation of number portability generates a huge amount cost by itself, social benefits are not guaranteed in a well-developed market. Some research explored the impact based on different carriers specific prefix codes on the introduction of MNP and a property-rights attribution policy, respectively (Gans & King, 2001; Gans, King & Woodbridge, 2001). They also positively asses that MNP would encourage participants to search for and achieve socially efficient outcomes by giving consumers ownership of their phone numbers and a right to port a number. Haucap (2003) has focused on the question of how to allocate the property rights in telephone numbers and the costs of implementing number portability, highlighted potential information and stimulant problems in operation, and Buehler et al. (2006) concentrated on MNP in Europe by comparing changes among different countries according to the adoption process, porting time, and charges. They demonstrated that MNP are conducive to reduce the cost of users to switch network, strengthen competition between operators and improve the quality of service to users.

2.2 ADVANTAGES TO NEW ENTRANT

MNP provides three major benefits for the new entrants.

2.2.1 COMPETING FOR CUSTOMERS WITH INCUMBENT OPERATORS

As discussed in the previous section, customer switching costs, including compatibility costs, transaction costs, uncertainty cost of new provider, long-term contract discount cost, and identity switching cost, create a real disincentive to consumers to switching network providers. For new service providers wishing to break into mobile markets, this presents a daunting challenge because new customers can be acquired only from a restricted pool of individuals who currently do not have service or from those at the end

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of their current contract period with incumbent carriers. These conditions make it much harder for new carriers to break into markets, and establish a viable customer base. MNP gives new entrants a new chance to enter markets by competing for customers from incumbent carriers.

2.2.2 MNP INFRASTRUCTURE COST SAVING A necessary network component for mobile number portability is a database, accessible to all carriers, containing instructions on how to direct calls through the public network to dialed numbers, associated with specific consumers, irrespective of the network to which they currently belong. In most countries, the installation cost of creating mobile number portability database infrastructure is usually shared by several existing carriers (Thomas, 1998). This means that new entrants would no longer need to spend money on creating routing databases. For existing carriers as well, the economies of scale inherent in one comprehensive database may reduce the costs of maintaining routing databases in-house.

2.3 REALLOCATION THE PROPERTY OF TELEPHONE NUMBERS

From a property rights perspective, the introduction of MNP reallocates the property rights in mobile telephone numbers from operators to consumers. Gans et al. (2001) proposed that giving consumers property rights in their phone numbers and enabling them to switch operators without changing numbers would achieve more socially efficient outcomes. Customers property rights from MNP are more important for business users who want to create memorable alphabet strings, or for owners of so-called lucky numbers. For example, two digits 6 and 8 are especially valued by Chinese people. In Chinese thought, the digit 6 represents the best, and the digit 8 signifies good fortune. So, mobile numbers including 6 or 8 are more expensive than others. That is the reason why numbers ending with 666 or 888 would cost a fortune. Also in China, people can tell from a telephone number, when it was first assigned, just as in the case of license plate numbers. People like to show off numbers that have been in use for a long time to show their wealth and status, since persons who used mobile devices early would be rich or of high social status. Business customers also advertise their telephone numbers, increasing the numbers value and converting it into a valuable business asset. Hence, reallocating the property rights of the telephone number will increase the customers investment incentive.

2.4 ENHANCED COMPETITION

MNP allows subscribers to pursue the better service and favorable price from operator to operator, and roam from network to network retaining the same mobile number. As a

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result, mobile carriers will need to actively compete, and provide innovative as well as more proper customer service for their subscribers based on their demand, in order to avoid consumer churn and attract new subscribers. Viard (2007) examine the competition in a fixed telecommunications market consequent to the introduction of MNP, and found that MNP enhanced competition in the supply of value-added services, and brought better services and more favorable prices. Vigorous competition will benefit the whole telecommunication industry. Competition will lead to product and service innovation (Shin & Kim2007). In order to differentiate themselves from their opponents in the market place, operators will research and develop a greater variety of new products and services. In this process, operators will attentively observe their consumer and discover what customers are willing to pay for and do their best to meet their consumers need. To an extent, innovation and new product development may increase supply-side costs, but consumers will benefit from the variety of choice and receive more value from new products. Finally competition will benefit the operator itself, which would have the opportunity to catch up with the more advanced telecommunication industries in the world and compete with them (Bueler and Haucap, 2004). That will strengthen domestic carriers struggling for foreign markets.

3 INTERNATIONAL EXPERIENCES MNP is gradually accepted as a strategy for increased competition in the mobile market and is being successfully implemented in a number of countries (Bueler & Haucap, 2004). Its purpose is to give consumers more flexibility to choose their service provider and enforce effective competition by enabling subscribers to switch between service providers without changing telephone numbers. From the middle of the 1990s, many telecommunications regulators in the world proposed to implement MNP. The idea of number portability became popular with the continuous development of mobile telephones, since in most countries different mobile carriers are designated with different area codes and, without portability, changing ones carrier would also change ones number. However, different carriers have different attitudes toward MNP implementation. Incumbent carriers with large existing subscriber bases, strongly oppose number portability on the grounds that providing this service incurs considerable additional management cost. At the same time competitor carriers and entrants warmly welcome number portability for it prevents consumer lock-in and gives them a chance to compete fairly with other carriers. Due to this conflict of interest between carriers, number portability is usually executed for all the carriers by telecommunication regulatory authorities. It was a significant milestone when number portability was first proposed. Since its initial implementation, mobile number portability has been found to bring considerable benefits to consumers, such as lower prices, greater choice, higher

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quality, broader social networks and a larger range of services. With the implementation of mobile number portability, we expected a potential revolution in telecommunication service with more liberalize competitions and less monopolization. In addition, MNP has been argued by many to be an effective policy instrument for creating a more competitive market, specifically by giving new entrants an important competitive opportunity.

3.1 IMPLEMENTATION IN ASIA

In 1997, Singapore was the worlds first country to implement (limited) MNP, followed by Hong Kong in 1999. In Hong Kong, nearly 30 percent of mobile users ported their numbers in the year after the introduction of MNP and the mobile market in there experienced a fierce price war with seven operators competing to attract new consumers. In the Korean mobile telecommunications market, the Ministry of Information and Communication implemented MNP in January 2004 to intensify competition between carriers (Park, Lee, 2002). As a result of MNP, all new subscribers were allocated a unified 010 number instead of the existing network identity number, such as 011, or 016. Japan was one of the few advanced countries that delayed implementation of MNP, because of opposition from three of the biggest four operators (NTT DoCoMo, KDDI/au, and TuKa). But academics, consumer organizations, and the mass media supported it. After protracted negotiation, the largest carrier and strongest opponent of MNP, NTT DoCoMo, finally agreed that operators would implement MNP if its profit exceeded the associated costs. Finally, with the help of Ministry of Internal Affairs and Communication (MIC) in Japan, Japan introduces MNP on March 2006 (Otsuka & Mitomo, 2012).

3.2 IMPLEMENTATION IN EUROPE

United Kingdom and the Netherlands were the first two European countries to implement MNP in 1999, followed by Spain in 2000, Sweden and Denmark in 2001, and Belgium, Italy, Germany and Portugal in 2002 (Sutherland, 2007). Due to regulatory inaction in some European countries such as Estonia, the widespread implementation of MNP in Europe took about six years. A number of countries postponed the implementation of MNP for various reasons. For example, Germany delayed the introduction of MNP due to the lack of adequate technical support (Buehlera et. al, 2006). With the legislation of Bulgaria and Romania in 2008, all 27 EU members had fulfilled their introduction of MNP (Sanchez & Asimakopoulos, 2012).

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3.3 IMPLEMENTATION IN OTHER COUNTRIES

Mobile Number Portability has been compulsorily implemented in the most developed countries by regulators as a means of increasing effective competition in local mobile markets. In the United States, the MNP implementation began in November 2003, which enabled Verizon Wireless to attract more subscribers, because of the quality of their network and customer service (Shi, 2007). Some countries postponed the introduction of MNP several times because of the conflicting opinions of different carriers. In Austria for example, smaller operators supported MNP, while the larger operators expressed reservations (Lin, Chlamtac, and Yu2003). Similar delays occurred in Australia, where MNP started after no less than 50 months of delay due to acrimonious negotiations; finally, the Australian Communications Authority set the date of September 25, 2001 for the implementation of mobile number portability (Ovum, 2005).

4 THE CASE OF CHINA

4.1 OVERVIEW OF THE CURRENT CHINESE TELECOMMUNICATIONS MARKET

The Ministry of Posts and Telecommunication (PTT) was the original state-owned monopoly operator of Chinas telecommunications business. In March 1994, the State Council divided PTT into the General Post Office and the General Communication (known as China Telecom), as separately accounted enterprises. In July 19, 1994, the state council approved the establishment of China United Telecommunications Corporation, authorized to offer both local telephone and mobile services, in competition with China Telecom. In February 1999, the State council divided China Telecom into two operating companies, the original China Telecom and a new China Mobile. In July of same year, China Mobile was made formally independent of its erstwhile parent. Initially, China seemed to take a pro-competition stand on the telecommunications industry. Scholars also found that the telecommunications restructuring had gone in the exact opposite direction of many other major sectors before the WTO accession in the early 2000s, when the State Council chose to consolidate fragments of many other industries but permitted telecommunications to diversify, and diversify quickly and deeply from one monopoly to seven companies (DeWoskin, 2001). However, later on, ironically, telecommunications has returned to the same course a decade after the accession to the WTO, from a diversified market structure to an oligopolistic one. From that time on, the tripod pattern of Chinese telecommunication industry emerged; three operators in vertically integrated competition. However, given the oligopolistic market structure, full-fledged competition has not emerged. A notable aspect of Chinese telecommunications policy is the tendency of the Chinese government to use policy

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action is support of weaker carriers, in order to stimulate more equal competition between carriers. This was evident in the most recent 2008 restructuring and the 2009 3G rollout, where the Chinese government adopted a balancing approach in the hope of creating a level-playing-field for the carriers in the 3G era and beyond (Xia, 2011). We argue in this paper, that this tendency was also evident in the MNP case, where China implemented MNP policy asymmetrically to allow consumers to switch from China Mobile to the non-dominant carriers but not vice versa.

4.2 CHINA MOBILE MARKET

With the launch of analog cellular service in 1989 and digital service in 1995, the Chinese mobile telecommunications service market grew substantially. By February 2012, the number of subscribers was over 997 million and the penetration rate was about 77%. There are three main operators: China Mobile, the dominant mobile carrier, and China Unicom and China Telecom, the two competitive carriers. With nearly 1 billion mobile subscribers, mobile phones have become an important communication tool that has penetrated into peoples lives, but on the other hand, after many years of rapid development, Chinas telecommunication market may be showing signs of saturation. The three Chinese mobile service providers are in an oligopoly dominated by one carrier, China Mobile in which the other carriers have struggled to find footing. In particular, the dominant carrier has maintained substantially half of the market share for over 10 years. MNP in such a saturated market was expected to increase subscribers churn rate and to stimulate competition in the mobile market. Hence, MNP was expected to give the non-dominant companies a good chance to increase the customer base by attracting customers from China Mobile. Prior to the initiation of MNP, China Mobile had benefited from the brand effect, with adverse effects on competition (Park et al., 2007). China Mobile has the best brand recognition among most consumers and a better signal than the competition. China mobile has built a strong reputation for service quality because it has enjoyed first-mover advantages over the other service providers, including early investment in base stations and acquisition of valuable or profitable subscribers in the early stages of the market. This early leadership and the creative use of marketing have created a dominant position for China Mobile that other carriers have found hard to challenge. Chinese policy makers intended to use MNP to restore some balance to the playing field: as Buehler and Haucap (2004) have argued, an effect of MNP is to aid entrants at the expense of incumbents, and smaller firms at the expense of dominant carriers.

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4.3 NUMBER PORTABILITY TRIAL IN TIANJIN AND HAINAN

China began trials of the MNP in Tianjin city and Hainan province in December 2010. The length of the trial was 6 months. The two trial sites have different portability rules. In Tianjins multi-way scenario, users, except for China Mobiles 3G TD-SCDMA subscribers with 157 and 188 prefix numbers, were free to take their numbers to any other operator. However, Hainan ran on a pretty limited version of the MNP, called the asymmetric "one-way" number portability plan, according to which China Mobile's 2G users can port their numbers to China Telecom or China Unicom, but not on the opposite direction. In addition, Hainans Unicom and Telecom customers could not port numbers to each other. Similar to Tianjin, Hainans TD-SCDMA numbers could not be ported to other operators. Clearly, the Chinese regulator is testing the asymmetric regulation in Hainan by prohibiting the transfer of the numbers from the competitive operators to the dominant carrier, while in Tianjin, a full-fledged competition was expected. In both locations, TD-SCDMA numbers were excluded in order to minimize the impact of the MNP to this homegrown technology. There are several prerequisites for porting a number. First, the applicants personal information must match that in the operators system. Second, the applicant must have no unsolved contractual issues with the current operator and the number is in the active standing when applying. Third, an application can be denied if there are technical problems with the current operator. Forth, the numbers bundled with other services, such as wireline and broadband services, can not be ported. Fifth, numbers cannot be ported more than one time within 120 days. Sixth, the remaining prepaid balance of the exiting number cannot be transferred to the new operator. Given the reality of the Chinese mobile market, those limitations actually create a very high barrier for those who are interested in transferring their numbers. Only those who have the complete and correct personal profiles with the operator, which is not common given the large percentage of prepaid subscriptions, or care to take time to complete it, and are out of contract, and are willing to forfeit any remaining pre-paid balances and benefits, such as points, and have no bundled services, which is very common in China because of the significant discount associated with the bundling service, or are willing to unbundled their packages, are eligible to transfer their numbers. In practice, only standalone postpaid wireless users are eligible to transfer their numbers immediately. Nielsen, a marketing research company, estimated that nearly 87 percent of Chinas mobile users are pre-paid in 2010 (Phillips, 2010). Thus, theoretically, approximately 10 percent and most likely much less given the restriction on bundled service and identification requirement, of mobile users are able to take advantage of the MNP initially.

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Nonetheless, the introduction of MNP was warmly welcomed by both the media and the consumers. MNP was expected to increase competitive pressure on the dominant mobile operator China Mobile (Chao, 2010; Li, 2010; Clark, 2010). In a web-based survey, conducted by one of Chinas major portal site Sina.com, 89.4 percent of the interviewees claimed that they would support the MNP and would transfer their numbers (sina, 2012)1. Data on MNP on which the remaining part of this section is based was collected by China Unicoms Research Institute and made available to the authors through research collaboration with the authors university. Thus, it was not publically available.

In the first month of the MNP trial, 22,200 users in Tianjin and 4,595 users in Hainan applied to transfer their numbers, among which respectively 13,291 and 1,096 were successful (Gu, 2010). According to the latest statistics from the China Academy of Telecommunication Research of the Ministry of Industry and Information Technology (MIIT), which is the coordinator of the MNP trial, approximately 58 thousand transferred their numbers in the first year of the MNP trial (Chen, 2012). Among the total of over 20 million mobile users in these two regions, 1 percent have applied to transfer their numbers. Although the percentage is in sharp contrast to the survey result mentioned earlier, it is not surprisingly low given the barriers mentioned in previous sections. In Tianjin, within 6 months of the trial, 21,320 applications had been filed to port the number to China Unicom, 90 percent of which were from the dominant China Mobile. Of these, 2,099 were successfully ported, a roughly 10 percent successful rate. On the opposite direction, 12,269 users applied to port their numbers out, among which 1,625 were successful. The number of porting applications, in and out, increased significantly in the first three months of the trial and became steady after the forth month. However, the success rate dropped dramatically from 75 percent in the first month to less than 45 percent in May 2011, the last month of the trial, for ports in both directions. Contractual and identification issues were cited as the top 2 reasons for the denial of porting, accounting for over 80 percent of the cases. On the contrary, the number of applications in Hainan had dropped continuously since the trial began, from 2,236 to 346, but the successful rate had remained at a comparatively high of 40 percent. The trial in Tianjin and Hainan has obviously not met the high expectation for the introduction of the MNP. By any indicator, the MNP has not changed the market structure of the mobile industry, although the competition has been arguably driven more intensely. The media has sarcastically described the MNP as another rather characteristic of Chinese telecommunications policy, and it is reported that the MIIT has

1 The polling is not closed, so the number might change along with the time.

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postponed its plan to extend the MNP nationally and is considering other alternatives (Su, 2012).

4.4 EXTENSION OF THE TRIAL

Because of the bad performance during the trial, MIIT extended the trial without explicit deadline. Table 1 summarizes the numbers of applicants and successful rate (Han, 2012; Wang, 2011; Kang, 2012). Table 1: Overall MNP statistics in last two years.

2011.5 2012.1 2012.6 2012.12

Applicant number 110,000 158,631 180,000 210,0002

Successful number 48,327 58,260 64,654 70,000

Successful rate 43.6% 36.7% 35.9% 33.3%

On the one hand, the MNP application number is very small with respect to the total number of mobile users, 20 million, in Tianjin and Hainan (Tianjin, 2012; Hainan, 2012), which results in very low switching ratio, about 1% roughly. On the other hand, the successful rate is also very low, about 33% roughly. In terms of the low switching ratio, the special situation of the mobile market in China accounts for why there are such few MNP applicants. Mobile users in China can buy mobile phones from open market instead of the operators, and there are abundant dual card phones available from low end to high end. Therefore, many potential MNP subscribers prefer to the dual card alternative instead of switching. In terms of the low success rate, it's widely reported that the operators are setting very strict rules to prevent subscribers from switching. The top 3 reasons why MNP applicants are refused switching from China Mobile to China Unicom are as following (China Unicom, 2011): 1. Contract duration has not finished (76.4%). MNP applicants must have been

staying as customers for an adequate period before being allowed to switch. 2. User profile does not match. (6.1%). This is because all operators promote SIM

cards selling by allowing all agents and distributors to sell SIM cards to everyone without recording his/her identity, and all such cards share the same user identity:

2 110000, 210,000 and 70,000 are not reported as accurate numbers, therefore, we just present the integer part.

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the seller. Therefore, subscribers with such shared cards can not provide any evidence to proof himself/herself as the owner of the card during applying for MNP.

3. Unknown errors (4.7%). These cases stem from unknown business conflictions and system compatibility.

Due to these small numbers, the market structure is not affected at all. China Mobile is still the dominant, though the government planned to balance the market share through MNP.

4.5 SUMMARY OF THE CASE

Chinas MNP experience provides some interesting observations. First, the Chinese trials indicate that MNP might benefit vertically integrated, multiple service operators more than purely mobile operators. In Tianjin, China Unicom is the dominant wire line operator and is the second largest mobile operator. China Unicom attracted more numbers ported in than ported out, particularly from the dominant mobile operator China Mobile, which however did not have a wire line presence in Tianjin. One possible reason is that China Unicoms customers can bundle their mobile and wire line services together and get a discount. On the other hand, China Unicom is the weakest mobile operator without wire line service in Hainan. We observe a sharp decline in the numbers ported into China Unicom after the first months enthusiasm. Clearly, China Unicom in Hainan has not gained much competitive advantage from asymmetric regulation. In other words, the MNP, even the asymmetric MNP, will not help the competitive mobile operator to challenge the dominant operator if the latter is a vertically integrated, multiple service operator. On the other hand, the MNP benefit the full-service operator to gain market share from the mobile operator. However, given the limited geographical scope and duration of the MNP trial, how significant the impact would be remains to be seen.

Second, value-added service associated with the number might impact the interested users decision to port the number. Mobile phones have become an integral part of peoples daily life in China. Many services, such as banking, government services etc., require a phone number for validation and communications purposes. Due to technical limitations, the ported number might not be able to flawlessly continue using services associated with the number, which does not only lead to inconvenience but also possibly impacts the users daily life. Also at issue is the problem that the telecommunications regulator in many countries usually does not have the expertise and the authority beyond the traditional voice and short message services provided directly by the regulated operators, and may thus be in no position to influence how information services are offered and used by mobile customers. In addition, it might add

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cost to other service providers to upgrade their systems to accommodate the MNP. A sustainably cost recovery mechanism is much needed.

Third, in a market like China where the majority of the mobile users are prepaid, it is pivotal to design a user-friendly refund method. In China, mobile subscribers can charge their account online, using a refill card and by tendering cash at the local branch office of the carrier. Current rules say that only cash tendered in the local branch office can be refunded with the original invoice. For those who charge their account online or by refill card, the remaining balance will be forfeited if they choose to port the number. Since only a limited number of Chinese customers pay their bills in the local branch office now, the non-refund rule inhibits many customers from porting their numbers. If the purpose of the MNP is to bring more welfare to the customer, this non-refund rule is clearly made to the convenience of the operator.

Fourth, it is tricky to handle the so-called lucky numbers. In China, as well as in other markets in Asia countries, operators might charge extra fee to some numbers that are considered to be lucky according to the local culture and some may even set a minimum usage requirement for those numbers. Thus, theoretically speaking, a lucky number with operator A can not be transferred to operator B because it supposedly has a lifelong contract with the original operator A. The issue is essentially related to the property rights of the phone number. According to Chinese regulations, phone numbers are owned by the state and lent to the operators. Neither the operator nor the user owns the number. That being said, it is the states authority to decide the eligibility of the number to be transferred. As a matter of fact, the regulator has made it clear that numbers associated with the TD-SCDMA (with the prefix 188) cannot be transferred. However, the current trial remains silent on the issue of the expensive and rather scarce lucky numbers.

Fifth, a mechanism to recover the cost of the MNP has not been set. It is reported that the cost of the MNP trial was financed by the MIIT. It is estimated that an investment of 2 billion RMB would be needed to nationally implement the MNP. It is not clear now whether the MIIT has designed a national plan to promote the MNP and what the funding mechanism will look like, except some sporadic report saying a distributed database might be the technical solution (Zhang, 2012). Keeping in mind that the MIIT has been struggling with establishing a modern universal service mechanism for the last 20 year without any sign of success, it is not too pessimistic to assume that the MIIT would not be able to make significant progress in the seemingly less emergent MNP in the near future.

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5 CONCLUSIONS AND FUTURE WORK China has followed the example set by many advanced telecommunications systems to roll out the MNP in the hope of creating a more competitive telecommunications market. Although progress has been made, the result of the trial in Tianjin and Hainan has not been extremely encouraging. It seems that the Chinese regulator is not prepared to implement the MNP nationally in the near future. Some issues are specific in the Chinese context, but others offer lessons for other countries. First, the smooth operation of the MNP is based on a comparatively complete and accurate consumer management system. For developing countries like China where the majority of the subscribers are pre-paid and also lack an effective credit system, the regulator must find a balance between the integrity of the national numbering system and the flexibility of the market. As shown in China, even a simple match of the number with the personal ID could be a barrier for many consumers to participate in the MNP. Second, detailed regulatory measures must accompany the MNP. The market itself will not automatically guarantee that the MNP policy will meet its goals. On the contrary, the dominant operator might take advantage of the MNP to enhance its position in the market. A close supervision of the implementation process of the MNP is necessary. Since any transfer of a number involves two operators, anti-competitive behavior is not uncommon at the port-out part. The regulator needs to make the porting process as transparent and simple as possible to avoid any intentional and unnecessary barriers set by the operators. Third and the last, Chinas experience has shown that the MNP has limited impact in changing well-entrenched market structures. Moreover, it has limited competitive advantages to offer a pure mobile carrier confronting a vertically integrated multi-platform operator, who can use bundling strategies to entice customers. Given the trend of converging technologies, the MNP might still serve as an alternative regulatory tool to level the market but euphoria about its potential to stimulate competition may not be warranted.

Future work to extend these findings will require the collection of detailed operational data from mobile carriers, as well as surveys of customers who switched successfully (and those who were unable to due to various reasons), to test the conclusions of this paper and figure out key factors affecting customers decision making.

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