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Last week, Xiaomi launched their own carrier network, offering consumers a package deal with phones and a sim for a starting price of approximately $10 USD. While it may seem ambitious to take on the state telecommunication companies at the same game, the truth is that it’s part of a government plan to promote innovation and competition in the industry.

Chinese authorities issued pilot operation licenses to eleven ‘mobile virtual network operators’, or MVNOs, at the end of 2013 and has gradually increased the number of virtual carriers to 42.

Instead of having these carriers compete with the state however, they are merely buying bandwidth from the existing government telcos, and despite a concerted push to get the small players of the ground, the numbers don’t look good for most of the existing MVNOs. And at the end of the year it seems many will be shut down when the pilot licenses are reassessed.

As of present, China’s MVNOs have signed 11.23 million subscribers, which only account for 0.9% of the country’s total mobile users. The number of customers is expected to reach 20 million by the end of this year, a net growth of around 2 million users per month (representing 48% of the total increase). Although this growth rate is by no means slow, it still falls short of the government projection of 50 million users by 2015.

There is also a disparity among current players in the field. Currently, only 35 out of the 42 license-holding operators are running virtual network services, while less then 10 virtual carriers are recording user growth. Some of them have amassed millions of users, (Snail Mobile top the list with 3 million users) and others saw they add fewer than 10 users per month. At present, none are recording profits.

One barrier to user acquisition is high wholesale prices for mobile traffic. The mobile virtual operators, which offer their services by renting infrastructure from the country’s three major carriers, are being offered a wholesale traffic fee double or triple the standard retail price, says Zou Xueyong, head of China MVNO Industry Alliance.

Such a price difference has made it difficult for the MVNOs to create attractive offerings for China’s price-sensitive customers, despite their endeavors providing service packages with zero monthly fees and offering to transfer consumer’s unused monthly data traffic to the following month.

As the two-year pilot program is terminating at the end of this year, the Chinese Ministry of Industry and Information Technology (MIIT) is planning to assess the status of current MVNOs and the license of firms with a poor performance will be revoked. The MIIT has yet to form an assessment system, but key standards will include innovation, customization and availability of a professional team, says Xu.

Despite all obstacles, the MVNO sector is still attracting major players to the open market. Aside form Xiaomi, Chinese internet companies like JD, Alibaba and Net.cn have all moved into the industry, as the market valuation of a MVNO license reaches 100 million RMB ($16 million USD).