China ramps up 3G focus as new networks near completion

Brought to you by Wireless Intelligence

The number of 3G connections in China surpassed the 10 million mark by year-end 2009, accounting for 1.4 percent of the country total, according to new Wireless Intelligence research. 

China’s three main operators – China Mobile, China Unicom and China Telecom – launched their respective 3G networks in January 2009 and spent the rest of the year investing billions building-out 3G coverage to vast swathes of the country. However, all three operators have recently announced lower mobile capex for 2010, suggesting that build-out may be near completion in some cases. A recent study in China found that total operator capex will fall 21 percent to CNY262 billion (US$38.3 billion) this year, while specific mobile network expenditure will fall by 25 percent.

Now that significant 3G coverage and capacity is in place, Wireless Intelligence predicts that the Chinese 3G market will consequently grow slightly faster than previously anticipated. We forecast that 3G connections in the country will reach 35 million by year-end 2010, accounting for about 4 percent of the country total by this point.

In 4Q09, third-placed China Telecom was the best performing operator according to our research. The CDMA-based operator has less than an 8 percent market share overall but attracted 9.3 million new subscribers (net) in the quarter, a third of the country’s total net additions in the period. This performance was underpinned by a strong subscriber migration to its new CDMA2000 1xEV-DO network, which accounted for almost 40 percent of total Chinese 3G connections by year-end 2009.
 
China Mobile remains China’s largest mobile operator by some distance, commanding a 72 percent market share by year-end. However, regulatory efforts to curb its dominance (notably the large-scale industry restructuring programme of 2008) appear to be have had an effect as the operator has reported signs of competitive pressure alongside evidence of mobile saturation in a number of its more developed regions. China Mobile was the first to rollout 3G services, switching on its first networks during the Beijing Olympics in August 2008. During 2009, the operator built-out its new network to 238 cities, with a 70 percent coverage rate among so-called ‘prefecture-level’ cities. But capex is to be cut 5 percent to CNY123 billion this year (from CNY129.4 billion in 2009) and eventually reduced to CNY80.4 billion in 2012. China Mobile’s 3G connections reached 3.4 million by year-end, accounting for less than 1 percent of its total. A significant drag on growth has been the lack of affordable handsets compatible with the homegrown TD-SCDMA standard being used for its 3G network. To counter this bottleneck, China Mobile funded an R&D effort to encourage manufacturers to develop TD-SCDMA devices. It has also created its own smartphone platform (‘Open Mobile System’) and devices portfolio (‘OPhone’) based on a proprietary version of Google’s Android operating system. Partly as a result of these efforts, China Mobile said that there are now 266 different designs of TD terminals on the market, some priced at or below the key CNY1,000 (US$146) threshold.

China Unicom: The costs of rolling-out 3G weighed heavy on second-placed Unicom, which recently reported a sharp decline in net profit for 2009 and announced plans to cut capex by 35 percent (to CNY73.5 billion) in 2010 in an effort to shore up costs. It also took a depreciation charge of CNY650 million on its WCDMA-based 3G network in 4Q09, a quarter which saw its market share of total net additions sink to around 17 percent. However, 3G network rollout is well advanced and currently covers around 335 cities in China, providing greater reach than China Mobile. Consequently, Unicom remains bullish on its prospects for 3G subscriber growth in 2010, and has set a target of adding 1 million new 3G connections a month during the year. A key advantage for Unicom in using WCDMA has been its ability to offer a wide range of compatible handsets (and other products such as dongles) at affordable price points. But the operator has faced problems in this area too. Sales of the iconic but highly-priced Apple iPhone – which Unicom has offered exclusively in China since September 2009 – reached just 100,000 by the end of the year. More recently, its rollout of Android-based smartphones has been affected by Google’s censorship dispute with the Chinese government, which has seen some models delayed. 

China Telecom inherited Unicom’s loss-making 2G CDMA network business as part of the 2008 industry restructuring and quickly identified 3G services as a strategy for returning its mobile business to profitability, which is expected to be achieved by 2011. By year-end 2009, China Telecom had built-out its CDMA2000 1xEV-DO 3G network to 342 prefecture-level cities, over 2,000 counties, and 60 percent of China’s towns and villages, which it claims made its 3G network the most expansive in China to date. The operator is aiming to add 30 million mobile subscribers in 2010, including 8 million 3G subscribers. China Telecom has already been the most successful of the three operators in migrating subscribers over to the new networks with over 7 percent of its subscriber base migrated by year-end 2009. Its success is due in part to a focus on the high-end business market. It also recently announced deals to offer high-profile handsets from the likes of BlackBerry-maker Research In Motion and Palm. During 2009, China Telecom said it launched, on average, 40 new CDMA terminals per month, including some 3G handsets at the CNY1,000 price point.

Matt Ablott, Analyst, Wireless Intelligence

All three operators made better-than-expected progress in building-out their new 3G networks in 2009, but migrating subscribers has proved more of a challenge; this has meant that return-on-investment – in the form of mass uptake of new 3G data services – remains some way off. China Telecom pushed 3G most aggressively in 2009, a strategy that led to its strong showing in 4Q09. Like its two competitors, China Telecom has marketed 3G services under a new consumer brand – ‘e-surfing’ – which, according to recent market surveys in China, has achieved significantly higher brand awareness than either China Mobile’s ‘G3’ or Unicom’s ‘Wo’. Another success factor has been China Telecom’s ability to bundle up its 3G and mobile broadband offerings with fixed-line and Internet services, which has allowed it to protect fixed-line voice revenues (something that didn’t happen at Unicom, which saw fixed-line subscribers decline 6.2 percent during 2009). However, China Telecom’s 3G lead in 4Q09 is unlikely to be sustained during 2010 as its larger rivals begin to aggressively market 3G services. China Mobile, in particular, looks well positioned in this area, recently rolling-out services such as mobile TV, mobile payments and mobile reading, as well as continuing to push its mobile applications store, Mobile Market. The market-leader is also expected to continue to advance its network infrastructure and is working on migration towards its own flavour of LTE (TD-LTE). Alongside consumer services, China Mobile is also looking at revenues from machine-to-machine services – a concept it calls the ‘Internet of Things’ – and its Wireless Cities initiative, which is expected to be trialled this year. Meanwhile, China Unicom has said recently it plans to ramp up 3G handset subsidies in 2010 in a bid to make up lost ground on rivals.