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China: 3G China Update(Pyramid Perspective - Asia Pacific Via Thomson Dialog NewsEdge)By Yiru Zhong, Analyst ([email protected] 2006 will be a watershed year for Chinas telecommunications market as 3G will finally be deployed. The launch of next generation technologies will be especially significant as the countrys duopoly will be broken and at least one new entrant will join the mobile market forever altering the competitive landscape. This new entrant will likely be a joint venture between the two fixed operators, China Telecom and China Netcom and is expected to deploy the local 3G standard, TD-SCDMA. Here we present the likely strategies that existing mobile operators and challenger will adopt in this 3G game. The winner in the Chinese 3G game will be the one who is best able to retain the high spender and even a uni-service operator, such as China Mobile, can have sufficient lead to maintain its brand leadership by remaining an innovative leader in the market. TD-SCDMA, being an untested technology, will initially face constraints. Its 3G market share expected in 2006 at 10 percent should expand to nearly a quarter by 2010. Operators Prepare for 3G Challenge At YE2005, comments from Mr. Wang Xudong of the Minister of Information Industry (MII), raised expectations that the much delayed 3G licenses will be announced this year. He was reported to have revealed more than usual when he said conditions were now satisfactory for a 3G decision. His official stance becomes more credible when it was subsequently announced that pre-commercial trials for the local 3G standard, TD-SCDMA will be held this month. With a three to six months trial period, it is possible that 3G could be deployed in 2H2006. For the sake of discussion, we ignore the possibility that TD-SCDMA will be deployed ahead of WCDMA and CDMA2000. This is not a critical distinction because we believe the challenger will still go for bundling and we do not expect a large time lag between TD-SCDMA and WCDMA/CDMA2000 deployments. The Challenger Has Triple/Quadruple Play Advantage Pyramid Research believes the two major fixed operators, China Telecom (CT) and China Netcom (CNC), will operate a joint TD-SCDMA in Beijing, Shanghai and Guangdong. Whether TD-SCDMA has a head start in the market or not, we believe CT and CNC will still need to entice subscribers to try out a new 3G standard and a new operator. A sure-fire method to bait new customers from their existing customer base is to tie in 3G services with broadband and/or PHS and fixed telephony. The types of customers CT and CNC will be looking to target belong to two categories. The first is the broadband user who is already a higher ARPU contributor than a PHS subscriber. By tying attracting broadband packages and 3G services together, CT and CNC can make their proposition attractive. The second customer profile is the PHS subscriber who is already increasingly looking at PHS VAS, such as SMS and ringtones downloads. The approach to price sensitive PHS customers will be to ensure that 3G applications are attractively priced. We expect TD-SCDMA to initially only take up 10 percent of total 3G subscribers in the first year or less than 0.5 percent of total population in the three regions, growing to 5 percent by 2010. China Mobile is an Innovative Leader China Mobile is now the undisputed market leader in mobile communications. Its greatest trump card lies in a well-run operation that is capable of going to market rapidly, ensuring customer satisfaction and relative brand loyalty. With 3G, China Mobiles strategy will be in customized handsets 3G users can easily access. Already, China Mobile has a popular Montenet, a platform on which users can access mobile applications. For at least the last twelve months, China Mobile has centralized management of content and service providers, taking a spring cleaning of preferred partners. In this way, China Mobile provides a similar i-mode approach for customers to access mobile data. This will have a strong conceptual pull to a customer shopping around for a 3G service provider. We also believe China Mobile will be reluctant to take the low-end route like TD-SCDMA because its value proposition lies in leading edge applications with fancy handsets. Since China Mobile is the market leader, a non-price differentiation approach can reap results. As such, we believe China Mobile will gain 60 percent of total 3G market in the three regions in the first year of operation. By 2008, China Mobile will still remain the market leader with 50 percent of market share. Anything less would not be acceptable, as China Mobile is the official sponsor of 2008 Olympics. China Unicom Has Data Applications Expertise China Unicom would have a three to six months head start over China Mobile if we assume it will operate CDMA2000 network. We have mentioned last year that China Unicom can learn how to sustain its gains from SK Telecom. SK Telecoms stable of value-added services (VAS) that are traffic intensive on its CDMA-based network and the introduction of attractive pricing have helped it achieve critical mass to achieve efficiencies and sustainable ARPS. Exhibit 4 shows SK Telecoms proportion of mobile data revenue broken down by technology. At only about 10 percent, China Unicom can aspire to these levels if it also correctly identifies the various segments to introduce new services. Another important success factor for China Unicom is the value chain, an issue that SK Telecom has addressed early in the game. China Unicoms disappointing January performance was due to too few CDMA handsets to meet customer demand. Bottlenecks on the terminals end still persist, and we believe this would be an important issue that China Unicom is addressing. |