China Telecom moves to CDMA – challenges and opportunities

As dictated by the Chinese government’s guidance on telco restructuring issued in May 2008, on 28 July China Telecom announced an agreement to purchase China Unicom’s CDMA network. China Telecom will pay $16.1 billion in total: $9.7 billion to acquire the CDMA network and $6.4 billion for the acquisition of subscribers and operations. China Telecom will begin the transfer of assets and commercial trial services in October and will most likely start offering 3G services in March 2009, by leasing network capacity from its parent company (China Telecom Group).

China Telecom, the fixed incumbent, has finally presented a clear timetable for providing mobile services. As a new entrant and the only CDMA operator, China Telecom faces both challenges and opportunities:

• Challenges: Compared with China Mobile’s GSM services, the existing CDMA business has less network coverage and poorer quality, as well as low revenue and ARPU. The 43 million CDMA subscribers only account for 7 percent of the total 601 million mobile subscribers in China as of June 2008

• Opportunities: Bundled services should become available, given China Telecom’s solid position in the broadband market; the lower cost of upgrading CDMA networks from 2G to 3G, in comparison with China Mobile’s TD network; good brand and marketing skills in the fixed market, which should help it to expand in the fast-growing mobile market.

China Telecom should be optimistic and its goals suggest that it is. It aims to have 100 million CDMA subscribers and an increased market share of 15% in the next three years. It also plans to spend $11.7 billion to upgrade its CDMA network for enlarged coverage, better quality and rolling out its 3G network.

Of course, it will be difficult for a small player such as China Telecom to compete against the market leader, China Mobile. So how are new regulations expected to help? China’s Anti-Monopoly Law (AML) became effective on August 1 and it should put pressure on China Mobile, given its dominant 70 percent share in the mobile market. Other potential regulations currently being discussed by the regulator MIIT and likely to be imposed this year include:

• Mobile number portability (MNP): One possible plan is one-way MNP between the three operators, which would only permit China Mobile subscribers to port their numbers to China Telecom and China Unicom, but not the other way

• Spectrum allocation: China Telecom is most likely to acquire extra 800MHz spectrum from the MIIT for its CDMA operation in order to allow for subscriber growth. 800MHz spectrum is efficient for both 2G and 3G operations, with better characteristics for coverage and high capacity

• Adjustment of interconnection charges: the mobile-to-mobile termination charge might be reduced from the current $0.09 per minute to zero. This would benefit the relatively small China Telecom as most of its customers’ calls are likely to be off-net calls

• National roaming and infrastructure sharing: China Mobile, with better coverage and networks, will likely be ordered to offer national roaming services and share infrastructure with its new rival operators, China Telecom and China Unicom.

We believe these regulations would assist the small mobile operators like China Telecom to compete better against China Mobile. Nevertheless, in the short term in the current 2G market their impact is likely to be limited given China Mobile’s good network quality and successful marketing strategy. Thus, all three operators’ eyes are now mostly on the 3G market, and we expect competition to intensify when all three operators start to launch 3G services next year.

Courtesy: Charice Wang, Research Analyst, Ovum