For China Mobile executives, it seems like just yesterday that the mobile carrier was the only game in town.
The company, the world’s largest mobile operator by subscribers, dominated the industry for most of the past decade. With the backing of state regulators, it called the shots and made the rules, along with the profits. It scoffed at deals with companies such as Apple and considered competition from China Unicom and China Telecom, the country's two smaller mobile carriers, altogether negligible.
Much has changed during the past four years since the country launched 3G services.
China Mobile still boasts well over 50% of Chinese mobile subscribers, yet its returns on its massive network have plummeted. The privileges it enjoyed from close relations with regulators have since turned it into the government's policy mule; it’s been forced to adopt expensive and faulty homegrown technology that has hobbled its progress. In the meantime, the two smaller carriers have become formidable opponents, snatching 3G market share from the giant.
The forthcoming launch of 4G is an opportunity to turn things around for China Mobile and potentially restore some of its former glory. That is, if it can get the new technology up and running on time.
What's the rush?
The original launch date for 4G in China was nearly a month ago, according to Bertram Lai, telecoms analyst at CIMB in Hong Kong. Plans are already behind schedule mainly because of the complex bargaining that must conclude before licenses for 4G are handed out.
The talks aren't simply between a mobile carrier and the regulator, the Ministry of Industry and Information Technology (MIIT). That would be far too simple for the way telecoms work in China. Rather, all three companies must agree on several different terms amongst themselves and with the ministry. To add a Kafkaesque twist to the already tiring arrangement, the National Development and Reform Commission, the powerful economic planning agency, gets to have its say as well.
“There's a lot of negotiation that's occurring right now and as a result it's probably going to take longer than everybody expects,” Lai told China Economic Review.
For example, one of the bargaining chips on the table is how much extra a carrier earns when a call from another network is dialed into its own. Currently, all three pocket US$0.0098 for every minute of interconnection between the carriers. The arrangement sounds fair but when China Mobile has 60% of the country's subscribers, more calls are naturally dialed into its network. This has always resulted in a net profit for the company.
The ministry will likely change this rule. Although no official announcement has been made, a state news agency reporter said on his personal blog recently that he saw ministry documents indicating China Mobile's tariff could be dropped to half the current rate without adjusting the rates for the two smaller carriers. Such a move could put the Goliath at a net revenue loss for interconnection fees while pulling China Unicom and China Telecom out of the red in this area.
Perhaps more significant are the talks over what kind of licenses will be handed out.
Earlier this year, both China Unicom and China Telecom said they preferred the more internationally developed standard, FDD, to China's own system, TD. The ministry has shown that it may not heed those wishes. Chinese media reports have pointed out that TD licenses will be issued first followed by licenses for the international standard.
This sounds like bad news for the two smaller carriers. However, heated debate over the type of licenses issued might be just what Unicom and Telecom want. The two smaller companies have robust 3G networks that have performed well since they launched in early 2009. They would like to keep that revenue flowing for as long as possible.
“They know what they want and they're not in a hurry otherwise, so they're willing to keep the negotiation going,” said Mark Natkin, founder and managing director of Beijing-based Marbridge Consulting, which focuses on telecoms and IT. “But China Mobile is very itchy to move forward.”
One final chance
Indeed, China Mobile, with more than 750 million subscribers, needs a license to deploy 4G as soon as possible.
The company's 3G network has, by most accounts, performed terribly. The average user contributes much too little to revenues on a network with a shrinking market share. Several other factors are chipping away at profitability as well. Smartphone apps such as Tencent's WeChat are killing traditional revenues from text messaging. As the company shovels cash into its 4G network, its profit dropped by 8.8% in the third quarter of the year, the biggest decrease since 1999.
Compare that with China Unicom, which notched a whopping 51% jump in profits in the third quarter, mainly on growth in 3G. China Telecom posted 20% year-on-year profit increase.
The numbers fly in the face of China Mobile. A quick and smooth 4G launch is the company's only opportunity in the foreseeable future to begin cashing in on high-end services. And that's not out reach. Technologically speaking, China Mobile's 4G network is far stronger than its attempt at 3G.
China Mobile was expected to offer 3G services starting as early as 2006. Yet, due to severe problems with its homegrown network, called TD-SCDMA, that launch was delayed time and again until 2009 in what was considered by many a disgrace to the company and the ministry that oversaw it. But the past, experts say, will not be repeated this time around.
“The technology is much readier,” Natkin said. “Frankly, it's a much more global technology.” China holds about 30% of the patents for the 4G standard. The rest are held by major international firms such as US-based Qualcomm that helped engineer it. Therefore, even though TD has been tested and used far less than FDD, its global standard should make the eventual 4G launch much smoother than that of the 3G system.
Trials for the network have shown positive results as well. China Mobile was originally expected to have 200,000 base stations, or transmitters for the TD system, in place by the end of 2014. On October 13, the company said it would expand the trials to 326 cities, which indicates “that 4G licenses are not soon to arrive” according to independent Chinese weekly newspaper The Economic Observer.
Analysts that spoke to China Economic Review had a different take. Pushing trials into more cities shows that TD is ready for deployment. Moving from wide-ranging commercial trials into real commercial operations is a simple transition.
“The trial expansion means they are seeing the technology itself is more mature,” Nicole Peng, a telecoms analyst at Canalys in Shanghai, said on Tuesday. “They're confident that it will be able to scale up when licenses are issued.”
Happy New Year's
Scaling up, or moving from trial to commercialization, is exactly what needs to happen now. Zero hour is fast approaching for the licenses. Six months ago, many analysts marked out end of the year. For Lai at CIMB, the first deadline came and went at the beginning of October.
Likely, TD licenses will be issued in the first two weeks of January, followed by an immediate commercial launch from China Mobile. Lai noted that 3G licenses were distributed four years ago during that exact period of time.
The delay until then isn't just about symbolism either. Handing out licenses any sooner than the first weeks of the new year would put the company at too great an advantage to sweep up the market for 4G, Lai said. If the launch is delayed any further it's Chinese New Year, when the country shuts for a week.
Lai picked a China Telecom commercial launch for some time between April and June next year followed by China Unicom – perpetually dragging its feet – at the end of 2014 or the beginning of 2015.
As intriguing as the launch dates are the standards that the companies will use. MIIT has burdened China Mobile with TD without room for debate. However, China Unicom and China Telecom have yet to hand over final reports on their 4G plans to the ministry. This leaves much ambiguity.
One probable outcome is that TD and FDD licenses will be handed out together, Peng at Canalys said. In major cities, the two smaller carriers may operate TD networks leased from China Mobile while expanding their own FDD networks elsewhere.
International trade protectionism could come into play when considering a simultaneous launch, Lai said. If the ministry handed out only TD licenses, that could be seen as excluding international telecommunications firms from the China market. It could even attract lawsuits in the US.
It's happened before. Lai pointed to a case in 2002 when China Unicom was forced to build a network that included telecoms equipment giant Qualcomm after it had already completed its original network. The ministry will look to avoid such squabbles again.
The uncanny happy ending
Unlike many industry stories in China, that of the country’s 4G rollout could end happily.
China Mobile may once again regain its position as an industry leader, this time for the nation’s most advanced telecoms services. The two smaller carriers, while not the vanguards of 4G, will pick up the technology at their own pace while trying to squeeze every last possible yuan from 3G services.
Such results are what the ministry is aiming for: A sector with three healthy carriers.
More surprising is that consumers could win too when they purchase phones. Today, China Mobile users must buy phones that are made for the company's 3G network. When 4G is available, they'll have to buy a new phone. If they want to switch to a different carrier, they’ll have to fork out yet again.
With both TD and FDD deployed around the country, phones would become usable between those standards. Devices like this, called “five mode” phones because they work across five different standards, could become ubiquitous in the country within a few years. “Finally, we can see some devices that you can use across three different operators,” Peng said. “It's a very big cost saver.”
Access to a cheaper and wider selection of phones will no doubt be a boon for China Mobile, whose customers have been restricted to a smaller range of devices for years. But having a network that works, more than anything, will help bury the arduous past four years that have sullied its reputation.
