China Mobile’s dominance eroded as competitors improve mobile performance

OVUM VIEW

Summary

The increasing competitiveness in the Chinese mobile market is evident from the recently published 2011 financial reports of China’s three major telcos. Last year was the first time that all three operators aggressively drove their 3G businesses. While China Mobile continues to be the largest overall mobile operator, the race is close in the 3G market. China Mobile’s advantage in the mobile market is being threatened by its competitors, and it has still not received the fixed broadband license that will allow it to offer integrated services. China Telecom’s CDMA network not only recorded a profit; it also became the company’s largest source of revenue for the first time. China Unicom’s 3G business made a significant contribution to its total revenues, and its growth rate was considerably higher than both China Mobile and China Telecom’s.

China Mobile reports steady growth in mobile services but is being challenged by its rivals

China Mobile is still the largest mobile operator in China, but its revenue and subscriber growth rates have begun to slow due to increasing saturation in the 2G market and competitive pressures in the 3G market.

China Mobile’s revenues were CNY528bn in 2011, which was a year-on-year increase of 8.8%. Over the same period, the operator’s net profit increased by 5.2% to CNY125.9bn. China Mobile’s total subscriber market share declined by 3.0% to 66.5% in 2011, while its share of new mobile subscribers was 49%, the first time that it has fallen below 50%. China Mobile’s ARPU continued to decline, falling to CNY71.

3G continues to be a small business for China Mobile in comparison to its rivals. Although the operator’s 3G subscriber market share was 40.0% in 2011, 3G subscribers only accounted for 7.0% of its total subscriber base. In comparison, 3G subscribers accounted for over 20% of the other two operators’ customer bases. China Mobile’s SCDMA 3G technology, which was adopted under policy pressure, has weakened the operator’s ability to develop the 3G market. As a result, we believe that China Mobile will push for the rapid licensing of TD-LTE in China.

In 2011, mobile data revenues accounted for 26.4% of China Mobile’s total revenues. Wireless LAN (WLAN) played an important role in the growth of these revenues, with China Mobile’s WLAN data traffic growing by 397.9% in 2011. With China Mobile hampered by its inferior 3G network and not having a fixed broadband license, the operator is using WLAN to offload an increasing amount of mobile data traffic to enhance mobile Internet experience.

In 2012, China Mobile’s capex is expected to increase to CNY131.9bn. However, it plans to shift investment away from the mobile network towards the transmission network and WLAN construction. This will help China Mobile to offload mobile network traffic and enable it to prepare to support integrated services once its fixed broadband application has been approved.

Although China Mobile claimed that it will expand its TD-LTE deployment from six to nine cities in 2012, the timetable for its commercial launch is still pending.

China Telecom’s mobile operation became its main business

In 2011, China Telecom’s revenues grew by 11.7% to CNY244.9bn, and its net profit increased by 10.5% year-on-year to CNY16.7bn. Ominously for China Mobile, China Telecom’s improved performance was mainly due to growth in its mobile segment. China Telecom’s mobile revenues of CNY82.7bn exceeded its fixed broadband revenues, becoming its largest source of revenue for the first time. China Telecom stated that its CDMA and 3G services became profitable in mid-2011. However, the revenue contribution of China Telecom’s fixed voice business declined to 20.4% of total revenues in 2011.

Fixed broadband remained a stable source of revenue growth for China Telecom in 2011, with its fixed broadband subscriber base increasing by 21% to 76.8 million. The operator invested heavily in its FTTx network in 2011, and it expects to grow its fixed broadband subscriber base to 100 million in 2012.

To maintain its fixed strength and prepare itself to offer integrated fixed and mobile services, China Telecom will continue to focus its investment on fixed broadband. In 2012, China Telecom’s capex is expected to be 8% higher than in 2011, with more than 50% of this used for FTTx infrastructure.

Since March 9, 2012, China Telecom has been selling the iPhone, making it the second Chinese operator to do so. The iPhone is expected to boost China Telecom’s brand among high-income users, which will help to increase revenue growth and ARPU. However, iPhone subsidies may increase the company’s cost of sales.

China Unicom’s 3G business finally contributing to growth

China Unicom’s 3G business has become its most significant driver of revenue growth, helping the operator to reverse the profit decline it experienced in 2010. China Unicom’s revenues increased by 22.2% to CNY209.2bn in 2011, while its net profit increased by 20.0% to CNY4.2bn. In 2011, China Unicom’s 3G revenues were CNY32.7bn, which was a year-on-year increase of 182.3%. 3G revenues accounted for 31.7% of China Unicom’s total mobile revenues in 2011, and the operator had a 3G market share of 31%. China Unicom has attracted more high-income users by offering premium smartphones such as the iPhone. Its 3G ARPU reached CNY117 in 2011, which is significantly higher than its total mobile ARPU of CNY47. This demonstrates the success of China Unicom’s strategy.

While China Unicom’s primary focus in 2011 was on its mobile business, the operator didn’t neglect its fixed services, with fixed broadband revenues increasing by 18.1%. China Unicom’s capex is expected to increase to CNY100bn in 2012, with the operator investing in expanding its 3G and fixed broadband networks.

APPENDIX

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