In many ways, China’s telecom markets in 2005 failed to live up to expectations: 3G mobile service did not bear out as many had hoped and IPTV, a broadband internet service that supposedly carries tremendous promise, never made tangible steps out of regulatory morass and limited trials.
Moreover, growth of telephony subscribers continued to slow down, as did revenue for telecom operators, despite an impressive cellular subscriber acquisition rate (an average user increase of 5.1 million per month during 2000-05). According to data released by the MII (Ministry of Information Industry), total telecom revenue grew a comparatively meager 11.3 per cent in 2005 to 637.4 bn yuan (US$79.7 bn). While still remarkable compared to many countries, the figure represents the smallest increase since 1990.
A closer look makes it more worrisome: average monthly ARPU (fixed and mobile services combined) was a little over 70 yuan (US$9). The official explanation is lack of innovative services to attract public interest, but it could also be an indication of weak demand or simply the amount most people are prepared to pay for service.
In the meantime, operator capex on new equipment, network expansion, marketing and service provisioning was 207.1 bn yuan (US$25.9 bn), down 4.7 per cent from a year ago and nearly 20 per cent off the peak in 2001. Clearly the decline was affected by spending cut in face of slowing subscriber growth, on-hold foreign investments and uncertainty around 3G standards, licensing and future growth. So what can be expected in 2006?
The staggering number of telephone users (over 740 million) and internet users (110 million) alone is not tenable to boost ARPU in coming years because of frugal use of basic service by most households and consumers; the catalyst has to come from ‘extraneous’ sources -- either through new services or value-added services that we have seen in the past (such as SMS, ringtones and broadband entertainment).
3G is the ‘wild card’ in this respect. Some predict the next-generation mobile service will create 80-100 million users in five years and service revenue may top 1 trillion yuan (US$125 bn). 3G could also generate 36 bn yuan (US$4.5 bn) in investment this year and 600 bn yuan (US$75 bn) in equipment sales in three years.
Despite its grand scale, 3G’s short-term effect on overall growth may be limited because the first licence may not be available until June and construction will likely be limited to major urban centers with increments in investment. Long term, it is unclear if much touted 3G applications, such as videophone, TV broadcast and video on-demand, will generate strong revenue for operators because cost may become a key barrier for most consumers.
Another critical aspect is continuing evolution of Chinese operators as a government owned entity but driven increasingly by market forces. In the past year, China Telecom said it wanted to change its image from a carrier to a “full information provider” including entertainment, but that can be a tough call given the deadlock of regulatory environment and the notorious turf battle in China. Nonetheless, all operators are turning their attention to internal reforms by consolidating divisions, cutting cost and centralising purchases. The result is encouraging: overall profit rose nearly 20 per cent in 2005 even though certain sectors still suffered heavy loss, such as CDMA operations by China Unicom. The trend is expected to continue in 2006 as Chinese operators must now improve their public image and satisfy investors’ expectations.
For foreign companies, major players will continue to benefit from the booming market. China accounted for one third of revenue for Nokia in 2005 and 12 per cent of global sales for Motorola. China is a top single market for companies like Sony Ericsson, Alcatel and Samsung. They are most likely to be awarded for 3G projects in one way or another. However, they should expect fierce competition is expected from Chinese companies like Huawei and ZTE, the latter poised to gain should TD-SCDMA, a government sanctioned standard, rise to national stature. ZTE spent heavily on developing turnkey solutions for TD-SCDMA betting the homegrown standard will be adopted for political, economic and technological leverage.
This, however, should not be interpreted that the Chinese telecom market will be wide open to foreign participation. Five years after China joined the WTO and vowed to open basic and value-added services, large-scale inflow of foreign capital is yet to occur as widely anticipated. It is true that most foreign operators are preoccupied with growth at home or elsewhere, but lack of fundamentals in the Chinese market played a major role in the stalemate: low ARPU, obscure decision-making processes, complicated cultural nuances, and conflict in management and objectives can quickly wear down any ambitions and well-crafted plans. Foreign investment will remain sparse as long as the current market conditions continue regardless of China’s commitment to WTO.
In summary, 2006 will break the impasse of Chinese telecom market with 3G launch, but growth will more likely be incremental than explosive. Other services carrying less momentum but worth watching are IPTV; TV broadcast to cellphones using DVB-H, a European standard, or DMB developed in Korea; IPv6 (infrastructure and applications); and continuing evolution in broadband access (like ADSL2+).
Overall, steady growth is expected as the market matures. Competition in equipment sales will intensify as operators become more cautious and selective on spending -- especially on new, unproven services and network expansion.
Lin Sun is a telecom consultant specializing in China. Contact him at lsun@chinanex.com.
This article originally appeared on www.telecommagazine.com, Telecommunications Magazine Online®, and was reprinted with permission of the publisher.