BEIJING, CHINA: As guided by the Chinese central government’s directive on telco restructuring in May 2008, China Telecom announced an agreement on 28 July to purchase China Unicom’s CDMA network.

China Telecom will pay Rmb110 billion ($16.1 billion) in total: Rmb66.2 billion ($9.7 billion) to acquire the CDMA network and Rmb43.8 billion ($6.4 billion) for the acquisition of subscribers and related operations. China Telecom will begin the transfer of assets and launch commercial trial services in October. 

It will most likely start offering 3G services in March 2009, by leasing network capacity from its parent company (China Telecom Group). On the positive side, China Telecom has the first to market advantage to launch 3G services or even FMC service bundles in China. On the other hand, it faces very keen competition in mobile service market-differentiated value proposition of CDMA services.

China Telecom, the fixed incumbent, has finally presented a clear timetable for providing its mobile services. Following are comments from Charice Wang, research analyst and C.W. Cheung, consulting director, Ovum, a leading global advisory and consulting firm, on the challenges an opportunities that lie in front of China Telecom.

Challenges: Compared with China Mobile’s well-established GSM and 2G+ services, the existing CDMA business has relatively poor network coverage and limited choice of handsets 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.China Telecom will face considerable challenges in three areas:
* Product development and service offerings.
* Customer segmentation and market positioning.
* Customer service transformation (shift from fixed location to on-the-move customer care).

China Telecom will have relatively stronger position to offer fixed mobile and multiple play bundled services (i.e., voice, broadband, IPTV and mobile). Given its leading position in the fixed and broadband market; the relatively lower cost and faster to market to upgrade CDMA networks for 3G services, in comparison with China Mobile’s TD network; relative stronger brand, marketing and customer field service in the potential multiple play bundled services market.

Opportunities: 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 percent in the next three years. It also plans to spend Rmb80 billion ($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. China’s Anti-Monopoly Law (AML) became effective on 1 August and it should put pressure on China Mobile, given its dominant 70 percent share in the mobile market. Other potential asymmetric 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 or asymmetric MNP between the three operators, which would only allow China Mobile subscribers to port their numbers to China Telecom and China Unicom, but not the other way.

Spectrum allocation of the golden band: 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 more efficient for both 2G and 3G operations with better transmission characteristics for wider coverage and high capacity adjustment of interconnection charges.

The mobile-to-mobile termination charge may reduce from the current Rmb0.6 ($0.09) per minute to zero (i.e. Bill and Keep). 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 mandated to offer national roaming services and share infrastructure with its new rival operators, China Telecom and China Unicom.
 
We believe these asymmetric 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," added Charice Wang and C.W. Cheung.