An interesting (mostly negative) article from Chinanex “Behind the Miracle of Seven Million”. Items I found interesting:
1. >>A report in late December quoted speculation that Unicom spent at least 200-400 yuan ($24-48) on every new CDMA customer. If true, it cost Unicom 800 million to 1.6 billion yuan ($96-193 million) for the 7 million CDMA customers. <<<
Appears to be a small sum to me to overcome the initial problems (lack of moderate and low priced handsets) and seed the market.
2. >>CDMA has created a peculiar situation in China: many customers want to have CDMA but are not willing to give up GSM. As a result, an increasing number of people now carry two or even three (PAS) handsets. (Can you imagine the scene in public?) However, the trend will only last a short time and people will begin to dump the one they don't like. <<
It appears we do have a market after all for the MSM6300 (GSM/GPRS- CDMA2000 1X “world phone”) equipped handsets.
3. >>To resolve the dilemma, Unicom has two choices. >>
They forgot one, the MSM6300 equipped handset!!
chinanex.com
Behind the Miracle of "Seven Million"
Wang Yiwei, 01/2003
Unicom announced in late 2002 its CDMA customers reached 7.01 million. At the first glance, Unicom accomplished the seemingly impossible amid fierce competition in the mobilecom market; however, questions and concerns arise after a careful study on how Unicom has made the number.
Extreme Marketing, Heavy Loss
In May, Unicom threw out the slogan, "Connect as you want, let us bear the cost." Indeed, consumer soon learned a great deal they could dream of: they only needed to deposit 200 yuan ($24) a month in exchange for call time worth 550 yuan ($66). In some areas, customers could enjoy 133 yuan ($16) worth of free air time a month (133 is network ID for CDMA). In other cases, customer who paid 2,500 yuan ($301) would receive a dual LCD handset (worth about 3,000 yuan), UIM card (100 yuan), 500 yuan worth air time a month, and up to 1,000 yuan free air time for a year.
In August, Unicom began to give away handsets to those with stable income and no history of payment delinquency. The condition was: customers must sign up for CDMA and use up total deposit within two years. Most of free handsets were tied to monthly plan between 150-296 yuan ($18-36), aimed at luring away China Mobile customers, some did defect to Unicom as the result. Undoubtedly without these extreme marketing tactics, Unicom would not have achieved 7 million set as the target for 2002.
Financial Pressure
Few believed Unicom would make a profit for 2002 after "buying in" CDMA customers at high costs. A report in late December quoted speculation that Unicom spent at least 200-400 yuan ($24-48) on every new CDMA customer. If true, it cost Unicom 800 million to 1.6 billion yuan ($96-193 million) for the 7 million CDMA customers.
According to an analyst, when Unicom launched GSM, its EBITDA for the first year was -55.4% and -16.6% for the following year. Cost for recruiting CDMA customers today should be significantly higher than GSM 7-8 years ago. Also, in order to lure customers, Unicom gave free handsets and service to business customers without requesting a deposit, which may lead to payment delinquency down the road. All this will likely create strong pressure on profitability for Unicom in 2003. If Unicom continues to subsidize handsets this year, it will face difficulty to make up the numbers in 2004, which could drag the company into a "Catch 22" in its financials.
When CDMA was first launched, retail price for handsets was above 3,000 yuan ($360). Compared to GSM, this price was clearly unattractive to customers, that forced Unicom to engage in tactics like free handset and air time, hence the beginning of financial pressure.
Dilemma for Customers
Despite marketing cost, Unicom still has a chance if call volume for CDMA will maintain growth. But can this happen?
In 2002, most defectors from China Mobile were for low-cost handsets and per minute charges, most of them were in mid- to low-end customer category who watch their wallet very closely. Therefore, it is unrealistic to expect strong surge in call volume from this group, which will directly affect Unicom's bottom line.
What's more, after nearly a year of try-out, an increasing number of CDMA customers have found various problems with handsets, some are technical, some customer support. According to a survey in Beijing, most complaints are about network quality, dropped calls, poor coverage, low connect ratio, loss of SMS, and others. A Unicom service center said CDMA handsets are difficult to repair, and customers must go through a lengthy process for replacement from the handset maker. In fact, many young customers who were lured by CDMA's avant-garde concept, less radiation and stylish design now realize the handset is not at all that fabulous as imagined, and they feel being cheated since they are bound by the two-year commitment.
How to Break the Cycle
With strong push in marketing and deliberate misconceptions, CDMA has created a peculiar situation in China: many customers want to have CDMA but are not willing to give up GSM. As a result, an increasing number of people now carry two or even three (PAS) handsets. (Can you imagine the scene in public?) However, the trend will only last a short time and people will begin to dump the one they don't like.
If CDMA cannot improve quality of service and customer support soon, its future is worrisome. The 7 million customers Unicom has mustered could become a new source of profit, but they could also become a heavy burden for Unicom. If many of them decide to leave in the future, they will also create a big hole for Unicom's money.
To resolve the dilemma, Unicom has two choices. First, reverse the approach of massive recruiting at loss to improving network performance and service. Meantime, allow dissatisfied customers to cancel the service and return the balance, but this will cost Unicom more and longer time to recover. Second, continue the current policy, but pay more attention to network and service. This approach will require additional investment and may be problematic in operations.
In conclusion, behind the seemingly splendid accomplishment in 2002, Unicom may have served itself a glass of bitter spirits and stepped in a new dilemma. |
