Here's Tero, again. Though the 9,000 new subscribers for Unicom's CDMA service is clearly a huge disappointment, it seems that prudence would suggest waiting before calling it dead. Sounds like claiming CDMA is a premium service could be a marketing disaster.
Mysteries of the Chinese Mobile Market
By Tero Kuittinen
Special to TheStreet.com
03/25/2002 01:27 PM EST
Two major shockers emerged from China during the first two months of this year. The first is the amazing strength of subscriber growth in global systems for mobile communications, or GSM, which is a fairly basic standard. The second is the sheer magnitude of China Unicom's (CHU:NYSE ADR - news - commentary - research - analysis) fiasco in launching CDMA.
Crouching Tiger...
Back in January, I discussed why the Chinese telecom market is so important. With 5 million subscribers added every month last year, this country suddenly emerged as the global volume driver, the only major market with such robust organic growth.
For the most part, the Chinese market is divided between China Mobile (CHL:NYSE ADR - news - commentary - research - analysis), with 72 million subscribers, and China Unicom with 28 million.
Overall, China now has 156 million mobile subscribers. The country has an urban middle class of around 200 million people, which is why I'm skeptical about this year's growth prospects. Nevertheless, the first two months of this year showed an amazing snapback from the lackluster November and December numbers. Not only did China return to a monthly growth pace of 5 million during January, but the Lunar New Year buying rush boosted February's subscriber additions to an all-time high of 5.9 million.
So far, the Chinese market has defeated the doomsayers, and that is probably what has put a floor beneath the leading mobile chip and phone companies. The latest tech slump hasn't devastated these stocks, and as long as China holds up, its market will remain a sort of safety blanket.
...Comatose Dragon
Lily Tomlin once said that no matter how cynical you get, it's impossible to keep up. When it comes to reviewing China Unicom's mobile strategy, this is as good an approach as any. China Unicom, the country's second-largest operator, recently launched the biggest new CDMA program in the world. The strategic flaws of this move are too numerous to list, so let's just hit the low points.
China Unicom added 2.18 million GSM subscribers in February vs. China Mobile's 1.79 million new GSM subscribers. New February subscribers for Unicom's spanking new CDMA network totaled 9,000. No, that's not a typo. Unicom actually added 240 times more GSM subscribers than CDMA subscribers. So what possessed Unicom to mess with its winning strategy and launch a new digital network using CDMA?
Unicom was so bullish last year that it projected 50 million CDMA subscribers by 2005. That hook lured network vendors like Motorola (MOT:NYSE - news - commentary - research - analysis) and Lucent (LU:NYSE - news - commentary - research - analysis) to bid for CDMA infrastructure deals at cutthroat prices, expecting a string of lucrative expansion deals, even as they lost money on initial CDMA network shipments.
Well, at the current rate, it won't take the projected three years for Unicom to hit 50 million CDMA subscriptions. It will take more than 400 years. So a certain measure of patience is required before Motorola or Lucent can get a dime out of their Chinese CDMA projects.
Unicom was so blinded by its own CDMA hype that it promised to turn its new CDMA program into a "high-end service." It didn't bother to add prepaid CDMA service -- no, this was going to be a high-class, luxury service for urban professionals.
Never mind that the roaming is limited and the phones mostly have downmarket brands such as Haier. Never mind that high-income, urban professionals already have GSM phones. Now Unicom is forced to launch a new program of handing out free CDMA phones to customers who sign up for extended service.
So the company is dragging its vaunted high-end branding strategy through the "Free Phones!" gutter only two months after the launch. The whole long-term CDMA deluxe philosophy was demolished in eight weeks. Good luck trying to recreate that elusive luxury buzz after this bargain-basement phase.
Unicom is also ordering massive amounts of phones from vendors because there's no market demand to jump-start volume production. This is the biggest mistake an operator can make: trying to create artificial demand by buying in bulk and dumping the phones in warehouses. I know that Unicom's position is desperate; it has to try to jump-start phone production to make vendors commit. But Unicom is risking a massive overhang of CDMA phones. At some point it must flood the market with models priced below manufacturing cost or eat a massive writeoff. You can't hoard phones for long because current models become obsolete at a rapid pace.
Unicom has made every mistake in the book by trying to launch a new digital standard in a market with 150 million users of a rival standard. The company now faces an excruciating choice: either slow down its runaway GSM success to feed the CDMA operation or cut its losses on the CDMA front.
Oddly, Unicom is getting the kind of GSM growth numbers that 95% of the world's operators would kill for. It's successfully catching up to China Mobile, and it might become one of the world's top 10 operators. Unicom's response to this triumph is to spend billions in propping up a CDMA service without consumer demand.
Interestingly, this situation mirrors KDDI's woes in Japan. KDDI was one of three Japanese PDC operators, and it also decided to launch a CDMA network. (PDC is a second-generation digital standard used by Japanese operators.) As a result, its PDC growth stalled, and rival Japan Telecom came out of nowhere to claim the No. 2 position in the mobile Internet market.
KDDI now plans to get rid of its original PDC service and focus exclusively on CDMA. Its attempt to run two competing digital services has resulted in massive debt and shrinking market share. All of its recent CDMA subscribers have come from its own PDC program.
This "Peter robs Paul" strategy apparently impressed Unicom enough to encourage it to try the same move on its own. No similar situation exists anywhere outside Asia.
But in a strange way, it's comforting to see that no matter what region is in question, mobile telecom seems to invite companies to express their self-destructive impulses. With the European 3G license nightmare, the U.S. regulatory and standards mess and the bizarre Unicom/KDDI CDMA philosophy, this sector is in no danger of becoming boring anytime soon. |
