"China 3G Drama Continues" - (Tero K slant for The Street)
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China 3G Drama Continues
~ By Tero Kuittinen, RealMoney.com Contributor | biz.yahoo.com
| Friday December 28, 11:25 am ET --
A news report about up to four 3G licenses being awarded to Chinese operators in the coming year electrified the telecom sector, triggering speculative trading in China Mobile and China Unicom shares.
This happened in January 2003.
And in 2004. And in 2005, and in 2006, and this week. There have been a barrelful of red herrings here -- three seasons of Lost have nothing on Chinese government officials entangled in a web of conflicting impulses and interests.
At the moment, China Mobile is the beast that is devouring China's telecom market, using its massive GSM mobile subscriber base to clobber rival operators. The fixed-line market has gone into a tailspin -- according to the Ministry of Information Industry, China's landline revenues are declining at a nearly 5% clip year over year. In November alone, China added 7.9 million mobile subscribers while losing 1.3 million fixed-line users.
China Mobile's giant 360 million GSM subscriber base has given it seemingly unstoppable momentum. In November 2006, China Mobile added 4.6 million new subscribers; in November 2007, that number had mushroomed to 6.5 million monthly adds. Smaller rival China Unicom keeps falling behind; it added 1.3 million subscribers in November 2006 and 1.4 million in November 2007.
Both China Unicom and fixed-line operators China Telecom and China Netcom are clamoring to get 3G licenses in order to try to stop China Mobile from turning into a de facto monopoly. The price of W-CDMA network equipment and handsets has plunged over the past five years -- it would now be far cheaper to move China into the 3G era.
Everything seems to be in place for a massive 3G auction that might give a major boost to Ericsson, Qualcomm, Texas Instruments and guarantee China's domestic telecom vendors a big slice of the 3G pie. There's just one huge problem here -- China is apparently dead set on using a domestic 3G standard, TD-SCDMA. And that protocol is nowhere close to being commercially viable.
Problem Gets Tougher by the Month
China's yearning for a domestic 3G standard is understandable. Over the past two decades, it has watched U.S. and European companies create mobile telecom standards like NMT, GSM, CDMA, GPRS, Edge, 1xRTT and W-CDMA, effectively locking in global market share domination of both mobile phone and network markets. Creating standards gives companies tremendous commercial heft.
But trying to legislate standards into existence can be hellishly complicated. The three-year delay in the debut of TD-SCDMA has given W-CDMA time to mature as a technology and reach formidable global momentum; there are already more than 200 million W-CDMA subscribers globally. The size of the latest W-CDMA models has shrunk below 90 grams and the thickness below 12 mm, and the cheapest ones cost less than $100. In the meanwhile, the testing/trial phase of TD-SCDMA keeps stretching.
It is by now clear that even if the Chinese government mandates some operators to adapt TD-SCDMA as their 3G technology, handsets won't be commercially viable for years. Even massive subsidies won't fix the issues of size, weight and power consumption.
A couple of years ago, it was assumed that the fixed-line operators China Telecom and China Netcom would be granted a mobile license and would agree to use the Chinese 3G standard as a price of admission into the lucrative mobile market. But both of these firms have recently been rumored to be in full rebellion. They have watched China Mobile grow into a mobile titan with cheap, light GSM models -- competing against it with a relatively immature 3G standard could be impossibly tough.
I think that China Mobile has the political connections to refuse TD-SCDMA and demand W-CDMA, but Telecom and Netcom simply will not be competitive against W-CDMA tech if they are saddled with TD-SCDMA. The problem is complicated by China Unicom, which was formerly assumed by many to go with a 3G technology used by Verizon -- CDMA2000. But CDMA2000 growth prospects have recently faded badly from Brazil to India, and Unicom's CDMA base is simply not keeping up with the GSM growth in China.
Killing off the TD-SCDMA program -- an ambitious symbol of national pride -- would be extremely painful for China. Forcing it on China Mobile is hardly possible. Forcing it on China Telecom and China Netcom would likely doom their mobile ambitions if their big rival gets access to cheap, light, well-miniaturized W-CDMA technology.
The latest round of rumors about an imminent solution to this impasse is likely as false as the previous dozen. The weirdest part of the whole situation is how China Telecom and China Netcom tend to soar on news that they might be shackled to TD-SCDMA. That is surely too high a price of an entry to the mobile market of China, particularly now that China Mobile's size advantage has grown to a level not seen in any other country in the world.
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