After China's golden Olympics, 3G looms large

By Tony Brown

China was awarded the Olympic Games by the International Olympic Committee in July 2001, and after seven years of meticulous planning and exhaustive preparation, the hosts produced a pitch-perfect Games in August, showcasing modern China to the world.

Hard though it may be to believe, the Chinese government began planning the launch of 3G services before it was even awarded the Olympics, and sad to say, 3G’s progress in China has been much slower that that of the Olympics, with commercial services not likely to begin until mid-2009.

The Olympics has dominated China’s political agenda for much of the past few years, meaning that many other commercial concerns have been given far less attention by the government, especially the deployment of 3G services by mobile operators.

The restructuring of the country’s telecoms industry laid the foundations of the road to 3G, but the government delayed the crucial issue of 3G licensing until the completion of the Olympics.

Now that the Games are over and China’s desperate desire for global recognition and respect has been fulfilled, the government will finally have to turn its attention to 3G licensing and face the result of its nearly decade-long procrastination.

The telecoms-industry-restructuring process made it all but inevitable that market leader China Mobile would be handed the poisoned chalice of a license for homegrown 3G technology TD-SCDMA, with China Unicom getting the prized WCDMA-based license and new entrant China Telecom a 1xEV-DO-based license.

But the key part of the 3G-licensing process will be the terms on which China Mobile – one of the country’s genuine blue-chip companies and a potential global telecoms giant – will be forced to deploy TD-SCDMA.

Some early reports suggested that China Mobile would be granted a WCDMA license alongside its TD-SCDMA license to soften the blow of having to deploy a startup technology with no global scale, but recent indications from the government have signaled that this might not be the case.

China Mobile already appears resigned to forging ahead with only a TD-SCDMA license in the 3G era, given the aggressive nature of its TD-SCDMA-network rollout.

The firm has started building the CNY30 billion (US$4.4 billion) second stage of its network rollout, which is set to add 28 cities to the 10 it covered previously for CNY15 billion. It had a trial-subscription count of about 100,000 at end-June.

The Ministry of Information Industry and Technology (MIIT) has set an ultra-aggressive TD-SCDMA-subscription target of 100 million by 2010.

But even taking into account the cheaper rollout costs offered by local vendors, such as ZTE and Huawei, it is inconceivable that China Mobile will be able to offer competitive TD-SCDMA services unless it delves very, very deep into its own pockets and subsidizes tariffs and handsets.

The stand-alone nature of TD-SCDMA means that the operator will be forced to offer dual-mode TD-SCDMA/GSM handsets, competing with the global might of WCDMA/GSM handsets in a highly price-sensitive market. Some analysts have suggested that China Mobile will have to offer subsidies of about US$100 per TD-SCDMA handset to make them competitive with the pricing of WCDMA handsets.

That is a huge subsidy in a market in which ARPU remains at only about US$12.50 a month, and it will come as a huge shock to local subscribers, who have been used to seeing China Mobile easily outmuscle longtime rival China Unicom in price wars.

The government’s gamble of stringing out 3G deployment for much of the past decade while it waited for TD-SCDMA technology to come up to scratch is now looking like a foolish bet, and one for which China Mobile appears to be paying a high price.

Chinese state-owned companies are not exactly known for speaking out against government decisions, but China Mobile’s management has discreetly made it clear that TD-SCDMA is still not performing at the level required for full commercial launch.

In particular, management has expressed concern about the high failure rate of TD-SCDMA-network equipment and has said that TD-SCDMA handsets are a long way behind WCDMA/HSPA handsets in terms of range and quality.

China Mobile’s medium-term plan is for its TD-SCDMA network to share the core-network infrastructure of its GSM network, which will then be upgraded to a full IP-based network, enabling the TD-SCDMA network to be upgraded to 4G once the TD-LTE technology path is completed.

But the problem for China Mobile is that the road to 4G – certainly if 3G is anything to go by – will not be a short trip and will give its rivals a clear and lengthy opportunity to exploit the considerable weaknesses of TD-SCDMA in the 3G market.

In addition, the MIIT and the broader Chinese government have invested too much time and money to let TD-SCDMA wither and die without giving it every chance to succeed, so they are likely to pressure China Mobile to push on with TD-SCDMA and turn it into a commercial success.

That would make it tough for China Mobile to adopt a “wait and hope” strategy of focusing on GSM rather than TD-SCDMA and hoping that 4G comes to the rescue sooner rather than later.

The best hope for China Mobile to hold on to its historical market dominance is if perennial bridesmaid China Unicom were to falter after its merger with second-ranked fixed-line player China Netcom and fail to make the most of its monopoly WCDMA services to get ahead in the 3G market.

Given China Unicom’s shaky history, few watchers of China’s market would be likely to bet that the firm will make the most of its golden chance, and China Telecom will also face difficulties in entering the 3G market with EV-DO services, given its lack of experience in the mobile market and EV-DO’s lack of global scale compared with WCDMA.