Global Mobile Market Situations and China Telecom´s Strategy to Enter Mobile Market

1 General Situation of Global Mobile Market

Although the development of the whole communication industry is suffering a winter, that of the global mobile communication is still growing fast. By April of 2002, global mobile users had reached 1 billion, and it is predicted that the number will have exceeded 2 billion by 2005. Mobile communication is now on the way of technology transition from 2G to 3G, and 3G has already been put into commercial use in Europe, America, Japan, Korea, Taiwan and Hong Kong.

1.1 European Mobile Market Overview

In Europe, the ratio of mobile telephone ownership per capita has reached over 60%, and even 100% in some countries. Due to the fact that the market for mobile voice services is becoming saturated, European operators have naturally regarded 3G as a new point for profit growth. The application of GSM networks is currently dominant in Europe, therefore, as an accessible technical upgrade of the GSM/GPRS system, the WCDMA system has been widely accepted there. At present almost all the European operators have adopted the network evolution path of GSM → GPRS/EDGE → WCDMA, opting WCDMA as their 3G standard.

Adopting the WCDMA/UMTS technology, many European countries such as Spain, Finland, Norway, Germany, Luxemburg and Croatia have already put 3G networks in use or into test. However, in northwest Russia, Delta Telecom has exceptionally commissioned a CDMA200 1x network.

1.2 American Mobile Market Overview

There are six national mobile operators in USA: Verizon, Cingular, AT&T Wireless, Sprint, Nextel and Voice Stream. They have chosen four different 2G standards, with Verizon and Sprint adopting the CDMA systems, Cingular the TDMA technology, AT&T Wireless and Voice Stream the GSM systems and Nextel the integrated digital enhanced network technology that is mainly used for enterprise private mobile networks. Such a complex picture of the mobile market in USA has caused  the deferment of 3G license delivery. Currently the mobile market competition mainly goes between the GSM/GPRS and the CDMA networks in USA. AT&T Wireless is operating a WCDMA/UMTS trial network, while Sprint is building its nationwide CDMA2000 1x network. Regional CDMA2000 1x EV-DO trials of some other companies are also in process.

Although the USA government has no clear development plans for 3G yet, the huge capacity of its mobile market will allow different networks to coexist in the future, just like the current 2G network pattern.

In other American countries 3G networks are also under construction. Canada has had its trial CDMA2000 1x network for many years, while Brazil launched its CDMA2000 1x EV-DO network covering seventeen states. In addition, the CDMA2000 1x networks in Mexico and Columbia have already been put into commercial use, and those in Guatemala and Porto Rico have been set up.

1.3 Asian Mobile Market Overview

Asia has the most successfully operated 3G networks and currently it is the most promising 3G market in the world and the only continent where three kinds of 3G technologies coexist.

Japan is one of the earliest countries to develop 3G networks. However, the 3G license can only be issued to three operators due to Japan´s limited frequency resource. In June of 2000, the Ministry of Posts and Telecommunications of Japan granted the license to three qualified applicants: NTT DoCoMo, KDDI and J-phone.

DoCoMo and J-phone have adopted the WCDMA technology, while KDDI abandoned its personal digital cellular (PDC) network and chose the CDMA2000 1x. KDDI also plans to have its network upgraded to CDMA2000 1x EV-DO by 2004. So, temporarily, CDMA2000 technology stands at the leading position in Japan.

The Korean government sold 3G licenses to KTICOM, SK Telecom and LG Telecom at the price of 1.3 trillion Korean yuan. SK Telecom launched the first commercial CDMA2000 1x network in the world in October 2000, so did LG Telecom in April 2001. Now CDMA2000 1x EV-DO services have already been open to the public in Korea. A mobile market mainly dominated by three operators with nationwide service scope has come into being in Korea through corporate mergence, which is considered as the key factor for the successful running of 3G networks. Now SK Telecom is the largest mobile operator in Korea, followed by KT FreeTel and LG Telecom. Obviously CDMA2000 is predominant in Korea, but Korea has not given up WCDMA technology. KTICOM demonstrated its achievements on WCDMA during the 2002 FIFA World Cup Korea/Japan.

Compared with Korea, Japan and Europe, China has lagged behind in the commercialization of the 3G technology. So far, the Chinese Government hasn´t issued any 3G license. After two years´ construction and operation, China Unicom has upgraded its CDMA Phase Ⅰnetwork  to CDMA2000 1x (defined as the 2.5G technology), and already made full preparation for 3G. Other operators are also doing research on 3G networks and waiting for the license-issuing.

The good performance of 3G in eastern Asia has stirred the interest of  a number of other Asian countries and regions.

• Hong Kong and Taiwan have offered 3G services.
• Nortel Network announced in January 2003 that it was constructing the first CDMA2000 1x and 1x EV-DO networks with voice and data services in Taiwan.
• CDMA2000 1x services are also available in India.
• And Malaysia is now constructing its own WCDMA network.

In the first half of 2003, Telstra became the first mobile telephone company in Australia to provide mobile services on 3G network by adopting the CDMA2000 1x technology. In fact, its trial network was launched at the beginning of 2002, and then one mobile service on its CDMA2000 1x network was offered to its commercial customers in last December.

2 China Telecom´s Strategy to Enter Mobile Market

The mobile communication industry, considered as the most active and potential part in the global telecom market, has grown at tremendous speed. By July 2001, the population of mobile subscribers in China had exceeded that in USA and become the biggest in the world. At the end of 2002, the number amounted to 210 million, close to the number of fixed line subscribers. It is estimated that the number of mobile subscribers will surpass 350 million in 2005.

China Mobile and China Unicom are currently monopolizing the huge Chinese mobile market. As one of the major telecom operators in China, China Telecom will definitely seek the best strategy to enter this market. Currently China Telecom and China Netcom are actively conducting 3G experiments and tests, and it is  just a matter of time before they enter the mobile market.

2.1 Value Chain Relationship

With the specialization of the mobile communications market, technical support vendors and system integration vendors have become separated from the telecom equipment suppliers. The system integration vendors will become the link between equipment suppliers, technical support vendors and operators. Also, mobile terminal customers who originally had simplified service demands are now differentiated into personal, enterprise and industry customers with differentiated service demands. Telecom agents are gradually changing into enhanced service providers with the capability of independent service development. Terminal manufacturers, previously independent of operators, are now closely related with operators. Such a relationship is expected to be further enhanced when the 3G era arrives.

In addition, content providers and application developers offer services independently and also play important roles in the value chain. Mobile operators are still the core of the chain, but their fates are connected with other value providers.

The change in the value chain and the benefit reallocation require mobile operators to keep sufficient subscribers, and to obtain support from system integration providers and enhanced services providers. As the core of the value chain, mobile operators, system integration providers and enhanced services suppliers interdepend on each other, and their long-term strategic cooperation is extremely important.

It is particularly important to give full play to the initiative of enhanced service suppliers by working out different but rational benefit allocation schemes for different services, because in the 3G era, the network will not be the sole linchpin and it will depend on qualified services and contents to win the market competition eventually.

2.2 Technical Options

The choice of mobile communication technologies China Telecom is faced with actually is the choice of 3G technologies. At present the mainstream CDMA technologies are  CDMA2000, WCDMA and TD-SCDMA. From the perspective of technology, the technology maturity, frequency utilization ratio and global roaming capability are key factors in making a decision.

Developed by Qualcomm, CDMA2000 is smoothly upgraded from IS-95, thus being the most matured CDMA technology. Korea has already launched a CDMA2000 network for commercial use. CDMA2000 has a clear track to improve its frequency utilization ratio, however, its global roaming capability is common.

Supported by European countries and Japan, WCDMA has been put into commercial use in Japan. With high spread spectrum gain and the best global roaming capability it enjoys wide development space.

TD-SCDMA was proposed by China. Current work on it is to make it compatible with the European time division duplexing (TDD) standard. Theoretically speaking, TD-CDMA offers a high frequency utilization ratio, but that, along with its technical maturity and global roaming capability, still need to be validated. With the intrinsic limitations of the TDD technology, TD-CDMA is not suitable for underpopulated areas or in the situation of speedy moves, therefore, it is better to take TD-SCDMA as a supplement to CDMA2000 and WCDMA, both of which employ the frequency division duplexing (FDD) technology.

Economically, it is a rational choice to upgrade GSM to WCDMA, as is upgrading CDMA to CDMA2000. Each of the three technologies has its distinctive characteristics. Duplexers are unnecessary for a TD-SCDMA system, which consequently reduces its cost. For the same service capacity, a CDMA2000 system requires more radio frequency (RF) components than a WCDMA system does, which means the CDMA2000 system costs more per channel.

While the terminal complexity is concerned, WCDMA and CDMA2000 are about the same: their key design costs rest on the design technology and integration level of ASIC.

GSM takes more market share than CDMA and while WCDMA is favored by most operators in the world and has attracted a large number of manufacturers to development terminal ASIC. On the other hand, the core chip technologies of CDMA2000 terminals are monopolized by Qualcomm with little competition in this market. Therefore, it is expected that WCDMA terminals will be more competitive than CDMA2000 terminals in the future because of the chip improvement and cost reduction derived from their mass applications and multi-vendor competition.

Considering intellectual property right (IPR), most IPRs of the CDMA2000 technology are hold by Qualcomm, and any product development, production and sales based on them are required to pay the corresponding charges for patent usage and production license. In contrast, the IPRs of the WCDMA technology are in the hands of numerous bodies, and most of them are in the public domain. Chinese carriers have advantages in TD-SCDMA IPR, since TD-SCDMA was developed by China.

Taking investment into consideration, China Mobile will still rely on its GSM network to ensure network coverage. It will use the WCDMA network as a solution to its frequency resource shortage in urban areas, and to meet the demand for new services in hot spot areas. Therefore, the speed of the application of 3G services in China will depend heavily on the development of the WCDMA/GSM dual-mode cell phone. Having provided services on its CDMA IS-95/2000 1x network in the 800 MHz band, China Unicom is obviously going to adopt the CDMA2000 technology.

China Telecom has no previously existed mobile network resource to use, which means it has no old baggage, so it may choose the most suitable technology by comparing technologies and taking the factors of economy and competition into account.

WCDMA technology has relatively fewer problems about IPR and has widely been accepted by mobile operators, with the stronger global roaming capability and cost advantage in network investment and operation, therefore, it should be the first choice for China telecom. Moreover, TD-SCDMA technology is an effective supplement to WCDMA and by now it has been made fully compatible with the European TDD standards. If China Telecom adopts the WCDMA technology supported by Europe to develop its mobime communications system, room will be left for it to make use of asymmetric frequency resources to construct a hybrid network of WCDMA and TD-SCDMA at a proper time in the future.

2.3 Differentiated Services

At present, China Mobile and China Unicom share the mobile market in China, but China Telecom and China Netcom are ready to enter it. The competition in the mobile market will be increasingly competitive, and no single operator can meet all the service demands in the future. Therefore, the strategy to provide differentiated services which are represented in the available service—mobile Internet access becomes the first choice.

Individual users of mobile services would like to improve their life quality by enjoying mobile communications services and products at acceptable prices, therefore personalized and creative services are very attractive to them. China Telecom may develop its personalized services aiming at individuals such as private enterprise owners, people with high income, wealthy housewives and faddists. Also, as the earliest short message users and with the strongest willing for 3G services, teenagers are also an important customer group.

 Industry customers will first consider issues such as the service quality, network coverage and service functions, and then take the price into account. The indexes they care about most are service features and functions, network coverage, service quality and rebates. China Telecom´s potential customers are mainly in transportation, telecom, finance/security/insurance and real estate industries, and government and public security departments.

Commercial users pay attention to the overall service quality, network coverage and service functions, which includes easy-to-use nature, uniqueness, rebates, efficiency and network coverage. China Telecom may focus on corporate managers, professional analysts and experts from labor-intensive enterprises, knowledge-intensive enterprises, research institutes and the culture and entertainment industry.

2.4 Regional Strategies

Vast geographic scope is one of the most distinctive characteristics of the Chinese mobile market. Different economies, cultures and customs in different areas, together with different provincial regulations, lead to the obvious difference between regional mobile markets.

According to the 2001 statistics and financial reports of China Telecom (China Netcom involved), China Mobile and China Unicom, Guangdong as the biggest telecom regional market in China had 12.7% of the total fixed and mobile subscribers in China in 2001. It had 17.9% of Chinese Mobile subscribers, the number having exceeded that of fixed subscribers in Guangdong.

15.1% of the service revenue and 88% of the before-tax profit of China Telecom came from Guangdong where the fixed subscribers were only 9.5% of the national total.

With no subscribers of China Unicom, Tibet, the most undeveloped area in China, had only 0.8% of the national fixed and mobile subscribers, which, however, had brought the losses of RMB 543.12 million yuan and RMB 93.93 million yuan to China Telecom and China Mobile separately. Therefore, it can be concluded that the regional differences heavily influence the mobile market.

Study of the information about China Telecom has shown that six relatively developed provinces or cities—Beijing, Shanghai, Guangdong, Jiangshu, Zhejiang and Shandong —owned about 38.3% of China Telecom´s total subscribers. These provinces and cities brought 42.2% of its total revenue, with before-tax profit of RMB 16.7 billion yuan (1.78 times more than the total for China Telecom). By contrast, the six undeveloped areas of Tibet, Qinghai, Ningxia, Hannan, Guizhou, Ganshu only had 3.9% of the subscribers of China Telecom and 3.9% of its total revenue, bringing the annual loss of RMB 2.34 billion yuan. Further investigation has shown the same pictures about China mobile and China Unicom, with even more severe polarization. There is no doubt that the regional differences play the same roles in both fixed and mobile markets in China.

As far as regional strategies of China Telecom are concerned, the six developed areas of Beijing, Shanghai, Guangdong, Jiangshu, Zhejiang and Shandong are the key markets for further development. 60% or more investment should be used in these areas and the complete network coverage should be realized at the very beginning in order to ensure their rapid business development.

As for the six undeveloped areas as Tibet, Qinghai, Ningxia, Hannan, Guizhou and Ganshu, they are not suitable for its business development and investment, unless it is with the support of the Universal Service Fund. The strategy in other areas may be selective, first putting investment into the 20% of areas as cities, counties, developed towns and main highways, giving up another 20% such as mountains, deserts, Gobi and undeveloped rural areas, and selectively expanding the mobile services into the other 60% according to the local economy development and the whole business situations.

2.5 Pricing Strategy

Given the fact that the current mobile market in China is monopolized by China Mobile and China Unicom, pricing is not determined by the supply and demand relationship but by the negotiation or competition between the two players. In particular, they may incline to cooperatively control market prices at the beginning when China Telecom enters the market. Thus China Telecom should consider the following aspects when making prices.

(1) Pricing Goal: More Market Share

The market share indicates the sales proportion of a specific of product out of the total sales of the same kind of products in the market, which, to a great extent, reflects the running of a business and the competence of the product. To improve sales or gain more market share is very important for an enterprise, because that it can first reduce the unit cost for production and marketing, and then make the enterprise quickly react to the market and enhance its capability of controlling the price and market in the long term, and finally get a high investment yield, for the investment yield is tightly related to the market share.

It is absolutely important for China Telecom to set prices aiming at improving its market share at the very beginning when it enters the mobile market under the disadvantageous circumstance of the current two players´ corporate defending.

(2)Pricing Reference: Current Competitors´ Product and Price

Given that the market demands decide the upper limit of the product price and the cost decides its lower limit, then what is the proper price for an enterprise to make between the limits? This depends on its competitors´ product and price. If the price of its product is higher than the competitors´, it will have negative impact upon its sale, but if it is lower, it may bring a price war and take the enterprise further into deficit. Therefore, as a newcomer, China Telecom should insist on the strategy of “better quality, equal or lower price”.

(3)Pricing Principle : Competition Oriented

Competition oriented pricing means the price is set based on the competition situation; in other words, when setting or adjusting a price, an enterprise makes reference to its competitors´ products prices and price fluctuations, followed by the consideration in the product cost and market demand. Competition oriented pricing is the result of intense competition and sufficient supply in the market, which is widely introduced in the modern business world, especially by those enterprises who set their pricing goals to gain more market share, coping with intense competition, avoiding competition or keeping the price stable and business in operation.

Such a pricing strategy will be helpful for China Telecom on the one hand to avoid its rivals´ possible strikes and coexist with them peacefully, and on the other hand to build up a good enterprise and brand image and attract more customers.

References

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