Well networked

Mutually satisfied: Apple’s Tim Cook with China Mobile boss Xi Guohua

What would Marco Polo have made of China Mobile’s new 4G service, which delivers download speeds of 100 megabits per second? After all, seven centuries ago, the Venetian explorer was bowled over by the sophistication of the Mongol emperor’s communications network. He wrote in wonder of staging posts placed at 25-mile intervals across China, with couriers running more than 100 miles a day between them, bells jangling on their belts to announce their arrival from one post to the next. Letters that arrived late resulted in a personal flogging – 20 strokes for each 45-minute delay.

Such ruthless efficiency was absent in Europe. Three centuries later, it was still taking 10 days for a letter to reach Paris from London, a distance of 250 miles.

And as China Mobile rolls outs its 4G network, its own employees have been feeling under the cosh, although fortunately such phrases are no longer interpreted quite so literally. CBN reports that – even during winter months – teams worked round the clock in the far north of the country to install the new 4G base stations. One employee told CBN: “This year has been the most pressurised ever. We’ve had a huge workload.”

As a result of the blitz, China Mobile had 410,000 4G base stations in place by the end of June (about 80% of its target), according to information provided at the carrier’s interim financial results.

In fact, China Mobile’s rivals have also reported results in the last few weeks, with China Telecom the last to do so this Wednesday. China’s smallest telco has been losing customers (5.34 million between January and June), while its largest player, China Mobile is well on its way to reaching its 50 million 4G subscriber target by year end. In large part this was thanks to the iPhone 5, which it began selling on January 17. In the first half, China Mobile signed up 13.9 million 4G customers, with the number of new arrivals accelerating each month. In July, a further 6.5 million came on board and analysts believe there will be another jump once the iPhone 6 launches in September (for an earlier look at the prospects for China Mobile and Apple, see WiC224).

After spending years hamstrung by the government’s homegrown 3G technology (which isn’t compatible with international standards), China Mobile appears to have been let off the leash once more, thanks to a vastly superior 4G standard. And while its results showed a fourth consecutive drop in net profits, analysts seemed more focused on when earnings will reach a symbolic tipping point, with data revenues offsetting declining voice and SMS sales. Previously the company has suggested this will be when data hits 50% of service revenues (24.2% currently vs 16.7% one year ago).

During the results call, China Mobile said it rolled out base stations aggressively during the first half of the year to maximise the window of opportunity granted by the issue of the first 4G licence in December. China Unicom and China Telecom received their own licences in late June.

However, CBN wonders if China Mobile is about to lose some of its first mover advantage, making it more of a struggle to generate returns on its enormous 4G capex. Peak spending years are expected to be 2014 and 2015, with Rmb225 billion ($36.6 billion) of capital earmarked for this year, compared to Rmb140 billion last year.

The newspaper also reports that every time China Mobile tries to re-establish its dominance, it runs into unforeseen obstacles (i.e. a new diktat designed to assist China Unicom and China Telecom with market share). For example, in January the government helped the other two telcos by lowering their interconnection fees (Rmb0.04/minute compared to the Rmb0.06 fee that China Mobile pays to connect to their networks).

At the end of 2013, China Mobile had a 69% market share, down from 81.6% in 2008, while China Unicom had risen to 17.7% and China Telecom to 13.3%.

But CBN believes the main threat to China Mobile is the new State Tower Company (STC), which was formally established in July to support the upgrading of the vast 2G communications network to 4G status. Ownership details are unclear, although it looks like there will be a 4:3:3 shareholding ratio between the three operators, led by China Mobile, which will take the chairman’s role.

According to CBN, STC will build all the new telecom towers from the end of 2014. The three operators will then share and lease them back, in the process reducing the industry’s overall capex burden. From 2015, they will start injecting their existing infrastructure into the new group as well.

During the results call, China Mobile executives were notably cautious about STC’s potential impact and said little beyond expressing their support for the new policy and vowing not to inject their own assets below book value. The most vocal supporter for the new set-up is China Telecom, which faces the most challenges in transforming from 3G to 4G. Its move to 3G, by contrast, required a far simpler and cheaper upgrade.

China Unicom is somewhere in between, having concluded an intensive phase of investment in installing a 3G/3.75G network capable of delivering speeds of 21 Mbps. The company says it will now overlay it with 4G hotspots and analysts seem to think that Unicom holds a competitive advantage because its network has been in operation for longer. While its fastest download speeds are theoretically slower than China Mobile’s, they are often faster in practice because China Mobile’s 4G network is still patchy.

China Mobile management admitted as much during the investor call: “In the first half, the network was still weak so we needed to work harder on promotions. In contrast, during the second half, we expect a better network and the pricing of terminals to come down to the Rmb700 range so there is much less pressure on us to subsidise.”

Another surprise was a government directive instructing all three carriers to reduce promotional spending by Rmb40 billion over the next three years. This represents a complete turnaround in industry practice and led to a stock price rerating (a positive one) across the board. In 2008, China Telecom’s entry into the mobile market coincided with the launch of 3G and all three carriers responded with aggressive customer subsidies. Investors feared a repeat with 4G, as free handset offers or reduced monthly billings cut into profits.

But China Mobile has said it will spend less on marketing costs – Rmb5.7 billion during the second half, compared to Rmb15.3 billion in the first. In the four trading days post-results, its stock price rose 10%. Its shares have risen by about 35% since late March, outperforming Unicom and Telecom, as well as the wider China Enterprises Index.

The key performance driver for China Mobile’s management is how quickly it can convert its 790.6 million strong customer base from 2G to 4G. This should improve – or at least stabilise – its ARPU (average revenue per user), which has been on a declining trend for the past five years. The interim results showed ARPU was down slightly at Rmb64 per month. But 4G ARPU is stronger, standing at Rmb143.

“Even though ARPU is declining, it’s also stabilising because of 4G. The number of 4G users has been accelerating month-on-month,” executive director Zhou Jinquan told reporters at a press conference in Hong Kong, adding that more data usage would help ARPU grow once more.

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