PHS Market in China Update - by BDA China Ltd.


- Key Trends in PHS
- Operator Activities
- Handset/Equipment Vendors



Key Trends in PHS

Source: the Ministry of Information Industry (MII)

China's PHS subscribers increased 1.78 million to 59.17 million in August, up from 57.39 million in July, according to the Ministry of Information Industry (MII). August's additions were 1% higher than July. PHS additions accounted for 46% of total new fixed-line users nationwide in August, down from 50% in July.

PHS subscriber additions trended lower in the second and third quarters, due to slowing network investment and service promotions by fixed-line operators and intensified competition from mobile.

However, PHS subscriber growth rebounded in September. Subscribers grew by 2.8 million to reach 62 million in the first 20 days of September. This was due mainly to aggressive promotions leading into the Moon Festival on September 28th and the October 1st holidays. Full month September data is not yet available.

PHS ARPU(Average Revenue Per User) has fallen steadily due to increasing price competition from mobile services. According to China Telecom (HK) CEO Chang Xiaobing, PHS ARPU was between RMB 40 and RMB 45 in 1H 2004, down from RMB 45-50 in 1H 2003. China Netcom ARPU has also fallen at a similar rate.

According to China Netcom, the ROI period for its PHS business now may be as long as 7 years, compared to previous estimates of just 3 years. The prolonged ROI(Return On Investment) period is due to low PHS APRU and handset subsidies by fixed-line operators. China Telecom said it subsidizes between RMB 200 and 300 per handset for each new PHS user this year.


Operator Activities

PHS SMS Interconnection between Fixed-line Operators Realized

China Telecom and China Netcom realized nationwide PHS SMS(Short Message Service) interconnection on September 27th. PHS subscribers can now send SMS messages to PHS users on either operator's networks at RMB 0.08 (USD 0.01) per SMS (mobile SMS are usually priced at RMB 0.10 / SMS). Previously, users could only send messages to other subscribers on the same service provider's system.

SMS Interconnection from PHS to Mobile Networks is in Trials

Starting from October 10th, China Mobile conducted PHS SMS interconnection commercial trials with China Telecom in Shanghai and Jiangsu province, and with China Netcom in Hebei and Jilin province. PHS SMS to China Mobile users is currently priced the same as the pricing of inter-network PHS SMS, for example RMB 0.08 (USD 0.1) per SMS in Shanghai, Jiangsu and Jilin province, and RMB 0.10 per SMS in Hebei province.

According to a news release citing China Mobile Guangdong, China Mobile and China Telecom have signed a point-to-point SMS interconnection and billing deal in Guangdong province. Interconnection fee for both sides is RMB 0.05 per SMS. The two operators have yet to decide SMS prices, but will start trials in the province soon.

China Unicom signed MoUs with China Telecom and China Netcom at the headquarters level in early October to implement SMS interconnection. China Unicom has established trial networks for PHS-mobile SMS interconnection in Shanghai, Jiangsu, Hebei and Jilin province. China Netcom Henan has signed an SMS interconnection deal with the Henan branch of China Unicom and will start trials soon.

SMS interconnection will help drive PHS subscriber growth, but nationwide interconnection may not happen until 2005. The MII had originally demanded that PHS and mobile operators realize interconnection by March 2004. Some local operators, such as those in Fujian, have already realized interconnection. Mobile operators have been reluctant to allow SMS interconnection with PHS networks, amid fears that it would result in churn away to cheaper PHS services.

PHS Operators Look to VAS

In Beijing, China Netcom will launch PHS value-added services including 'color ringback' by year-end 2004. China Telecom in Guangdong began color ring-back trials on May 17th and plans to launch to its 5 million PHS users province-wide by the end of September. Driven by aggressive promotion, network optimization and new VAS, Guangzhou Telecom's PHS users broke through the 1 million mark in early September. China now has 7 cities with over 1 million PHS subs.

PHS VAS are still at an early phase. According to BDA's proprietary survey conducted in June in Beijing, Shanghai, Guangzhou, Xian and Chengdu, although 53% of primary PHS users have used SMS, 45% have never use PHS VAS, and only 4% have used VAS other than SMS. Other applications that operators are developing include location based services for mobile handsets and Internet access provided over laptop data cards.

Handset/Equipment Vendors

PHS Handset Competition Heating up

Nan Yuejun, the Manager of Handset Business Unit of Lucent (China), on September 15th said Lucent will invest USD 50 to 100 million on PHS handset R&D in the following 1 to 2 years. New handset development will be focused primarily on middle to low end models. Lucent is targeting 10%-15% PHS handset market share in 2005, according to Nan. Lucent (China) established its Handset Business Unit in July 2004 to drive PHS handset development.