PHS Market in China Update - by BDA China Ltd.


- Key Trends in PHS
- 3G
- Operator Strategies
- PHS Value Added Services


Key Trends in PHS

PHS Subscriber Growth (Million)

PHS Subscriber Growth (Million)

Source: Ministry of Information Industry (MII)

PHS users increased by 1.5 million in November and by 0.29 million in December, reaching 65.2 million at the end of December. PHS additions for November and December were 58% lower than September and October
Fixed-line operators in December stripped out inactive users (customers who have not paid fees for 3 months) from their totals, which resulted in a significant drop in PHS and fixed-line growth. Fixed-line subscribers (including PHS) declined for the first time in China due to the year-end subscriber accounting clean up, falling by 0.72 million in December to 312.44 million, according to the MII. PHS subscriber growth is expected to slow in 2005, but to continue at a higher rate than the abnormally low December number.

China Telecom vs. China Netcom Market Share

Source: MII, company information

China Netcom's market share grew to 35.2% in December, up marginally from 34.5% in September. China Telecom's December market share was 64.8%.


3G

BDA expects 3G licenses to be issued this year.

Operators have received a circular from the MII instructing a further 3G trial to be held in March. Although the MT-Net Phase II trials were completed in September 2004, the additional phase of trials has been ordered to allow TD-SCDMA more time to prove itself. According to an official in the China Academy of Telecom Research, a research institute under MII, network deployment for the new round of 3G field tests will start at the end of March.

Ahead of 3G, further operator restructuring is also likely. Wang Xiaochu, the CEO of China Telecom, has said that China Telecom has submitted a proposal to the Chinese government to buy a mobile network from China Unicom together with Netcom. Although Unicom subsequently denied this report, Unicom could still face a break-up or the loss of one of its networks.


Operator Strategies

China Netcom to use PHS to complement 3G services

Yang Xiaochun, the director of China Netcom's Market Operation Management Department, said on December 10th that China Netcom will use PHS to complement future 3G services. As China Netcom will need a long time to expand 3G network coverage, the operator will likely seek to offer PHS/3G dual-mode handsets to provide coverage across its 3G and PHS networks.

3G service is expected to face coverage problems in the early stages, and dual-mode handsets could provide a temporary solution. If China Netcom uses PHS to resolve 3G coverage issues as expected, the operator will likely put more effort into promoting PHS roaming and data services.

Commercial launch of PIM-enabled PHS handsets in 2005

China Telecom and China Netcom have released the timetable for the commercial launch of Personal Identity Module (PIM) cards and PIM-enabled PHS handsets. China Telecom will introduce PIM-enabled PHS handsets nationwide on 'World Telecom Day' on May 17th, while China Netcom Beijing plans to begin offering them in either March or April 2005.

China Telecom and China Netcom also set up the "Fixed-line and PHS Terminal Alliance" jointly with UTStarcom, ZTE and Huawei in December 2004, aiming to promote PHS handsets embedded with PIM cards.

PIM cards will give PHS a substitute for full roaming service which is still not allowed by the MII. The cards will also allow PHS users to retain their phone numbers, helping to drive the PHS handset replacement market.


PHS Value Added Services

PHS: Emphasis shifts to value added service

SMS interconnection from PHS networks to GSM and CDMA networks is becoming available in more regions, stimulating SMS usage among PHS users. Nearly half of all 31 provinces have realized SMS interconnection. For China Telecom, by the end of January, 19 provinces (excluding Guizhou and Tibet) had realized interconnection with China Mobile and 18 provinces (excluding Qinghai, Yunan, and Ningxia) had realized interconnection with China Unicom. China Telecom provides PHS service in 21 southern provinces.

PHS operators are also cooperating with content and service partners (SPs) to develop and launch various value-added services for PHS. Tencent is cooperating with China Telecom for its Mobile QQ service. By November 2004, the service was available in 18 provinces. A growing number of SPs are looking to PHS for new opportunities. Most are seeking to cooperate with local fixed-line operators on SMS-based services.

PHS promotions that include bundles of value-added services are proliferating. According to China Netcom Beijing, the operator plans to offer bonus VAS credits to new PHS subscribers to compete with mobile operators' GPRS/CDMA 1x services. China Netcom said it will focus on promotions that bundle VAS credits instead of handset discounting in the future.

SMS-based service is currently the most popular PHS VAS in China. Fixed-line operators are also promoting other services such as color ring-back tone and LBS Location-Based information Service) services.

Color ring-back tone service may be especially attractive for PHS because it does not present any handset compatibility issues. China Netcom Beijing launched PHS color ring-back tone services on January 20th. The service is charged at a flat rate of RMB 0.16($0.0192) per day. China Telecom Gansu and China Telecom Hunan also plan to offer color ring-back tone service in Q1 2005.

China Telecom plans to offer LBS service in most of its 21 provinces in 2005. China Telecom currently has LBS trials in Jiangsu and Sichuan province. Teltron plans to launch a handset model, the T100, to support China Telecom's LBS service.