- Key Trends in PHS Market
- 3G
- Operator Strategies
- PHS Value Added Service



Key Trends in PHS

China’s PHS subscribers totalled 89.5 million by end of March 2006 with subscriber growth rebound since January 2006 driven by seasonal factors as well as promotions by operators. Net additions in March 2006 were 1.83 million, up substantially from February’s 1.3 million net additions and the highest level since June of 2005. (See Exhibit 1)

Exhibit 1: PHS Subscriber Statistics

As China is likely to further push off the issuance of 3G licenses until the end of 2006 or 1H 2007, BDA expects PHS subscribers will continue to grow as China Telecom and China Netcom need PHS to offset the impact of mobile-fixed substitution. The delay in 3G licensing is in part to allow more time for trials of the domestic 3G standard TD-SCDMA. Large-scale pre-commercial trials are currently being held in Shanghai, Beijing, and three medium-sized Chinese cities, which will last until August 2006. China Telecom is still the most likely operator to use TD-SCDMA. The government is likely to issue the TD-SCDMA license first to give the home grown technology a head start.


Operators’ Strategies

China Telecom started to offer free handsets to retain PHS users
Starting from this year, China Telecom has promoted a countrywide free handset program for current PHS users who can exchange new PHS handsets with credits earned through their previous usage fees. Before this promotion, China Telecom focused on acquiring new subscribers, but put less effort into retaining current users. As a result, PHS churn reached as high as 18%-20% per year, according to press reports.

From September to October last year, Shanghai Telecom began this free handset promotion trial in Shanghai, branded as “September Storm”. Current PHS users with 1,100 credits over two years can receive a new handset. More than 15% of Shanghai PHS users are eligible for this promotion. During the promotion, Shanghai Telecom reported better customer retention and 10% new subscriber growth. ZTE also benefited from this promotion with sales of more than 100,000 PHS handsets, according to press reports.

Due to the successful promotion in Shanghai, China Telecom decided to offer similar promotions national wide at the beginning of this year. Meanwhile, China Netcom is planning to conduct similar promotions later this year.



Value Added Service

PHS operators continue to promote PHS VAS service to increase ARPU

China Telecom and China Netcom’s ARPU is declining due to intensifying price competition with China Mobile and China Unicom. Operators hope that PHS VAS will help fight the decline in ARPU and reduce churn.

China Telecom’s PHS users’ ARPU rebounded to RMB 43 in 2005 from RMB 40 in 2004. VAS ARPU at China Telecom continued to grow and reached RMB 8 in 2005 on a per subscriber basis, or 19% of overall PHS ARPU.

China Netcom’s PHS VAS ARPU may be smaller than China Telecom’s as PHS VAS development in Northern China lags behind Southern China. For example, China Netcom’s CRBT penetration rate of 31% lags behind China Telecom’s at 41% due to China Telecom’s intensive promotion in Southern China. (See Exhibit 3-6)

However, China Netcom’s PHS CRBT and SMS were the fastest growing services in 2005 with growth rates of 1011% and 241% respectively due to strong market demand.

Over the next few years, PHS SMS and CRBT will remain the most important services. Operators will roll out extensive promotions for SMS and CRBT to drive VAS revenues. PHS SMS and CRBT will still see strong growth in 2006, but subscriber growth will level off after 2007 as penetration levels reach their ceiling.