China Mobile: Set for 3G Blitz? 中国移动将发起3G攻势？
I’ll end out this peak week of second-quarter earnings season with a couple of telecoms items, starting with comments from dominant wireless carrier China Mobile (HKEx: 941; NYSE: CHL) that indicate it may finally be preparing for a much-needed offensive to breathe new life into its flagging 3G network. While China Mobile struggles under its own massive weight, separate news bites indicate the up-and-coming Xioami, a maker of low-cost, high performance smartphones, may be running into its first troubles after a strong debut for its first product last summer.
Let’s start with China Mobile and its underwhelming results, which saw its profit actually dip slightly in the second quarter as it lost steady share in the 3G space to more aggressive rivals China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA). (results announcement) The company’s shares fell 5 percent in Hong Kong after the results came out and were down another 3 percent in early Friday trade, as the results spotlighted its stagnant growth as it fumbles with a problematic 3G network based on a homegrown Chinese technology standard known as TD-SCDMA.
While investors were clearly unhappy with the performance, I’m actually slightly encouraged by comments from company officials at their earnings press conference, which seemed to indicate a much-needed promotional campaign for its 3G network will soon be coming. Specifically, media are quoting company officials saying that marketing costs will rise sharply in the second half of the year as China Mobile increases its spending on handset subsidies to boost sales. Investors seemed to be worried about further profit erosion from the new subsidies, but in my view this is a campaign that China Mobile should have begun a year ago rather than waiting until now.
In other comments at the press conference, executives also cited a lack of suitable cellphone chips as the reason why China Mobile remains the only one of China’s 3 major telcos that still doesn’t have an Apple (Nasdaq: AAPL) iPhone for its 3G network. Those comments are consistent with other market talk we’ve heard in the last few months, including a recent report that leading cellphone chipmaker Qualcomm (Nasdaq: QCOM) is planning to launch a TD-SCDMA chip as soon as next month. (previous post)
That development, if true, means we could see China Mobile offer an iPhone for its 3G network by the end of this year. Taken together, the new 3G handset subsidies and introduction of a TD-SCDMA iPhone both seem to indicate China Mobile is finally getting serious about promoting its 3G network, and I would expect to see some meaningful change in its 3G subscriber trends by the first half of next year.
From China Mobile let’s move to Xiaomi, which has just held a high-profile event to launch its second handset that is priced at 1999 yuan, or about $320, well below the price tag for comparable high-performance smartphones. (Chinese article) While Xiaomi is aggressively promoting the new phone, some media are reporting that China Telecom and Unicom are considering cutting their ties to the company due to technical problems with its first-generation Xiaomi smartphone.
I suspect this report, which cites unnamed sources, may be partly true, as any new product will always have some technical issues. But I also believe the news is probably coming from some of Xiaomi’s rivals, many of whom would love to undermine this start-up that is much better at promoting itself and its products than many of its larger, stodgier rivals. The true test will come when customers start reviewing the new Xiaomi model, and I’m sure we’ll be hearing much more about this new smartphone in the next 2 months.
Bottom line: China Mobile appears to be gearing up for a major 3G offensive, which could see it reverse its steady market share losses by the first half of next year.
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