China Telecom, Unicom Rush Into 4G

China Telecom’s 4G launch imminent

A new flurry of reports are saying that 4G service launches are coming soon from the nation’s 2 smaller telcos, China Telecom (HKEx: 762; NYSE: CHA) and Unicom (HKEx: 762; NYSE: CHU), as both seek to stop leading telco China Mobile (HKEx: 941; NYSE: CHL) from gaining any advantage from its earlier roll-out of similar service. The move initially came as a slight surprise to me, as I really didn’t expect either company to aggressively promote 4G until the second half of this year for technological and cost reasons I’ll explain soon. But this sudden acceleration in their plans actually looks like a smart strategic move to prevent China Mobile from gaining new momentum, even if such a tack could create both technical and financial challenges for both smaller carriers.

The latest reports say China Telecom is being the most aggressive with plans to formally launch its 4G service as early as February 14, which is today. (English article; Chinese article) The reports say China Telecom has already developed several 4G handsets and ordered 300,000 units, and has put together a series of competitive packages to rival China Mobile’s previously announced service plans. Meantime, Unicom is reportedly also preparing a 4G service launch in 23 cities on March 1, with the figure to be expanded to 56 cities by May, according to one report, citing a leaked internal company document.

Both services will have to rely on a homegrown 4G standard called TD-LTE, though it’s unclear what technology China Telecom and Unicom will use as a backup for 2G and 3G service on their newest handsets when 4G signals are unavailable. Most of today’s mobile phones usually support at least 2 and sometimes 3 standards, one for 4G, another for 3G and sometimes also one for the oldest 2G service. That way, if signals for newer 4G networks are unavailable, then the phones can still provide service over older 3G and 2G networks.

I won’t go into too much detail here, but China Telecom and Unicom now face the big challenge of having to develop handsets that can support TD-LTE for 4G, alongside their own 3G and 2G standards that come from a different family of technologies. That particular mishmash of technologies doesn’t exist elsewhere because few other countries in the world use a similar combination of standards. That means both China Telecom and Unicom are having to devote big resources to developing suitable 4G handsets and will only be able to offer a limited number of products. By comparison, China Mobile’s technology is more consistent across 2G, 3G and 4G, and it has already developed dozens of models for its new 4G service.

In addition to the technological challenge, China Telecom and Unicom are also being challenged by the fact that they will have to lease 4G network capacity from China Mobile, since neither has a commercially-ready TD-LTE network. That means China Mobile, as the country’s sole owner of a TD-LTE network, can charge its 2 smaller rivals high prices for leasing capacity. As a result of both of the technology and leasing challenges, I suspect that China Telecom and Unicom will both lose lots of money in their initial 4G offerings. They should be able to offer more profitable products in the second half of this year, when they’re expected to get newer separate 4G licenses to build networks that are more compatible with their current 2G and 3G networks.

This decision to launch 4G service now rather than at a more logical time later this year looks like a smart one, even though both of the smaller carriers are almost certain to lose big money and face other technological challenges because of the decision. Such a move will allow both China Telecom and Unicom to prevent China Mobile from gaining momentum in 4G. Both of the smaller telcos made big gains over China Mobile in 3G in the last 3 years due to a state-granted technological advantage, and now both are rightly realizing they may need to make some difficult decisions and sacrifice short-term profits to maintain that edge in 4G.

Bottom line: Planned 4G service launches soon by China Telecom and Unicom despite technological and cost drawbacks look like smart moves to prevent China Mobile from gaining momentum in 4G.

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