TELECOMS – Unicom Aims High As 4G Era Draws Near

Bottom line: China could have as many as 400 million 4G subscribers by the end of next year, as the nation’s 2 smaller carriers join China Mobile in offering aggressive promotions starting in January.

4G to explode in 2015

After a period of relative quiet following the iPhone 6’s delayed China launch last month, we’re seeing a sudden flurry of news on the development of 4G service in China. None of the headlines are unexpected, but they do collectively point to a coming explosion in 4G service in 2015. Leading the headlines are reports that the telecoms regulator will give 4G licenses to China’s 2 smaller telcos, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), by the end of this year. At the same time, another report is giving the latest national 4G figures, and yet another headline details Unicom’s aggressive 4G plans for 2015.

If everything occurs the way many people expect, we could easily see a rapid migration to 4G service next year, with as many as 300-400 million users by the end of 2015. That would be a remarkable shift if it really happens, since the nation had a far more modest 43 million 4G users at the end of September, according to data from the regulator, the Ministry of Industry and Information Technology. (Chinese article) The vast majority of current 4G users are subscribers to service from industry leader China Mobile (HKEx: 941; NYSE: CHL), which formally launched at the beginning of this year.

So what exactly is going to cause the number of 4G subscribers to explode as much as 8-fold over the next 15 months? Several factors are involved, led by the highly anticipated entry to the 4G space by China Telecom and Unicom at the beginning of next year. At the same time, the market should get a boost from the millions of cheap 4G handsets now being churned out by domestic Chinese brands, some costing less than $100.

All that said, let’s zoom in on the latest major headline, which says that China Telecom and Unicom are expected to receive licenses to offer 4G service based on the globally developed FDD-LTE standard next month. (English article) Both carriers have already received another license to offer 4G service based on a domestically-developed standard called TD-LTE; but each has indicated it will wait to receive an FDD license to build systems based on a global technology that is more compatible with their current 3G networks.

China Telecom and Unicom collectively control about a third of China’s mobile market, and had been holding back on promotions for their current 2G and 3G services in anticipation of offering 4G FDD service soon. They received licenses to build trial FDD-LTE systems back in June (previous post), and have been spending billions of dollars to build up networks since then. They will probably launch commercial 4G service in January, and are planning aggressive promotions after that.

We’re getting an early indication of just how aggressive those promotions could be with another major news story, which cites a Unicom official saying his company plans to sell more than 100 million 4G devices next year. (Chinese article) He said Unicom has budgeted a hefty 5 billion yuan ($813 million) for subsidies to promote the service. Obviously not each of those devices represents a single new user, though it’s probably safe to say that Unicom is aiming for around 80 million 4G subscribers by the end of next year.

So let’s make a few assumptions, starting with my forecast that China Telecom will be equally aggressive with its 4G promotions and aim to sign up a similar amount of subscribers. That would equate to 160 million 4G users between the 2 smaller telcos. Assuming China Mobile maintains its current market share of about 60 percent, it would need to have about 240 million 4G users at the end of next year to maintain its position. All this means 2015 could be the year of 4G in China, marked by a massive migration of about a third of the nation’s mobile users to the high-speed service.

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