Unicom On Wrong Track With TD 4G Plan

Unicom trials TD-LTE

After offering some rare praise last week for China Unicom (HKEx: 762; NYSE: CHU) related to a smart new tie-up with Internet giant Tencent (HKEx: 700), I’m sorry to have to return to my older pattern of criticizing this bumbling company, this time for a 4G strategy that looks quite schizophrenic. Somewhat appropriately, Unicom discussed its latest 4G plans on a day when it also bumbled the release of its latest financial results. In that instance, a government organization published Unicom’s interim results before their official release via the Hong Kong Stock Exchange, forcing Unicom to request a temporary halt in its stock’s trading until the official stock exchange release.

Unicom’s results were actually relatively impressive, with the company reporting a 55 percent surge in its first-half profit. (results announcement) But I’ve said before that Unicom’s results are always somewhat cryptic, as its profit growth often varies widely from quarter to quarter, unlike the more stable results of rivals China Telecom (HKEx: 728; NYSE: CHA) and China Mobile (HKEx: 941; NYSE: CHL).

From my perspective, the much more interesting story from Unicom are 4G comments made by Chairman Chang Xiaobing at a news conference to discuss the results. At the briefing, Chang disclosed that Unicom is trialing a 4G network based on a homegrown technology called TD-LTE, even though the company’s current 3G network supports a more mature standard called FDD-LTE that is used by most telcos outside China. (English article; Chinese article)

Chang explained the decision to trial TD-LTE by saying that China’s telecoms regulator may stipulate in its first round of 4G license awards expected later this year that those licenses are only for the building of TD-LTE networks. FDD-LTE licenses could also be awarded eventually, but that may not happen until 2014 or perhaps even later — if such licenses ever come at all.

This awarding of 4G licenses in 2 stages isn’t a complete surprise, as previous reports have hinted that the telecoms regulator wants to give TD-LTE a competitive timing edge due to its relative newness compared with FDD-LTE. Other previous media reports have indicated that China Telecom, which would also like to use FDD-LTE for its network, might consider leasing capacity from China Mobile, which is now building a TD-LTE network, if the regulator awards TD-LTE licenses first.

The regulator’s decision to award TD-LTE licenses first is obviously designed to give the homegrown technology a boost, but it’s also creating a lot of confusion and extra costs for the market. If they choose to offer TD-LTE service , both Unicom and China Telecom will need to develop special cellphones that can integrate TD technology with their 3G networks that use more mainstream technologies, since no such cellphones currently exist. What’s more, Unicom could incur billions of dollars in extra expense if it builds a 4G networks based on TD-LTE and then builds another based on FDD-LTE a year or two later.

Unicom’s decision to incur this extra expense by building its own TD-LTE network looks like a big mistake, as the company could easily end up with 2 incompatible networks if it later builds a FDD-LTE networks. China Telecom’s approach of leasing 4G capacity from China Mobile’s TD-LTE network makes more sense, since it can quietly drop the service if and when it receives an FDD-LTE license.

If I were a consultant, I would advise both Unicom and China Telecom to simply ignore the TD-LTE licenses if that’s what they get first, and then wait another year or so until they get the FDD-LTE licenses that they really want. China Telecom could end up doing that;  but Unicom’s plan to potentially build a TD-LTE network looks set to create confusion and billions of dollars in unnecessary spending for the company, which certainly won’t help its performance over the next few years.

Bottom line: Unicom’s decision to potentially build a 4G network based on a homegrown Chinese technology is a mistake that will create confusion and unnecessary spending.

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