China Telecom, the country's biggest fixed operator, demonstrated strong growth in the mobile market in the first half of 2009. The 3G licence it was granted in early 2009 has provided it with an opportunity to enter the mobile market just as fixed-to-mobile substitution is beginning to accelerate its fixed subscriber losses. Its mobile subscriber numbers are now beginning to grow. It averaged almost 2 million monthly net additions in 1H09, and saw strong growth in its mobile net addition market share . In contrast, the largest mobile operator, China Mobile, is losing its dominant share of net subscriber additions, with a share of 66% in 1H09, down from 85% in 1H08.
We expect China Telecom's strong mobile growth to continue in the second half of 2009 for two reasons:
China Telecom is leading the way on 3G network deployment. Currently it has the largest coverage of any of the Chinese operators, with 342 cities and more than 2,000 counties covered by its CDMA EV-DO rollout as of July 2009. In contrast, China Unicom has only deployed WCDMA in just over 100 cities, and China Mobile's TD-SCDMA networks will only cover 238 cities by the end of 2009.
Bundling will help China Telecom continue its strong growth. The bundling of mobile and fixed services is leading to the rapid expansion of its mobile subscriber base. China Telecom announced that in the first half of 2009, the penetration of bundled among its mobile subscribers was 48%. China Telecom's dominance in the fixed and broadband markets should promote further growth in the mobile market.
Evidence from July 2009 bears this out, with China Telecom gaining 2.45 million new subscribers - its highest monthly growth to date.
But there are difficulties to overcome
Despite the potential for further growth, China Telecom needs to address several issues if it is to remain competitive with China Unicom and China Mobile.
Poor choice of handsets for 3G customers is one issue. Although China Telecom has been heavily advertising its 3G brand in the market, the lack of handset choice is likely to become a limiting factor for further growth of its 3G services. It needs to expand the range of handsets available soon in order to maintain its current rate of growth.
Weak show in rural markets is another issue. China Telecom has made great progress in urban markets, but it needs to take action to win new customers in rural areas too. China Mobile is dominant in rural markets and China Unicom has recently announced its rural strategies. With mobile penetration only around 20% in these markets, there is huge potential for growth in rural regions.
Over-reliance on heavy subsidies is a third issue. Although the use of heavy subsidies has been a successful competitive strategy for the three operators in the 3G market, these subsidies have become a drag on financial results. China Telecom should consider targeting niche markets and enhancing its bundled offerings to reduce reliance on subsidies.
