- Key Trends in PHS
- 3G
- Operator Strategies
- PHS Value Added Service



Key Trends in PHS



PHS users increased by 3.24 million in March and by 2.47 million in April, reaching 75.3 million at the end of April. PHS additions for March and April were 32% higher than for January and February.

The rapid growth in PHS subscribers from February to April represents a significant rebound from the second half last year when PHS user growth slowed dramatically. PHS growth is expected to have continued more recently thanks in part to the May launch of PIM card-enabled handsets.


China Telecom vs. China Netcom market share



China Netcom's market share fell slightly to 34.3% in March 2005 from 35.2% in December 2004. China Telecom's March market share was 65.7%. The two operators' market shares are believed to have stabilized at this level.



3G

BDA believes the government's timetable for issuing 3G licenses may be pushed back even further to 2006, due to continued uncertainty over the restructuring of the stated-owned operators and the slow development of products for the home grown TD-SCDMA standard.

On May 18th, MII Minister Wang Xudong told the Fortune Global Forum that he believes 3G technologies would be in use before 2008, when Beijing hosts the Olympic Games. However, Wang did not provide a specific timetable. He also said that 3G licensing would be determined by the market, hinting at a possible further delay of a 3G launch in China.

Field tests for the TD-SCDMA standard, thought to be the primary reason behind the licensing delay, are currently ongoing and scheduled to be completed by the end of June. The State-owned Assets Supervision and Administration Commission (SASAC) also previously indicated that China Unicom, which operates two mobile networks, would need to be restructured before 3G licenses are issued.



Operators' Strategies

China Telecom to cut 2005 PHS capex by 36% from 2004

The chairman of China Telecom Corp, Mr. Wang Xiaochu, said during a March 31st conference call that the operator planned to cut PHS capex in 2005 by 36% to RMB 8.3 billion, from RMB 12.9 billion in 2004. Mr. Wang also said China Telecom would not expand PHS into new areas this year. Instead, China Telecom plans to focus on network optimization in order to increase network utilization and offer more PHS value-added services. PHS capex accounts for 15% of China Telecom's total planned capex in 2005, down from 23% in 2004.

Operators to reduce PHS handset subsidies amid declining ARPU

Operators will need to reduce PHS user acquisition costs by lowering handset subsidies in 2005. China Netcom paid RMB 207 in subsidies for each handset in 2004, down from RMB 276 in 2003. China Telecom spent about RMB 240 on handset subsidies per user in 2004 (average acquisition cost per PHS user was RMB 270).

Operators have seen ARPU declines due to falling service tariffs, newly added lower-end users and a lack of VAS offerings. China Telecom reported PHS ARPU of RMB 39.9 in 2004, down from an estimated RMB 40-50 in the previous year. China Netcom's PHS ARPU fell to RMB 45.2 in 2004 from RMB 50 in 2003.

PHS PIM card handsets launched May 16

PIM card-enabled PHS handsets were officially launched on May 16 in 20 southern provinces under China Telecom and 4 northern provinces under China Netcom. They will be expanded nationwide in the coming months.

A total of 10 handsets were available on the day of the launch. The handsets were provided by UTStarcom, Huawei, ZTE, Lucent, Inventec Applicances and Corise. Of the first batch of handsets, 3 were candy bar models and 7 were clam shell models. 4 of the handsets had color screens. Since then, the number of handset models has increased to 19. The PIM card handsets are more expensive than traditional models, with prices ranging from RMB 500 to RMB 1000.

The PIM card handsets have attracted subscribers. In Beijing, China Netcom reported a strong increase in subscriber growth after the PIM card handsets entered the market, while PHS handset distributors also reported strong sales.



PHS Value-Added Service

PHS: Color ring back tone penetration grows

Color ring back tone (CRBT) is offered in most cities across the country by China Telecom and China Netcom. On June 1st, China Telecom Shanghai launched CRBT for PHS, which was the last city to launch PHS in China.

CRBT penetration has been strong among PHS users and is expected to become the most attractive value-added service after SMS. China Netcom Beijing launched its PHS CRBT service on January 20th. By the end of March, it had 210,000 subscribers, accounting for over 10% of total PHS users. In Wuhan, China Telecom, which launched CBRT in January, reported that 27% of PHS users had subscribed to CRBT by May 17th.

BDA believes CRBT will help offset ARPU declines of PHS users. CRBT adds at least RMB 5 to ARPU, based on the basic tariff of RMB 0.16 per day. In addition, users pay RMB 1 to 2 to buy music clips or ring back tones from SPs and CPs, a percentage of which goes to PHS operators.

Spam SMS emerges as volume increases

Since the establishment of SMS interconnection in early 2005, the volume of SMS traffic has increased rapidly. In Beijing, 3.5 to 3.9 million SMS are sent daily, averaging 60 SMS per month per PHS user.

As a result of the increased SMS volume, spam SMS has emerged as a serious problem. China Netcom Beijing reported 22 million spam SMS in March. In April, the operator even recorded 10 million spam SMS in a single day. However, after recently implementing anti-spam measures, China Netcom reports having reduced spam SMS to an average of about 0.2 million pieces a day.