PHS MoU Newsletter Briefing – January 2006

- 3G
- PHS operators are increasingly reliant on PHS VAS in 2006
- PHS VAS drives revenue growth
- Outlook



Exhibit 1: PHS Subscriber Statistics

PHS net additions totalled 0.91 million in January 2006. In December 2005, operators cleared inactive users off their accounts resulting in a decline PHS in subscribers.

PHS users totalled 85.3 million at year-end 2005. New additions during the year reached 20.1 million, slightly from the 28.2 million recorded in 2004.

3G

With a new round of TD-SCDMA trials being conducted from March to August 2006, 3G licensing will be delayed to 2H 2006. BDA believes that China Telecom is still the most likely to receive China’s first 3G license for TD-SCDMA, which would give the technology a head start and put it on a more equal footing versus W-CDMA and EVDO.

PHS operators are increasingly reliant on PHS VAS in 2006

China Telecom and China Netcom’s PHS ARPU is falling due to reduced service tariffs under local promotions and the predominantly low end make up of new users. PHS VAS is critical for operators to combat declining ARPU. The two operators are now building up this area to increase overall ARPU as well as reduce churn. BDA estimates that VAS ARPU of China Telecom’s PHS users was RMB 2.4 in 2005, or just 6% of overall PHS ARPU. We believe PHS ARPU for both operators fell slightly in 2005, although VAS ARPU likely increased. China Netcom’s PHS VAS ARPU is believed to be lower than China Telecom’s as the former operates mainly in the country’s northern areas where PHS VAS development lags behind.

Exhibit 2: PHS ARPU by Operator

 

PHS SMS and CRBT will remain the most popular services over the next few years. Operators are expected to roll out extensive promotions for these two services to drive their VAS revenues. Both PHS SMS and CRBT will continue on a strong growth trend in the next two years. BDA forecasts PHS SMS users to reach 58.2 million in 2006 and 63.7 million in 2008, while PHS CRBT users will rise to 31.8 million in 2006 and 37.3 million in 2008.

PHS VAS drives revenue growth

SMS and CRBT were the biggest contributors to the growth of PHS VAS revenues in 2005. China Telecom attributed roughly 50% of its VAS revenue increase during the year to PHS SMS and CRBT. There is still significant room for growth, given that both services were launched in 2005 and accounted for just 16.5% of the year’s total VAS revenues.

SMS is the most successful PHS VAS in China, with 39.4 million users. Penetration rose from 30% in 2004 to an estimated 45% by year-end 2005. According to China Telecom, the volume of SMS sent over its network rose by 143% between 2H 2004 and 1H 2005. An average of 50 point-to-point SMS per user were sent in September 2005.

The major driver for PHS SMS has been the completion of interconnection agreements between different operators. China Telecom and China Netcom achieved nationwide SMS interconnection in September 2004 and SMS interconnection between PHS and GSM/CDMA networks was available in most regions in 2005. Growing penetration of SMS-enabled PHS handsets, which reached 79% among China Telecom users in September 2005, is also boosting usage.


Outlook

3G’s impact on the market remains the billion dollar question, but nonetheless, PHS subscribers should continue to increase in the near term and will remain a key revenue driver for fixed-line operators. To further stimulate PHS growth, operators will need to push down handset costs to better compete with GSM. They will also have to boost promotions of other value-added services, including data cards, and work more closely with mobile data service provider partners. After 3G licenses are issued, the provision of roaming services and development of next-generation PHS technologies will become critical.