Key Trends in China’s PHS Market

- Operator PHS Service Strategies

- PHS Value-Added Services

- Expansion of China Mobile’s TD-SCDMA network and service

Operator PHS Service Strategies

China Netcom confirms it will continue to offer a PHS service

Beijing Netcom has confirmed that upon completion of the merger with China Unicom at the end of September, China Netcom will continue its PHS operations. As the company believes there is a good future for PHS, Beijing Netcom will continue to carry out PHS network optimization; PHS has already achieved an impressive wireless internet access rate of 128Kbps.

Wang Chuanbao, Vice-President of Beijing Netcom, said that China Netcom continues to regard the development of the PHS business as important, despite the fact that after the merger with Unicom, China Netcom will also operate a GSM network. At present there are over 30,000 PHS base stations in Beijing, covering almost all the urban area. The company will continue its efforts to remove blind spots for PHS signals.

Beijing Netcom provides a leasing service during the Olympic Games

Beijing Netcom has announced that during the Olympic Games it will operate a PHS leasing program, designed specially for domestic and foreign tourists in the city. Clients of this service will enjoy savings not only on the price of the handsets and calls but also on the regular monthly subscription fee. Tourists can only obtain the leased phones and numbers from hotels that have signed up to the program.

Beijing Netcom is prepared for competition with China Mobile’s TD-SCDMA leasing service during the Olympic Games and offers the advantage of lower leasing fees. The PHS leasing service fees are much lower than for the traditional PHS service provided by Beijing Netcom.

Exhibit 1: Comparison of Fees- Traditional PHS and the PHS Leasing Service

source from Beijing Netcom

China Netcom expands PHS coverage in Beijing

Passengers can receive Netcom PHS signals in the stations of the newly opened Subway Line 10. To date the broadcast of PHS signals has been trialed on the platforms and passageways of Beijing Subway Lines 1, 2, 5, 10, and 13, plus the Olympic and Batong Lines

PHS is the first mobile system to be operational on Line 10 and the Olympic branch line. On these routes subscribers are not able to receive China Mobile’s GSM and China Unicom’s GSM and CDMA signals. PHS is the only system that can provide subscribers with an uninterrupted service over the whole Beijing Subway system.

China Telecom enables roaming in more areas

As confirmed by Zhejiang Telecom’s service hotline, PHS users in the province can roam not only within Zhejiang but also in neighboring Anhui province, thus making Zhejiang the first place where inter-province roaming is possible. It is understood that China Telecom’s next step is to enable PHS roaming services in the Yangtze River Delta region covering Jiangsu, Zhejiang and Shanghai.

In the past regulations have strictly limited PHS roaming. Although no change has been made to the regulations, roaming internally within provinces has been realized in many provinces including Jiangsu and Hunan. Without any public announcement, provinces have begun to provide an internal roaming service by allocating users a remote temporary PHS phone number - this number is the same as the user’s local number.

PHS Value-Added Services

Beijing Netcom provides an Olympic information service

During the Beijing Olympic Games tourists can access the 116114 city information service through PHS handsets. This service provides not only general public transport, shopping, and entertainment information, but also schedules and results of Olympic events, and information on all the Olympic venues. For overseas tourists using leased PHS handsets, Beijing Netcom will provide an enquiry service in foreign languages.

Expansion of China Mobile’s TD-SCDMA network and service

China Mobile has acquired TD-SCDMA networks in Baoding and Qingdao. It assumed responsibility for the 413 TD-SCDMA base stations constructed by China Netcom in Qingdao, and China Telecom’s 300 base stations in Baoding. After this transfer, China Mobile is responsible for all 10 cities with TD networks, leaving no doubt that the future operation of the TD-SCDMA network will be solely in the hands of China Mobile. The transfer is further proof of the Ministry of Industry and Information Technology’s (MIIT) determination to promote TD-SCDMA, the state owned 3G technology.

At the same time China Mobile has begun to expand TD-SCDMA coverage to other cities, and to improve the service in the 10 cities already covered. Plans for the second phase of TD-SCDMA network construction have received official approval from MIIT. In this phase networks will be built in all provincial capitals, increasing the number of cities covered to a total of 28. This expansion will start after the Olympic Games because construction work is banned between July 20 and September 20 in Olympic cities, and August 1 to 25 in others.

In the 10 cities already covered China Mobile will improve access by increasing the number of base stations to 18,000 by the end of the year. It has already completed an HSPDA upgrade on the existing TD-SCDMA networks, and can now provide a data access speed of 2.4 Mbps to 8.4 Mbps.

During the Olympic Games, TD-SCDMA will be the only 3G network available in China and China Mobile will provide the service free of charge in the 10 cities. China Mobile will also provide a mobile TV service through TD-SCDMA/CMMB handsets. Procurement of the 40,000 handsets required has been completed. Apart from these TD/CMMB handsets, China Mobile has also finished a second round of TD-SCDMA handset procurement, involving the purchase of 215,000 units (200,000 handsets and 15,000 data cards). By July 1, 2008, 52,000 people had subscribed to the TD-SCDMA service, some 8,000 of whom participated in the commercial trials, the remainder being complimentary trial users.

Restructuring process

China Telecom has just reported the details of the transactions linked to the proposed acquisition of China Unicom’s CDMA business. These are largely in line with the Framework Agreement announced on June 2, 2008. The company is aiming to complete the transfer of assets by December 1, 2008.

China Telecom has set itself the ambitious target of having 100 million CDMA subscribers in 3 years’ time. To ensure a higher quality of service, China Telecom intends to expand the network to achieve an overall capacity of 200 million users in the same time frame. A first round of procurement for this network expansion has been launched, with the total planned investment expected to amount to RMB 80 billion.