TELECOMS: 4G Heats Up With LTE Expansion, Final VNOs
Bottom line: 2015 will see an acceleration in 4G services, with China Telecom and Unicom winning commercial FDD licenses in the first quarter and 2-4 VNO licensees potentially emerging as real rivals to the big 3 telcos.
A number of telecoms stories are in the headlines today, highlighting the huge hopes everyone has for new 4G services that will open up the market to a wide array of new products. Leading the headlines are word that China Telecom (HKEx: 728; NYSE: CHA) and Unicom (HKEx: 763; NYSE: CHU) have gotten the green light to expand their trial 4G networks, as the nation’s 2 smaller mobile carriers play catch-up to industry titan China Mobile (HKEx: 941; NYSE: CHL).
At the same time, another new report is showing the pathetic state of under-utilization for China Mobile’s 3G network, which uses a homegrown technology that has been plagued with problems. Finally there’s a third report saying the telecoms regulator has just issued its fifth and possibly final batch of virtual network operator (VNO) licenses, creating several dozen new carriers that will compete in in 4G by leasing capacity on the networks of the big 3 telcos.
All 3 of these stories provide a nice summary of developments for China’s 4G market in the soon-to-end 2014. The year began with the launch of 4G service by China Mobile, which got a half-year head start over its 2 smaller rivals due to its use of a homegrown technology called TD-LTE that required more testing. Unicom and China Telecom got trial licenses midway through the year for their 4G networks, which will use a globally mature standard called FDD-LTE that requires far less testing.
Meantime, the Ministry of Industry and Information Technology (MIIT) kicked off 2014 by awarding its first batch of VNO licenses, which are designed to breath new life into the industry by creating new carriers to compete with the big state-run telcos. The first VNOs launched service in the spring, and the MIIT has been taking steps since then to give this new group a real chance to compete with the big telcos.
Against that backdrop, the latest news that Unicom and China Telecom have been given permission to expand their trial 4G networks is mostly incremental. According to the latest reports, the MIIT has allowed both companies to boost their trial FDD-LTE networks to 56 cities from a previous 41, which should give them coverage in most of China’s largest markets. (Chinese article)
We may see one more expansion announcement after this. But the more likely next step is that both Unicom and China Telecom will both get formal commercial licenses for their 4G networks in the first quarter of 2015. When that happens, both should be able to quickly launch their 4G networks for ordinary consumers, igniting a fierce war between the nation’s 3 telcos to convert current 2G and 3G users to the faster service.
Speaking of 3G, another new media report shows just how pathetic China Mobile was in developing its 3G network, based on the homegrown technology called TD-SCDMA. That report says China Mobile has invested a whopping 200 billion yuan ($32 billion) on the network to date, and theoretically expects to have 188 million 3G customers by year-end. (English article)
But it also cites an analyst saying only 30 percent of that network is actually being used, and China Mobile plans to slowly start phasing out the system. Perhaps we’ll see some big write-downs coming from this huge failed investment, though I suspect China Mobile will use accounting tricks to find a way to hide the losses.
Last there’s the news on the fifth and possibly final batch of VNO licenses, which has just been issued by the MIIT. (Chinese article) There aren’t any big names in this latest batch of 8 licensees, which would cap a year that has seen the MIIT officially license 42 private companies, including Alibaba (NYSE: BABA) and Xiaomi, to offer telecoms services.
I’ve expressed both optimism and doubts about the VNO program in the past, due to resistance by the big telcos and big start-up costs involved. But that said, some of the new licensees do have wealthy backers to help fund and subsidize their operations for at least the next few years. Accordingly, all eyes will be watching closely to see if any of the operators start to gain some traction in 2015.
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