TELECOMS: FDD, Spending Surge Coming In Year Of Sheep

By newsdoug on February 17, 2015

Bottom line: China Telecom and Unicom are likely to launch aggressive 4G promotions over the Lunar New Year holiday, sparking a recruiting war that could see up to a third of China’s mobile users on 4G service by the end of 2015.

A flurry of telecoms stories are buzzing through the airwaves on this last trading day of the Lunar Year in China, setting the stage for a turbocharged Year of the Sheep that should see the nation’s 3 telcos embark on a massive free-for-all to sign up subscribers for their new 4G networks. That certainly doesn’t sound too good for profits, since all 3 telcos will be spending heavily on both promotions and infrastructure to build their new networks. But investors could still get excited about these 3 telcos if they can get users to boost their spending, reversing a years-old trend that has seen average user spending steadily decrease.

Most of the news is quite expected, led by reports that China’s telecoms regulator will make a long-awaited move and finally award commercial 4G licenses for the global standard called FDD-LTE on Thursday, the first day of the Lunar New Year. Both of the nation’s smaller telcos, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA) are planning to build FDD-LTE networks, and have been trialing the technology since last year.

The other major news bit has media reporting that China Mobile (HKEx: 941; NYSE: CHL), the largest the nation’s 3 telcos, has reaffirmed its goal of adding 150 million 4G users this year, after finishing out 2014 with just over 100 million. China Mobile’s goal, combined with Unicom and China Telecom’s goals of each adding up to 100 million 4G users, means the trio will soon embark on a sign-up frenzy that could see the nation end 2015 with up to 450 million 4G users, about a third of the current national total.

Let’s begin this final telecoms post of the Lunar Year with the FDD license news, which has been highly anticipated for quite some time. All 3 of China’s telcos received commercial 4G licenses just over a year ago for another homegrown technology called TD-LTE, but only China Mobile is actually building a network based on that technology.

Unicom and China Telecom were waiting for permission from the regulator to build networks based on FDD, which is far more mature than TD-LTE and compatible with most of the world’s other wireless networks. The pair received licenses to build trial FDD networks last summer, and now media are saying they will finally get the official green light to launch commercial FDD 4G service on Thursday. (English article)

China Mobile’s reaffirmation of its 2015 target is also no surprise, and comes the same day the company formally announced it met its earlier target to sign up 100 million 4G users in 2014. If all 3 companies meet their targets for 4G this year, it would mean China Mobile would have just over half of the 4G market, with Unicom and China Telecom each having just under a quarter.

One final news bit of interest is Unicom’s latest monthly user data, which shows the company added a paltry 83,000 new subscribers in January — a record low. (Chinese article) China Telecom also posted meager or no net subscriber growth for most of last year, as it and Unicom both sharply reduced their promotional activities to wait for their commercial FDD 4G licenses.

So now that the licenses are finally coming, we can expect both Unicom and China Telecom to launch aggressive 4G promotions during the upcoming Lunar New Year holiday. That would match similar promotions that China Mobile has been doing for most of the last year. The heavy promotions will almost certainly cut into profitability for 2015, and I expect all 3 telcos could see falling profits for the year.

But the bigger picture will be whether the 3 telcos can reverse the long-term declines in their average revenue per user, as subscribers hopefully spend more money on data to do things like watch video and play games over their phones. A reversal of the longer trend could bring some much needed excitement back to these companies, providing some new life to stocks of the carriers that can show the strongest turnarounds.