China Telecom faces daunting 4G market entry

Network hurdles, subscriber concerns loom large for country's smallest carrier

China's Ministry of Industry and Information Technology (MIIT) announced last week that it will permit China Telecom and China Unicom to start testing a 4G mobile network that can support the use of FDD-LTE (frequency division duplex-long term evolution) standard.

Industry observers see this as a major step for China Telecom as it works to tap the burgeoning 4G arena. But the carrier still has a great deal of work to do if it wants a piece of the action.

After struggling with declining subscriptions and cost pressures earlier in the year, China Telecom's fortunes brightened on June 25 when word broke that it had been awarded a trial license to build its own 4G network on the FDD-LTE standard. Indeed, its recent travails are widely seen as a result of tougher competition from China Mobile, which rolled out 4G services on the TD-LTE (time division-long term evolution) standard in December. At present, TD-LTE is still the only official 4G standard in China; but, unfortunately for China Telecom, this State-approved technology is incompatible with its own 3G services.

Against this backdrop, China Telecom's rough patch in the first quarter comes as little shock. Although the carrier's revenue increased 6.9 percent year-on-year during the period to hit 83.18 billion yuan ($13.39 billion), its subscriber count fell to 183 million from just over 185 million, a drop which the company pinned on the spread of China Mobile's 4G services, vigorous spending on promotions and a more competitive market environment.

Rather poetically, China Telecom Chairman Wang Xiaochu is said to have commented on these results by explaining that while spring will come late to his company, the blossoms will nevertheless bloom. Such confidence aside, the 4G market will not be an easy one to crack. The carrier will have to take action sooner rather than later if it wants to make up ground against early leader China Mobile.

The first thing China Telecom will have to focus on is avoiding the expense of running a parallel standard network like the one recently approved by the MIIT. If tests with China Unicom go well, China Telecom will hopefully get the nod from regulators to start work on mobile networks that run the FDD-LTE standard alone. With its own unique standard, the carrier could be much better placed to compete against China Mobile. Moreover, since this standard is already well-developed in many overseas markets, China Telecom could potentially draw on a wide range of advanced technologies and an extensive body of technical know-how as it constructs its network. If authorities insist on the parallel standard though, China Telecom's hardware spending would skyrocket.

Downstream, China Telecom must also address factors which are slowing consumer uptake of 4G services. This will be a much harder goal to accomplish as it requires the cooperation of handset manufacturers.

China is already the largest mobile phone market in the world. According to data from the MIIT, the country had 1.2 billion mobile network users by the end of May 2014. As many have noted, high rates of mobile device penetration are fueling booms in many other businesses, including mobile gaming, video streaming and online shopping, to name just a few.

While there is clearly a demand for high-speed mobile Internet, industry researcher GSMA Intelligence estimates that nearly 31 percent of China's mobile Internet users still rely on 2G networks to access the Web. Service contract costs and 4G handset prices are likely the main reason for this somewhat sluggish shift to next-generation technologies.

Local reports say that China's telecommunications regulators have approved no more than 10 smartphone handsets to provide China Telecom's 4G services. Most of these devices are expensive flagship models that sell for several thousands of yuan, making them too expensive for some subscribers - particularly those who may have just recently upgraded to 3G. In May, for example, China Mobile Chairman Xi Guohua announced that most of the 1.3 million 4G subscribers it had netted at that time were using Apple iPhones.

But bringing down costs for consumers won't be easy now that all three carriers are said to be considering cuts on handset subsidies in order to improve profitability. Making prices attractive to mid-market buyers will require manufacturers to strengthen the industrial chain that supports 4G devices. But as the smallest of China's three telecoms titans, China Telecom may have its work cut out influencing hardware designers, assemblers and chip producers.

Looking ahead, China's mobile market is expected to continue heating up, especially with the entry of virtual network operators and third-party service companies that lease capacity from big carriers and then resell it with their own innovations on top. With regulators showing strong support for the gradual liberalization of the sector, we can expect more competition and more innovation over the years to come. If they want to expand their foothold in the country's expansive mobile telecoms space, smaller players like China Telecom must do everything in their power to capitalize on these trends.