Julian Watson is the Head of Telecoms Practice at World Markets Research Centre (WMRC). Mr Watson began his career at WMRC as a research analyst covering the former Soviet Union. Before joining WMRC, he served as a market analyst at the International Financial Services London and at London Capital Consultants. Mr Watson earned his BA degree, with honours in politics, Russian and Parliamentary Studies at Leeds University. He speaks fluent Russian and French. Jessica Ramakrishnan is the Senior Research Analyst for Asia at WMRC. She was a senior reporter at Corporate Location, Euromoney Institutional Investor business publication, before joining WMRC. She specialises in Asian mobile telecommunications. Ms Ramakrishnan was awarded a BA degree in Politics and Development Studies from the University of London, School of Oriental and African Studies. In addition to English, she speaks Malay fluently.
China's PAS, or Personal Access System, is a quickly deployed, fixed-wireless system that provides mobility within a given metropolitan area, but does not allow inter-city roaming. It gives fixed-line players a cost-effective way to counter the mobile operators' GSM/CDMA alternatives and boost short-to medium-term revenues. Competition from PAS systems has forced mobile operators to cut prices considerably. Migration from PHS to full mobility and next-generation services, though, creates an entirely new set of problems for the fixed-line operators.
The Fixed-line Challenge Over the past few years fixed-line around the world has faced two key strategic challenges: the limited potential for growth in fixed lines – as most households only need one telephone line the acceleration of competition from fixed-line and mobile carriers. This has resulted in ongoing revenue loss from their core voice businesses, while revenue growth from data communications and broadband services has failed to meet expectations. These negative trends form only part of the picture. Over the same period, many incumbent operators have also invested in the rollout of domestic 2G networks. They have tried to tap into the growing demand for mobile connectivity. This demand is driven by longer working hours, less time spent at home, ongoing growth in the mobile workforce and in emerging markets, the inadequacy of fixed-line infrastructure. Mobile operators claim that 'we all need a mobile phone' and this have proved to be prophetic. In all developed and many emerging markets the number of mobile subscribers by now far surpasses fixed-line subscribers. For many fixed-line operators the erosion of fixed-line revenues has, at least partially, been offset by strong growth in mobile revenues. No Bundle Without Mobile Mobile growth has helped fixed incumbents such as France Telecom and Telecom Italia, but not all incumbents have robust cellular arms. There are several reasons for this, but the consequences are the same: the loss of mobile revenues and weakened customer retention strategies that suffer from the inability to offer a full range of 'bundled' services. Both the UK's BT and the US's Qwest have attempted to rectify this weakness by re-entering and strengthening their domestic mobile operations through alliances with competitors. Both, nevertheless, have missed out on the opportunity to exploit organic wireless growth and will probably remain bit-part players in their domestic mobile markets. China Telecom in 1998 China Telecom in 1998 seemed to be in a situation similar to BT in November 2001. The following factors made the 1998 outlook for ‘subscriber and revenue’ growth at China Telecom quite uncertain: the lack of mobile operations while the Chinese market saw its greatest growth eliminate access to early adopters and high spending business users uncertainty about government policy towards granting 2G licenses and the likelihood of forming partnerships with competitors vulnerability to fixed-line substitution by modern low-cost mobile competition uncertainty about future revenues from data and broadband services given evidence of slow growth in developed markets. Forward to 2003 By the middle of 2003, China Telecom's overall prospects look far brighter – at least for the next two years. This turnaround has come about through China Telecom's adoption and commercial deployment of a legacy technology, PHS, adapted for the Chinese market. PAS, or Personal Access System, is a fixed wireless system that, like PHS, gives the subscriber mobility within a given metropolitan area, but not beyond. It does not allow inter-city roaming. It is cheaper to deploy than cellular alternatives because it exploits the existing fixed-line infrastructure. PAS base stations are also cheaper than the GSM/CDMA alternatives. Consequently, end-user prices are lower than those for the cellular offerings of China Mobile Ltd and China Unicom. The low PAS prices offered by both China Telecom (northern China) and China Netcom (southern China), coupled with rapid network deployment, have led to rapid growth in PAS subscribers. By the end of June 2003, there were an estimated 20 million subscribers to the PAS service known as 'Little Smart'. By August 2003 strong PAS additions by both China Telecom and Netcom had pushed total monthly additions to the fixed-line network to 4.2 million – only 0.5 million less than total monthly mobile network additions. Not only has 'Little Smart' reinvigorated China Telecom's fixed-line subscriber and revenue growth, but during 2002 and 2003 has forced both mobile operators into a series of price cuts, leading to a 10 per cent decline in China Mobile's monthly ARPU (average revenue per user) in the first six months of 2003 and a 12 per cent fall in China Unicom's ARPU over the same period. PAS Looks Good for at Least Two More Years In the short term, the prospects for continuing PAS growth are positive. Little Smart will be the main driver of fixed-line voice revenues at China Telecom during the next two years, at least. This will be due to pent-up demand for cut-price mobility services, further deployment of PAS networks – including the Ministry of Industry's mandated entry into Beijing, Shanghai and Guangzhou – and the launch of a dual mode PAS/GSM handset. Although its mobile competitors will continue to cut prices, it is likely that the steepest cuts are over. China Mobile HK and China Unicom are focusing more on 'upselling' their subscribers to wireless data services before the launch of 3G services in 2005/6. In the meantime, the Ministry of Information Industry's restrictions on PAS spectrum allocation are limiting the competition China Telecom will face in the PAS market. What to do about 3G is the BIG question for China Telecom for 2004. PAS has grown rapidly; there has been a 67 per cent increase in China Telecom's PAS subscribers in the first half of 2003. This was due to rapid deployment, low costs resulting from the leveraging of existing infrastructure and affordable handsets and tariffs. Still, these factors will not help China Telecom to migrate low-end wireless customers to high-end 3G services or capture the higher-end customers of China Mobile HK or China Unicom. For China Telecom, PAS has proved to be a successful short-to medium-term defence of its voice market share. PAS has also helped China Telecom to build up its wireless subscriber base, but the limited mobility of the service will not attract high-end subscribers in the longer term. PAS and 3G The emergence of 3G will not, however, prove the death knell for PAS in the Chinese market. As in other markets, China Telecom's legacy (PAS) networks will co-exist for a number of years with 2.5G and 3G networks. Although economic growth in China and rising personal incomes, means a greater number of people can afford GSM/CDMA services, there will always be a segment of the market which neither has the money nor the need for value-added services. Therefore, PAS growth will likely taper off in the medium term, but will still be attractive for certain segments of the population. Despite 3G's well-publicised problems – handset shortages, high cost, spotty service – this is the only viable option for China Telecom and China Netcom to tap into high-end revenue growth. Both operators would have preferred to enter the mobile market earlier though the launch of GSM or CDMA services, but they did not have this option. Although the development of a dual-mode PAS/GSM handset by UTStarcom marks a form of limited convergence and will have a positive impact on short- to medium-term PAS growth, China Telecom and China Netcom will need to build out their own greenfield 3G networks in order to build a mobile subscriber base for the long term. Following the issuance of 3G licences, China Telecom will divert the bulk of its spending from PAS to 3G, but this strategy ushers in a series of new risks: timing risk: The Chinese government has not announced when 3G licences will be issued. New 3G licences are not expected to be issued before mid-to-late 2004. The longer this takes, the longer China Telecom will lack access to higher-spending segments of the Chinese mobile market technology risk: the government might mandate the use of TDS-CDMA for its 3G network. The Chinese government is investing tens of millions of US dollars developing this standard, but it may not be fully interoperable with CDMA 2000 and WCDMA networks and the handsets might not allow TDS-CDMA to roam on other types of 2G and 3G networks investment risk: China Telecom will seek to mitigate investment risks through network sharing and such, but it will still be investing in a network to provide value-added services for which there is uncertain demand competition risk: China Telecom will face tough competition from China Mobile HK and China Unicom, which have large 2G/2.5G subscriber bases and better established wireless data offerings bundling risk: China Telecom and China Netcom currently offer a package of services that includes PAS and fixed-line voice, in selected areas. This is likely to be expanded to include broadband Internet (DSL) in the future, but it is unclear how 3G would fit in the bundled service offering. PHS Beyond China PAS has, to date, provided China Telecom a fresh fixed-line revenue stream and proved moderately successful in countering the threat from mobile operators. Still, in the longer term PAS is not the appropriate platform to generate mobile revenues for China Telecom. However, there are a number of other markets where the potential for rapid growth in PHS services exists, including India, Indonesia and Vietnam. These markets will primarily be driven by the following factors: low fixed-line penetration and the fixed-line operators' need to reduce their waiting lists, particularly in rural areas, using PAS for relatively low-cost, rapid deployment GSM/CDMA services are too expensive for most residential users limited demand for next-generation services over the next few years. Of the three markets, India is the ripest for growth. Trials with a number of Indian service providers are already in progress. China Telecom is also interested in investing abroad and would like to replicate its success with PAS in other countries. In these countries, as in China, the deployment of PHS gives fixed-line operators the opportunity to defend their market share against mobile competition and generate new revenues by providing low-cost, limited mobility services. This strategy is particularly well suited to emerging markets, where PHS deployments form a low investment/low risk alternative to greenfield GSM deployment. Nevertheless, longer-term strategies must aim towards providing fully mobile voice services with data add-ons.