New Competition Nears In China 4G, Broadband

Includes: CHA, CHL, CHU
by: Doug Young

Just a day after China Mobile (HKEx: 941; NYSE: CHL) reported some of its worst results in years, new developments in the telecoms space are showing why the nation's leading telco will face a rough time for the rest of this year and quite possibly well beyond that. According to the latest media reports, China's telecoms regulator could issue 4G licenses for the main technology being used by China Mobile's 2 rivals as soon as next month, injecting a major shot of competition into the market. The second telecoms news bit comes in broadband, with reports that the nation's newly formed national cable TV company has formally registered and will start business soon.

Both of these moves should add much-needed competition to China's telecoms space, after years of lopsided development that saw most key areas dominated by just 1 or 2 companies. From China Mobile's perspective, the biggest threat could be the regulator's potential decision to award 4G licenses for the FDD-LTE standard as soon as next month to the company's 2 main rivals, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU). (English article)

Practically speaking, China Mobile is currently the only one of China's 3 telcos that can offer 4G service, after receiving a license from the Ministry of Industry and Information Technology (MIIT) late last year. Unicom and China Telecom also received 4G licenses at that time; but for technical reasons those licenses were largely hollow and the pair have been waiting impatiently to get useful licenses to build networks based on the FDD-LTE standard that is compatible with their current 2G and 3G networks.

Now media are reporting that China Telecom is expecting to receive its FDD-LTE license as soon as next month, and is preparing 8 handsets for its 4G service. If the reports are correct, then presumably Unicom will receive an FDD-LTE license at the same time. The MIIT is notorious for its delays, and I wouldn't be surprised if the licenses don't actually come out until June or even July. But the timing seems about right, since an award of FDD-LTE licenses in that time frame would give China Mobile a half-year head start in 4G.

The regulator gave that head start because China Mobile is using a newer, more problematic homegrown standard in its 4G network. But this new award of FDD-LTE licenses means that Unicom and China Telecom could launch their commercial 4G service as early as the third quarter, potentially denting China Mobile's ambitious targets for new 4G subscribers this year.

Next let's look quickly at the latest reports that say the nation's long-discussed national cable TV operator has finally been formally registered as a new company, called China Radio and Television Network (NASDAQ:CRTN). (English article) The assembly of this company through the consolidation of China's hundreds of regional cable TV companies has been happening for much of the last 3 years, and is quite a bit behind schedule due to the huge complexity of the task.

But this formal registration seems to indicate that most of the consolidation has now been completed, and that CRTN could start offering service under its new name later this year. It should be able to achieve some immediate cost savings due to its large scale, though it will also need to invest huge sums to upgrade its many cable networks to allow for high-speed broadband services.

Such upgrades will require new money, and I wouldn't be surprised to see the company announce plans for a Hong Kong IPO later this year to raise several billion dollars. In the meantime, CRTN is almost certain to quickly start entering the broadband market in some of its more lucrative regions, which will create headaches for all 3 telcos that now have a monopoly in the space.

Bottom line: The MIIT could award FDD-LTE 4G licenses to Unicom and China Telecom by July, forcing China Mobile to scale back its aggressive 4G subscriber targets for this year.

Disclosure: No positions.