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Unicom, China Telecom lag in telecoms race.

China's 2 smaller telcos, China Telecom [(HKEx: 728); NYSE: (NYSE:CHA)] and China Unicom [(HKEx: 762); NYSE: (NYSE:CHU)], are reportedly urging the telecoms regulator to quickly give them new 4G licenses as they find themselves in the uncomfortable position of rapidly losing share to dominant carrier China Mobile [(HKEx: 941); NYSE: (NYSE:CHL)]. The development looks a bit worrisome from a broader market perspective, as it appears to show that 3 years of steady gains by the 2 smaller companies in the 3G era could quickly be reversed if the regulator doesn't act soon, stifling competition and hurting consumers as China Mobile re-emerges as the nation's overwhelmingly dominant player.

The situation looks the most worrisome for China Telecom, the smallest of China's 3 mobile carriers, which has just reported its sixth consecutive month of declines in total subscribers. (Chinese article) The company lost nearly 1 million subscribers in May, and has now lost 4.4 million subscribers so far this year - more than 2 percent of its total at the beginning of the year. China Unicom's situation looks a little better, though both companies are clearly losing share to China Mobile.

Industry watchers will know that 4G lies at the heart of this issue, along with China Mobile's deep pockets for spending on promotion of its new 4G service. China Mobile got a head start on its 2 rivals in 4G, receiving a license to launch service last December using a homegrown technology called TD-LTE. Because China Mobile had been aggressively building a trial 4G network over the previous 2 years, it could launch its service almost immediately after receiving the license and has been quickly adding subscribers since then through aggressive promotion.

At the end of May, China Mobile already had more than 8 million 4G subscribers, and recently announced an aggressive target of signing up 50 million subscribers by the end of this year. (previous post) Many of those 4G subscribers may be current China Mobile users who upgrade from 2G and 3G service; but the latest data show that many of the new subscribers are also likely to come from China Telecom and Unicom, which still have yet to get permission to build their own 4G networks.

Both China Telecom and Unicom are waiting for the regulator to give them licenses to build networks using a technology called FDD-LTE, which is widely used in most countries outside China. The Ministry of Industry and Information Technology (MIIT) gave China Mobile its 4G license early to give it a head start due to its use of homegrown technology. But that head start, combined with China Mobile's deep resources, is now starting to look unnecessary and is undermining the 2 smaller companies.

Both Unicom and China Telecom have been steadily urging the MIIT to award FDD-LTE licenses (Chinese article), and previous reports had indicated that the awards might come last month. (previous post) But true to form, the slow-moving and extremely cautious MIIT failed to issue the licenses in May, meaning the 2 smaller telcos are now a full 6 months behind China Mobile and are still waiting.

Even if the MIIT awarded licenses tomorrow, China Mobile's actual head start in 4G would still be closer to a full year rather than just 6 months. That's because whereas China Mobile could instantly launch service after getting its license, Unicom and China Telecom will have to do a bit of building and probably won't be able to launch their 4G service until around the end of this year at the earliest. Shares of both Unicom and China Telecom have come under pressure in the last month as they wait for 4G, and both could be looking at more downside until they finally get their licenses and can start to seriously counter China Mobile's threat.

Bottom line: China Telecom and Unicom are likely to see their business erode and shares come under pressure until they receive FDD-LTE 4G licenses and launch 4G service.

Disclosure: None.

Source: China Telecom, Unicom Plead For 4G Licenses