China Telecom Jumps Into 4G, Out Of Airports

| About: China Telecom (CHA)

China Telecom (NYSE:CHA) could quickly regain the growth momentum it lost in the first half of this year, with word that the smallest of the nation's 3 mobile carriers has already launched 4G service just weeks after getting a license for the business. At the same time, media are reporting that both China Telecom and larger rival China Mobile (NYSE:CHL) are preparing to shutter their airport VIP lounges, in a move that was long overdue as each faces pressure to cut marketing costs. The pair of developments show that China Telecom should soon return to positive subscriber growth, after posting net losses in the first half of this year as it waited for a 4G license.

I'll admit I was somewhat surprised by the latest headlines, which say that China Telecom has formally begun selling handsets for its 4G business and launched service plans in 16 major cities nationwide. (Chinese article) The move comes less than 4 weeks after China Telecom and rival China Unicom (NYSE:CHU) got long-awaited licenses to start trialing 4G service based on a globally mature technology called FDD-LTE. (previous post)

Those licenses allowed the pair of companies to start testing out service in 16 cities, which is why China Telecom's newly launched service is limited to just those cities. I previously predicted China Telecom and Unicom would quickly build new networks and finish their trials over the next few months, allowing them to offer commercial service by the end of the year after receiving formal commercial 4G licenses.

But apparently China Telecom was quietly preparing for the regulator's granting of these new trial licenses, and had already built up sufficient infrastructure to offer service as soon as those experimental licenses were issued. Some might argue that China Telecom's latest move looks like it is jumping the gun a little by offering commercial service before it receives a formal license, though I doubt the regulator will object to the move.

According to the latest reports, the company is selling 19 new handset models as part of its 4G launch, which will cover major cities including Shanghai, Shenzhen, Chongqing and Nanjing, though not Beijing. The handsets will cover a wide range of vendors and price points, with models on sale from Samsung (OTC:SSNLF), HTC (OTC:HTCCY) and LG Electronics (OTC:LGEIY), ranging in price from 1,000 to 5,000 yuan ($160-$800). There's no word about pricing of the service plans, but I expect that all will be quite cheap to quickly attract lots of new customers.

The move would come after a tough first half of 2014 for China Telecom, when the company sharply curbed its promotional activities as it waited impatiently for its 4G license. The company lost 4.4 million net subscribers in the first 5 months of the year, indicating it would make a strong bet on 4G when it got permission to offer service. (previous post)

Meantime, all 3 of China's major telcos are coming under growing pressure to reduce their marketing costs from the central government, which is also their controlling stakeholder. None of them wants to slash its 4G marketing budget too much, and thus all are looking for other ways to cut spending. That explains the recent decision by both China Telecom and the larger China Mobile to formally shutter airport VIP lounges for their premium customers. (English article)

I remember when the 3 telcos rolled out these lounges about a decade ago, back in the days when less than half of the country's 1.3 billion people had mobile service and each carrier was looking for ways to sign up new subscribers. But those days of heady growth are now in the past, as the country's mobile market reaches saturation point. What's more, these lounges were expensive to operate and probably didn't generate too much new business, since most higher-end customers probably already had access to airport premium lounges through their airlines.

At the end of the day, China Telecom's quick move into 4G, combined with its airport lounge closures, show the company will quickly become aggressive in 4G services while also looking to pare back non-core costs. Its profits could remain soft for the next year or so as it spends heavily on attracting new 4G customers, but it could ultimately return to stronger profitability once it resumes solid subscriber growth.

Bottom line: China Telecom's quick launch of 4G service shows it will aggressively pursue customers for the business, eroding profits in the short term as it returns to net subscriber growth.

Disclosure: None