After several false alarms, China's slow-moving telecoms regulator has finally made its highly anticipated award of 4G licenses to the nation's 2 smaller telcos, providing a much needed boost as they lose share to dominant telco China Mobile (NYSE:CHL). Now China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU) will have to quickly build networks based on 4G FDD-LTE technology, the standard used in most of the rest of the world that will now finally make its debut in China.
I have to applaud Unicom and especially China Telecom for keeping the pressure on the Ministry of Industry and Information Technology (MIIT) to award the FDD-LTE licenses. China Telecom has sharply slowed promotions for its current 3G networks this year, causing its subscriber base to contract in the first 5 months of 2014. (previous post) Much of its losses have gone to an already dominant China Mobile, which picked up share after winning its own 4G license based on the homegrown technology called TD-LTE last December. Thus the MIIT was no doubt alarmed that China Mobile was further bolstering its already dominant position, and finally moved to give the other 2 telcos 4G licenses.
It's hard to discuss this topic without bringing in the technology issue, which lies at the heart of the MIIT's staggered approach to issuing 4G licenses. The bottom line is that China Mobile has gotten a half-year head start on 4G over its 2 smaller rivals due to its use of a less mature technology. Some might argue its head start may be even bigger, up to a year, since China Telecom and Unicom have only been approved to build trial 4G networks for now.
The MIIT was rumored to be on the verge of issuing 4G licenses to China Telecom and Unicom at least twice in May, and finally made the formal move late last week. (Unicom announcement; China Telecom announcement) Both companies said they've received licenses to build trial networks based on a hybrid of the globally accepted FDD and homegrown TD standards. (English article; Chinese article)
Regular industry followers can easily read between the lines and know that China Telecom has no intention of building any TD-LTE infrastructure. Unicom may build a small TD network, but it almost certainly won't get promoted and instead is designed to satisfy Beijing regulators who want to develop the homegrown technology.
The award of licenses should bring a small business bonanza to telecoms equipment makers, with the world's 5 largest providers all likely to share equally in the awards. That means we can expect to see big new contracts worth billions of dollars soon for the European trio of Ericsson (NASDAQ:ERIC), Alcatel-Lucent (ALU) and Nokia Solutions Networks, as well as the powerful Chinese duo of Huawei and ZTE (OTCPK:ZTCOY).
The more important questions will be how quickly China Telecom and Unicom receive commercial 4G licenses, and how aggressively they promote the service once they launch it. Neither company should require much time to trial 4G, since FDD has already been tested numerous times over the last few years by most of the world's largest telcos, and thus most of the major problems have been solved by now. So that means that China Telecom and Unicom could probably offer commercial 4G service by year-end if the regulator awards them licenses, which seems likely.
As to 4G promotion, I would expect both Unicom and China Telecom to be extremely aggressive in their 4G packages, which should help the latter return to net subscriber gains. A huge array of FDD phones models are already available globally, which will allow the 2 telcos to offer a wide range of plans and handsets at different price levels. I do expect we'll see some weakness in China Telecom's and Unicom's results through the rest of 2014 while they're trialing 4G. But their subscriber numbers should start to show some new strength towards the end of the year.
Bottom line: China Telecom and Unicom are likely to launch FDD 4G commercial service by the end of this year, at which time they will gain share from China Mobile due to aggressive promotion.