By Ma Jun

Research Report No 018, 2006

Advances in telecommunication technology are facilitating significant structural change inthe telecommunication industry. One after the other, global telecom operators have embraced enterprise transformation strategies. Basic Chinese operators have also put forward these strategies, although in ways that differ significantly from their international counterparts because of China’s different development conditions and environments. Mobile operators are continually developing and progressing while fixed line operators are developing in a leap-forward fashion. The government should adjust its regulatory and enterprise policies according to the characteristics of the two types of enterprises in order to facilitate their smooth transformation and the development of the communications industry.

I.Advances in Telecommunications Technology Are Facilitating Significant Structural Changes in the Industry

Over the past ten years, optical communication technologies, digital communication technologies and wireless communication technologieshaverapidly developed and gradually become integrated with each other. The launch cycle for new products and applications has become faster and faster, and the structure of the telecom industry is facing significant changes. Structural changes in the communication industry in China are visible in three major trends.

1. Rapid growth of mobile communication services

Mobile communications networks are increasingly competitive. They provide portability and the convenience of private and personal use at any time. Their cost is continuously falling. Mobile services are growing at a faster speed than traditional fixed line services and their number of subscribers and revenue also exceed those of their fixed line counterparts.

In the future, the mobile communication will continue to grow in a stable way. On the one hand, the adoption of broadband wireless technology will generate plenty of new services. Broadband wireless technology, represented by 3rd generation mobile communication technology, will allow mobile communications to enter the multimedia era. This technical advance will extend the industrial chain of the mobile communications industry, create huge downstream application service groups and generate new growth trends. Mobile voice services will replace fixed voice services, and government liberalization of telecom charges will accelerate this switch.

2. Swift development of Internet service

The Internet has three major characteristics: a high degree of openness, a globally interconnected network, and a highly competitive market. The Internet is a hot destination for global venture capital as well as a leading innovative field which is developing rapidly. The number of Internet and broadband subscribers in China ranks second worldwide and will maintain high-speed growth. It is estimated by the CCID Consulting Co., Ltd that, from 2005 to 2009, Internet market will maintain an annual growth rate of 34.8% and its market will reach 140 billion RMB in 2009.

Internet information service enterprises in China have achieved an initial scale. Many enterprises that provide various network information services such as Internet portals, network communications, network games, network search, network education, network medicine, e-government, e-business, and more are innovating rapidly. Some of them have grown quite large and been listed on overseas markets.

3. Gradual retreat of fixed voice service

The replacement of traditional fixed voice technology by new technology is the main cause for the retreat of fixed-line telephone service. Two types of services are replacing traditional fixed-line telephone service. The first is mobile service, including mobile voice service and short message service. The second is Internet communications, including network telephony, network text and multimedia communication, etc.

The volume of the retreat in fixed-line telephone service was significant in 2004.In terms of local communications time, the monthly use of fixed telephone per subscriber fell by 68.7 and 40 minutes compared with the same periods in 2002 and 2003 respectively, while the monthly use of mobile telephones per subscriber increased by 63.7 and 37.6 minutes compared with the same periods in 2002 and 2003 respectively. In terms of long-distance calls, although the communications time of traditional long-distance telephone service increased in 2003 and 2004, its proportion fell gradually, while the proportion of long-distance telephone and IP telephony gradually increased. The proportion of IP telephony increased to 46% from 37.2% in 2002.Internet telephony appeared recently, and Internet communication software such as that provided by Skype, has started to threaten traditional fixed-line telephone.

II.Mobile Operators Are Continually Developing and Progressing and Adjustments Are Made to Companies

Mobile operators are maintaining stable growth in traditional services and control over emerging data services as well. In fact, the transformation of mobile operators involves rationalmanagement of the industrial chain by utilizing their advantageous position in emerging data services to gain profits. This transformation does not require a complete adjustment to internal resource and capabilities and so is a relatively stable process.

1. There is still space for growth in the core services of mobile operators

The current core service for mobile operators is mobile voice service, which will keep its leading position in the coming years. The proportion of data service for China Mobile and China Unicom is now 10% to 20% or so, compared with a figure of about 30% for advanced international operators.At present, mobile voice service is maintaining stable growth. Revenue from mobile services in the first half of 2005 increased by 15.7% compared with the same period in 2004, most of which comes from voice service. Since there is still space for growth in the number of China Mobile subscribers and mobile voice service can potentially replace fixed-line telephones, mobile voice will keep growing in the coming years.

2. Mobile operators will strengthen their market power during this transformation and stand in the leading position in the industrial chain for emerging data services

The transformation for mobile operators involves their realignment from concentration on voice to concentrating on data services. Mobile operators are taking the leading position in emerging data services.

(1) A complete industrial chain and huge industrial cluster for data services is forming

The development trend for mobile operators in the future will focus on mobile data services. The coming years will see the mobile voice market become saturated while the mobile data service market is unlimited. The mobile operators will stand in an upstream position for mobile data services, while diversified value-added services provided by innovative small and medium-sized enterprises will stand downstream.

A complete industrial chain and huge industrial cluster for mobile data service is forming. At present, there are more than 5,000 enterprises providing value-added mobile services in China. They provide various value-added services such as news reports, weather information, TV programs, discount information services, cultural information services, rental information, real-time stock information, etc. via short message or multimedia message service; and provide real-time news, entertainment, position, communication and business information via wireless Internet; and games, entertainment, business and daily life information via download services for mobile phones.

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