China Mobile Needs To Step Up As 3G Growth Slows

China Mobile (NYSE:CHL) reported the slowest growth in 3G additions in 19 months as only about 1.9 million subscribers opted to join the company’s 3G network in July, a sharp fall from over 2.8 million in 3G net adds posted in June. This is in stark contrast to competitor China Unicom (NYSE:CHU) which continued its impressive 3G show by adding about 3.1 million 3G subscribers in July, the most any carrier has had this year in a month. For the first half of 2012, China Unicom led the 3G charts with about 17.5 million 3G net adds compared to China Mobile’s less than 16 million for the same period. Despite an overwhelmingly large subscriber base of close to 670 million, China Mobile is falling behind in the 3G race as smaller rivals such as China Unicom are getting aggressive with their 3G plans.

See our full analysis for China Mobile’s stock here

Chinese 3G market is an equitable mix

With close to 670 million subscribers, China Mobile is the largest wireless carrier in the world and has twice as many overall subscribers as nearest rival China Unicom. But, when it comes to 3G, the difference is not nearly as wide. As of July 2012, China Mobile had 69 million 3G subscribers, only about 13% ahead of 61 million that subscribe to China Unicom’s 3G network. Low 3G penetration of around 18% in China gives smaller carriers such as China Unicom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.

Moreover, the fact that China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard has proved to be a big deterrent for the carrier in securing smartphones compatible with its network. Even the iPhone, which has already been launched on the other two carriers in China, hasn’t made its way to China Mobile yet.

However, 3G adoption is still in its very early stages and smartphone as well as chipset makers will eventually start focusing on China Mobile’s 3G network to tap China’s burgeoning mobile base. We believe that the iPhone, for one, will arrive on China Mobile’s network soon considering the seriousness with which Apple is considering China and Qualcomm’s recent announcement of a Gobi reference platform that not only supports TD-SCDMA but also multiple LTE bands. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal) China Mobile is the only carrier in China that is currently testing out a TD-LTE network and could be the first to launch the high-speed technology in the country.

Opportunity huge once 3G compatibility issues are overcome

China Mobile has also managed to overcome its 3G shortcomings by building out a nationwide Wi-Fi network. But the unavailability of an unsubsidized iPhone on the nation’s largest wireless carrier is a serious deterrent to widespread 3G adoption. The fact that China Mobile has still managed to add about 15 million iPhone customers, as of February 2012, despite not officially offering a subsidized iPhone is testimony to the brand loyalty that the world’s largest wireless carrier enjoys among the Chinese. (see China Mobile Adds 15 Million iPhone Customers Despite No iPhone Deal) These customers have foregone the advantages of accessing a 3G network to stick with China Mobile’s more reliable and wider 2G network.

Going forward, as smartphone makers increase their focus on China by bringing out more TD-SCDMA handsets and China Mobile launches its 4G LTE network, the carrier will be able to reap the advantages of having a huge 2G subscriber base to transition to 3G. However, with rival carriers rapidly increasing their presence in 3G, China Mobile needs to start building better relationships with handset and chipset makers if it wants to avoid ceding any more 3G market share.

Getting its 3G act straight is important for China Mobile since these services are expected to be the biggest driver of ARPU in the coming years. 3G services have been driving the ARPU levels of many carriers in the developed world. Carriers such as Verizon, AT&T and Sprint in the U.S. have seen rapid growth in mobile data revenues over the past few years, driven by growing demand for 3G-capable smartphones. This has come about even as voice ARPU has declined, a trend that can be seen in the Chinese telecom market as well. China Mobile’s voice ARPU levels have declined from around $7.40  in 2007 to about $6.50 in 2011, by our estimates.

With voice ARPU on the wane, China Mobile needs to start pushing 3G-capable smartphones to drive data ARPU levels and protect overall ARPU from falling. 3G penetration is at a low 18% currently, so the opportunity to push 3G is immense. Carriers, with the exception of China Mobile, are now adding more number of 3G subscribers than 2G. In the longer term, however, China Mobile, which has over 600 million 2G subscribers currently, stands to gain heavily from this transition as handset makers bring out compatible smartphones and the carrier gradually rolls out a nation-wide LTE network.

We have a $59 price estimate for China Mobile, about 10% ahead of the current market price.

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