Little Smart may have had its day

PUBLISHED : Monday, 05 September, 2005, 12:00am
UPDATED : Monday, 05 September, 2005, 12:00am

The mobile phone for the masses may be running out of calling time. Xiaolingtong, or 'Little Smart', has grown from humble origins as a transplanted niche service operating in regulatory grey space to become a major telecommunications player boasting 80 million mainland subscribers.

Correctly known as the personal handy-phone system (PHS), the service uses fixed-line technology and essentially functions like a cordless phone on steroids. PHS phones provide a range of several kilometres, giving users citywide coverage at less than half the cost of traditional mobile services.

But despite accounting for about 30 per cent of all new users signing up for wireless services last year, newer technologies and industry restructuring mean Little Smart's days as the darling of the mainland industry are numbered.

Already, state-run fixed-line operators China Telecom and China Netcom are scaling back investment in PHS infrastructure in anticipation that they will receive licences to offer third-generation (3G) mobile services in the not-too-distant future.

Leading PHS handset maker and equipment provider UTStarcom, which drew 90 per cent of its revenues from the mainland market just a few years ago, is now hedging against China and moving into other technologies. Today, mainland PHS business accounts for only 50 per cent of its revenues and is set to decline further.

Zeng Li, director at the marketing centre of ZTE Corp, the mainland's second-ranked seller of PHS networks, said: 'We hope Little Smart can have a longer lifespan. Little Smart meets the demands of low to middle-tier consumers and has helped spread mobile communications to more members of society.'

Indeed, PHS has introduced substantial competition to a market that was set up as a duopoly. It has forced mobile providers China Mobile and China Unicom to drastically reduce prices and offer wide-ranging discounts to narrow the gap between their offerings and the rock-bottom pricing on PHS, which starts at 20 yuan to 25 yuan per month for a base package.

Unlike mobile phones, it is free to receive calls on a PHS handset: only the person making the call is charged. In more affluent markets with high mobile penetrations such as Jiangsu, Guangdong and Zhejiang, customers often only use their mobile phones when on the road. At home, they forward all calls to a PHS phone. This may be fine for the consumer, but PHS delivers a mixed bag to the corporate balance sheet. Fixed-line operators worry they may be cannibalising their own revenues as people using PHS tend to stop calling from land lines.

'In terms of revenue and return on investment, there are still lots of question marks,' said Zhang Dongming, research director at consultancy BDA China. 'But consumers definitely benefit from the growth of [PHS] and cheaper services, and especially those who can't afford mobile services.'

The rise of PHS in China is an underdog's success story. Developed in the early 1990s in Japan by then state-owned NTT, PHS first caught on with the Hello Kitty crowd.

Teenage Japanese girls went wild over the cute, cheap phones that let them keep in touch with their friends in the same city. But the teen market is a fickle bunch, and as prices came down on mobile services in Japan in the late 1990s, they largely migrated to the better quality, faster data downloads and, of course, multi-city functionality of 2G services.

Already in decline in Japan, PHS was first offered in China in 1999 by the local telecommunications bureau in Yuhang, a town outside of Hangzhou. While an instant hit with consumers because of its affordability, the service was regarded with a high degree of scepticism by regulators.

At the time, the Ministry of Information Industry had drawn a clear line in the sand between fixed-line and mobile-phone operators, and PHS appeared to be trampling on it. Nonetheless, operators proceeded to quietly offer the service in hundreds of cities as a way to offset stagnating growth and revenues from core fixed-line subscribers.

It was not until 2003 that the ministry finally made clear it would not ban PHS. However, the regulators have moved to ensure PHS does not pose too serious a threat to mobile operators. The ministry forbids operators from offering roaming PHS services (which is technologically feasible) and equipment providers from launching combined PHS-GSM handsets on to the market (which companies such as UTStarcom have done in other markets).

'We believe that [PHS] will remain an important technology and co-exist with 3G in China in the long run,' UTStarcom investor relations manager Charles Zhang said.

But the subscriber growth of PHS appears to have peaked in 2003 and is now in decline.

Even without the regulatory constraints, the underlying technology of PHS is not up to existing 2G services, and prices on the latter are expected to fall significantly after 3G is launched and further restructuring plays itself out.

Indeed, it was restructuring of the telecommunications sector in Japan that eventually led to the privatisation of the company that invented PHS. As prices on 2G mobile services declined, successor firm NTT DoCoMo began losing money on PHS services and last year suffered an US$4.3 billion writedown on the business. In April, the company stopped accepting new PHS subscriptions and is now considering terminating the service altogether.

That is one aspect to the technology that China's telecommunications may be reluctant to import.