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SCMP Reporter

Fixed-line giant says new licence will boost falling profits but analysts have doubts
Fixed-line giant China Telecom is betting on obtaining a mobile licence  in the upcoming state-engineered industry restructuring to reverse the declining profitability of its voice business.
But will that prove the panacea  for all its woes that its chairman, a mobile telephony veteran in his previous capacity, expects it to be? Armed with a mobile licence, will China Telecom be in a position to challenge China Mobile's growing lion's share of the mainland's telephony market?
Wang Xiaochu,  who served as chairman of China Mobile before joining China Telecom in 2004 and is now China Telecom's general manager,  knows the success formula of his former company  perhaps more than anyone else. He voiced confidence last week that offering mobile services would brighten China Telecom's prospects.
Despite speculation that he might be promoted to a ministerial position,  Mr Wang said he was staying  put to complete the restructuring. 'I won't quit my present post, at least not until the company is operating on the same scale as China Mobile.'
But there are concerns that the type of mobile business China Telecom will operate will not allow it to compete with market leaders.
Under the  industry restructuring plan, China Telecom is expected to acquire China Unicom's Code Division Multiple Access (CDMA) mobile  operations, a  less advanced service with only 40 million subscribers as of last year, compared with more than 400 million users  of the  Global System for Mobile Communications (GSM) developed in Europe.
Mr Wang put the restructuring agenda on the table in February 2005 when he first met the media and analysts in Hong Kong as chairman of China Telecom. He raised the possibility that China Telecom, together with China Netcom, could buy a mobile network from China Unicom. Both fixed-line companies could then share the network and offer services in their respective markets.
Whatever happens, China Mobile is expected to dominate the market for the foreseeable future, even if  other operators are given licences.
The government's introduction last year of the 'calling party pays' pricing mechanism, which cut phone tariffs, is expected to make it  harder for new players to challenge China Mobile.
'The best time for China Telecom to challenge China Mobile's leadership has passed,' Nomura International  telecommunications analyst Kelvin Ho  said. 'The lack of government support for new players means you cannot change the existing market landscape. China Telecom as a new player will need to compete with these lower tariffs.'
Goldman Sachs said China Telecom's management was continuing to lobby for regulatory assistance from the government before it launched  its mobile service. That includes one-way mobile number portability, which allows users to switch providers without changing numbers and a cap on market share capital.
Mr Wang said the company planned  to bundle  mobile service  with its  fixed-line packages for residential and corporate users. 'We won't succeed if we just offer the same services as  existing mobile operators,' he said. 'We will try to differentiate our service by making the mobile business an extension  of our fixed-line package.'
However, analysts  are sceptical that bundling packages would attract  existing mobile phone users.
Marvin Lo at  Daiwa Institute of Research  said: 'It is all about the market position of CDMA in the future. Corporate and government customers prefer to use China Mobile or China Unicom's GSM service because GSM supports global roaming. The CDMA service is another story with its lack of network coverage when compared with GSM.'
Mr Lo said CDMA would not be attractive to users of China Telecom's fixed-line (Xiaolingtong) service because of its limitations.
'For the consumer market, the CDMA branding is not that good,' he said. 'Why would people give up their existing phone service for an inferior service like CDMA? I doubt  whether China Telecom could gain market share from China Mobile after the restructuring.'
China Telecom had about 58 million users of Xiaolingtong at the end of last year and expected about a third of high-spending users to migrate to mobile. The remaining customers, which were low-spending, might be offered a bundled service with broadband.
Mr Ho said: 'Those high-spending users account for more than 70 per cent of Xiaolingtong revenue. We are concerned the profit margin will be under pressure if China Telecom cuts prices to lure new users.'
China Telecom's fixed-line voice business is under pressure as customers move to cost-effective cellular services. The company's local phone service revenue dropped 9.8 per cent to 70.42 billion yuan (HK$78.2 billion) last year. Revenue from domestic long-distance calls fell 5.4 per cent and international long-distance calls dropped 10.6 per cent. Net interconnection charges fell 9.7 per cent to 7.11 billion yuan.
New services such as broadband are being pushed heavily to make up for these losses. China Telecom will boost non-voice services (broadband, fixed-line value-added and video applications) to more than 50 per cent of total revenue in 18 months, up from 36.5 per cent by the end of last year.
Strong growth in non-voice  services last year helped China Telecom  report a 2.8 per cent increase in total revenue to 175.4 billion yuan, and a 1.1 per cent increase in net profit to 22.5 billion yuan. Broadband achieved growth of 32.1 per cent and value-added services 35.4 per cent,  partly offsetting  a 9.8 per cent decline in traditional voice revenue.
China Telecom added 7.3 million broadband customers last year and management wants to increase that to 8.5 million this year. Total broadband subscribers reached 35.65 million last year.
Citigroup  telecommunications analyst Michael Meng,  quoting data from China Telecom, said: 'More than 60 per cent of new broadband customers this year will come from outside the major cities, which implies lower affordability and lower average revenue per user.'
Its broadband average revenue per user was 70 yuan per month last year, up from a monthly 66 yuan  in 2006. Other internet value-added services such as video on demand and digital music could stimulate demand  and boost revenue growth.



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