Envisioning China's 3G Market (2) 3G License & Market Strategy

One of the key factors is the appearance of the 3G Only carrier.

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[+] PHS subscribers will not be the first 3G subscribers.

Currently, 3G handsets are still too expensive. Particularly, WCDMA handsets are selling at prices slightly higher than those of high-end 2G handsets. Therefore, carriers will have to invest higher handset subsidies to lower the entry barriers for consumers to buy, if they want to accelerate the development of 3G subscribers.

To prepare for the flooding-in of 3G subscribers, carriers must provide voice services with the quality and network coverage comparable to that of 2G. The idea of "building 3G infrastructures mainly around urban areas" might incur massive subscriber complaints. Therefore, carriers will have to invest in the development of base stations at the same time.

Having made huge investments at both sides, carriers might naturally expect high ARPU from subscribers during the initial stage of 3G to justify what they have done. In the current market, high-ARPU subscribers exist in 1) their own 2G subscriber bases, and 2) 2G subscriber bases of other carriers.

In whichever case, PHS subscribers will not be the source of the first 3G subscribers that carriers wish to attract. That is a customer group that requires cheap handsets and low fee rates. For carriers, huge handset subsidy for this kind of customer is definitely not a good deal.

In addition, as we mentioned in the previous section, there might be a growth room of 100 million subscribers in the 2G market (not including PHS). Would they be the prime source of 3G subscribers? Would their first cell phones be 3G handsets?

As discussed above, after so many years of mobile communication development, those who without a mobile handset by now will be low-end subscribers of the saturation stage. For carriers, such subscribers are of marginal value. They will not be the prime source of subscribers at the initial stage of 3G, either.

[+] Marketing strategies for two types of the 3G carrier

Therefore, at the initial stage of 3G, carriers will have only two options: to upgrade their own high-end 2G subscribers to 3G, or to grab high-end 2G subscribers from other carriers. The former seems hardly necessary (to spend a lot of money to upgrade their own subscribers to 3G without increasing their ARPU would be hardly justifiable, as their ARPU is already high).

As to the latter, there would be the question of "with what means to grab high-end subscribers away from other carriers?" Suppose that two carriers both have 3G and offer largely similar value added services, is there any way to attract subscribers other than the old tactic of price cut? If 3G ends up in a price war, that would be the cause.

The possibility of a price war at the very beginning to lead 3G away form its main track will depend on the way in which 3G licenses are issued. Here 3G carriers can be divided into two major types: the carrier without 2G subscribers (3G Only carriers) and the one that has 2G subscribers (2G+3G carriers).

If all carriers in the market are 2G+3G carriers with similar sizes, 3G will be used as a weapon for defense instead of attack. For carriers, the purpose of developing the 3G service is to prevent their high-end 2G clients from turning to rivals.

To avoid big drop of ARPU when migrating their 2G subscribers to 3G, carriers will not offer substantial cut in 3G voice service tariff. Therefore, it will be hard to grab subscribers from other carriers. Please note that, value added services are bright spots for 3G, but what really attracts subscribers to shift to another carrier is the voice tariff.

Carriers will focus their efforts on existing 2G subscribers of their own, and introduce value added data services at a tariff lower than the 2G counterparts. While trying to "keep peace at the tip of a bayonet", carriers are working slowly to promote 3G. As a result, the coverage of the network would expand gradually from urban areas to rural regions.

[+] New carriers could disturb the situation.

In view of the above situation of competition, carriers will sell the concept of "2G+" to consumers for 3G positioning. In other words, their 3G voice service tariff will equal to that of 2G, with the 3G data service regarded as a "plus". To subscribers, 3G is an upgrade version of 2G.

That seemingly reasonable concept could be broken apart by other competition modes, including: 1)2G+3G carriers of smaller size wishing to use 3G as a weapon to grab subscribers from each other; or 2) a possible price war for voice services triggered by 3G Only carriers.

The first situation would hardly occur, for, if they want to grab subscribers from other carriers, 2G would be a weapon good enough and there is no need to use 3G (isn't it much cheaper to use 2G as a weapon for competition?) The second situation, however, has already happened in Europe.

In Europe, the 3G Only carrier is Hutchison 3, which started its 3G business with data services as the focus. Yet the slow growth of subscriber number compelled the company to use the last-resort weapon: price cut for its voice service, which has lasted till today.

The most interesting part, however, is the reaction of those 2G+3G carriers. They seem not bothered by Hutchison 3's 30%-lower voice tariff at all. The following figure shows that Vodafone UK does not change its rates in face of the Hutchison 3's challenge.

In addition to lower rates, there are also considerable handset subsidies. Imaginably, it has cost Hutchison 3 huge money to build a subscriber base. With the support of 2G revenues, 2G+3G carriers are not afraid of the challenge at all. They just sit there waiting for the reduction of the 3G handset cost. For them, subscriber loss is tolerable so long as it is contained within a reasonable range.

[+] The 3G market growth will depend on the way licenses are issued.

To what extent 3G will develop in a country depends on how many carriers in the local market are willing to promote the service. Typical cases in the regard include Japan and South Korea. In Japan, NTT DoCoMo offers a 20% cut in voice tariff to accelerate the development of the 3G service.

However, even the case in Japan reveals that, when carriers push for 3G services, most of their 3G subscribers are those who migrate from their own 2G subscriber bases. To accelerate business development, carriers often have to reduce their voice tariff.

In other words, it is not quite right with the argument: "3G will save carriers out of the trouble of the declining voice revenue with higher revenues from data services." It is because carriers are eager to accelerate the 3G service that they are now caught in the mire of declining voice revenue, which would not have dropped so fast if they had not pushed for the 3G service.

Maybe five years after the launch of 3G, carriers will find that their ARPU is back to the level of 2G again, but with data services holding a bigger share. There will not be any change to the total revenue of carriers. The only thing changed will be the revenue structure.

Let's get back to the topic raised at the beginning: how should 3G licenses be issued? The question can be translated into a simpler one: "how fast does China plan to develop its 3G service?" It is better to look at the issuance of 3G licenses from the viewpoint of marketing. One of the key factors will be a simple question: will there be a 3G Only carrier? (
2005/09/04 - By Digitalwall.com - Way to
China Internet/Telecom )

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