Digitalwall: Envisioning China's 3G Market (3) Systems & Markets

The split-up of China Unicom will be inevitable.

[+] Case study: market development in Japan

With the government's intention of supporting Chinese own TD-SCDMA standards, the issuance of 3G licenses, which are already intermingled with a lot of considerations, is getting even more complicated. Counting WCDMA and CDMA2000, there are three 3G systems available in China's 3G market.

However, if we get back to the arena of marketing, things often get much easier. When we look at the Japanese market, for example, we can get a lot of inspiration. The following figure shows that NTT DoCoMo and KDDI walk through a similar path by upgrading their own 2G subscribers into 3G systems.

Although NTT DoCoMo introduced the 3G service half a year earlier than KDDI did, its migration of 3G subscribers has been much slower than KDDI until recent months when it picked up speed. The following figure shows the increase in 3G subscribers:

Remember, despite the strong growth momentum, most 3G subscribers of the carriers are upgraded from their own 2G subscriber bases. Why was KDDI able to achieve such a rapid growth at the beginning, while DoCoMo was dragging far behind? The key lies in the 3G system that they used.

In addition, the above figure shows that while KDDI has almost upgraded all of its own 2G subscribers, NTT DoCoMo has just started in the initial stage to accelerate the process. Predictably, DoCoMo will have far more 3G subscribers than KDDI in the next two years.

[+] User experience will depend on the 3G system used

Why was KDDI, which adopted the CDMA2000 system, able to achieve satisfactory performance at the beginning? There are a number of reasons: 1) thanks to the features of the CDMA system, KDDI was able to deploy 3G systems rapidly at its existing 2G base stations at lower costs and higher speed. Only half a year after KDDI's introduction of 3G, its services covered 90% of the entire territory of Japan.

Despite the attraction of 3G value added services to users, the fundamental part is its mobile communication function. In places where 3G service is not available, a CDMA2000 handset may roam automatically to an existing CDMAOne system (2G) to extent the availability.

As NTT DoCoMo used PDC system to provide 2G mobile communication, its 3G WCDMA system had to be built all over again. As a result, its 3G services could cover only the Tokyo region in the initial stage. What's more, subscribers out of the region were not able to roam into the PDC network. Therefore, subscribers had to bring two handsets.

2) KDDI did not intend to tell its subscribers that what they used was the 3G service at the very beginning. As its goal was to attract its own 2G subscribers to upgrade into 3G, KDDI only told its subscribers: "KDDI is introducing a location based service", or "KDDI is introducing mobile streaming media service". It never mentioned the word "3G".

Of course, to use those services, subscribers had to change their handsets. While they did so at the stores appointed by KDDI, the 2G subscribers did not know they were switching to 3G network. With the same voice service coverage of 2G systems, more value added services and similar handsets, subscribers did not feel any pain at all during the upgrade process.

[+] The key is to allow 3G subscribers to roam into 2G networks

On the part of DoCoMo, in addition to the disturbance of the network coverage, it had another trouble: the expensive, large and highly power consuming WCDMA handset, which had far less model options than CDMA2000 handsets did, severely affecting the growth speed of its 3G subscriber base.

The case of Japan gives us two lessons: 1) network coverage is the prime condition for the rapid development of the 3G service; 2) there must be sufficient models of handset available, with prices and standby time comparable with 2G handsets. In addition, such handsets should not be too large; otherwise subscribers would not be interested at all.

When Hutchison 3 started to introduce the 3G service in Europe, it had similar troubles. It had only three models of handset for subscribers to choose from. Why are subscribers of both DoCoMo and Hutchison 3 beginning to increase drastically lately? The answer is that the problem of WCDMA handsets has been preliminarily solved.

If China starts to issue 3G licenses in 2006, by the time carriers complete their initial equipment deployment, both 3G handsets of WCDMA and CDMA2000 systems will not be a problem. Even the price will drop to a reasonable level, freeing carriers of the pain of the expensive handsets that the current 3G carriers are suffering from.

By that time, WCDMA handsets will be able to roam into existing GSM networks where 3G signals are not available. In the meantime, CDMA2000 handsets should be able to roam into the existing CDMAOne network, which will significantly improve the user experience of 3G subscribers.

[+] The restructuring of carriers and the issuance of 3G licenses

From a standpoint of the country's development, the government should minimize repeated investments in telecom infrastructure. However, in view of the long-term development of the telecom industry and the country's competitive edge, it seems necessary to accelerate the development of 3G, and to cultivate the power of carriers and equipment/terminal manufacturers. Whether the restructuring of carriers and the issuance of 3G licenses will be attached equal importance is beyond the scope of my prediction. However, if we return to the arena of marketing while also considering the above national policies, the situation would become crystal clear all in a sudden.

China only needs to issue three 3G licenses, which should be based on the WCDMA, CDMA2000 and TD-SCDMA respectively. To be more specific, the WCDMA is an extension for the existing GSM system, and CDMA2000 for the CDMAOne system.

In that case, the split-up of China Unicom will be inevitable. Its CDMA network will be able to get a 3G license, as that would be the best way to minimize the waste of repeated investments. When we look back at the experience of KDDI, we could see that it is an approach to ensure highest subscriber acceptance rate, painless upgrade to 3G and acceleration of 3G development.

As to whether the GSM network of the post-split-up China Unicom should be combined with those of other carriers, it might be considered separately. The key is there need to be only one license for the WCDMA-based 3G license. Carriers with the GSM system could upgrade their existing systems into WCDMA to avoid repeated investments and to ensure quick acceptance of subscribers.

[+] TD-SCDMA carriers will be 3G Only

For China Telecom and China Netcom, which have their own PHS systems, the huge subscriber base cannot be turned into 3G customers, and repeated investments would be inevitable with whichever 3G system. Therefore, a TD-SCDMA-based 3G license would be most suitable for them.

There would be 3G-only carriers in the market. Without a 2G subscriber base, carriers with TD-SCDMA networks will try the fastest way of attracting 3G subscribers. Inevitably, they will offer lower voice tariff as a means for market competition, which will eventually pull 2G+3G carriers into the battle and stimulate the high-speed development of the 3G market.

However, carriers with only TD-SCDMA systems might not be so lucky. They must achieve the coverage of all regions once for all, as they will not be able to allow roaming into existing 2G networks. That would incur heavy burdens of capital expenditures during the initial stages. More importantly, they should be particularly careful not to step into the painful path of DoCoMo again. (
2005/09/11 - By Digitalwall.com - Way to
China Internet/Telecom )