Digitalwall: The Mist of 3G in China (1) 3G Makes No Profit

It's all about a brutal fact: consumers do not have demand for 3G.

[+] How to sell 3G faster in China?

In the late 2006, I gave a 15-minute presentation in Beijing on the development of 3G at the Second Conference of Telecom Value Added Service Collaboration and Trading. Due to the time limit, I started with asking around 200 value added service providers on the spot the following question:

"There could be two selling models when telecom operators are going to sell 3G mobile phones and service rate plans to consumers. One is to tell consumers that using this kind of phone they can save 30% voice call expenses than before. The other, however, is to tell them that many value added services are provided for this kind of phone.

I then asked, "Which way do you think will sell the 3G phone faster?" What surprised was that all the service providers agreed unanimously that the second model would sell faster. It can be seen that even service provider are still in the mist of 3G, it is not surprising that the 3G market in China is becoming more and more unclear.

The fact is the first model sells faster, and much faster. I agree that value added services are the shining points of 3G. However, it has been proven unrealistic from previous experiences for telecom operators to attract 3G subscribers through value added services.

Because through that selling model, the increase of the subscriber base is so slow that telecom operators feel desperate to recover from their billion dollars investment in the foreseeable future. The intense pressure will eventually pull telecom operators out from the dream of value added services. Thus, it is unavoidable to promote 3G by reducing the voice calling rate.

It's all about one brutal fact: consumers do not have demand for 3G. To be more specific, they don't know and don't want to know what 3G is. What they want are immediate benefits. The benefit of "cheaper voice rate plan" is much more immediate than that of "more value added services".

[+] The First Thing of 3G in China: Price War of Voice Service Rate

The second brutal fact of 3G is: for telecom operators, 3G makes no profit. If consumers do not have apparent demand for 3G, telecom operators have to beg consumers to use it. After using various methods to reduce prices, they will ask themselves: why not make money on 2G instead of being stuck in the mud of 3G?

We have a great myth of 3G: "3G can increase the proportion of value added services in the revenue of telecom operators." The conclusion is correct, but neglects the real reason leading to the result.

The revenue of voice services will definitely drop down when telecom operators try to promote 3G by reducing the voice calling rate. Thus, the proportion of data-oriented value added services will certainly increase. The question is: does the overall revenue of telecom operators increase? No.

Because telecom operators have been stuck in the price war of voice calling rate during the promotion of 3G, they have to develop 3G value added services in order to complement their loss of voice service revenue. Inevitably, value added services become the shining points. That is the true process.

Why does the advent of 3G in China start with a price war of voice service? In addition to the price reduction resulting from consumers' insufficient demands for 3G, when we look into the possible 3G promotion strategies of various telecom operators, we will find out that the price war of voice service is inevitable in China.

The following figure is the common market segmentation adopted by telecom operators when promoting 3G. Among them, B, C, D are the common strategies taken by those operators who already have GSM or CDMA subscribers. It is easy to see that those operators try to sell 3G to heavy users of value added services without reducing the voice calling rate.

[+] Existing 2G Telecom Operators Benefit A Lot from Upgrading to 3G Systems

Why those telecom operators are not willing to promote 3G by reducing voice calling rates? Because they have a lot of 2G subscribers, if doing so, they will lose profit if their existing 2G subscribers transfer to the cheaper 3G service.

This kind of telecom operators all set the same voice calling rates for 3G as 2G. They only reduce the rates for value added data services. It is easy to imagine that when China Mobile obtains WCDMA or China Unicom obtains CDMA 3G licenses, they will take the above strategy in order to retain their income from 2G subscribers.

Expensive mobile phones with many functions and various value added contents are for metropolitan residents with high incomes. While the 3G Data Card with faster Internet connection speed is for business people. Value added services will become the shining points of commercial films on TV.

Of course, the penetration rate is comparatively low with the high price mobile phone terminals. However, telecom operators of this type are not worried at all because they can still make a lot of money from the existing 2G subscribers every month. Operators can take slow steps for 3G promotion, while putting emphasis on value added services.

As a result, 3G subscribers of the telecom operators of this type often directly upgrade from the existing 2G subscribers. They seldom grab 3G subscribers from other operators. The deployment of 3G base stations could start from metropolitan areas. Subscribers can roam seamlessly on the 2G network in suburban areas where 3G signal has no coverage.

This is the advantage for GSM/CDMA operators to upgrade to WCDMA/CDMA 3G systems. Operators may take their time to deploy 3G base stations. There is no need to worry about subscribers' complaints about bad signals. The 3G mobile phones of WCDMA and CDMA have been sold at a relatively low price over the years. But how about TD-SCDMA, the 3G standard of China? (
2007/04/01 - By Digitalwall.com - Way to
China Internet/Telecom )