Digitalwall: The Mist of 3G in China (2) TD-SCDMA is a Hot Potato

Will we have a price war of voice service? The determinant is the persistence toward China's self-developed 3G standard: TD-SCDMA.

[+] 3G promoting model that best suits the benefit of 2G telecom operators

Let's look back to the competition strategies of telecom operators in the 3G market (figure shown as below). In conclusion, for those telecom operators who already have GSM or CDMA 2G subscribers, the most beneficial tactics for them are as below:

- Focusing on the deployment of 3G base stations on metropolitan areas, and doing small-scale deployment in suburban or rural areas at the beginning. Because WCDMA or CDMA 3G systems are easily compatible with 2G, subscribers can roam seamlessly on the 2G network in those areas where no coverage of 3G signal is available. Therefore, the cost for telecom operators is relatively low.

- In order to ensure that revenue is not affected when the existing 2G subscribers upgrade to 3G systems, operators will set the 3G voice service calling rate the same as or similar to 2G. Since this part is still the primary revenue of telecom operators, it won't affect much even if their 2G subscribers transfer to their own 3G systems.

- Because the voice calling rates of 3G and 2G are similar, the price plan for 3G mobile Internet service (data service) is largely reduced in order to differentiate from 2G as a selling point. Operator focus on the promotion of value added services together with multi-functional high-end mobile phones, targeting the metropolitan white-collars with higher incomes.

- Since the increase of 3G subscriber base is relatively slow at the beginning, the market will gradually expand to suburban or rural areas, 3G base stations spread to those areas and the price of 3G phone reduce. To prosper sales, telecom operators will consider to offer packages with reduced voice service calling rates.

Here comes the question, if as stated above, telecom operators who already have 2G subscribers do not hurry to sell 3G by reducing the voice service rate, how come the price war happens in China's 3G market? The determinant is the persistence towards China's self-developed 3G standard: TD-SCDMA.

[+] Is TD-SCDMA a killer or a lamb to be slaughtered?

The European 2G operators were not so familiar with the above concepts when they first obtained their 3G licenses. But as time went by, they more and more adopted the above concepts towards 3G. Almost all of them took the strategies in B, C and D segments when they started to promote 3G.

Even Hutchison Telecom, the so called "pure 3G system" who had no 2G subscribers, believed that value added services were the shining points of 3G. They tried to attract consumers with high-end mobile phones and various value added services when they started to promote 3G. But they encountered the dilemma of slow increase of subscribers.

Because of their "pure 3G" feature, the deployment of base stations had to start from scratch and was not able to be very comprehensive. Therefore, even the signal coverage in metropolitan areas was not good at the beginning. Consumers attracted by TV ads regarding 3G value added services bought 3G mobile phones. However, their complaints about the unstable signals did not work at all.

Afterwards, Hutchison signed roaming contracts with other 2G operators, allowing subscribers to roam on other operators' network when there was no 3G signal coverage. In order to obtain more subscribers, Hutchison started to promote by reducing the voice calling rate together with low-price mobile phones (with the high cost of handset subsidies). The number of subscribers thus started to increase rapidly.

We learn a lot from Hutchison's lesson. In conclusion, "It is very tough for telecom operators who have no 2G systems or subscribers to promote 3G." Look back to China's market, who comes into your mind from the story of Hutchison? The answer is the ones who will have obtained TD-SCDMA licenses.

The system of TD-SCDMA is incompatible with GSM or CDMA. The deployment of its base stations has to start from scratch. The cost is huge if the same level of coverage as 2G is offered at the very beginning. However, consumers who have already been accustomed to the coverage level of GSM will not forgive "the poor signal of TD-SCDMA".

[+] Market competition will inevitably drive the price war of voice service

In China's mobile communication market, when asked "which telecom operator's signal is poor?" I believe you will speak out the name of some operator without hesitation. Consumers' impression is appalling. It is hard for telecom operators to change their images once they have been put on some labels.

Since the system is brand new, telecom operators with TD-SCDMA licenses will inevitably carry out a lot of system and terminal optimization work during the commercial operation. As an early 3G practitioner, Hutchison used to spend many years in optimizing its system. The process of optimization will strengthen consumers' impression of "poor signal".

These problems, however, do not all exist in WCDMA and CDMA2000 systems. There are lots of telecom operators working on these two 3G systems worldwide, who have accumulated abundant experiences. In addition, the global-scale production reduces the average cost of the 3G mobile phones of those two systems, so that they can be sold cheaper.

From the consumers' perspective, the signal would be poor, mobile phone would be expensive and there would be many bugs in the early stage of TD-SCDMA. Telecom operators would not be able to attract consumers rapidly, although they spend huge amount of investment at the beginning. Finally, it would become inevitable to provide low-price mobile phones without value added services and to promote lower voice service rates.

This is the reason of the price war of voice service during the initial stage of China's 3G market. The starters of the price war, however, are those telecom operators who will have obtained TD-SCDMA licenses. Operators with other 3G system licenses will not respond to the price war in the initial stage. But in the long run, it's difficult for them not to be affected.

The second mist of 3G in China: who is the first largest user group of 3G? Many people would answer without hesitation: "metropolitan young white-collars". Is it true or false? I will say: the answer is workers and students with low income in cities instead. (
2007/04/08 - By Digitalwall.com - Way to
China Internet/Telecom )