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Current Issue: March 2008
3G awaits Olympic start
by Lin Sun
When the Ministry of Information Industry (MII) pledged in 2006 that China would launch 3G service during this summer’s Olympic Games in Beijing, the promise brought mixed feelings. On one hand, it rekindled hope the Chinese 3G standard, TD-SCDMA, would finally take center stage. On the other, the pledge was a serious challenge to an unproven technology facing competition from veteran standards WCDMA and CDMA EV-DO in the world’s largest cell phone market. Whatever the outcome, 3G service will open a new chapter in mobile communications in China; one with a very different landscape.
As the Olympics draw near, many look eagerly to TD-SCDMA, not on its technical merit or expectation of new service, but as a symbol of China’s rising power in world telecommunications. From the outset, TD-SCDMA was never merely a market issue but instead charged with national pride, political correctness and firm government support. To a great extent, this has propelled rapid development, mainly in handset design and performance issues such as video display in high-speed moving vehicles, antenna, battery life and compatibility with GSM (dual-mode operations for roaming). More important to its future growth, TD-SCDMA has spawned in two short years a new ecosystem, moving from operating system to video module, chipset to base station, and lab test to field trial.
What to expect
The Chinese government has played a vital role in bringing TD-SCDMA to fruition from a mere crude spec. In fact, the government has delayed 3G licensing in part to allow more time for TD-SCDMA to catch up with competing standards. The Olympic Games offer the perfect occasion to debut TD-SCDMA while excluding WCDMA and CDMA.
Many criticize the Chinese government for its anti-market practice, but this is how the government enforces its determination to reverse an otherwise normal 3G evolution. China Mobile is the largest GSM operator in the world; it would adopt WCDMA as a logical migration to 3G under normal circumstances. However, the operator was directed to develop most sites for the Olympics with TD-SCDMA: eight cities out of 10.
Although this may not necessarily be a bitter pill for China Mobile to swallow—it can preempt all competition as a de facto TD-SCDMA operator if it turns out to be successful, plus it still can offer dual-mode service for its GSM customers—the operator must forgo a preferred path and devote its resources to a new standard.
Apparently the government does not think that way. In its eye, China Mobile is the best candidate for TD-SCDMA: It runs the world’s largest cell phone network, has experience with large-scale operations, and sits on a large hoard of cash. It is the best assurance China has to make TD-SCDMA a success.
Despite the fanfare, what will happen during and after the Olympics is anybody’s guess. The Games will take place in 10 cities and only last for two weeks during which most use of 3G service will be limited to people associated with the sporting event: officials, athletes, coaches, reporters and those dealing with logistics. If travel occurs outside the venue, handsets will switch automatically to GSM which does not support high-speed data service. Clearly the Olympics is not a good gauge of 3G demand in China, not only because service will be limited, but also because handsets will be offered as free rental and most services will be free of charge as a show of good will.
Post-Olympic excitement
But the real excitement is expected after the Olympics. China Mobile plans to install 15,000 BTSs (a 10-million-user capacity)—way beyond the sporting event’s needs. Meanwhile, TD-SCDMA networks are under construction in a dozen more cities in preparation for quick launch once TD-SCDMA receives the green light for commercial service. Initial growth will depend on service availability, cost of handsets, basic service, and teaser offers, incentives and bundling that are still on the drawing board.
It is estimated the number of cell phone users will continue to grow an average of 54 million a year and reach nearly 900 million by 2013. During that time 3G users will rise from 0.5 percent in 2008 to 25 percent. The accelerated growth is attributed to market momentum, falling prices and competition from other 3G services.
Another critical factor affecting TD-SCDMA’s future and the overall 3G market is operator restructuring. China Unicom seems likely to merge with China Netcom sometime this year and sell its CDMA operations to China Telecom. The change, if confirmed, will reduce the number of 3G licenses to three: China Mobile for TD-SCDMA; China Unicom for WCDMA; China Telecom for CDMA EV-DO.
Such division clearly reflects the government’s intention to seek balance among 3G technologies and operator strengths. The largest and most experienced operator, China Mobile, will undertake the least proven standard, while two smaller competitors will carry more mature services.
The government, however, does not want to let on who’s in line to receive a license and with which standard. It is premature to assume all operators currently deploying TD-SCDMA networks will receive permission to operate one. In fact, licensing is more tied to restructuring than to 3G trials. Some analysts favor TD-SCDMA given its momentum and government support and estimate the Chinese standard will hold the lion’s share (50 percent) by 2010, followed by WCDMA with 40 percent and CDMA EV-DO with10 percent, but market dynamics—affected by competition—can change.
Government control
Another cloud hanging over 3G is license type. At this time, it is unclear if the license will be general and allow licensees to decide which standard to use or whether the government will require a specific standard. The Chinese government has promised the WTO and foreign governments it would not interfere with "market activity" in choosing a 3G standard.
Most people, however, think the government tells the world what it wants to hear. The Chinese government can exercise its influence in many ways: blatantly, in the form of notice and executive order; or implicitly with tax, finance and subsidy. There is little clue as to what the government intends to do on this issue. Since late 2007, the guideline for reform from government documents and officials has been to "accelerate full service operators." Full service, however, usually refers to eliminating restrictions between fixed and mobile services, not to giving an operator freedom to choose what it deems fit.
Progress is well underway on the ground. Last March, three operators (China Mobile, China Telecom and China Netcom) ordered TD-SCDMA equipment worth 27 billion yuan (US$3.5bn). So far, most shipments have been delivered and at least six cities have completed installation. In Beijing, the largest Olympic site, the TD-SCDMA network not only covers all stadiums and the Olympic Village, but also is being extended to the city’s financial district and government quarters.
On the outside, however, you don’t see much going on because the project still is considered a trial without a commercial license; operators want to keep a low profile because no one is certain it will be a success. Obviously China does not want to be embarrassed in front of the world by touting TD-SCDMA if it turns out to be a flop. Regarding licensing, the government apparently wants to wait until after the Olympics to decide when and how to proceed.
The mobilecom market
Licensing aside, the real effect of 3G on the mobilecom market may have been overblown. Many are carried away by 3G’s charm and have made egregious predictions of what 3G may become in China. Most predictions assume 3G will replace current mobile service in grand scale, which is unlikely to happen. At best, 3G will supplement where 2G falls short by offering an option for customers who demand it: mainly video content (e.g., video phone, live TV broadcast, video games).
It is intriguing to watch TV on a slick cell phone screen, but not everyone has the desire or willingness to pay for the service. The majority of people most likely will stick with what they do today, namely voice, text messaging, ring tones, music downloads and Internet access, even after 3G. To them, 3G is not a must-have but a fancy option. Making the switch will be determined largely by handset price and service charge.
3G will take off gradually in China forming a critical mass rather than demonstrating explosive growth. This will affect operators in two ways. First, spending on network buildout will be incremental and revenue from 3G will be less rosy. Second, operators will continue to rely on current service for growth by recruiting customers and improving ARPU (see 3G revenue outlook, page 24).
Money in handsets
If the past is any guide, a significant amount of 3G revenue will come from handset sales. By one estimate, 3G handsets will account for 60 percent to 70 percent of total equipment sales. If during the next five years 25 percent of current cell phone users buy a 3G handset for 2,500 yuan, that is a staggering 340 billion yuan (US$47 billion) for handset manufacturers and operators that does not include charges for service and bandwidth.
This is why operators are wary about TD-SCDMA handsets and want to get it right from price to performance and from design to supply. It is also the single largest motivation for handset manufacturers to chase operators with their latest gear: a chance to be on the short list. China Mobile plans to spend 4 billion to 6 billion yuan (US$526m to US$790m) for 2 million TD-SCDMA handsets to keep unit price at about 2,000 yuan to 3,000 yuan (US$260 to US$395), a range most customers are willing to spend.
Because handsets are the most important gauge for 3G growth, operators insist all TD-SCDMA handsets be compatible with GSM, so 3G won’t become an island with little connection to most other users. During a recent MII test, only seven models (from suppliers including ZTE, Samsung, LG, Hisense and Lenovo) were chosen from more than 100 submissions to become first suppliers for China Mobile.
Tests show their products performed better in video display, auto-switch, auto-roaming, high-speed Internet access and battery life. A Hisense model, for example, lasted 450 minutes in continuous talk time and 270 hours in standby. As 3G service becomes readily available, handset sales are expected to follow one of two routes: at a discount price bundled with service plans, or through retail channels where customers choose their own models and services.
Video bright spot
While it is not clear how many people will sign up for 3G, few doubt video will be a bright spot for the new mobile service, especially with young consumers. ABI Research predicts mobile TV users in Asia-Pacific will soar to 260 million by 2012, making it the largest market in the world.
In China, some analysts estimate 20 percent of 3G users or 30 million people could use mobile TV by 2012: that translates to 10 billion yuan (US$1.3 billion) a year in service revenue. Public sentiment seems to support the outlook. Surveys show more than 70 percent of cell phone users would like to try 3G just for its video features if the service is affordable. The concern, however, is 3G is not the only way to deliver video entertainment to handsets; in fact, it may not be the best way compared to a more humble but effective technology.
The telecom industry has been embroiled in drawn-out debate on a mobile TV standard with proposals for DVB-H (Europe), Media-FLO (United States), T-DMB (Korea) and Chinese flavors like DMB-TH (a digital TV spec modified for handhelds developed by Tsinghua University), CDMB (recommended by the National Standardization Committee), T-MMB (Nufrontsoft) and CMB (Huawei).
Despite certain differences, all the proposals follow the same path of in-net transmission with a video overlay on top of 3G infrastructure. China Mobile, meanwhile, requires all TD-SCDMA handsets to be equipped with MBMS (multimedia broadcasting multicast system) developed by Datang Mobile for video download and display.
Broadcasters tread quietly
While the telecom industry wrangles over a mobile TV standard, the broadcasting industry has launched its mobile TV service quietly. In late 2006, Beijing Radio became the first in the country to broadcast two TV channels and 12 radio stations to DAB-enabled handsets and other devices via over-the-air reception with a video module and enhanced processing power.
A year earlier, SARFT (State Administration of Radio, Film and TV) introduced CMMB (China Mobile Multimedia Broadcasting), which is compatible with DAB, as the standard for mobile TV. SARFT claims CMMB is completely homegrown, saving at least 1 billion yuan (US$130 million) in foreign IPR dues. SARFT hopes the savings will translate to lower price for handsets and service.
As part of its ambitious plan, SARFT has also unveiled STiMi (satellite and terrestrial interactive multimedia), a transmission system comprised of satellite and terrestrial boosters. STiMi supports bandwidth up to 7.5MHz and offers a data rate from 2.7Mbpsto 12Mbps, capable of high-quality video download. STiMi is also designed for two-way communications for VoD, interactive services and authentication.
SARFT said its short-term goal is to make CMMB available with terrestrial relays in 35 cities by summer, then expand to more than 320 cities after launching CMMB-Star, an S-band satellite, in June. According to SARFT, CMMB will offer four to five free national TV channels, one to two local programs, and charge for premium services such as VoD, video games and special features.
Messy but clear
It is a messy picture and will take some time to sort out, but the basic scheme seems clear: 3G service becomes more attractive to potential customers when mobile TV is added, as China Mobile is doing with TD-SCDMA or as SARFT is offering with the separate CMMB service.
Both services will find their way into the mainstream of mobile video communications and entertainment, but SARFT appears to have the upper hand in feasibility and cost: CMMB offers free TV programming and the cost for premium service can be as low as 20 yuan (US$2.7) a month. Because it uses a lot of bandwidth for transmission, the 3G version of TV service will charge a fee for actual data volume, running as high as 1,000 yuan (US$138) a month, which is exorbitant for most customers. Also, because of 3G bandwidth constraints, mobile TV has a limited offering for live TV broadcast and VoD.
Video content (e.g., phone, messaging, entertainment) can be a strong catalyst for 3G success in China because many Chinese use cell phones as personal entertainment centers. The future of mobile TV lies in its ability to attract a large number of cell phone users. However, like 3G itself, entertainment potential does not necessarily lead to operator profit.
With issues like regulation and unruly competition, it remains to be seen how the mobile TV market will spawn a new ecosystem of content developers, service integrators, handset manufacturers and other value-added services. It will be a new challenge for China’s telecom and broadcasting industries.
Lin Sun is a Beijing-based consultant with more than 20 years' experience in the Chinese telecom industry. E-mail him at lsun@chinanex.com
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