For years China Telecom, China’s fixed market leader, has had to sit and watch China Mobile and China Unicom enjoy the extraordinary growth in China’s mobile market. However, the restructuring of China’s telecoms market in 2008 meant China Telecom acquired mobile operations. Unsurprisingly, mobile has since taken centre stage for China Telecom.

Without mobile, China Telecom’s growth would have been dire

Before the restructuring, China Telecom’s growth prospects were fairly lacklustre. Its fixed telephony connections have peaked and are still rapidly decreasing, largely due fixed mobile substitution (FMS) and the loss of PHS (Personal Handyphone System) customers. China Telecom lost 11.2 million PHS subscribers in 2008 and will lose another 42 million over the next two years as PHS services have been given a shutdown deadline of 2011 in China. In addition, its household fixed voice lines have gradually declined over the past two years, peaking at just over 122 million connections in 2006 and declining to 115 million by 1Q09. Broadband lines are increasing steadily, but this growth is clearly slowing down, signalling that the broadband market is also approaching maturity. In order to sustain the growth of broadband business, China Telecom has spent much effort in developing broadband content services (e.g. IPTV) but the regulatory barriers in broadcasting and telecommunications convergence pose considerable challenges.    

Another underlying factor in the declining fixed connection is China Telecom’s difficulty in capturing rural customers. Despite its dominance, scale and experience in the fixed market, targeting the rural markets with fixed services is proving expensive and not a cost-effective solution in terms of cost and speed in services provisioning, particularly when compared to mobile services.

Mobile presents an opportunity to grab significant growth, but a tough one

Going forward, the bulk of China Telecom’s growth will come from its new mobile division. In particular, China Telecom is focusing its efforts on targeting urban regions. This makes sense as urban regions possess the mid- to high-spending customers in China, and these are exactly what China Telecom wants, especially with the arrival of new 3G services.

However, China Telecom is a relatively inexperienced mobile player in comparison with its rivals and is also the smallest player, with a 5% share of China’s mobile market. In addition, the urban regions are highly saturated and mature. Due to China Telecom’s strategy to target urban users, the majority of its mobile growth will have to be generated by either convincing existing mobile subscribers to churn from China Mobile and China Unicom or by encouraging subscribers to take multiple mobile subscriptions, both of which will prove to be a hard sell. The lack of (asymmetric) mobile number portability is another obstacle to overcome. In addition, China Telecom is targeting mid- to high-end mobile subscribers. These customers are valuable and its rivals will not give them up easily.

Even if China Telecom does a good job of winning mobile customers in urban regions, it is unlikely to be enough to reach its target of 100 million mobile subscribers by 2011. Therefore we suspect that the rural market will take higher priority in China Telecom’s mobile strategy in 2010 and 2011. However, China Mobile’s dominance in China’s rural market means that even capturing new mobile customers will be a difficult battle for China Telecom.

Service bundles aim to stabilise fixed revenues

Let’s not forget that China Telecom is a fixed operator at heart and this will never change. Fixed services make up the bulk of its service revenues, and will for the near future. For instance, in 2008 97% of total revenues came from fixed services. Naturally, China Telecom has to find ways to stabilise its fixed revenues, and hence it is striving to be the market leader in China’s service bundle market.

Competitively bundling fixed and mobile services following a quadruple play service strategy will make perfect sense for China Telecom. It allows it to cross-sell mobile services to existing fixed customers, which if successful will increase loyalty within its customer base. However, it is likely that most of China Telecom’s fixed customers will have mobile subscriptions already, so this is no easy task.

China Telecom has entrenched presence in its enterprise customer segment, and enterprise related fixed revenue is a very important share of its total fixed revenues. Fixed mobile convergence services such as unified communications (UC) will have an increasingly strategic impact to its enterprise customers.

Comment by Raymond Yu, Analyst at Ovum