China Mobile (NYSE:CHL) unveiled a new integrated communication service at the Mobile World Congress in Barcelona last week, most likely to compete against Over-The-Top (OTT) instant messaging applications such as WeChat. China Mobile’s new service will effectively integrate calling and messaging services with its high-speed 4G network. This will allow subscribers to share pictures, messages, locations and even video chat using their 4G data connections without needing to download applications such as WeChat. The company plans to start trials of this service in the second half of this year and go commercial a year later.  
The world’s largest carrier has seen a rapid decline in revenues from traditional sources such as voice calling and SMS due to the advent of applications such as WeChat, which enable users to call and share messages over their mobile Internet data plans.  China Mobile’s effort in developing such an integrated service to compete against OTT alternatives is in stark contrast to rival China Unicom‘s (NYSE:CHU) strategy of collaborating with WeChat to boost data usage on its network.
China Mobile’s strategy bodes well with its 4G expansion plans in the country and could help the carrier boost its 3G/4G data usage as well as its average revenue per user (ARPU). However, it will depend on how the carrier differentiates its service from competition and how many users it is able to attract away from established players such as WeChat, which currently has a subscriber base of about 300 million.
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Our price estimate for China Mobile is at $55, implying a premium of about 15% to the market price.
China Mobile’s Rapid 4G Expansion Plans
China Mobile is currently the only carrier offering 4G services for smartphones in China. The carrier is aggressively expanding its 4G network and plans to install about 500,00 base stations across 340 cities by the end of the year. In order to boost its 4G subscriber base, China Mobile is working on improving the supply of low-cost 4G-enabled smartphones in the Chinese market, costing as little as $100-$150.
The carrier had faced handset availability issues at the time of its 3G launch last year due to the chipset incompatibility of popular smartphones with its SCDMA 3G technology. This resulted in smaller carriers like China Unicom and China Telecom (NYSE:CHA) gaining market share at China Mobile’s expense. This time, China Mobile is leaving no stone unturned when it comes to rolling out its network and attempting to differentiate itself from rivals. Its rapid 4G expansion and lack of competition is likely to boost its share in the Chinese wireless market in the near term.
Integrated Communication Service Likely To Boost ARPU
China Mobile added about 38 million new 3G subscribers in 2012 and its Internet ARPU grew almost 43%. Adding 3G/4G subscribers helps the carrier increase its ARPU levels, as 3G and 4G smartphone users consume more data than 2G subscribers. According to the latest subscriber data released by the company, it added over 14 million new 3G/4G subscribers in January alone this year. China Mobile should continue to benefit from the growing adoption of 3G/4G services since most of the growth is coming from data rather than voice, which has reached near-saturation.
China Mobile’s integrated communication service is likely to provide a common interface where subscribers will be able to use calling and messaging services on their smartphones using their 4G data plans. This service is likely to pose a direct competition to applications such as WeChat, which is the number one messaging app in China. We can use WeChat’s financial data to estimate China Mobile’s potential in this market.
WeChat generates its revenue largely from e-commerce services and advertisements. It currently has more than 300 million subscribers and its revenue is estimated at RMB 300 million per month. This gives us an ARPU of RMB 1.00 per month for WeChat. If China Mobile were to introduce e-commerce or advertisements as part of its integrated service – a big “if” at this point – there could be ARPU potential of RMB 1.00 per user per month, excluding revenue generated from subscriber Internet data plans. This would translate to annual revenues of RMB 2.4 billion ($390 million) for the carrier from its existing 3G subscribers alone. However, even if the company doesn’t use any ads on the service, the increased data usage would likely boost its ARPU. We expect the carrier to see 3G/4G subscriber growth as well as a boost in ARPU, allowing it to grow its mobile Internet service revenues at double-digit rates in the near term and mid-single-digit rates in the long run.Notes:
- China Mobile Accelerates TD-LTE Development in Network, Terminal and Service, PR Newswire, Feb 27 2014 [↩]
- China Mobile to launch integrated communication service, WantChinaTimes, March 02 2014 [↩]
- China Mobile blames Wechat for falling profits: Net profit drops 9% in Q3, Nov 04 2014 [↩]