China Unicom’s 3G-4G Subscriber Adds Slow Down In August On Growing Competition, Dual 4G Strategy

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China Unicom (NYSE:CHU) reported a marked decline in 3G and 4G subscriber additions in August with about 1.3 million adds, compared to over 2.5 million in July and over 3 million in June. In terms of high speed (3G and 4G) user gains, this was the carrier’s weakest monthly performance in over three years. Currently, the carrier offers 4G services on the TD-LTE standard, the licenses for which were granted by the government in December 2013. However, it is in the process of building its FDD-LTE 4G network, after the government recently issued licenses to carriers to conduct a hybrid FDD-LTE 4G network trial in select cities in the country. [1] [2] ((Key Performance Indicators, China Telecom, September 2014)) [3]

China Unicom’s performance was dwarfed by market leader China Mobile (NYSE:CHL) as well as smaller rival China Telecom (NYSE:CHA), which gained about 10.5 million and 1.8 million high speed subscribers in the same period, respectively. Increased competition in the 3G/4G market, aggressive 4G network expansion by China Mobile and a dual 4G strategy seem to be weighing on China Unicom’s performance. Considering that China Unicom entered the 4G market a few months ago by selectively launching TD-LTE services, we expect the carrier to face problems in expanding its 4G network in the near term with its mixed approach.

Our current price estimate for China Unicom is $17, implying a slight premium to the market price.

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China Unicom’s Dual 4G Strategy

When the government awarded TD-LTE licenses last year, China Unicom was unsure on whether to use the home-grown TD-LTE standard or wait for the FDD-LTE license to launch 4G services. Eventually, the carrier chose to selectively launch 4G services on the TD-LTE standard by building the required network itself and wait for FDD-LTE licenses to expand further. Now with the FDD-LTE trial licenses in place, the carrier intends to expand its 4G network using this technology.

The company could not choose to extensively expand its 4G offerings only on the TD-LTE standard because its existing 3G network (WCDMA) was compatible only with the FDD-LTE 4G standard (rather than TD-LTE), which would not have allowed a seamless transition of its existing 3G user base to 4G. In contrast, market leader China Mobile’s 3G network (TD-SCDMA) was fully compatible with the TD-LTE standard, which is the reason for its rapid 4G expansion and subscriber gains in the last eight months.

Problems With China Unicom’s 4G Strategy

China Unicom earlier announced that, as part of its 4G strategy, it would unify its 3G and 4G operations in network construction and monthly plan rates. This reflected in its 4G plan offerings, which were priced similarly to its 3G plans. Additionally, the carrier offered several handset options to potential subscribers, which were compatible with both its 3G WCDMA as well as 4G TD-LTE networks. These handsets included popular smartphones such as the Samsung S4, Samsung Note 3, Sony Z1 and HTC One Max. [4] [5]

However, there is still a lack of clarity regarding some aspects of the carrier’s strategy, such as how subscribers will use these new handsets with the carrier’s new FDD-LTE 4G network. Also, whether China Unicom will be keeping its TD-LTE network independent of its FDD-LTE network is unclear. The best plan for the carrier to provide seamless 4G connectivity in the long run may be to introduce handsets which are compatible with all three technology standards- WCDMA 3G, TD-LTE 4G and FDD-LTE 4G. However, since such handsets are not in use anywhere else in the world, this could prove difficult in the near term.

Apple‘s (NASDAQ:AAPL) latest iPhone models launched earlier this month support all the aforementioned technology standards, including the HSPA+ network provided by China Unicom. However, we believe this is likely to benefit China Mobile more than any other carrier in China, considering its expansive 4G presence and better network quality. China Unicom will need to work on developing a robust and seamless 4G network in the near term to effectively compete with rivals in the rapidly expanding Chinese 4G market. [6]

*Note: Apple’s iPhone 6 and iPhone 6 Plus models are not yet officially available for sale in China.

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Notes:
  1. Press Release, China Unicom, June 27 2014 []
  2. Operating Data, China Unicom, September 2014 []
  3. Operation Data, China Mobile, September 2014 []
  4. China Unicom finally rolls out 4G, but confusion reigns over dual LTE strategy, Tech In Asia, March 18 2014 []
  5. 4G/3G Mobile Offers, China Unicom, 2014 []
  6. iPhone 6 and iPhone 6 Plus: The world’s best phones for wireless and LTE connectivity, ExtremeTech.com, September 11 2014 []