China Mobile (NYSE:CHL) will announce its half-year interim results on August 15 amid a lackluster performance by its 3G business. In Q1 2013, the company reported only a 0.3% increase in net earnings over the previous year as it failed to capitalize on its 3G potential. China Mobile’s proprietary TD-SCDMA 3G technology is incompatible with popular smartphones models like the iPhone, which is the prime reason for China Mobile’s unsuccessful 3G foray. As a result, China Mobile has lagged its rivals China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) in terms of 3G penetration, and has consistently lost market share in the last couple of years. 
China Unicom and China Telecom have improved their mobile ARPU levels on the back of burgeoning data demand from their 3G subscribers. In contrast, China Mobile’s ARPU has declined over the last few years as the carrier has not added a sufficient number of 3G subscribers to offset the decline in voice ARPU.
In a bid to get over its 3G issues, China Mobile is conducting large scale pre-commercial trials of its TD-LTE network, which is better placed in terms of industry ecosystem and compatibility as compared to TD-SCDMA. Going forward, we expect profitability (as measured by EBITDA margins) to take a hit as the carrier will have to spend more on smartphone subsidies in order to promote its 4G LTE service.
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3G Subscribers Grow But Not Enough
China Mobile has been facing the consequences of deploying an unpopular and largely incompatible 3G mobile standard. It’s been more than four years since China Mobile launched its 3G service, but less than 20% of the carrier’s 740 million mobile subscribers have switched to 3G to date. In comparison, rivals China Unicom and China Telecom have 3G penetration of almost 40% and 50% respectively. With an incompatible TD-SCDMA network, China Mobile has been losing market share to its rivals. As of June 30, 2013, its market share was close to 63%, having declined from around 70% in 2008. 
China Mobile has around 137 million 3G subscribers. In the last couple of months, the pace of 3G subscriber growth has picked up substantially. For the six months ending June 2013, China Mobile added close to 50 million 3G subscribers, which translates to a 300% increase as compared to the same period last year. However, considering China Mobile’s low 3G penetration, 3G subscribers will have to grow faster to have a meaningful impact on ARPU and profit growth. 
The most worrying trend in China Mobile’s case is the decline in its ARPU level. In Q1 2013, ARPU declined to RMB 63 from RMB 71 in Q4 2012. What this implies is that China Mobile’s 3G subscribers have not been able to offset the impact of decline in voice ARPU. Globally, mobile operators have seen their voice ARPUs decline. However, they have been able to diminish its impact with simultaneous growth in data revenues. This has not happened in China Mobile’s case as less than one fifth of its subscribers have opted for the faster 3G data service, with voice revenues still contributing almost 65% of its overall revenues. 
4G On The Anvil
China Mobile is betting big on 4G LTE in an effort to turn around its data business. The carrier has set out an ambitious plan to build more than 200,000 4G LTE base stations by the end of 2013, with an investment of $6.7 billion. China Mobile has already built close to 20,000 LTE base stations covering 15 cities for the large scale pre-commercial trial of its network. The carrier is much ahead of its rivals China Unicom and China Telecom as far as 4G preparedness is concerned. Once 4G LTE licenses are issued, which are expected to be issued by the year end, China Mobile will be in a leading position to cater to faster 4G LTE data demand. 
China Mobile is unlikely to face incompatibility issues with its TD-LTE network as its ecosystem is more mature and robust as compared to TD-SCDMA. Moreover, TD-LTE is now being deployed by large carriers like Softbank (Japan), Bharti Airtel (India) & Sprint/Clearwire (U.S.). (see China Mobile Readies For A Massive 4G Launch) Therefore, a successful roll-out of China Mobile’s 4G LTE service depends on how effectively the company executes its capex plan and when the licenses will be issued.Notes: