Good first-half results from China Unicom Ltd. suggest that China’s number two mobile operator is making headway with its attempt to lure subscribers onto its CDMA network (see China Unicom Announces H1). But while CDMA growth is picking up after a disappointing start, analysts believe Unicom is unlikely to adopt the CDMA 3G evolution route with 1x-EVDO and 1x-EVDV.

Such a decision would be a blow for CDMA patent king Qualcomm Inc. (Nasdaq: QCOM) in terms of potential revenues slipping through its fingers. Equally, it would be bad news for the CDMA network equipment suppliers like Lucent Technologies Inc. (NYSE: LU), Ericsson AB (Nasdaq: ERICY), Nortel Networks Corp. (NYSE/Toronto: NT), and Motorola Inc. (NYSE: MOT). All four, via their local business units, were awarded contracts in phase one of Unicom's current CDMA rollout.

In the meantime, Unicom's latest financials revealed all around good news for the operator, with total revenue to June 30 hitting 17.99 billion yuan (US$2.1 billion), up 32 percent from a year ago, and net profit up 2.7 percent to 2.25 billion yuan ($271 million).

Unicom added just over 7 million cellular subscribers in the six months, taking its total to 34.1 million (33.13 million GSM customers and 936,000 CDMA customers). Unicom would prefer to be adding CDMA customers, as they spend more. The average revenue per user (ARPU) per month from its GSM subs in the half was 71.6 yuan ($8.65), down from 92.5 yuan ($11.17) per month a year ago, while ARPU for CDMA users was 106.5 yuan ($12.86). GSM revenues, at 13.32 billion yuan ($1.61 billion), accounted for 97 percent of the total, with CDMA bringing in just 450 million yuan ($54.4 million).

Since June 30 the CDMA user base has risen steeply, suggesting that the carrier is overcoming some of its early problems (see CDMA Hits Chinese Wall). Unicom added 322,000 customers in July and a further 432,000 subs in August to take its total to 1.69 million. However, this still makes the company's target of 7 million CDMA users by the end of the year seem unattainable.

Of particular note, however, is that there appears to be little evidence of CDMA cannibalizing Unicom's GSM numbers. While the operator added 1.4 million mobile customers in August, as many as did its main rival China Mobile Communications Corp., its CDMA growth was not at the expense of its GSM subscriber base, says UBS Warburg telecom analyst Dylan Tinker. With CDMA handset costs falling by 10 percent a month, and the launch of a pre-paid CDMA service in the pipeline (Unicom did not reply to our polite requests for information), Unicom could soon be boasting better subscriber growth figures than China Mobile.

UBS Warburg also believes that new additions to the CDMA base are even bigger spenders than the ARPU figures suggest. New additions to the service spend about 145 yuan ($17.5) per month, but the overall average is depressed by the low ARPU of the subscribers inherited from Great Wall Telecom, which Unicom took over last year. In addition, the per user capital expenditure for the CDMA service stands at $190 and falling, compared with $210 per GSM customer, according to UBS Warburg.

Developer support for the technology is also growing. “CDMA development is hitting a growth phase. At the end of August there were nearly 200 developers and [Unicom’s] difficulties have been solved, basically,” says China Research Corp. senior consultant Anty Zheng Yun. Application support will be further boosted by Unicom's recent decision to offer additional services using Qualcomm's Binary Runtime Environment for Wireless (see China Unicom Picks BREW).

This all sounds very positive, and indeed should see the company reach at least 4 million CDMA subscribers by the end of 2002 and upgrade its base stations to 1x-RTT, says Warburg's Tinker. Officially, the upgrade to CDMA 1x is due before the end of this year, with a capacity of about 15 million subscribers, according to the carrier, though Tinker expects the upgrade to be completed in the first quarter 2003.

But will the carrier go further with CDMA? Unicom says it expects China to have between 260 million and 290 million mobile subscribers by 2005. According to Unicom spokeswoman Sophia Tso, the operator intends to have capacity for up to 70 million CDMA customers by then. However, it has yet to announce a 3G strategy, if you count 1x as a 2.5G technology (which Unstrung does -- see A Wireless Taxonomy).

This indecision isn't because Unicom is agonizing over whether to adopt time-division synchronous code-division multiple access (TD-SCDMA), the homegrown 3G technology, or 1xEVDO/DV before the Ministry of Information Industry (MII) awards between two and four 3G licenses next year, says Tinker. He says Unicom isn't contemplating either technology and is not concerning itself with 3G license applications. Why? "It's too expensive for China and there’s no market for it." Those seem like good reasons.

Tina Tang, senior analyst at IDC China's communication team, agrees that the potential CDMA user base will not justify a further upgrade. IDC's latest estimate is that CDMA will account for a maximum of 10 percent of the total mobile subscriber base in 2005, she says.

At most, Unicom will consider a CDMA upgrade in "selected areas" beginning at the end of next year, says Tinker, who, when pressed, limits himself to "Shanghai and Beijing" as the only potential upgrade zones.

— Paul Kallender, special to Unstrung
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