CDMA Hits Chinese Wall

As China Unicom Ltd. continues its dual approach to mobile growth – it offers GSM and CDMAone services – the long-term success of its relatively recent foray into CDMA territory could lay at the door of Qualcomm Inc.'s (Nasdaq: QCOM) licensing strategy. Qualcomm's cut of the action just might hamper potential uptake, suggests an IDC analyst.

While that may affect Unicom's uptake down the road, it has some more immediate issues, such as its struggle to meet its year-one CDMA subscriber targets. Uptake in the first few months following the January launch were so disappointing that the company's share price took a bit of a kicking. The operator's goal is to have 4 million customers by the end of 2002, but by the end of June, six months into commercial service, it had a mere 936,000 subscribers.

Recent uptake figures have been somewhat encouraging, however. Following a grim May, during which it added just 83,000 to its CDMA subs base, that figure rocketed to 151,000 in June. During the same month, however, Unicom signed up another 1 million customers to the GSM network that now serves more than 33 million individuals.

The large monthly increase shows that the operator is ironing out some of its early problems, such as handset price and availability, and network coverage. Such issues were so serious that the February new customer figure was just 9,000. Following this, Unicom promptly placed a bulk order of 500,000 terminals to local OEMs, and the handset situation, at least, is now largely improved. While Unicom’s CDMA handsets are still selling at CNY2,200 (US$266) – a 40 percent premium on a typical CNY1,600 ($193) GSM handset – the price is dropping by about 20 percent a month, according to UBS Warburg telecom analyst Dylan Tinker.

“A lot of different models are now available in the market,” says Sophia Tso, director of Unicom’s corporate communications. Popular models include the C2101 from HiSense Corp., the KZ610 from Kyocera Corp. (NYSE: KYO), the V680/V8060 from Motorola Inc. (NYSE: MOT), and the CU100 from LG Electronics Inc. subsidiary Langchao LG.

In addition, average revenue per user (ARPU) is not only rising but topping that from Unicom's GSM subs base. It hit CNY119 ($14.39) per month compared with CNY73.8 ($8.92) per month from the company’s GSM subscribers during the first quarter, according to Tso.

So where's the big problem? Research house IDC believes Qualcomm could provide one. Following years of negotiations to break into GSM-dominated China, Qualcomm’s licensing practices may still put local equipment manufacturers at a disadvantage.

“I see CDMA taking between 5 and 10 percent of the [China] market in the early stages, and the long-term growth depends on Qualcomm’s licensing strategy," says IDC senior analyst Michito Kimura. He says Qualcomm’s 7 to 8 percent premiums will continue to inflict burdens on OEMs and maintain price differentials with GSM terminals.

Kimura cautions that IDC is busy readjusting its figures for CDMA uptake in China, though he won’t say whether that's up or down. Qualcomm's strategy could be the key to greater uptake, though. “If Qualcomm was to lower its license fees, the [CDMA] market could [reach] the 20 to 30 percent range after 2004,” he believes.

Right now, though, network coverage still appears to be an issue, even as Unicom continues to build out its next level CDMA1x RTT network, which the company says is on track to be completed by the end of 2002. One CDMA user, Tina Tang, a senior analyst at IDC China’s communications research team, says only about 100 commercial buildings in downtown Beijing have good CDMA reception, and the subways nothing. Out-of-town coverage also fails to impress Tang. “The handset has excellent voice quality,” she says. “But last Saturday, I drove out into the country, for about an hour, and when I tried to use my phone, I couldn’t get a signal.”

These are not insurmountable issues, however, and UBS Warburg's Tinker is bullish about Unicom’s second-half performance, believing that cheaper handsets and improving service quality might even take Unicom close to its 4 million target. “They were off to a slow start, but we are not overly concerned," he says. "We think the numbers will ramp up.”

Looking ahead, Tinker believes Unicom could hit 7 million by the close of 2003, but that's where his figures end. Another analyst at a major research firm, who wished to remain anonymous, has a worst case scenario of 10 million to 20 million CDMA subscribers in 2005, which would leave the GSM evolution route the more likely dominant path to next-generation mobile networks in China. While Unicom has taken six months to attract nearly 1 million customers to the CDMA way of mobile life, its rival and dominant carrier China Mobile Communications Corp. signed up more than 1.3 million subscribers to its GPRS service in the seven weeks following that service’s June launch.

— Paul Kallender, special to Unstrung
http://www.unstrung.com