China Mobile has reported its sharpest yearly fall in net profit this century due to spending on a high-speed 4G network and rising levels of competition in the country's mobile data market.
The operator, which is the biggest in China's three-player mobile market, saw net profit tumble 10.2% in 2014, to 109.3 billion Chinese yuan renminbi ($17.64 billion), while its operating revenues fell by 1.8%, to RMB641.1 billion ($103.5 billion).
China Mobile Ltd. (NYSE: CHL) blamed heavy spending on its 4G network to improve the quality of customer services for the fall in net profit.
Using the TDD LTE variant of 4G, the operator has been able to establish a huge lead over rivals China Unicom Ltd. (NYSE: CHU) and China Telecom Corp. Ltd. (NYSE: CHA) in the 4G market. Its network covered "more than one billion people" by the end of the year, while more than 90 million customers had taken out 4G subscriptions, up from just 1.34 million in February 2014. (See Forget 3G: China Mobile Is a 4G King and China Issues 4G TDD Licences.)
Even so, while overall customer numbers rose from 767 million in December 2013 to nearly 807 million a year later, average monthly revenue per user dropped from RMB67 ($10.81) to RMB61 ($9.84) over the same period.
One problem is that many of the customers China Mobile has recently lured to 4G from older mobile technologies spend relatively little on data services compared with the early adopters.
In a statement, China Mobile said it was also now facing "severe challenges" from over-the-top (OTT) players as well as traditional rivals.
"The substitution effect of OTT business has become more intensified, branching into competition for customers," said the operator. "Competition among traditional operators focusing on existing customers and business and data traffic will be further intensified."
In addition, China Mobile expressed concern about the impact of new policies. Much of its spending has gone on marketing and subsidizing tariffs for aspirational devices like Apple's iPhone 6, but authorities have told all of the country's operators to be more frugal in this area.
Along with that, China Mobile intends to reduce capital expenditure this year. Having increased investments from RMB185 billion ($27.6 billion) in 2013 to RMB213.5 billion ($31.8 billion) last year, it aims to channel RMB199.7 billion ($29.8 billion) into overall capital expenditure in 2015. About RMB72.2 billion ($10.8 billion) of that is earmarked for the 4G network, down from RMB80.6 billion ($12 billion) in 2014.
By contrast, China Unicom and China Telecom look set to ramp up their 4G activities this year, having recently been awarded licenses to use FDD LTE technology, which each player appears to favor over TDD LTE as a 4G solution. (See China Issues LTE FDD Licenses .)
FDD uses one spectrum allocation for uplink communications and another for the downlink, while TDD runs uplink and downlink signals over the same allocation.
China Telecom is planning to spend RMB63 billion ($9.4 billion) in capital expenditure on its mobile network this year, up from just RMB29.6 billion ($4.4 billion) in 2014, with most of the investment set to go on the deployment of 4G infrastructure.
This will certainly increase the pressure on China Mobile, but neither of its rivals seems capable of overturning its 4G lead. China Unicom has reportedly indicated it will be able to make 4G services available to just 100 million of its 300 million subscribers this year, while China Telecom hopes to be serving 100 million 4G customers by the end of the year.
Reporting 2014 figures earlier this month, China Unicom claimed to have captured about 149 million "mobile broadband" customers -- predominantly users of 3G technology -- up from 122.6 million in 2013.
China Telecom, which published its 2014 report a few days ago, says its base of 3G and 4G customers grew by 15.52 million, to 119 million, over the same period.
China Unicom served a total of 299.1 million mobile customers in December 2014, while China Telecom had 185.6 million on its books on the same date.
China Mobile's share price fell by 3% in Hong Kong during Thursday trading, the operator having missed analyst expectations regarding sales and net profit.
— Iain Morris, , News Editor, Light Reading