Unicom, Telecom Merger: A 5G Bull in a China Shop
China may be on the verge of sacrificing competition on the altar of 5G. Seemingly terrified of falling behind the US in the race to build a next-generation mobile network, its authorities are reportedly poised to merge China Telecom and China Unicom to create a mobile giant with more than half a billion customers, according to a report this week from Bloomberg.
The move could produce a much stronger telco with the muscle to build a 5G network more speedily. But it would inevitably leave China with just two big national players: the new-look China UniTel (as it may be called), plus market leader China Mobile, which currently serves more than 900 million mobile subscribers. (See China Telecom Beats Rivals but Gets Lost in Translation.)
While both China Telecom Corp. Ltd. (NYSE: CHA) and China Unicom Ltd. (NYSE: CHU) seem to have denied or played down knowledge of the government scheme, investors are taking the Bloomberg report seriously. In Hong Kong, shares in the state-backed operators rose 4% yesterday, after the news surfaced. Nor did the Bloomberg report come entirely out of the blue: Rumors of a merger between Telecom and Unicom have circulated for several years as the two operators have continued to labor in the shadows of the far mightier China Mobile Communications Corp.
Against the backdrop of the trade war triggered by US President Donald Trump, Chinese officials are apparently alarmed by what they see as growing 5G momentum in the US market. Telco giant AT&T Inc. (NYSE: T) is poised to launch 5G services in some US cities in the next few months. Verizon Communications Inc. (NYSE: VZ) is pioneering the use of 5G as a substitute for fixed broadband technologies in residential communities. Both T-Mobile US Inc. and Sprint Corp. (NYSE: S), the number three and four players, have also announced aggressive 5G plans. A merger between those operators, should US authorities allow it to proceed, would be able to bring 5G to market sooner than if the operators remained separate, executives have argued. (See AT&T Picks Indy as 7th Mobile 5G City , 5G Fixin' to Become 'Largest Existential Threat' to Broadband Providers – Analysts and T-Mobile Forming 'Wireless First' TV Strategy .)
The same rationale has influenced government opinion in China, it seems. Should three become two, China would be able to cut out some duplication of effort and channel resources into just two nationwide 5G networks. In the more liberal West, operators in a relatively uncompetitive market might have little incentive to splash the cash, especially given doubts that 5G's availability will fuel an increase in customer spending. But Chinese government pressure on the country's telcos should keep the funds flowing.
According to Bloomberg, trade tension between China and the US is driving the latest developments. Accusing ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) of violating sanctions against Iran and North Korea, US authorities brought the Chinese vendor to its knees, and very nearly sent it to an early grave, with a ban on its purchase of US components. The much bigger Huawei Technologies Co. Ltd. may now be in the US government's crosshairs, and US service providers are already forbidden from using either Huawei or ZTE products in their networks, purportedly due to concern that Chinese authorities could use these technologies to spy on Americans. In the past couple of weeks, Australia's government has similarly barred Huawei from selling 5G equipment to Australian telcos, possibly under some pressure from the US. If China has interpreted these moves as an attempt to cripple its 5G vendors, then fortifying its 5G telcos may be one response. (See ZTE Back in the Game, Seeking Trust & 5G Deals and Australia Excludes Huawei, ZTE From 5G Rollouts.)
Not everyone is convinced, though. One analyst cited in Bloomberg's reports thinks a merger would lead to monopoly behavior and inefficiency, not the 5G lead that China seeks. To others, a merger could seem like a solution in search of a problem. Market-research firm Deloitte thinks China is currently winning the 5G race against the US, outspending its main geographical rival on mobile infrastructure by as much as $24 billion since 2015. In April, Analysys Mason, a UK-based analyst firm, said China then had a "narrow lead" over the US in 5G thanks to proactive government policy and industry momentum. (See America Is Losing the 5G Race, Says Deloitte.)
Moreover, a lot of bluster surrounds nearly all US announcements on 5G. Services will not be widely available across the US when they are launched in coming months, and nor will they seem revolutionary to consumers. If 5G is to spur economic growth, as authorities expect, it will have to power new types of service in non-consumer markets -- providing connectivity for industrial machinery and transportation, for instance. The standards that will underpin this flavor of 5G have not yet been finalized, and there are doubts that 5G is needed or will thrive in some of these areas. (See The US 5G 'Lead' Over Europe Is Bluster.)
Spectrum availability is another reason to worry about the US position in 5G. AT&T and Verizon have focused heavily on the deployment of 5G in much higher, "millimeter wave" spectrum bands. Yet while these can support the very fastest services, they do not carry signals over long distances or provide decent in-building coverage. Their use in smartphones also looks problematic: One concern is that a user's head or hand could block signals as effectively as a wall or tree. In the meantime, there is some anxiety about the current shortage of more versatile "mid-band" spectrum, parts of which are still used by the satellite industry. In Europe and Asia, these mid-band frequencies are attracting most of the 5G attention. (See FCC's Rosenworcel: US 'Falling Behind' on 5G.)
In the long run, a merger between Telecom and Unicom would be as regrettable as a tie-up between T-Mobile and Sprint in the US. China's operators have already pooled some of their site assets in an entity called China Tower, helping to cut unnecessary spending on duplicate infrastructure. A more sensible government move would be to mandate other forms of infrastructure sharing without killing retail competition. In its absence, a wave of consolidation in China and the US might support a more rapid deployment of 5G services in the next couple of years. But it will ultimately leave consumers in both markets worse off. (See T-Mobile & Sprint: Marriage Made in Hell.)
— Iain Morris, International Editor, Light Reading