Envisioning China's 3G Market (1) 3G Will Not Increase ARPU
High ARPU users will use 3G first, while 3G will not increase users' ARPU.
[+] The clamorous 3G market in China
3G has been a hot topic during the recent years. Numerous academic studies are intermingled with the speculation of equipment manufacturers, the concerns from inside the industry on the development of Chinese own 3G standards, and even the split-up of carriers, all those making the prospect of the 3G market even harder to predict.
China's mobile communication market has huge potentials. That is why the country's 3G market has got the attention of the entire world. However, whether or not to launch 3G, or how to launch it is often affected by non-market considerations, which are scarcely brought into open discussion on the media.
Since I made up my mind to write about trends of the high-tech industry, I have never doubted that a technology will not bring its investors any return if it is not accepted by the market and the consumer. If the investors cannot hold on to the day it is eventually accepted, they will starve.
How to issue 3G licenses? How to split up and then reconstruct carriers if necessary? How to treat Chinese own 3G standards? What will be the fate of the PHS (Personal Handphone System) service after the start of the 3G time? Are value added services really so fabulous as to bring the carriers back to the time of high ARPU? The answers will have to depend on the market.
[+] Carriers can do without 3G
In the first place, carriers' attitudes toward 3G depend on the situation of the mobile communication market in their specific countries. Currently, most countries that are trying to develop 3G are facing a saturated 2G market, where the growth of the subscriber number is slowing down and ARPU is declining each year. That has brought two interesting questions:
First: Would carriers be dying if they do not deploy 3G systems? The answer is "no". Currently, an argument is widely spreading in the industry that 3G could save the carriers from the trouble of declining revenue growth. However, the fact is: most carriers could sit at ease with the revenue from 2G voice services. Instead of rushing to put the money in, they could just wait for a few more years.
In Europe, for example, most carriers have not been passionate, expect Hutchison 3, which is driving hard to secure a 3G subscriber base, as It does not have any 2G one (by offering handset subsidies much higher and toll fees much lower than those of its peers).
As to the question in Japan, why is NTT DoCoMo, which introduced the 3G service (i.e. FOMA) as early as in October 2001 when the mobile communication market was far from saturated, so enthusiastic? The fact is, DoCoMo was planning to replace its out-of-date PDC system with 3G to converge with the trend of the world.
[+] PHS service and the mobile communication market in China
The second question is: what is the situation of China's mobile communication market? It has been growing rapidly for previous years, while is slowing down recently. I agree with many analysts on the view that "the mobile communication market has reached a turning point." In the following figure, I even predict that the number of mobile subscribers in China will not exceed 600 million (the red curve).
Please note that the number of mobile subscribers include those of the PHS service (the purple curve). Although PHS is defined by the government policy as a portable fixed line telephone service, for subscribers, there is little difference in terms of the user experience compared to mobile service of GSM/CDMA. Therefore, to consumers, both services could substitute each another.
It is for that reason that the lower tariff of the PHS service has forced China Mobile and Unicom to defend themselves by continuous cuts in their respective voice service charges. From the tendency curves in the above figure we can also see that, in the next few years, both the growth speed and net increase of the subscriber number of the PHS service will surpass those of the GSM and CDMA services.
The development paths of the mobile communication service have been largely similar across the world. In the start-up stage, the subscriber number is usually small, but with high-end subscribers (with high ARPU). Comparatively, most new subscribes are of the middle end in the expansion stage and the low end in the saturation stage. In China, a large portion of the low-end subscribers in the mobile communication market have been intercepted by the PHS service.
[+] 3G will not increase ARPU
If the 3G license is not issued, there will be 100 million more subscribers for China Mobile and Unicom to fight for. Although those are low-end customers that could be pulled in only through low tariff, the figure itself would be attractive enough for carriers and handset manufacturers over the world to lick their lips.
With the above explanations, the question on whether or not to launch 3G turns into a much simpler one: "should carriers try to attract the remaining low-end customers with lower rates (including toll fees and handset subsidies), or should they invest in new systems and equipments to embrace the 3G subscribers? (According to market expectations, they would be high-end customers.)"
I have read many reports on domestic media saying that, as 3G value added services are easier to use and their contents more interesting, they could be able to get more money out of the purses of subscribers. Some even predict that 3G ARPU will be 60% higher than that of 2G. Such reports are ridiculous, leading to an over-high market expectation for 3G.
What I must point out is the first subscribers of the 3G service will be heavy users, who will have already spent a lot on 2G value added services. Therefore, their expenses will have little to do with the availability of 3G. In other words, it is "the subscribers with higher ARPU in 2G will use 3G service first", not "3G will increase ARPU of the subscribers."
[+] Typical cases in mature 3G markets
Except Japan and South Korea, 3G markets around the world are still in their start-up stages, where ARPU is naturally higher than that in the 2G markets, which are already in their saturation stages. Moreover, there are cases of mature 3G markets, which could prove the above points.
South Korea is one of the countries with the most mature 3G service. Its telecom system has developed from CDMA 95AB (2G) to CDMA2000 1X (2.75G) and then to CDMA2000 1X EV-DO (3G). The following figure shows the development of SKT, and June is a mobile video service brand of the company.
The above figure shows that, with the spread of mobile terminals, the proportion of 3G subscribers is increasing every year. In the meantime, the ARPU of the real 3G subscribers, including data ARPU and voice ARPU, is much higher than that of the conventional subscribers.
It gives us some inspiration: 1) heavy users of value added services have much longer call time than conventional subscribers; 2) There would be low-end subscribers too as 3G enters its own saturation stage, and then the overall ARPU of carriers will return to the level of 2G again.
Why should carriers invest big money in 3G to obtain subscribers who already have high ARPU in 2G? The answer depends on whether the 3G subscribers are those upgraded from its own 2G subscribers, or new subscribers obtained from the market (or other carriers). In the next section, we will talk about the marketing strategies of carriers.
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