Times are tough for China Mobile - just hang in there

China Mobile has reported that it’s profits dropped by 1.6% during Q2, compared to last year. This is despite it’s total subscribers rising to almost 500 million during that same quarter - that’s right, around 7.35% of the entire world population are subscribed to China Mobile. Roughly every 13th person on the planet is a China Mobile subscriber. So why have its profits dropped?

Mostly 3G, but also greater competition.

Last year, the Chinese government restructured the mobile industry to allow for greater competition. Since then, we’ve also seen 3G arrive in China. A combination of factors based around these two events have caused a dip in China Mobiles profits for the first time since 1999.

The Chinese mobile market is in an odd place right now - all the major operators are gearing up for the launch of 3G services, but it’s not really ready yet. None of them have launched any hugely attractive 3G smartphones yet (just look at the disappointment of the Mini 3i on Monday).

3G networks:

China Mobiles two competitors, China Unicom and China Telecom, have an advantage over China Mobile when it comes to 3G. They were both extended licenses to use a particular type of 3G network called W-CDMA. This is one of the more popular network types globally - for example, it is the basis of the entire 3G network of Japanese giant NTT DoCoMo. China Mobile, on the other hand, is using a proprietary form of network called TD-SCDMA. This is the network type that the Chinese government declared would be the standard for the country. And since the Chinese government is effectively China Mobiles parent company, China Mobile has to use this network as its standard. There’s just one problem - it was designed specifically so that Chinese networks wouldn’t have to rely on Western technology. This has had the side-effect that no one else uses it, anywhere. So that is causing delays and complications in the creation of its 3G network that the competition isn’t suffering.

3G users:

Another big problem for China Mobile is the “pioneer” issue. 3G had a long, hard climb to the top in Europe. It seems ubiquitous now, but a lot of operators sweated blood and tears to get it that way. And China Mobile is only beginning the process now - Chinese mobile owners aren’t used to 3G. They use their devices almost exclusively as voice and text devices. China Mobile is faced with the task of educating the public and spreading the use of 3G, while at the same time they have to create a functional network. So a huge amount of money is being poured into infrastructure while the consumers aren’t there yet to use it - and that’s not really a problem that can be avoided.

What we think?

Apart from anything else, the sheer size of China Mobile is working against it. Like I said, over 7% of the world population is on its network. A large part of the operators profit plan depends on hauling in a huge number of subscribers and profiting from them. But there are a finite number of subscribers in the world, something other operators are being challenged by. So subscriber up-take is slowing down. Not only that, but the amount that each individual subscriber is costing China Mobile is going up - 3G networks are expensive to build and maintain, and 3G handsets are expensive to subsidise. So not only is the number of subscribers dropping, but the profit made on each subscriber is also going down.

As the mobile market in China approaches saturation, its existing model based on subscriber numbers won’t work. So China Mobile is investing in the future. There are only 1 million or so people using its 3G services now. But if it can make 3G more attractive to the Chinese phone-owning public, it’s made. The number of new subscribers may be dropping, but it already has a huge subscriber base it can sell new handsets to. If it sets itself up with the best 3G network in China (which is well within its abilities), it can eventually pull subscribers away from the competition. In an increasingly saturated market, the only way to go is sideways.