Telecom Restructuring Rumors: China Telecom on the Chopping Block
Since the issuance of 4G licenses on December 4, 2013, the three major operators holding TD-LTE licenses have experienced vastly different fortunes. China Mobile saw a surge of 10.5 million new 3G users in December, followed by an unprecedented 14.263 million in January. In contrast, China Telecom suffered a setback, adding only 110,000 users in December and losing 800,000 users in January. China Telecom openly attributed this decline to competitors (China Mobile) launching LTE services and intensifying marketing efforts, which heightened market competition. Due to the incompatibility between CDMA networks and TD-LTE, China Telecom, which only obtained a TD-LTE license, was completely unable to compete in the 4G arena (having only data cards and no 4G handsets). Facing China Mobile's dual advantages in policy and capital, China Telecom was left defenseless. Pessimism spread within the company, and many industry insiders began calling on the government to issue FDD-LTE licenses promptly to ensure fair competition.
Although the issuance of FDD-LTE licenses is a foregone conclusion, months have passed without government approval. Moreover, at China Telecom's 2014 work conference, Vice Minister of Industry and Information Technology Shang Bing explicitly required China Telecom to achieve interoperability between CDMA and TD-LTE. According to China Telecom's preliminary estimates, even with strong government support, the most optimistic timeline for commercial interoperability between CDMA and TD-LTE would be at least three years (2017). If conditions are unfavorable, such interoperability may never be realized.
As the national regulatory authority, it is puzzling that the government, fully aware that CDMA operators cannot support TD-LTE, insists they adopt only TD-LTE—a practice that defies objective laws.
It is well known that China Telecom acquired its CDMA network from China Unicom in 2008 at the government's behest. China Unicom originally built the CDMA network ostensibly to introduce a more advanced technical standard, but in reality, it was the result of Sino-US negotiations. To join the WTO, China had to engage in extensive talks with the United States. Under intense American pressure, China was forced to compromise and invest heavily in Qualcomm's CDMA technology. This decision directly led to China Unicom's eight-year struggle with dual networks and indirectly contributed to China Mobile's market dominance.
Due to Qualcomm's high patent fees, CDMA development has always lagged behind GSM, which is free of such fees. Anticipating the restructuring, China Unicom shifted its focus to the GSM network, largely neglecting CDMA maintenance for years. In the 2008 telecom restructuring, China Unicom finally offloaded this troubled asset onto China Telecom. To obtain the long-coveted mobile license, China Telecom not only paid 110 billion yuan but also handed over its fate to Qualcomm. To this day, the limited variety and high prices of CDMA handsets remain a persistent pain point for China Telecom. Furthermore, the low data rates of its 3G network and the inability to evolve to TD-LTE have left China Telecom, despite holding a TD-LTE license, in a dire situation, making the one-sided 4G market outcome inevitable.
Qualcomm's patent policies have not only severely hindered China Telecom's development but also impeded TD-LTE's progress. After the Chinese government explicitly expressed support for TD-LTE as a domestically developed 4G standard, Qualcomm publicly announced its confidence in collecting TD-LTE patent fees in the Chinese market. With the launch of China's 4G networks, Qualcomm anticipated growth in patent licensing revenue in China in 2014. The fact that Qualcomm, despite TD-LTE being a Chinese proprietary technology, threatened to collect higher patent fees naturally sparked intense debate. Many believe this statement directly led to the National Development and Reform Commission's antitrust investigation into Qualcomm.
In recent years, the United States has repeatedly blocked Chinese telecom companies from entering its market under the pretext of "national security," and Snowden's exposure of the "Prism" program has made the public wary of American companies. Against the backdrop of supporting proprietary intellectual property and safeguarding national security, the government may well decide to minimize the use of American equipment in telecom infrastructure (e.g., de-IOE). By restricting the development of CDMA networks, the government can reduce Qualcomm's influence in the domestic telecom market. Simultaneously, leveraging the opportunity to develop the proprietary TD-LTE standard, the government can nurture domestic chip manufacturers, enabling local telecom companies to catch up with international standards.
Based on this reasoning, the unfair treatment China Telecom has endured becomes understandable. While the government's intent may not be to limit China Telecom's growth, restricting CDMA development is the most effective way to diminish Qualcomm's influence in China. From losing its mobile license in the 1999 split between China Telecom and China Mobile, to the 2002 north-south division between China Telecom and China Netcom, and the 2008 acquisition of the flawed CDMA network for 110 billion yuan, China Telecom has consistently been a focal point of restructuring, repeatedly weakened through splits. We have reason to believe that the government, to support proprietary intellectual property, could once again make the decision to sacrifice China Telecom.
On the day TD-LTE licenses were issued, the Ministry of Industry and Information Technology also approved China Mobile Group to authorize China Mobile Limited to operate its fixed-line communications business. This move signaled that the wired broadband market, once considered the last stronghold of China Unicom and China Telecom, would face a massive impact from China Mobile. Months later, we have witnessed China Mobile's aggressive low-price broadband offensive. Leveraging cross-subsidization advantages, China Mobile has launched promotional policies in many regions, such as "300 yuan for 4M broadband for one year" and "1,000 yuan for 10M broadband for two years." According to insiders at China Mobile, although these broadband services are sold at a loss, they reduce competitors' broadband revenue, preventing rivals from gaining advantages in either the broadband or mobile markets, ultimately securing China Mobile's absolute competitive edge.
Since we are entertaining conspiracy theories, let us be bolder. With CDMA subscriber numbers rapidly declining and broadband users continuously churning, China Telecom's market value is bound to shrink significantly. In such a scenario, the government may push for a new round of telecom restructuring. On one hand, the thriving China Mobile could acquire China Telecom's CDMA users, compressing CDMA subscriber numbers to a relatively low level. This would reduce dependence on Qualcomm while alleviating pressure from the United States. On the other hand, China Telecom's fixed-line operations could merge with China Unicom, forming a new nationwide fixed network. If this were to happen, not only would the north-south division in the broadband market be resolved, but China Mobile's GSM+TD-SCDMA+TD-LTE/FDD-LTE and China Unicom's GSM+WCDMA+TD-LTE/FDD-LTE networks could both escape Qualcomm's absolute control, and the need to switch handsets when changing operators would become history. From this perspective, China Telecom's current push for full-netcom phones and China Mobile's forceful promotion of five-mode handsets become entirely comprehensible.
Do not assume that a reduction in the number of basic operators would dampen competition. In today's era of thriving virtual operators, future competition may become even fiercer. If the above speculation holds true, a competitive landscape featuring multiple national virtual operators and several regional virtual operators could emerge within the next 3-5 years. Current telecom companies like China Mobile and China Unicom would then be relegated to roles of network construction and maintenance, providing only network resources without participating in competition. Thus, network and services would be separated, with each focusing on its own specialty.
Of course, just like the mysterious disappearance of the Malaysia Airlines flight, the trajectory of China's telecom industry may be far more complex, and the above analysis is merely my personal speculation. Whether right or wrong, we should trust the wisdom behind every national decision.
Source: NetEase Tech