Wireless in China Today "From Little Red Book to Little Red Phone"

1. Wireless in China Today"From Little Red Book to Little Red Phone" Stephen Hope Orange Labs

2. Contents • The Chinese Telecom Service Market • 3G – What, How Much and When? • The 2008 Olympics • Technology Neutrality • Mobile TV • WiMax • Impact Assessment • Conclusion

3. 中国铁通、中国 Others, 卫星等 中国电信 中国移动 China Telecom, China Mobile, Mobile 457m Subs Fixed 373m Subs 中国网通 中国联通 China Unicom, China: Telecom Service Market China TieTong - from 2004 formerly

4. China: Mobile Market (As at Mar 2007 [source MII]. Figures in brackets 2004 figures at first mission) 中国联通 China Unicom 中国移动 32 (37)% China Mobile 109(83)m GSM Subs 38(25)m CDMA Subs 68 (63)% 316(188)m GSM Subs • There are also ~91(50)m PHS Subscribers as Fixed Line Wireless extensions (China Telecom and China Netcom

5. A Changing but still Growing Market • China Mobile had 45% of total telecom service revenue ($85Bn) in 2006. • Q1 07 19.5% Revenue Growth for China Mobile vs 4.2 % China Unicom • Growing mobile-fixed substitution impacting on China Telecom and China Netcom the Fixed Operators • Revenue Growth 2.2% and 0.2% respectively • Currently 91(50 in 2004)m PHS Subscriber base operated as Fixed Line Wireless extensions by China Telecom and China Netcom • predicted to shrink to 3m by 2011 as Mobile Operators have aggressively implemented CPP (Calling Party Pays). • Capital Investment reduced in preparation for Broadband and new 3G licences • The previous model of both Called and Calling Party Pays – the norm in 2004 – was the key reason for the growth of the PHS market.

6. A Changing but still Growing Market • The number of CDMA subscribers remained static in 2006 • China Unicom likely to spin off its CDMA assets and sell them to China Telecom in 2008 • Net Subscriber additions still at 5 to 6 million per month - 80% China Mobile – 50% Rural • Increasing Rural Market Penetration through low cost handsets is key for subscriber growth

7. 3G – What, How Much and WhenThe Waiting Game In 2004 3G Award of Licences was widely expected within the next year……. • Speculation was that China Mobile would receive W-CDMA, China Unicom CDMA-2000 and China Telecom a TD-SCDMA Licence. In 2007 3G Licences ... still awaited… • A deliberate government strategy to encourage the development of Chinese IPR? • An expected Leadership reshuffle may further delay licence awards until 2008 • Large scale trials in all the 3 technologies.

8. The rise of TD-SCDMA (1) • Much of the IPR in TD-SCDMA is owned by Datang, in partnership with Siemens • In 2004 early trials TD-SCDMA significantly lagged other standards in commercialisation • Slow take up of 3G worldwide allowed external investment to be maintained to develop own standards and IPR rather than paying Qualcomm etc • In 2007 the picture has changed…..

9. The rise of TD-SCDMA (2) • "China already has 3G (TD-SCDMA) Networks deployed“ • The trial networks have been extended • TD-SCDMA Forum stated Feb 2007 that 20000 users with more than 40 different terminals from 14 companies have participated in the 1st round of trials • 2nd round will use significantly higher numbers • A key driver is the 2008 Olympics

10. The 2008 (Political?) Olympics (1) • January 2007 - MII announced TD-SCDMA had passed a series of tests and selected as a 3G technology • China Mobile have been asked by the Chinese Government to build and operate a TD-SCDMA network in 10 cities including the 6 Olympic Games Cities. • This fulfils the Chinese Government pledge for 3G coverage for the Olympics • During the time of the 2007 mission infrastructure contracts were awarded • Datang 27% and ZTE 46% ($414M ) of contracts to date • Other players are shown in the table

11. The 2008 (Political?) Olympics (2) • Announcement in July 2007 by China Potevio (born out of China Putian, largest Chinese handset manufacturer and IT manufacturer) of successful handover between 3G TD-SCDMA and 2G GSM (both packet- and circuit- switched) will improve the potential business model for China Mobile • This TD-SCDMA deployment is without a licence. • Any future 3G Licence award is seen as being a separate activity from the "Trial" • It is anticipated that China Mobile will receive a licence for TD-SCDMA • …….but NO timescales for award of 3G licences

12. Technology Neutrality & Licensing • EU Commissioner Viviane Redding reported assurances that China would be 3G technology neutral. • MII announced W-CDMA and CDMA treated equally and will be used in China • More than one 3G license would be issued • Operators allowed to choose which standards they wish to use • Government would still determine the number of licences issued. • Terms of WTO membership appear to have had some impact • …….but NO timescales for award of 3G licences

13. Market Demand for 3G Services? • In 2004 it was predicted that Mobile Demand would plateau at 500m out of 1.3Bn population due low income levels in rural areas. • Current Mobile Market as of June 2007 is 451 million GSM subscribers and 38 million CDMA • CDMA subscribers still showing a slight but not dramatic increase in numbers • GSM subscribers still increasing at 5m per month although the relative rate of increase has slowed ! • Mobile Operators particularly, China Mobile, have aggressively addressed Rural Areas through the introduction of low cost handsets and cheaper tariffs to maintain the growth.

14. Market Demand for 3G Services? • Also in 2004 • Voice the Key Revenue Driver • SMS the main Data Revenue Driver • In 2007 mobile ARPU levels at around 8.5 – 9 Euro have not increased over the past two years, Voice and SMS still being a key driver but the Chinese Telecom market as a whole saw a 34% increase in non-voice service income in 2006 • As with Europe, the mobile industry needs to further increase data usage in a static ARPU market for long-term growth, although subscriber numbers are still increasing • The Olympics and 3G offers a significant opportunity for encouraging usage of data services across the full subscriber base • China Mobile have announced some 34 new Olympic Services and working with many partners.

15. Market Demand for 3G Services? • China Centre for Information Industry Development published optimistic survey results in December 2006 • 77% of China Mobile's customers were keen to buy 3G Handsets when they become available citing Mobile TV, Video Calls and Mobile Internet as attractive services. BUT • 76% of those surveyed buy handsets worth less than 2500 Yuan ($320) with 25% going for handsets less than 1000 Yuan ($128) • Less than 24% would buy a handset over 2500 Yuan

16. Market Demand for 3G Services? THEREFORE • The cost of the handset from both an operator and end user perspective will have a significant impact on the economics of supplying a successful 3G service without some form of handset subsidy business model • The introduction of the Calling Party Pays model with cheaper tariffs and low cost handset is succeeding in gaining a greater subscriber base from the rural market but these may not be able to afford the 3G handset without such a subsidy HOWEVER • MII has recently issued 3G Video Telephony interoperability standards for TD-SCDMA and W-CDMA handsets and is expected to extend these to the PSTN and ISDN. This should significantly drive revenues, particularly for those living in the cities and wishing to communicate with their families in rural areas • This standardisation activity is an example that Europe could follow !

17. Mobile TV Regulatory Structure • MII – Ministry of Information and Industry • SARFT – State Administration of Radio Film and Television

18. Mobile TV • Like their European counterparts the Chinese Telecoms Operators view services through convergence of telecoms and broadcast as an important market and aim to introduce TV over 3G. Other standards being reviewed • TV to the Mobile competes within a regulatory structure that protects the dominance of cable and investment in digital TV • SARFT controls IPTV and content in mass media • MII controls Telecoms • MII and SARFT at times appear to act in competition • Telecoms Operators must partner with a licensed media companies • The Chinese Government trying to gain cooperation to ensure Olympics opportunities are realised

19. WiMAX – A Market in China, A Market for China? (1) • WiMAX products figure strongly in the portfolio of the major Chinese Infrastructure manufacturer such as Huawei and ZTE, like their other international counterparts, for international export • Market forecasts from the MII suggest the Chinese Broadband Wireless Access market will comprise some 14 million users with a manufacturing market value of 25 Billion RMB • The operators are mostly expected to be Local and National Government, Medical and Emergency Services - rather than the personal WiBro concept in S.Korea • Whilst the MII presents a vision of WiMAX and 3G TD-SCDMA as complementary technologies, the informal view suggested that, unlike S.Korea where the Govt led the drive for WiBro, there will not be a policy that could undermine 3G market growth

20. WiMAX – A Market in China, A Market for China? (2) • An interesting SME Jushri which is a spin-off from the Shanghai Wireless Research Centre, well supported by both local and national govt, is set up to develop and industrialise BWA, first fixed and then upgrading to mobile access • Working with China Netcom ‘to deploy WiMAX equipment for the 2008 Olympics’ • Their two target markets include Metropolitan Area Networks and the Emergency Services, plus, in the longer term, Interactive Broadcasting

21. WiMAX – A Market in China, A Market for China? (3) • Interactive Broadcasting - an initiative to evolve a Chinese development of WiMax dubbed "ChiMax“ • Designed to support converged telecom and broadcast services in the UHF broadcast spectrum • Based upon IEEE802.16e but incorporating additional locally developed IPR to overcome some inherent problems in current technology for this application • A drive towards national and international standardisation • ChiMax is a significant development but current regulatory differences between MII and SARFT could hold this back. Support from national government may be an indication of a change of approach • WiMAX an internal market, not one for external players

22. Impact Assessment

23. Impact Assessment 3G TD-SCDMA • The early cooperation between Datang and Siemens, followed by joint ventures and further foreign direct investment, has accelerated the development of the technology • TD-SCDMA accepted at the ITU as a 3G Standard. Development continues but still lags behind W-CDMA development. This may hinder export potential, although domestic market potential is huge. (…and, China Mobile is looking for acquisitions in Africa) • Despite 3G licence delays, Chinese companies such as ZTE and Huawei have firmly established themselves as major international players in all 3G technologies

24. Impact Assessment Mobile TV • Yet to happen in China • A potential market enabler for 3G particularly for the Olympics in 2008 • Subject to significant regulatory hurdles • TV over TD-SCDMA seems the most likely prospect in the first instance, although other standards being reviewed. • Even if regulatory hurdles are overcome, mass market scalability and capacity issues of a comparatively immature technology would still give some concern for real time broadcast.

25. Impact Assessment WiMAX • WiMAX not a central plank of telecom policy in China • International Chinese companies have WiMAX within their product portfolio but potentially not as mature as companies such as Samsung, for whom it is a major product investment • In 2004 Chinese universities were noted to be carrying out WiMAX R&D for Korean Companies, so expertise will be available in China • The developments by Jushri in this area for Civic networks, including the Olympics and their development of ChiMAX to support converged telecom and broadcast services in the UHF band, are very significant but still potentially subject to regulatory difficulties • There are significant opportunities in the Domestic market for Jushri but it seems unlikely they will be able to develop and grow rapidly enough to make an impact in both the domestic and international arena • Strategically it seems unlikely that the government would support a technology competing with TD-SCDMA at this delicate point in the proceedings

26. Conclusion • Since the 2004 mission there is no doubt that Chinese telecoms infrastructure companies such as ZTE and particularly Huawei have become major international companies, supplying networks of all types worldwide. • The sheer market size and revenue potential, albeit at a lower ARPU than Europe, makes companies such as China Mobile hugely powerful in developing and fulfilling Government telecoms policy and there is no doubt that they will succeed in driving 3G TD-SCDMA forward. • Irrespective of the fact that the products are well made, much of the early success of Huawei and other major Chinese companies was because of the very favourable price differential between them and US/European manufacturers, due to the much lower cost base. • With the growing economy and improving living standards for the city dwellers, and increased expectations, one can envisage this may not be the case in the longer term