Abstract

The series of call charge cuts that China's mobile phone operators have implemented since 2004 have eroded the competitiveness of PHS service. PHS subscriber growth has slowed, and ARPU has fallen. Regular mobile phone service offers better signal reception, a wider range of services, and charge rates that are now almost as low as those for PHS. It is anticipated that PHS subscriber growth will remain weak.

While they wait for the Chinese government to issue the first 3G licenses, China's fixed-line operators -China Telecom and China Netcom -are faced with the difficulties in maintaining fixed-line telephony and PHS growth. Both operators have been working actively to develop new business areas such as broadband and IPTV (Internet Protocol Television), while attempting to improve their PHS services with roaming and dual-mode mobile phones. They have also allocated resources to developing the rural market.

PHS' price advantage is offset by the restrictions that the Chinese government has placed on roaming. Conforming to these restrictions means that PHS can only be used as a supplement or extension to fixed-line service. A key element in the fixed-line operators' PHS strategy has therefore been the search for ways to implement roaming with PHS. China Telecom and China Netcom have tried to get round the MII prohibition of roaming by introducing PHS mobile phone models with removable SIM cards. With this method, a PHS user can purchase SIM cards to use in two different cities; however, the extent of the roaming that can be achieved in this way is still very limited and requires extra cost. While the introduction of PIM cards will facilitate the introduction of new value-added services, these are probably not the type of services that low-income PHS users will be particularly interested in.

An alternative strategy is to integrate PHS with fixed-line telephony or with mobile phone service. The Homebox concept integrates subscribers' PHS mobile phone with their fixed-line telephone, giving them the convenience of a cordless phone at low cost. Dual-mode PHS mobile phones integrate PHS with regular mobile communications, by enabling the user to switch between PHS and GSM. As these mobile phones are likely to have a negative impact on the development of regular mobile phone service, the MII has attempted to prevent their introduction by refusing to issue network access licenses. The government's attitude has discouraged most Chinese mobile phone makers from producing mobile phones of this type. UTStarcom, which holds the largest share of the Chinese PHS mobile phone market, introduced a single dual-mode PHS model in 2004, but, as of 2006, only ZTE was undertaking mass production of dual-mode mobile phones.

PHS service has helped China's fixed-line operators to accumulate experience in mobile communications network deployment and operation. The service has also helped them to retain some subscribers that might otherwise have been lost to the mobile phone operators. The number of PHS subscribers continues to grow, providing a boost to the fixed-line operators' cash flow. However, as the competition from the mobile phone operators becomes more intense, the contribution of PHS to the fixed-line operators'' revenue and profits is becoming more and more limited. Having invested heavily in PHS network development and built up such large PHS subscriber bases, the fixed-line operators will continue to provide PHS service even after they secure their 3G licenses. When 3G begins to take off, the main target market will be medium- and high-income consumers, not the low-income consumers that use PHS, so PHS service and 3G service will complement each other. Rural areas -where telephone penetration rates and income levels are both low -will continue to offer significant potential for the development of PHS service. Until 3G networks and terminal devices reach maturity, 3G will be coexisting with GSM, CDMA, and PHS services. This transitional period is expected to last for many years, ensuring continued opportunities for PHS service using dual-mode or multi-mode mobile phones. The fixed-line operators will also be able to leverage their existing PHS networks and subscribers to develop FMC (Fixed Mobile Convergence) service, by integrating PHS mobile phones with fixed-line telephony service.

Appendix

List of Companies