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Cover Stories Series 2013> WeChat's Overseas Plan> Archive
UPDATED: March 27, 2013 Web Exclusvie
A Telecom Dilemma
China's three major state-owned telecommunications companies are facing challenges and need to create a new profit-making mode
Edited by Pan Shuangqin

China's big three telecoms, namely China Mobile, China Telecom and China Unicom, recently issued their 2012 annual reports one after another.

According to the reports, the net profits of both China Mobile and China Telecom dropped. Although China Unicom ranked first among the three in terms of net profit growth, its traditional businesses such as voicemail and messaging showed declines.

Poor performances

China Unicom's annual report, which released on March 21, shows that its business revenue last year was 248.93 billion ($39.51 billion), an increase of 19 percent, and its net profit is 7.1 billion ($1.15 billion), up 68.5 percent. The growth is mainly attributed to the company's 3G business. Its 3G users increased 36.44 million, reaching a cumulative total of nearly 76.46 million. Income from 3G services rose 82.6 percent, reaching 59.8 billion yuan ($9.65 billion).

China Telecom's financial report, which released on March 20, shows that its 2012 business revenue was nearly 283.1 billion ($45.66 billion), with the mobile service income reaching 92.8 billion (14.97 billion), up 36 percent from 2011. Its income from mobile voice services was 49.1 billion ($7.92 billion), up 27.3 percent, accounting for 17.4 percent of total revenue.

In spite of hundred billions in revenue, China's telecom magnates are suffering from low profits. For example, the net profits of China Telecom fell to 9.5 percent last year.

"China Telecom obtained iPhone 5 sales last year and put a great ammount of money in marketing, thus leading to a sharp increase in the cost of sales and management. Such situation might be continued for a period of time," said Wang Ning, an IT research fellow with CIConsulting.

At the same time, China Mobile's performance declined for the first time in 10 years due to the impact from emerging network communication tools such as Tencent's WeChat mobile instant messaging service, Wang noted.

China Mobile's financial report, which released on March 14, shows that its 2012 business revenue was nearly 560.4 billion ($88.25 billion), up 6.1 percent from 2011. Its users reach 710 million.

Now, China Mobile is actively working on 4G network infrastructure, which might facilitate its mobile phone network construction, Wang said.

China Unicom's business grew with strong momentum last year compared with China Mobile and China Telecom. Currently, China Mobile still remains on top. In terms of business revenues, the market shares of China Mobile and China Telecom accounted for 50.9 percent and 27.2 percent, respectively.

New profit mode

In the future, the operators' data traffic will see growing momentum, while the growth of traditional business like SMS and voice service will see sluggish, even a negative increase. Therefore, China's mobile telecom operators will face dual pressure--a decline in traditional businesses and rising costs.

"Currently, all the operators are changing their management thinking," said Yang Haifeng, editor-in-chief of Communications World Weekly.

Data shows that the number of new 3G users of China Unicom jumped to nearly 3.4 million in Feburary, while that of China Telecom increased 2.81 million. A great number of 2G users are switching to 3G service.

In scrabbling for high-end users, both China Telecom and China Unicom have put in a great deal of subsidies and this will continue for a period of time.

"Due to the oligopoly in China's telecom sector, China Telecom and China Unicom have to sacrifice their huge profits to vie for more users," Yang noted.

Telecom operators are making great efforts to strive for the initial launch and collaborative rights to iPhone. However, smartphones have entered in a great prosperous era worldwide, and mobile phone innovation has reached a bottleneck. In the future, China Telecom and China Unicom will gradually reduce their input in subsidies, said Yang.

WeChat vs operators

The number of WeChat users had registered 300 million as of January 23 this year. Insiders believe that traditional businesses will face a great challenge from the rising of WeChat, a mobile phone text and voice messaging communication service developed by Shenzhen-based Tencent.

" WeChat has caused serious losses in SMS and MMS businesses," said a China Mobile spokesperson, respectively referring to the short and multimedia message services.

According to Wang Xiaochu, Board Chairman of China Telecom, the polarization of WeChat has less impact on the company's business. It might impose a negative impact on traditional businesses, especially on income from SMS and other value-added business.

Data from the Ministry of Industry and Information Technology shows that in January and February this year China's SMS declined 10.6 percent.

Yang believes the emerging new business of over-the-top (OTT)-based technology will definitely affect the traditional ones, resulting in the decline in SMS and voicemail services.

"The charge from OTT service is not reasonable. At the moment, we should encourage openness rather than molopoly," Yang added.

(Source: Securities Daily)

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