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Chinese are voracious consumers of mobile data. In fact, 80% of the 777 million Chinese mobile subscribers use text messaging and there are more mobile Internet users in China than there are Americans. So why has high-speed 3G been such a bust?
It is more than one year since the launch of 3G in the Middle Kingdom and only around 3%, or 25 million people, have subscribed. It is time to assess what went wrong and how the industry can address the main barrier to adoption – price.
The Ministry of Industry and Information Technology continues to stick by its goal of 180 million 3G consumers by the end of next year. Unfortunately for carriers, who have already invested more than $21 billion into 3G infrastructure, consumers are not adopting value added services as quickly as they are abandoning voice. Last year, voice average revenue per user plunged by 10%. Based on the experience in Western Europe, where 3G was widely deployed in 2003 but had a tepid initial response, I would suggest three approaches:
1. Handset subsidies
2. Handset diversity
3. It’s the Internet stupid
Handset subsidies: Chinese consumers are price sensitive. The top three reasons for not adopting 3G are all price-related: hardware cost, service plan cost and upfront payment. Carriers have focused their marketing efforts almost exclusively on capturing the low-ARPU, mostly rural 40% of the population that does not yet subscribe to mobile. This overlooks the 50 million Chinese earning $20,000 per year and spending at least $22 per month on mobile data services. If the carriers are serious about converting those higher-margin consumers to 3G, they will need to begin with handset subsidies.
I’m talking to you, China Unicom (CHU). The No. 2 carrier (20% market share) is squandering its three-year exclusive deal with Apple Inc. (AAPL) for the iPhone and now has a similar arrangement for iPad. Currently, iPhone owners are required to pre-pay a deposit of $1,032, a princely sum in a country with per capita GDP of $6,675. This cost is then credited against monthly fees. Not surprisingly, the 300,000 iPhones that China Unicom has sold is paltry relative to Morgan Stanley’s estimate of 2 million grey-market iPhones in China. This figure is also substantially lower than neighboring, Korea, which has 3.5% of China’s population but has sold three times as many handsets in the same period. Let’s not even talk about Softbank in Japan, where 10% of its entire customer network has been transitioned to the iPhone.
China Telecom Corp. Ltd. (CHA), the No. 3 carrier with 8% market share, is equally egregious in its lack of subsidies. For example, last month the carrier launched Research In Motion Ltd.’s (RIMM) BlackBerry 9530 priced at $671. No wonder they are targeting government and business customers.
Stating the obvious is Steven Liu, an analyst at DBS Vickers in Hong Kong. Carriers “may have to raise handset subsidies or lower prices if they want to attract more users to the 3G service.”
Handset diversity: The best strategy to address Apple’s one-size-fits-all approach may be to offer a diverse assortment of handsets. Instead, China Mobile, the largest carrier with 72% market share, has added complexity for global handset manufacturers. Last year, the company created its own mobile operating system, the Ophone platform. Tier-one global handset manufacturers responded by prioritizing other markets. However, this did create an opportunity for fledgling players, such as Lenovo Group Ltd. (LNVGY), Dell Inc. (DELL) and Philips, who were willing to forego other opportunities. By the end of this year, China Mobile promises more than 30 Ophones in the market.
One of the more practical approaches may be that of HTC Corp., which has learned from seven years of working with Chinese carriers. The Taiwanese smart phone maker, which was the first to align with Google Inc. (GOOG), is now positioning all of their handsets under the “HTC” brand. In addition, they cut an independent distribution and promotion deal with GOME, China’s largest electronics distributor.
It’s the Internet, stupid: In 1992, presidential candidate Bill Clinton was able to unseat the incumbent, George H. W. Bush, by focusing single-mindedly on the one theme that mattered most to voters, the economy. Similarly, in a country with only 125 million broadband subscriptions, the importance of mobile for Internet connectivity cannot be overstated. In many cases, mobile is the primary Internet access device. Particularly for the young demographic, even more so than in North America or Western Europe, mobile is the first screen.
Besides lower handset prices and service plans, a key catalyst for 3G adoption will be integration and partnerships with the dominant Internet players. This can also help integrate a younger demographic, as 90% of Chinese Internet users are under 44 years old. Consumer loyalty from the web can drive them to mobile.
Leading Chinese Internet companies include Tencent, which runs the hyper-popular (170 million monthly unique visitors) instant messaging platform QQ. Another is Alibaba (100 million uniques) with their market leading e-commerce site Taobao. Sina (102 million uniques) is the largest Chinese language infotainment portal. Youku (70 million uniques) is the number one video hosting site. These companies can help drive 3G adoption. The most aggressive in this sector has been Baidu, which had 58% of the online search market in May. Currently, Google’s Android and Baidu each own about 25% of the mobile search market. Baidu is now widely reported to be building its own open source mobile operating system to rival Google’s Android. The bottom line for wireless carriers- leverage the passion your consumers have for their Internet sites to spur adoption of mobile 3G services.
And for crying out loud, make it easy to access the damn Internet. Until this month, in an effort to promote an alternative WAPI wireless standard, the government prohibited the sale of Wi-Fi enabled handsets. Considering that a majority of mobile Internet traffic in the United States is offloaded to Wi-Fi, this would seem a counter-productive strategy.
In summary, expect to see an explosion of 3G adoption in China when three factors fall into place: smart phone prices fall, the variety of 3G handsets increases and the Internet user experience improves. Currently, none of those criteria are in place. There is a Chinese proverb that may apply to this process: “The beginning of wisdom is to call things by their right names.” At this point, it is time to call the initial launch of 3G in China by its right name – failure.
Levi Shapiro is a Partner at TMT Strategic Advisors, a research and strategy firm focusing on the technology, media and telecom sectors. Clients are split evenly between early-stage, Israeli start-ups and large entities like NTT DoCoMo, OpenTV and the Australian government.
During a 15 year career in media and technology, Shapiro has launched new business units (IBM), new technologies and services (Toyota) and entirely new companies (Two Minute Television, Snack Mobile, etc).
Shapiro founded and sold two mobile start-ups. In addition, at research firm Telephia he grew the mo
bile audience measurement practice in Los Angeles from zero to sale. Levi began his career with Toyota in Japan and China, worked as an Associate in venture capital firm “Doublespace” and earned degrees from Tulane (BA), Cornell (Asian Studies) and MIT (MBA). He speaks Japanese, Chinese and Italian.
Shapiro is an Adjunct Professor at UCLA Extension. He is also an Angel investor and sits on the Advisory Board of several digital media companies. In his free time, when not roller-blading near his home in Venice Beach, California, Mr. Shapiro writes a weekly column about digital media for the Jerusalem Post called “Unleavened Media”. He can be reached at levi.shapiro@tmtstrat.com or via twitter: @levshapiro
