Before last year's industry restructure, China Telecom's growth prospects were weak. Its fixed telephony connections had peaked and are still rapidly decreasing, largely due fixed mobile substitution (FMS) and the loss of PHS (Personal Handyphone System) customers.
China Telecom lost 11.2 million PHS subscribers in 2008 and, with the service due to shut down by 2011, will lose another 42 million over the next two years. Household fixed voice lines have gradually declined over the past two years, peaking at just over 122 million connections in 2006 and declining to 115 million by 1Q09.
Broadband lines are increasing steadily, but this growth is clearly slowing, signaling that the broadband market is also approaching maturity. In order to sustain the growth of broadband business, China Telecom has spent much effort in developing broadband content services (e.g. IPTV) but the regulatory barriers in broadcasting and telecommunications convergence pose considerable challenges.
An underlying factor in the declining fixed connections is China Telecom's difficulty in capturing rural customers. Despite its dominance, scale and experience in the fixed market, targeting the rural markets with fixed services is proving expensive and not cost-effective in terms of cost and speed of provisioning when compared to mobile services.
Following the restructure, the bulk of China Telecom's growth will come from its new mobile division. In particular, China Telecom is focusing its efforts on targeting urban regions. This makes sense as urban regions possess the mid- to high-spending customers in China, and these are exactly what China Telecom wants, especially with the arrival of new 3G services.
However, China Telecom is a relatively inexperienced mobile player in comparison with its rivals and is also the smallest player, with a 5% share of the market. In addition, the urban regions are highly saturated and mature. Due to China Telecom's strategy of targeting urban users, the majority of its mobile growth will have to be generated by either convincing existing mobile subs to churn from China Mobile and China Unicom or by encouraging subscribers to take multiple mobile subscriptions.
Rural battle
Both will be a hard sell. The lack of (asymmetric) mobile number portability is another obstacle to overcome. In addition, China Telecom is targeting mid- to high-end mobile subscribers. These customers are valuable and its rivals will not give them up easily.
Even if it does a good job of winning customers in urban regions, it is unlikely to be enough to reach its target of 100 million subscribers by 2011. Therefore we suspect that the rural market will take higher priority in China Telecom's mobile strategy in 2010 and 2011. However, China Mobile's dominance in rural areas means that even capturing new customers will be a difficult battle for China Telecom.
Let's not forget that China Telecom is a fixed operator at heart and this will never change. Fixed services make up the bulk of its service revenues, and will for the near future; in 2008 97% of total revenues came from fixed services. Naturally, China Telecom has to find ways to stabilize fixed revenues, and hence it is striving to be the market leader in China's service bundle market.
Competitively bundling fixed and mobile services following a quadruple play service strategy will make perfect sense for China Telecom.