Aggressive handset subsidies are ratcheting up the competition in China's mobile market, and that competition could turn ugly in the future, warn analysts.

The warnings came after China Unicom, the country's No 2 mobile operator, announced earlier this month the number of its CDMA (code division multiple access) subscribers had hit 6.3 million.

In September, it had only 3 million. As of late October, it had 4.2 million.
Generous handset subsidies are widely believed to be a major driving force behind the breakneck growth of the CDMA business.

And rumors are swirling that China Mobile, Unicom's arch rival, is planning to offer subsidies to promote its GPRS (general packet radio system) service.

"Unicom's subsidy policies are paying off," said Guo Chang, an analyst with CCW Research, a Beijing-based information technology (IT) market researcher.

"Aggressive subsidies are ensnaring China Mobile's subscribers, and leading them to migrate to Unicom."

Guo estimates 20 percent of Unicom's newly added CDMA subscribers have migrated from China Mobile's GSM (global system for mobile communications) network.

Some industry insiders suggest the figure is higher -- around 50 percent.

Wang Jianzhou, president of China Unicom, said earlier this month Unicom is set to realize its self-imposed target of 7 million CDMA users.

About half of Unicom's CDMA users are "renting" their handsets under plans where they commit to spend a certain amount of money on their phone bills over a period of time, but don't have to pay for the phones.

Many of Unicom's sales agents provide customers with subsidies and, in turn, get a portion of the monthly fee from Unicom, Tong Jilu, vice-president of Unicom, was quoted as saying.
Unicom has spent an estimated 1 billion yuan (US$120 million) in handset subsidies, said Edward Yu, president of Beijing-based Analysis Consulting.

The average subsidy per CDMA handset is 1,600 yuan (US$193), he said.

Goldman Sachs estimates the average subsidy is as much as US$300 a phone, while each service yields about US$20-25 per month in ARPU (average revenue per user).

Guo said China Mobile's low-profile attitude has caused subscribers to turn to Unicom. They have been lured by the generous subsidies.

However, with the number of CDMA users skyrocketing, China Mobile is unlikely to ignore the harsh reality, the analyst said.

"China Mobile is set to offer subsidies to boost its GPRS service, which will put increasing pressure on Unicom. A price war is likely."

China Mobile has launched GPRS handset subsidy policies in Guangzhou, Shenzhen and Shanghai, three of China's most-affluent cities, local media have reported.

"China Mobile's subsidies for GPRS handsets will spark a boom for replacement mobile phones," Guo said.

Shanghai Mobile has sold more than 10,000 subsidized handsets since November, a company official was quoted as saying.

While trumpeting the short-term success of subsidies, analysts are warning that operators are "paying a price of subscriber growth" as irrational handset subsidy policies will lead to the downgrading of mobile services.

CDMA users' complaints about network coverage and voice quality are rising, Guo noted.
"Unless these issues are addressed, Unicom's CDMA business will be distorted in the long term, and some entrapped subscribers may go back to China Mobile's GSM network."

CDMA was launched in April as a high-end product boasting high-quality voice traffic, but was eventually repositioned down-market. That helped Unicom rack up sales.

"Mobile operators should phase out their subsidies after the market is initiated," Guo said.

"Otherwise, their cash might be drained and they would be unable to ... improve services," Guo said.

Wang acknowledged earlier this month that aggressive CDMA handset promotional packages have placed Unicom under great financial pressure.

Unicom plans to compete with China Mobile next year in services, not in prices, he said.

But analysts are concerned that competition has reached a fierce level.

They are worried aggressive subsidies will entrench malignant price competitions and undermine operators' profitability.

Despite the low network utilization, Unicom announced a doubling of its network capacity in CDMA2000-1X contracts in October, far more than the market can bear.

The CDMA2000-1X network promises better services to mobile phone users, in terms of value-added features such as video and photo mail.

Analysts predict the growth of the number of mobile subscribers will slow down next year after hitting its stride this year.

Ministry of Information Industry statistics indicate the number of China's mobile users reached 200.31 million at the end of November, with the penetration rate hitting 14.95 per cent.

"Improving service will play a key role in enticing users next year in a slow-down market," Guo said.