Global Mobile Markets

The global market for mobile services is a vast and complicated space. Each country
will have several mobile operators in competition, leading to complex domestic
markets.

Market Overview: China
China’s economy grew 9.5 percent year-on-year in 2004. Telecommunications has
been one of the priority sectors targeted by the Chinese government since the early
1990s in an effort to speed up China’s industrialization process. The telecommunications
sector grew 12.6 percent in 2004 (the mobile market alone grew 18.8
percent), faster than the growth of the overall economy. The industry’s value-added
total accounted for 2.77 percent of China’s GDP in 2004.

The Chinese Mobile Market
China became the world’s largest mobile market in terms of officially counted subscribers
in July 2001. At the end of 2004, there were more than 319 million mobile
users, over 7 million more than fixed-line subscribers (312 million), and 50 million
new mobile customers were added during the year. Of the two operators, market
leader China Mobile enjoys a 64 percent market share but its rival, China Unicom,
has a faster rate of growth, with a compound annual growth rate of 40 percent over
the past three years.

The number of mobile subscribers surpassed that of fixed-line subscribers in
September 2003 (Table 1.8). Mobile capacity had already overtaken fixed capacity
on a national scale the year before, with just six provinces having a greater fixedline
than mobile capacity as of 3Q 2002. Despite the large numbers and robust
growth, however, market penetration stood at 29.6 percent at the end of 2004,
meaning that, unlike most other large mobile markets, there are still many remaining
potential users.

China is a vast country in terms of its population and territory. For historical
reasons, there exists a huge disparity in its economic development across regions.
Large urban centers — Beijing, Shanghai, and Guangzhou — and then, to a lesser
extent, on the eastern seaboard linking these three cities are the forerunners in
economic development; the mobile penetration rate there is significantly more
than 70 percent. However, China’s more remote and rural areas, predominantly
in China’s west, still lack basic access in many places. Therefore, mobile capacity
is considerably lower in the west than in the east and south, with the country’s
industrialized northeast — apart from Beijing, Hebei, and Liaoning — lagging
as well.

China’s mobile sector has been plagued by price wars over the past few years,
despite government pricing rules. As competition stiffens and wireless subscription
rates begin to mature, especially in urban areas and high-end segment, operators
find their revenue growth slackening. In recent years, the new subscribers have
come mainly from the low end. As a result, the overall ARPU has been dropping:
for example, the average ARPU at China Mobile has declined steadily since 2000,
falling from U.S.$19.08 per month in 2001 to U.S.$12.50 by September 2003 and
U.S.$11.10 in 2004.

Operators hope value-added services will help stem the ARPU decline. SMS
has been extremely successful in China over the past years. China Mobile and
China Unicom reported sending 172.57 billion and 44.22 billion SMS, respectively,
in 2004. During the one-week Spring Festival holiday in 2004 alone, 7.8 billion
SMS were sent by China Mobile users and more than 2 billion sent by China
Unicom. Now all the service providers (SPs) derive the majority of their revenues
from SMS.

Other new mobile value-added business grew significantly in 2004. Colour
Ring Back Tone (CRBT), known as another “gold mine” following SMS, won
more than 20 million customers with a market value reaching nearly RMB1
billion (U.S.$121 million) since it was first launched by China Mobile in May
2003. WAP service also maintained a rapid rate of growth, increasing at more than
16 percent per month in the domestic market during the first quarter of 2004,
due to the improvement of 2.5G networks and the active participation of SPs.
By the end of 2004, the number of WAP users grew to 25 million, and the market
value climbed by nearly RMB1.2 billion (U.S.$145 million). In addition,
entertainment services such as mobile games, pictures, and ringtone downloads;
comprehensive information services; and IVR chat services also promised good
prospects.

Chinese Mobile Operators
In July 2004, China Mobile (Hong Kong) Limited successfully completed its
acquisition of the mobile telecommunications companies in ten provinces from its
state-owned parent, China Mobile Communications Corporation, and extended its
network coverage to all provinces in mainland China.

Ranking as China’s largest telecom operator in terms of revenues, China Mobile
posted RMB179.1 billion (U.S.$21.6 billion) in operating revenues in 2003 and
RMB203.9 billion (U.S.$ 24.6 billion) in 2004. It also boasts the world’s largest
mobile subscriber base, with 204.3 million users at the end of 2004, representing
an annual growth rate of 23 percent and commanding 64 percent of China’s
mobile market.

China Unicom (Hong Kong), which owns 30 of China Unicom Telecommunications
Corporation’s 31 provincial networks (the exception being Guizhou),
saw its operating revenue increase by 17.3 percent from 2003 to RMB 79.33 billion
(U.S.$9.59 billion) in 2004. By the end of 2004, China Unicom had a total
of 114.7 million subscribers — 85.9 million GSM subscribers and 28.8 million
CDMA subscribers.

China’s largest fixed-line operator, China Telecommunications Corporation
(China Telecom), was established as a result of the 2002 industry restructuring,
incorporating 21 southern branches of the original China Telecom. Operating revenue
in 2004 was RMB161.2 billion (U.S.$19.5 billion), after acquiring the other
ten provinces from its parent company in April 2004, up 6.4 percent from 151.5
billion (U.S.$18.3 billion) in 2003.

China Telecom offers PAS-based mobile services (known as “Little Smart” in
China. PAS is a personal wireless access system that provides the convenience of a
mobile phone with the cost advantages of a fixed-line phone). Its PAS subscriber base
increased by 67 percent to 43 million at the end of 2004 — from 25.6 million in 2003
— representing 66 percent share of the national PAS market. China Telecom also offers
a CDMA-based limited mobility service, known as “Shihuatong,” in Shenzhen.

China Network Communications Corporation (China Netcom) accomplished
IPO in New York and Hong Kong in November 2004, incorporating six northern
and two southern provinces. It also offers PAS-based mobile services, with 22.5
million PAS subscribers at the end of 2004, more than doubling its customer base
during that year. Total revenues in 2004 reached RMB 64.9 billion (U.S.$7.84 billion),
up 8 percent from RMB 59.9 billion (U.S.$7.2 billion) in 2003.

Like the current China Telecom, China Netcom was established as a result of
the 2002 industry restructuring, incorporating three companies — the original
China Netcom, China Jitong, and 10 northern branches of the original China Telecom
— into the new China Netcom Group. These companies essentially operated
independently until June 2003, when China Netcom purchased China Jitong for
RMB 482 million (U.S.$58.2 million). In 2004, China Netcom Group has split
itself into three companies to operate future businesses in northern China, southern
China, and the global market.

Western Europe
The annual growth rate for the total customer base of western European markets
rose in 2003 (9 percent, versus 7 percent in 2002) and maintained this level in
2004. As a result, 2 million more new customers were added in 2004 than in 2003
and penetration for the region has passed 90 percent (Table 1.10). It is not expected
that this annual growth rate will be maintained now that the penetration is so high.
It is forecast that the growth rate will decline from 2005 onward; despite this, the
regional penetration rate is forecast to exceed 100 percent in 2007.
Nine countries in western European have been profiled and forecast. The total
customer bases of these nine countries accounted for 86 percent of the regional total
at the end of 2004, while their combined populations accounted for 87 percent of
the total. In forecasting for the remaining countries, it is assumed that, because the
markets are very similar, their growth, usage of data, and launch of 2.5G/3G would
be largely the same as the markets that have been forecast.

As expected, commercial 3G services were launched in many of the region’s
markets in 2004 and more than 2 percent of the region’s subscribers (7.3 million)
were using 3G services by the end of the year. This was forecast to rise to 20.9 million
(over 5 percent of the customer base) by the end of 2005. By the end of the
forecast period, we expect there will be 359 million 3G users — 86 percent of the
total mobile users. 2.5G services are also gaining acceptance; in 2004, the number
of 2.5G users doubled to 50.7 million, and by end-2006 there are forecast to be
81.8 million 2.5G subs. By 2007, 3G is forecast to overtake 2.5G, having 95.5 million
subs compared with 2.5G’s 81.9 million subs.

Data services accounted for more than 15 percent of the total revenues in 2004.
This figure is set to increase over the forecast period, and in 2010 nearly 30 percent
of total revenues are forecast to come from non-voice revenues. However, the
increase in enhanced data services does not have the effect of increasing revenues
overall — the ARPU is forecast to drop in western Europe over the forecast period.
This is likely due to competitive data pricing as well as declining voice prices.
Many of the operators have reappraised their strategy for prepaid and, rather
than simply trying to migrate their customers on to contracts, have used prepaid
as a way of accessing certain customer segments that have not been targeted until
now. As a result, there was more focus placed on prepaid; and in 2004, 43 percent
of the total net additions were for prepaid, up from 19 percent in 2003. Even so,
the percentage of total customers who use prepaid offerings fell below 60 percent
for the first time in several years. It is forecast that the percentage of net additions
for prepaid will remain at around 45 percent for the rest of the forecast period, and
prepaid’s share of the total market will decline to 57 percent by end-2010. Overall,
the western European mobile market is forecast to grow by 16 percent over the
forecast period (2004–2010), adding 57.3 million customers.

United States
The U.S. mobile market has been under-penetrated compared with
advanced telecom markets in other regions such as Western Europe and Asia
Pacific. Historically, this was seen as a result of an overly complex and competitive
marketplace — numerous small operators servicing small customer bases — and
a lack of interoperability between the various mobile operators impeding seamless
service offerings. This lack of interoperability was such that roaming agreements
were required while still within the United States.

This complexity has been reduced and U.S. operators have undergone a period
of consolidation, leading to operators with U.S.-wide mobile coverage. During
2004, there was something of an upturn in the market — the annual growth rate
rose and 6.8 million more new customers were added than in 2003 (22.6 million
net additions in 2004 vs. 15.8 million in 2003).

Cingular Wireless’s acquisition of AT&T Wireless, which was completed in
October 2004, has triggered a renewed phase of consolidation in the U.S. wireless
market that has considerably reduced the number of operators. In 1998, 12
operators accounted for 80 percent of the U.S. wireless market. With the merger
of Sprint and Nextel, just four operators account for more than 80 percent of the
market: Cingular Wireless, Verizon Wireless, Sprint Nextel and T-Mobile USA.
More mergers and acquisitions among the smaller players in 2005 — Alltel’s
acquisition of Western Wireless, Alamosa’s acquisition of Airgate PCS, and the
merger of Horizon PCS and iPCS — will consolidate the market even further.
Cingular Wireless’s enlargement has changed the competitive landscape. Cingular
and Verizon had more than half of the total U.S. market at the end of 2004:
Cingular had a 27 percent share (49.1 million subs) and Verizon had a 24 percent
share (43.8 million subs). Even the nationwide operators Sprint PCS and T-Mobile
will find it more difficult to compete, while many of the country’s numerous smaller
regional and local operators are likely to be swallowed up in the long term, unable
to compete independently without enjoying the clear advantages that mergers and
acquisitions bring: economies of scale, OPEX and CAPEX savings, and the advantage
of increased spectrum resources.