Chinese authorities reportedly told the country’s three mobile operators they must cut their marketing expenses due to overspending on advertising and subsidies for certain devices.
Bloomberg sources said the State-owned Assets Supervision and Administration Commission (SASAC) informed China Mobile, China Unicom and China Telecom that they must cut their combined marketing spend by CNY40 billion ($6.4 billion) over the next three years.
The state-owned operators have spent significant amounts of money on subsidising the likes of Apple’s iPhone and Samsung’s Galaxy S5, to make them more affordable and to drive uptake.
According to a client note from UBS, around 60 per cent of phones sold in China are subsidised, with a reduction in the practice likely to impact the high end of the market, which accounts for 20 per cent of sales. Apple accounted for about 33 per cent of the high end segment in 2013, according to UBS.
This move is likely to benefit the makers of lower-cost devices, particularly China’s domestic phone makers, such as Xiaomi, Lenovo and Coolpad.
China Mobile only began selling the iPhone in January, with discounts on the Apple smartphone cited as one reason why total phone subsidies will rise 29 per cent this year for the operator, according to Xue Taohai, the operator’s CFO.
China’s mobile operators are all investing heavily in their networks to roll out 4G services, while at the same time losing out on voice and SMS revenue as free messaging services continue to become more popular.
SASAC previously lowered the profit-growth target for companies within its remit to 5 per cent in 2014, from 10 per cent in 2013, according to the sources.
Speaking at a conference last week, Finbarr Moynihan, general manager for international corporate sales at mobile chipset maker MediaTek, predicted that operator subsidies will soon become a thing of the past, driving the creation of a “super mid-market” for mobile phones.
Operators will soon decide they are not prepared to subsidise devices, he claimed, making the most advanced models more expensive. Moynihan noted that T-Mobile US is already heading in this direction.