NEW ANALYSIS: GSMA Intelligence estimates that China is home to half a billion mobile internet subscribers, a substantial share of which still rely on 2G networks to access the web. Our research shows that mobile is the primary means to access the internet in the country.

Connecting China to the mobile internet
In 2013, China was home to 630 million unique mobile subscribers actively using more than one billion active SIM connections. This shows that ‘real’ mobile penetration based on subscribers (i.e, people) currently stands at 46 per cent of the population in China, whereas the industry reported almost 90 per cent penetration based on connections (i.e, SIM cards). The latter metric has been traditionally used by the industry to measure market maturity and growth opportunities. However, it is largely distorted by the phenomenon of subscribers holding multiple SIMs. According to our consumer survey, Chinese subscribers hold 1.79 SIMs each, on average.

Our recent survey identified the share of unique mobile subscribers that actively use mobile connectivity to access internet services. Our research showed that in 2013, almost four in five unique subscribers in China use mobile internet services, adding up to 499.5 million mobile internet subscribers.

This also means that around 130 million unique subscribers in China do not use mobile internet services for a variety of reasons – including cost of ownership – and only use their mobile connections to place voice calls or send text messages.

Interestingly, our research also shows that 31 per cent of mobile internet subscribers in the country access mobile internet services via non-mobile broadband networks (i.e, 2G), adding up to around 155 million subscribers. Cost of ownership and access to mobile broadband network coverage are likely to be the key reasons for this. Nonetheless the vast majority of mobile internet subscribers in China (69 per cent) access internet services via mobile broadband networks (3G/4G).

Furthermore, our research demonstrates that in developing economies such as China, mobile is the primary means for consumers to access the internet. The China Internet Network Information Center (CNNIC) reported that in 2013, the share of individuals using the internet (fixed or mobile) in the country reached 45.8 per cent, adding up to over 600 million individuals. Using this metric as a proxy, we can therefore claim that amongst all internet subscribers in China, more than 80 per cent (about five in six) access the internet via mobile, highlighting the critical role that mobile networks play in connecting the population to the internet.

In its latest statistical report on internet development in the country, the CNNIC stated that as of December 2013, China had 500 million mobile internet users, adding that “mobile phones are still the main driving force for the growth of internet users in China”.

Increasing the availability and affordability of mobile internet services
Network coverage is a key factor in driving the adoption of mobile internet services. As expressed above, mobile internet services can run on 2G (GPRS/EDGE) networks as well as on mobile broadband networks. As the market has developed, so mobile operators and vendors have accelerated the deployment of 3G and more recently 4G networks, increasing the coverage of these newer technologies to make them available to the wider population, while introducing a growing choice of affordable tariffs and devices.

China Mobile, the world’s largest mobile operator, said it would cut prices by as much as 50 per cent in June this year amid shareholder concern about profitability and high network investment. This sharp drop in tariffs followed a decision by the Ministry of Industry and Information Technology (MIIT) that operators – and the “market” – would independently determine tariff pricing in order to promote competition.

Such reductions in tariffs will appeal to cost-conscious consumers, which include the more than 100 million mobile internet subscribers still using 2G connections, and more than 100 million subscribers not currently using mobile internet services at all. However, targeting this potential subscriber base requires significant investment in network deployment that will put further pressure on operator profitability.

China Mobile indicated that it expects network capex to rise by 14 per cent in 2014 to reach CNY162 billion ($26 billion), while its competitor China Unicom (which launched 4G in February 2014) anticipates that its mobile capex will increase by 44 per cent over the same period, to reach CNY42.3 billion. While there is a limited amount of publicly available information regarding operators’ 4G rollout plans in China, we estimate that 4G networks will cover 20 per cent of the country’s population this year, expanding to cross the 80 per cent threshold by 2018.

Handset subsidies to change the mobile internet landscape in China
To achieve return on investment, 4G services must be made available to the mass market. However, one of the key barriers to mobile internet uptake in developing markets is device affordability. While device subsidies can trigger a fast adoption of 4G services, their potential impact on profitability has to be carefully assessed – especially if the deregulation of tariffs triggers a price war.

In its Q1 2014 report, China Mobile noted that it “faced continuously increasing pressure in infrastructure resources allocation and cost control”. Indeed, combined with subsidy costs for the iPhone, China Mobile’s 4G rollout costs led it to report a third straight quarterly drop in profit during Q1 2014.

Profitability concerns are leading Chinese operators to examine their overall cost bases for potential savings. This has already led them to explore the possibility of a network infrastructure joint venture, but is also forcing them to rationalise overall subsidy costs. In May 2014, it was reported that the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) had issued a requirement that in order to counter the negative impact of tax reforms, and to maintain profitability, Chinese operators should reduce subsidy costs by CNY10 billion during 2014.

The mix of subsidies within the market was already changing to reflect evolving market dynamics. China Unicom for example, reduced 3G handset subsidies as a percentage of 3G service revenue in 2013, down 1.5 percentage points to 8.7 per cent, as it switched the focus of its subsidised tariffs towards “users subscribing CNY96 ($15.40) and above monthly plans to drive growth of mid-to-high-end contract users”. However, SASAC’s requirement will see Chinese operators focus more heavily on subsidising 4G devices, at the expense of 3G. Indeed, China Mobile’s Deputy Marketing Manager, Lu Wenchang revealed that the operator would seek to phase out 2G and 3G subsidies in favour of 4G. This cost control, alongside a desire to drive 4G adoption, will see operators favour subsidies for lower-cost 4G devices, giving a boost in particular to local handset manufacturers.

Mobile internet subscribers and penetration in China, 2013 (click to enlarge)
Source: GSMA Intelligence, CNNIC, UN

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