Ever since China's three leading phone companies were granted 3G licenses in early 2009, they have embarked on a fierce and costly battle to win subscribers in the biggest cellphone market on the planet.
China Mobile, the largest telecom operator in the world, is tasked by the Chinese government with expanding the country's homegrown 3G network, using the TD-SCDMA standard developed in China. It has built the largest 3G customer base in the country, with 6.9 million subscribers at the end of February.
While China Mobile has strong brand recognition and the biggest customer base in China, its rivals are taking aggressive approaches to increase market share. China Unicom, the country's second-largest telecom carrier by market value, spent almost 3 billion yuan ($439 million) more last year than in 2008 on its networks, operations and supporting facilities. It has chosen Apple ( AAPL - news - people ) as its principal handset partner and started to sell iPhones at the end of last October. China Unicom uses the WCDMA standard.
China Telecom, another licensed 3G telecom operator, is also eager to chime in. It now leads in the nation's 3G network coverage, even though it has fewer subscribers than China Mobile. The company plans to spend more money on its 3G business expansion to reach its goal of 8 million 3G subscribers in 2010, said chairman Wang Xiaochu in a March press release. China Telecom uses the CDMA standard.
China has 16.1 million 3G subscribers as of February 2010, with 1.5 million new users signing up in February alone, according to the latest statistics released by the Ministry of Information and Technology. Overall, China has 766 million mobile phone users, so 3G has plenty of room to grow.
But analysts worry the 3G market may not as lucrative as the telecom companies predict, and the three telecom players could get hurt if they continue their heavy spending on the 3G rollout.
"The 3G business will become a burden for Chinese telecom carriers in the long run," said Wang Liang, chief securities analyst at Shenzhen-based Valuelive. "Chinese government imposes strict censorship on the country's Internet content while the future of 3G lies in the network's rich content and wide application."
The 3G subscription rates of the three telecom operators have all shown signs of slowing down in February. China Mobile's number of new subscribers was down 22% compared with the previous month, and China Unicom's fell over 50% to 410,000 in February.
"Overseas 3G networks have been in commercial use for nearly 10 years, but almost none bring profits to their carriers except in Japan and Korea," said an Internet analyst from Sina.com (SINA ( SINA - news - people )), one of China's most-visited online portals. "Most Chinese mobile phone subscribers only use low-end services and have little demand for data transmission and other value-added services, or they simply can't afford them."
Many Chinese 3G users have complained that the signal and reception quality on their smartphones are not as strong as the telecom operators advertised, even in Beijing's Financial Street, one of the capital's most business-intensive areas.
The earnings of China's three big telecom operators have already been dragged down by the massive investment in their 3G businesses.
"China Unicom will expand its 3G business this year, which is going to have a significant impact on its cash flow," said Du Xianjie, senior auditor and consultant at Hong Kong-based PricewaterhouseCoopers. "Its capital expenditure this year is estimated to be 100 billion yuan ($14.6 billion), so it will definitely raise more capital in future."
Fu Liang, a Beijing-based independent telecom analyst, projected that the 3G business will turn profitable for China's telecom operators by the end of next year.
"China's total population, mobile phone subscribers and handsets elimination rates are probably the sum of those of European countries," said Bruce King, director general at the finance and market intelligence division of Beijing-based MoneyTalks. "3G services users are primarily college students, office workers and middle classes in big cities. Their proportions are growing in the social strata and will definitely bring sufficient demands for 3G services. Then what follows after fulfilling their demands is the profit."
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