China Mobile Ltd, the world's biggest wireless carrier by subscribers, posted first-half falls in key measures of revenues and profitability.
China Mobile, the only Chinese carrier that doesn't have a deal with Apple Inc to sell iPhones in the world's biggest mobile market, said on August 16 it would ramp up spending on handset subsidies, which it uses to entice more subscribers to smartphones and data, a bigger revenue driver than voice services.
China Mobile has signed up close to seven out of every 10 of China's one billion mobile phone users. But only a tenth of them use higher-revenue, third-generation (3G) technology, a much smaller proportion than that of its main rivals.
Most of the firm's 683 million subscribers - more than twice the population of the United States - use lower-value 2G, a factor weighing on the company's average revenue per user (ARPU), which fell 4.3 percent in the first half of the year to 67 yuan.
The slide in the ARPU and a 0.9 percent drop in first-half earnings before interest, tax, depreciation and amortisation to 123 billion yuan, suggested its core business was feeling the impact of rising competition.
"This means the telecoms earnings are already declining, which I don't think the market was expecting, so I would say this is quite negative," said Marvin Lo, an analyst at Mizuho Securities in Hong Kong.
"The second-quarter results this year are going to trigger a downward revision for China Mobile's earnings going forward."
First-half net profit rose just 1.5 percent from a year earlier and April-June net profit of 34.4 billion yuan ($5.5 billion), was slightly below expectations of 35.2 billion. The company only reported figures for the first half, so the quarterly profit was calculated from the company's data.
To compete with China Unicom and China Telecom Corp Ltd, the company said it would step up spending in the second half of the year on handset subsidies.
Chief Financial Officer Xue Taohai said it spent 12 billion yuan on handset subsidies in the first half of the year, but that it would raise full-year subsidies to 26 billion yuan from an initial plan for 21 billion yuan.
China Mobile shares slumped more than 5 percent on the day, while China Unicom fell 0.65 percent and China Telecom rose 0.5 percent.
Just over a quarter of China Unicom's subscribers have 3G contracts, while at China Telecom it is 35 percent.
"We faced a number of severe challenges including the increase in mobile penetration, intensified competition, as well as the impact of new technologies and services that are replacing traditional communications services," said Chairman Xi Guohua in a statement accompanying the results.
Reflecting some of the competitive pressures, rival China Unicom introduced a budget calling scheme earlier this year in a few Chinese locations, such as Zhejiang province. It allows 2G users to make calls at a very low costs.
"A price war in the Chinese telecom market is inevitable," said Chris Hsu, China product manager at Allianz Global Investors Taiwan, which invests in China Mobile's shares.
"Handset subsidies have been pressuring all three carriers' ARPU," Hsu said. "Carrying iPhones usually incur costs for Chinese carriers, but the contracts and services bundled with these iPhones will slowly offset such costs."
China Mobile's home-grown 3G technology called TD-SCDMA is a stumbling block in clinching a deal with Apple, which does not support the technology in its iPhones. China Mobile's rivals use a different 3G technology supported by iPhones.
However, analysts speculate that chipmaker Qualcomm Inc will roll out a TD-SCDMA chipset later this year. That could pave the way for an Apple-China Mobile deal, although it would also raise other questions, analysts said.