5G bidding is finalized, and competition is changing again

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2021 is the third year of 5G commercial use in China and the second year of large-scale construction of 5G networks. As the results of the 2021 5G base station bidding by the four major operators are announced one after another, compared with 2020, the competition landscape of the domestic 5G market has seen a series of new changes and trends.

1. China Radio and Television, the fourth largest telecommunications operator, officially enters the market

On June 25, commissioned by China Radio and Television, China Mobile launched the bidding for 700MHz base station equipment on behalf of China Radio and Television and China Mobile. This shows that China Radio and Television, which holds the fourth 5G commercial license, has finally been reorganized and officially entered the 5G construction and 5G operation as the fourth largest telecommunications operator in China.

The first phase of the 700MHz base station equipment bidding reached 480,000 stations. After the bidding results are announced, the construction progress will be promoted according to the construction plan to achieve full network coverage within two years. At the national 5G industry application scale development on-site meeting held in July, Song Qizhu, chairman of China Radio and Television, said that China Radio and Television is accelerating the construction of 5G networks and preparations for the release of numbers, striving to provide differentiated services for government, civil, commercial and other scenarios as soon as possible.

According to the implementation plan of the 5G co-construction and sharing cooperation agreement reached by China Radio and Television and China Mobile at the beginning of this year, China Radio and Television should pay China Mobile wireless network operation and maintenance fees and transmission bearer network usage fees based on the number of base stations "starting from the second month after the 700MHz 5G base station is connected to the China Radio and Television core network or its designated transmission node." Therefore, in order to realize revenue as soon as possible to pay China Mobile, China Radio and Television may not wait until the 700MHz network is fully completed, and it will need to start the commercial use of 5G numbers in the 192 number segment within the year by sharing China Mobile's 2G/4G/5G network for a fee.

The commercial use of 5G numbers in the 192 number range of China Radio and Television will undoubtedly intensify the competition in the mobile communication user market. According to data from the Ministry of Industry and Information Technology, as of the end of June this year, the total number of mobile phone users in my country has reached 1.614 billion, an increase of only 1.2% year-on-year. This also means that the release of numbers in the 192 number range of China Radio and Television will mainly focus on the existing market of China Mobile, China Telecom and China Unicom to compete for 5G users.

According to the data released by the three major operators, by the end of June, the total number of 5G package users in my country had reached 495 million, accounting for more than 30%, but the number of 5G mobile terminal connections counted by the Ministry of Industry and Information Technology was only 365 million; that is, although nearly 500 million users have turned to 5G packages considering the cost-effectiveness of package rates, 130 million of them have no intention or ability to use 5G networks. Therefore, for the new operator China Radio and Television, what kind of tariff policy and business model to adopt to attract the existing users of the three major operators to switch to the 192-number 5G network will become a severe test for it after entering the market.

Although China Radio and Television has been promoting 5G NR broadcasting as a "killer" application that can form differentiated competition with the three major operators, at a time when the rate of home TV power-on is declining and various video apps are competing for user attention, using 5G mobile phones to watch TV and listen to the radio is unlikely to become a rigid demand that can attract users to switch networks.

Therefore, if China Radio and Television wants to gain a foothold in the To C market, it should take advantage of the low cost and wide coverage of the 700MHz network, and take the lead in deploying 5G networks to urban suburbs, counties and towns that China Telecom and China Unicom have not yet covered. Then, with more radical tariff policies, it should start from the accessibility of 5G networks and the affordability of 5G tariffs to guide the three major operators' existing 4G users to migrate to the 192 number segment. This may be the 5G To C development path that China Radio and Television can currently take and form differentiated competition with the existing three major operators.

Of course, if China Radio and Television’s entry strategy is to follow what Chairman Song Qizhu said, “strive to provide differentiated services for government, civilian, commercial and other scenarios as soon as possible”, put the “government” scenario first, and focus on 5G NR broadcasting applications to “promote mainstream core values”, then this will be another revolutionary competition that touches the souls of the existing three major operators.

2. 5G network construction tends to be lower frequency and lower cost

The bidding and large-scale construction of 5G base stations in 2020 will focus on medium and high frequency bands. China Mobile was awarded 2.6GHz and 4.9GHz spectrum, China Telecom and China Unicom were awarded 3.5GHz. In order to achieve 5G coverage in cities at the prefecture level and above, according to data from the Ministry of Industry and Information Technology, the three major operators have opened a total of 961,000 5G base stations as of the first half of 2021.

Since the medium and high frequency bands have the characteristics of large capacity and good performance but small coverage, if the next step is to expand the 5G coverage from prefecture-level cities downward, the number of 5G base stations that the three major operators need to invest in and build will remain high, but their capacity and performance may not be fully utilized in urban suburbs and county towns.

Therefore, low-frequency network construction has become the focus of 5G network construction in 2021. China Mobile took the lead in reaching a cooperation agreement with China Broadcasting Corporation on 700MHz co-construction and sharing. China Telecom and China Unicom, on the one hand, called for participation in the 700MHz frequency band sharing on various occasions, and on the other hand, applied to the Ministry of Industry and Information Technology for a frequency band license to build 5G networks at 2.1GHz to compete with the low-frequency network construction strategy of China Mobile and China Broadcasting Corporation.

The demand for low-frequency network construction corresponds to the heavy 5G investment pressure on the three major operators. According to financial report statistics, as of the end of 2020, the three major operators' cumulative fixed asset investment in 5G networks has reached 216.2 billion yuan, and it is expected that 184.7 billion yuan will continue to be invested in 2021. In addition, since 5G base stations that support medium and high frequency bands have high power requirements, their energy consumption exceeds that of 4G base stations by 3 to 4 times. Under the current operating conditions where the number of 5G mobile phone terminal connections is only about 20% of that of 4G, the high procurement costs and subsequent operating costs of these high-frequency band, high-power 5G base stations will undoubtedly become the biggest stumbling block for operators in their quest for 5G profitability.

Judging from the published bidding results for 700MHz and 2.1GHz, only for Huawei's 5G equipment with the widest application range, its bids for 700MHz and 2.1GHz have dropped by 50% and 36% respectively compared with last year's 2.6GHz and 3.5GHz. This means that even with the same scale of construction needs, China Mobile's fixed asset investment will be saved by 50%, while China Telecom and China Unicom will save 36%. What's more, to meet the same coverage requirements, the number of low-frequency base stations required is far less than that of medium and high-frequency base stations.

Therefore, due to the strategy of building 5G networks in low-frequency bands, the fixed asset investment and operating cost pressures of the four major operators in 2021 will be greatly reduced, which will enable the operators to have spare capacity to further accelerate the construction progress of 5G network nationwide coverage. At the same time, they will also be able to increase investment in research and development and promotion of 5G applications, promote the coordinated development of 5G construction and 5G business, and form a virtuous circle.

3. 5G equipment manufacturers have a more concentrated share

As China's benchmark companies leading the world in 5G, Huawei and ZTE won 91% of the market share in the joint bidding of 700MHz by China Mobile and China Broadcasting Corporation, and further increased their winning share to 92.44% in the joint bidding of 2.1GHz by China Telecom and China Unicom. Their market concentration has been greatly improved compared with 86% and 88% last year.

Under the unreasonable suppression of the US authorities, Huawei and ZTE, as representatives of the globalization of domestic brands, have encountered unprecedented blockades in overseas markets. After the global 5G network construction started, Huawei and ZTE, which previously had an advantage in the European communications market, were successively excluded from the list of 5G equipment suppliers by the governments of the United Kingdom, Sweden, Italy, Romania and other countries. Even their 4G equipment is facing the risk of being gradually dismantled, which has also led to a continuous sharp decline in Huawei and ZTE's overseas market revenue.

Therefore, giving Huawei and ZTE more market share in the domestic 5G market to support state-owned brand manufacturers to maintain their R&D investment and continue to maintain their competitiveness has become an unshirkable responsibility of the four major operators. As a result, the market structure in which Huawei and ZTE occupy more than 90% of the domestic 5G market is expected to gradually solidify.

However, this will also cause Huawei and ZTE to become more dependent on the domestic market. Taking Huawei as an example, its latest performance for the first half of 2021 showed that its operator business revenue was 136.9 billion, a year-on-year decrease of 14.2%. The main reason was that the domestic operators' 5G equipment bidding started three months later than last year and was delayed to the second half of the year.

my country has opened 960,000 5G base stations, accounting for more than 70% of the world's total. Therefore, Huawei can rank first among global 5G equipment manufacturers based on its domestic market share alone. However, after the four major operators complete the goal of advanced 5G network construction, they will inevitably quickly reduce the scale of network construction investment, while overseas markets, especially the European market, will start large-scale 5G network construction. If Huawei still cannot break through the US blockade, can it still maintain its market leadership in the ups and downs of 5G network construction in the Chinese and foreign markets? Furthermore, can the domestic 5G market alone support its current revenue scale and R&D investment level? These are all tests that Huawei must face.

From another perspective, the share of 5G base station equipment is overly concentrated in Huawei and ZTE. Under the continued suppression of the US authorities, if the supply of key components such as their chips is further restricted, whether the domestic 5G network construction process will be affected due to insufficient supply capacity is also a risk that the four major operators and related 5G industries need to consider.

Conclusion

my country's 5G network construction speed and scale are already leading the world. With the launch of 700MHz and 2.1GHz low-frequency network construction, this leading advantage is expected to continue to expand. In addition, as a new operator, China Radio and Television will promote the commercial operation of new 5G number segments, which will also set off a new wave of competition in the 5G user market, thereby promoting the innovation and development of 5G services. After the 5G equipment bidding in 2021 is settled, China's 5G strides forward will undoubtedly be bigger and faster! (The author of this article is Lao Jie, a senior communications industry insider)