No doubt about it -- China's dominant wireless service provider has been on a tear lately. Investors in the ADRs of China Mobile (NYSE:CHL) have seen their investment soar 232% in the past three years. The happy market tidings are largely due to the huge growth of the company's subscriber base. The company gained nearly 100 million users from 2004 to 2006 and currently services a staggering 321.4 million customers in mainland China and Hong Kong.
As penetration rates climb in the nation of 1.3 billion, though, investors should consider how China Mobile can adapt as subscriber growth eventually slows and as the government meddles in the market. Global operators Vodafone (NYSE:VOD), Deutsche Telekom (NYSE:DT), and France Telecom (NYSE:FTE) offer services mostly in mature, saturated markets and must squeeze shareholder value from a variety of sources, rather than relying just on customer growth.
As the Chinese market matures, one area to watch is China Mobile's rising churn rate.
|
2004 |
2005 |
2006 | |
|---|---|---|---|
|
Churn |
1.3% |
1.9% |
2.7% |
|
Subscribers (in millions) |
204.3 |
246.7 |
301.2 |
While this trend is clearly negative and well above the 1.1% of Verizon Wireless (a joint venture between Vodafone and Verizon Communications (NYSE:VZ)) and the 1.7% of AT&T (NYSE:T), it's not surprising in a rapidly expanding and increasingly competitive market. But as mobile markets mature, operators have to focus more and more on customer retention, something that was more of an afterthought in the boom years. How well or poorly China Mobile addresses churn will be increasingly important to investors.
Another significant obstacle to China Mobile's future growth lies in government regulation of the communications industry. Since the Ministry of Information Industry (MII) exerts significant influence on tariffs and network expansion, China Mobile is subject to the designs that the Chinese government has in developing the industry.
For instance, the MII has permitted competing carrier China Unicom (NYSE:CHU) to offer services at rates up to 10% below standard tariffs imposed on China Mobile, allowing China Unicom to capture more customers. Even though the government wants to see dramatic subscriber growth continue overall, further regulations could favor competitors and erode China Mobile's dominance. Since China Mobile estimated it had 67.5% of the mobile subscriber base at the end of 2006, sanctions to limit further dominance are not out of the question.
So, while there's plenty of untapped growth left in subscribers and enhanced mobile services in China, the competitive landscape is changing rapidly. Time will tell how well China Mobile can adapt and keep the growth alive.
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Fool contributor Dave Mock is considering launching his own Chinese mobile service and figures he only needs to capture 0.0001% of the market. He owns no shares of companies mentioned here. Vodafone is an Inside Value recommendation. France Telecom is an Income Investor recommendation. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy offers lifetime subscriptions for free.
