China Mobile Is Growing Rural

The world's No. 1 cellular carrier is piling up customers by taking cheap handsets and pricier add-ons to Mongolia's steppes and Tibet's peaks

By the time you finish reading this sentence, China Mobile (CHL) will have signed up four more subscribers. The company is adding new users at a rate of 1.8 per second, which means that the company will easily exceed 300 million subscribers by the end of the year.

Not only is China Mobile racking up customers at a turbo-charged rate, but it's adding them three times as fast as its rival China Unicom (CHU). For the month of November, China Mobile gained 4.36 million new customers, compared to 1.56 million for Unicom. Today, its 65% share of the Chinese market has made it the world's biggest cellular carrier. It is also the biggest by market cap.

The remarkable thing is that China Mobile has sustained stellar growth even as competition in China's cities has intensified. Thanks to an aggressive expansion from the steppes of Inner Mongolia to the rugged peaks of Tibet, the company has built-up an impressive user base in rural China, which now accounts for half its new subscribers. "This is a market with huge potential," says China Mobile chief executive officer Wang Jianzhou. "In [cities] market penetration is very high. But in rural areas it is only 12%—and there are 700 million people living there."

The Farmers Want Ring-Tones

Falling handset prices have played a big part in making mobile phone use affordable in the Chinese hinterlands. Foreign handset makers Nokia (NOK) and Motorola (MOT) have been particularly aggressive in promoting models costing as little as $35 as part of their global emerging-market strategies.

And contrary to predictions, the average revenue per customer has not fallen as China Mobile has expanded into the countryside. That's because it has been able to convince rural Chinese to cough up extra cash for goodies such as music downloads, short messages, and ring-back tones. Today, these high-margin services make up 23% of total revenues. China Mobile's net profit rose 25% in the first nine months of the year to $5.8 billion on sales of $26.9 billion.

Last month China Mobile also signed a deal with media giant News Corp which will allow users to download music created by Internet users. The agreement follows earlier cooperation between the two companies. China Mobile's parent, China Mobile Communications, bought a 19.9% stake in Phoenix Satellite Television from News Corp subsidiary Star Group in June. "We want to make the cell phone into a new medium," says CEO Wang.

The Single-Standard Advantage

Despite its greater heft, China Mobile is actually more nimble than China Unicom. The No.2 player is hobbled because it operates services using both the CDMA and GSM standards while China Mobile is purely GSM. "China Mobile has the financial size and capability to be aggressive, to expand especially in a way Unicom cannot match," says a Hong Kong-based telecoms analyst with a U.S. investment bank, who requested anonymity. "Unicom has two competing products that cannibalize each other."

But China Mobile's dominance could prove to be a handicap. When the Chinese regulators grant 3-G licenses next year, analysts expect China Mobile to be awarded a license based on China's homegrown standard TD-SCDMA. This new and untested system has been billed as a sign of China's growing technological sophistication, and authorities are keen to have it running smoothly in time for the Beijing 2008 Olympics. "China Mobile is the strongest carrier, so if the government wants TD-SCDMA to be successful, they will give it to the carrier with the most resources to support it, which poses risks," says Ted Dean, managing director of Beijing-based telecom research and advisory firm BDA China.

Still, with just 4 out of every 10 people currently owning handsets, and projections that China will have half a billion users by the end of 2007, China Mobile has plenty of room to keep growing.