Little Smart 'cell' phone very, very
smart in China By Kaiser Kuo
BEIJING - "The countryside," Mao Zedong once
said, "surrounds the city." Granted, the Great Helmsman
probably didn't have China's wireless market in mind
when he coined this basic dictum of guerrilla warfare.
But the strategy made famous by China's preeminent
communist has been put to effective use by China's
fixed-line telecommunications operators for decidedly
capitalistic purposes: to grab a share of China's vast
mobile market.
And the upstart system - known in
China as Little Smart - is expanding aggressively into
Southeast and South Asia.
With some 270 million
mobile subscribers, China is now the world's largest
mobile market. Faced with long waits and high fees for
land-line installation, many Chinese consumers naturally
opted for cellular service instead: mobile subscriber
numbers surged to pass fixed-line users last year. After
Beijing forced China Telecom to surrender its cellular
business to the newly created companies China Unicom and
China Mobile in the mid-1990s, the erstwhile monopoly
operator - joined later by its northern China-based
rival, China Netcom - could only watch from the
sidelines as mobile subscribers multiplied and
fixed-line revenue growth fell off.
Salvation
for the ailing fixed-line carriers came from an
unexpected quarter: a wireless local loop (WLL)
technology called Personal Handyphone System (PHS) that
had been tried, without much success, in Japan. Retooled
for the Chinese market by an obscure US-based company
called UTStarcom (Nasdaq: UTSI) and rechristened
"Personal Access System" (PAS), the service was quietly
introduced in 1998 in small, remote cities in western
China.
"The key was that when China Telecom lost
their mobile business, they lost their growth point,"
says Ying Wu, the US-educated chief executive officer of
UTStarcom's China subsidiary. "We saw a golden
opportunity: Sure, the top 20 percent income earners
will be cellular subscribers. But that leaves the middle
50 percent - 650 million people - who need wireless
service but for whom affordability is the issue."
Little Smart takes mobility to the
masses China Telecom was quick to recognize that
this quasi-mobile phone service offered a back door into
the booming mobile market. It gave it a brand -
Xiaolingtong or "Little Smart" - and priced it low
enough to bring mobility to the masses.
A Little
Smart handset looks like a cell phone and, for the most
part, works like a cell phone: users can make calls,
send text messages, disrupt meetings and annoy
theater-goers just as they can with a standard cell
phone. Technically, however, Little Smart is a
limited-mobility extension of the fixed-line phone
network. Think of it as a revved-up household cordless
phone with a citywide reach: Little Smart users connect
to the copper wire network through base stations placed
on rooftops around their city. The only functional
difference from cellular phones is that Little Smart
users can't roam beyond their home cities.
That,
and one more major difference - cost. Little Smart users
pay about one-fourth of what regular cellular
subscribers do for air time - a major draw for China's
cost-conscious consumers. Subscribers are charged a
monthly fee equivalent to US$3, and a 10-minute call
averages out to about 12 cents. What's more, unlike
cellular service in most parts of China, only the
calling party pays. Sarah Zhao, who works as a secretary
at the Ruijiin International School in Tianjin in the
northeast, bought her Little Smart in November for the
equivalent of $56. "I typically save 50 yuan [about $6]
on my monthly phone bill," says Zhao. It doesn't sound
like much until you realize that the 27-year-old only
takes home the equivalent of $120 a month.
For
Little Smart and the Alameda, California-based
UTStarcom, it hasn't been smooth sailing. China's two
licensed mobile operators, China Mobile and China
Unicom, recognized the threat Little Smart represented
and lobbied hard to keep the "poor man's mobile phone"
out of the market. During Little Smart's first few
years, the Ministry of Information Industries (MII),
China's main telecoms regulatory body, was downright
hostile: it ordered a halt to Little Smart deployment
while it tried to decide just what it was, and for a
time the ministry banned wireless activity in a
frequency range that happened to include the 1,900-1,920
megahertz at which Little Smart operates. That was
before it settled on a compromise policy that allowed
Little Smart to operate in the provinces as long as it
kept out of the big cities.
Upstart finally
won over ministerial mandarins But Little Smart
braved these choppy regulatory waters, surmounting the
skepticism of technologists and finally convincing
ministerial mandarins officially to pronounce Little
Smart an extension of fixed-line service. "It's gone
from a policy of 'grow quietly, but grow' to one of
almost no regulation at all," says Duncan Clark,
co-founder of the Beijing-based telecoms consultancy BDA
China Ltd.
The secret of its success: Little
Smart is backed by popular demand. By serving China's
vast low-end market with the right technology at the
right price, Little Smart built its strength in the
provinces a la Mao, before the MII relented and
Little Smart marched triumphantly into the cities.
"After service launched in Beijing, MII's new minister,
Wang Xuedong, pronounced that Little Smart appears to be
the people's choice, and the ministry line now is, 'We
will neither support nor hinder.'"
Between them,
China Telecom and China Netcom added an average of 2
million new subscribers a month in 2003. "Two out of
every three new fixed-line subscribers are Little Smart
users," says UTStarcom spokesperson Richard Feng. Little
Smart now boasts some 38 million users across China -
nearly 15 percent of total fixed-line phone subscribers,
and all within three years. Little Smart is selling well
in Beijing, where service was launched in mid-2003: more
than half a million Beijingers have already signed up.
Shanghai, the jewel in the crown, is next: Little Smart
is already available in the suburbs of China's largest
city, and full service is expected to be launched in the
city proper this year.
The MII has recently
mandated that carriers facilitate short message service
(SMS) interconnection between Little Smart and the
cellular providers, allowing China Netcom and China
Telecom finally to tap into China's enormous SMS
revenues: an estimated 120 billion text messages were
sent in China in 2003.
All this has of course
been very good for Ying Wu, who arrived at the New
Jersey Institute of Technology in Newark to begin
graduate studies with just $27 to his name. Wu, with his
down-to-earth demeanor and distinctive facial hair, is
feted by the Chinese media as a model of a successful
returnee entrepreneur. According to Forbes, Wu now ranks
as the 43rd-richest man in China, with a net worth of
$186 million.
Expanding fast into Southeast
Asia, South Asia UTStarcom, which already
dominates the China market for Personal Access System
(PAS) equipment and Little Smart handsets, is now
expanding aggressively in Southeast Asia, Latin America,
Africa and the South Asian subcontinent. The company has
signed contracts to provide nationwide PAS coverage to
Honduras, and UTStarcom-supplied PAS networks have
serviced the Vietnamese cities of Hanoi and Ho Chi Minh
City for a year. Tests with both private and state-owned
carriers in India currently are under way.
Could
Little Smart take off in the United States? "It's
unlikely," says Dave Carini, an analyst with
Beijing-based telecoms consultancy Norson. "Even in
China, many people are unhappy with Personal Handyphone
System signal quality and the ability to carry on a
conversation while moving at high speeds. In the US, I
think the average consumer is willing to pay a few bucks
more each month for a more reliable network."
Complaints about signal strength are common from
Chinese consumers, but most are willing to accept some
sacrifice in call quality for the savings they realize.
"Some of my friends have given Little Smart the nickname
'Wei Wei Call' because you're always saying 'Wei? Wei?'
(Hello? Hello?) every time you call," says Sarah Zhao,
the secretary in Tianjin. "In my experience, it's true
that sometimes your call gets dropped or people can't
get through, but it really is cheap." Just in case, she
carries two phones, using her GSM (Global system for
mobile communications, a leading digital cellular
system) phone when signal strength on Wei Wei Call
flags.
"In early days, there were some
disadvantages. Handover was too frequent, quality was
not so great," admits UTStar spokesperson Feng. "But in
2003 we've made great improvements to core networks and
in base station coverage."
Little Smart now
moving up-market Meanwhile, Little Smart has
started moving upmarket. "By the end of 2003, there were
over 100 models of Little Smart phone available on the
market, made by 25 different manufacturers," says
Carini, the Beijing telecoms analyst. "High-end models
are still far cheaper than many high-end GSM and CDMA
[code division multiple access] handsets, yet still have
the latest features, such as color screens, cameras, and
polyphonic ring tones," he adds.
UTStarcom hopes
soon to obviate the need for Sarah Zhao to carry two
phones: dual-mode GSM-PAS handsets are expected to come
on the market this year. "Demand is going to be very
strong," predicts Feng, the UTStarcom spokesperson.
"Every time we demo these handsets, people ask if they
can buy them right away."
There are clouds on
the Little Smart horizon: China Mobile and China Unicom
are weighing significant tariff cuts, largely in
response to competitive pressure from Little Smart, and
they are likely to implement Calling Party Pays pricing
this year. And with the fixed-line carriers expected to
receive 3G (third-generation mobile technology) licenses
late this year or in early 2005, some analysts speculate
that carrier support for Little Smart will wane.
Despite skepticism from overseas Chinese, for Wu
- the inventor and China's 43rd-richest man - the nation
is still very much the land of opportunity. "My Chinese
friends in the States say to me, 'Ying, you guys came
back to China 10 years ago and made it, but it's too
late for us now.' But I tell them, 'You'll regret it
even more if you don't come back 10 years from now.'"
