The cost of bringing 3G smartphones to China showed up in China Telecom’s earnings report today as the nation’s third-largest carrier reported a sharp drop in quarterly profits. The operator earned $1.4 billion in the second quarter, down 10% from the year-ago quarter. Investors were not disappointed; many were expecting an even bigger earnings drop due to the cost of subsidizing and marketing 3G handsets like the iPhone.
China Telecom and China Unicom both carry the iPhone now, leaving only China Mobile without the iconic device. China Mobile is the world’s largest wireless carrier with an estimated 688 million subscribers, but only about 10% of those customers are paying for 3G. In contrast, almost 37% of China Telecom’s subscribers use 3G.
Subsidies for handsets other than the iPhone claimed about 23% of the China Telecom’s revenue during the second quarter, according to published reports. The operator started carrying the iPhone 4S in March, and clearly expects the impact of iPhone subsidies to increase in the future. “The company believes that the launch of the iPhone to expand the high-end market would require an appropriate increase in marketing initiatives which would create short-term pressure on profitability, however, it would enhance long-term sustainable growth and value creation for the company,” the company said.
China Telecom has been leasing CDMA infrastructure from its parent company China Telecom Corp., but today the company said it will purchase those assets for $13.3 billion. The news helped send its shares up more than 4% on the Hong Kong stock exchange.
Despite the sting of handset subsidies, Chinese carriers are clearly committed to using smartphones to convert customers to 3G. China Mobile, which has also seen its earnings fall this year, says it will increase spending on handset subsidies in the months ahead.
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