"The development of Xiaolingtong will see a sharp uptick in the first half of this year, due to the delay of the issuance of new mobile licences, said Chen Yuping, a research fellow with the Ministry of Information Industry's (MII) China Academy of Telecommunications Research.

MII officials had planned to issue 3G (third-generation) mobile phone licences to four telecoms operators before March, when Minister Wu Jichuan retires, Chen told Business Weekly.

However, regulators ?concerned MII will be merged with other ministries during an anticipated cabinet reshuffle ?decided to postpone the issuance of licences.

Regulators will give China Telecom and Netcom ?both promised mobile phone licences by MII officials after their split from former China Telecom ?room to develop Xiaolingtong to help them penetrate into China's mobile market, Chen said.

That will fuel the fast take-up of Xiaolingtong. Policy barriers have limited development of the service.

Xiaolingtong, a citywide mobile service that connects directly with fixed-line phone networks, offers lower fees than mobile services provided by China Mobile and Unicom. Unlike services offered by the two giants, there is no charge for incoming calls and no connection fee.

Fearing Xiaolingtong would dent revenues and stocks of overseas-listed China Mobile and Unicom, regulators prohibited the new service in Beijing, Shanghai, Guangzhou and Tianjin.

Xiaolingtong is scheduled to be launched in Guangzhou around May, and deployment of a trial network, despite the prohibition, is secretly under way in Tianjin, media have reported.

Analysts suggest that will be a major breakthrough for the ill-fated Xiaolingtong, which has technical limitations.

Xiaolingtong does not have roaming capability, and is hard to upgrade to 3G technology.

Xiaolingtong's network coverage is somewhat patchy.

Rumours have been swirling that regulators will acquiesce and allow Xiaolingtong in all cities except Beijing and Shanghai.

"Xiaolingtong will realize further market penetration this year, as it has become a big income earner for China Telecom and Netcom with the growth of their fixed-line business slowing, said Lian Mengke, an analyst with Shanghai-based Haitong Securities.

"Without mobile licences, the two operators will ramp up investment ... to expand the scale of Xiaolingtong's user group, Lian told Business Weekly.

Subscriber growth will continue rapidly as networks are built, and as markets are flush with price-sensitive consumers.

Once considered an outmoded service, Xiaolingtong has grown in China like wildfire.

Low prices have made it an extremely popular mobile alternative everywhere it has been launched.

More than 10 million users in about 300 cities have subscribed to the service.

Analysts estimate the number will be near 20 million this year.

More than 200 million Chinese subscribe to either China Mobile's GSM (global system for mobile communications) network or Unicom's CDMA (code division multiple access) network.

Analysts once speculated Xiaolingtong would be shut down as carriers did not have mobile licences.

That risk has been reduced given the sharp increase in the number of subscribers, as too many users would be harmed if the service was terminated.

Rapid development of Xiaolingtong has left China Mobile and Unicom feeling more intense pressure.

"With the dazzling expansion of ... Xiaolingtong users, China Mobile and Unicom are becoming more sensitive to low-price rivals, Zhu Min, an analyst with Analysys Consulting, told Business Weekly.

An increasing number of the companies subscribers have defected to other service providers.

China Telecom and Netcom, the two latecomers to the mobile market, are using Xiaolingtong to gain experience in both operating a mobile business and ensnaring users from China Mobile and Unicom, Zhu said.

"After securing 3G licences, China Telecom and Netcom will help their Xiaolingtong users to properly migrate to their mobile networks, he said.

Analysts are closely watching for Xiaolingtong's further market penetration.

US-based communications equipment maker UTStarcom earlier this month signed equipment-supply contracts worth about US$114 million with Netcom.

Netcom plans to expand its Xiaolingtong service in Liaoning, Hebei and Shandong provinces with the equipment.

The equipment will allow Netcom to offer users services like short-text messages, MP3 downloads and Internet browsing in the three provinces, making Xiaolingtong more attractive.

China Telecom and Netcom have attempted several times to extend their Xiaolingtong services to Beijing and Shanghai.

Xiaolingtong was reportedly launched in Shanghai in December to a limited number of users.

"If Xiaolingtong penetrates Beijing and Shanghai, that will beat China Mobile and Unicom to the punch, Lian said.

Industry insiders said China Telecom and Unicom have filed several complaints with MII officials about Xiaolingtong.

Despite its furious growth, Xiaolingtong's long-term development, in large part, still rests on the timing of one-way charging, Zhu said.

"With the escalation of competition between China Mobile and Unicom, mobile phone fees swill be further reduced and Xiaolingtong's competitiveness will be eroded, Zhu said.

"Once one-way charging is adopted, the development of Xiaolingtong will be greatly stifled, he added.

(Business Weekly January 28, 2003)