Chinese Broadband Market Divergence Grows as Unique Innovations Take Root

By Andrew Spivey | 4Q 2024 | IN-7615

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China has the largest number of fixed-broadband subscriptions of any nation worldwide, at 659.4 million as of August 2024. The country also boasts some of the world's most advanced broadband infrastructure, with 95.3% of subscriptions served by Fiber-to-the-Home/Office (FTTH/O). To put this into perspective, across the European Union (EU) FTTH/O subscriptions account for under 50% of the market, whereas in the United States they don't even reach 20%. While state-led campaigns and generous subsidies have, of course, played a pivotal role in driving network modernization in China, fierce rivalry between the country's three state-backed Internet Service Providers (ISPs)-China Telecom, China Mobile, and China Unicom-has been equally as consequential. In a desperate attempt to retain existing customers and attract those of their rivals, all three have invested heavily in ensuring that their networks remain at the leading-edge, and have engaged in intense price wars to offer their services at competitive rates. But with FTTH/O now approaching universal coverage, and profit margins on broadband subscriptions already razor thin (or even negative in some cases), China's big three ISPs are now looking for new innovations to stimulate growth, and for fresh, enticing services to help increase the Average Revenue per User (ARPU) and enhance customer loyalty. This is leading to the rapid deployment of advanced Fiber-to-the-Room (FTTR) networks, alongside plans for the commercialization of 50 Gigabit (50G) Passive Optical Network (PON) infrastructure within the next 12 months. This ABI Insight scrutinizes the role of inter-ISP competition and state directives in stimulating the rollout of FTTR and 50G-PON in China, and assesses how these innovations will impact both the domestic and international broadband markets.

An appreciation of inter-ISP dynamics within China is essential for understanding trends in the country's broadband market. The largest of the three, by far, is China Mobile. Having historically dominated the Chinese mobile telecommunications market (consistently maintaining more mobile subscribers than China Telecom and China Unicom combined), in 2015, China Mobile entered the broadband market through its acquisition and integration of China Tietong's fixed line network. Within 2 years, China Mobile's broadband subscriber number had surpassed those of both China Telecom and China Unicom, and since then, its lead over the competition has only continued to widen, with subscribers expanding at a 12.5% Compound Annual Growth Rate (CAGR) between 2019 and 2024, compared to 8.0% for China Unicom and 5.6% for China Telecom. As of 2Q 2024, China Mobile maintained 309 million broadband subscribers, 116 million more than its closest rival China Telecom, and just 1 million short of the combined subscriber number of both China Telecom and China Unicom. The substantial edge in both mobile and broadband subscriber numbers that China Mobile has over its peers is reflected in its colossal revenue, which for the 2023 financial year were US$142.2 million, dwarfing China Telecom's US$72.4 million and China Unicom's US$52.5 million. Such large revenue, in turn, furnishes China Mobile with immense funds to invest in cutting-edge network upgrades and price promotions, both of which have helped it further solidify its supremacy in the broadband market. Threatened by China Mobile's preeminence, China Telecom and China Mobile have been in a frantic search for new innovations and business models they can leverage to capture customers from their rivals and prevent customer churn, ideally while also increasing subscriber ARPU.

One solution to achieve this is FTTR, which was introduced by Huawei in 2020 with the promise to decrease average latency by >30% and increase download speeds by 140% compared to FTTH/O. FTTR achieves this by essentially shifting the termination of the fiber network from the perimeter of the property (as is the case for FTTH/O) to the room(s) where the network is to be accessed. This means that instead of the fiber-optic cable ending at the customer's main Optical Network Terminal (ONT), an additional fiber-optic cable will continue from this main ONT, pass through an optical splitter, and then multiple fiber cables will extend throughout the property to other room ONTs. In a standard residential property in China, the network typically consists of one main ONT and one room ONT (referred to as a 1+1 solution), although in enterprise environments, the number of room ONTs is naturally significantly more. By stretching fiber coverage down to the room level, FTTR is able to improve the strength and coverage of the Wi-Fi signals emanating from the ONT by bringing their source closer to the end user and avoiding the interference, which would be caused when the Radio Frequency (RF) waves pass through walls and other objects throughout the environment. These benefits don't come cheap though, with the additional equipment and labor required for FTTR estimated to cost north of US$100 per installation. While relatively low manual labor costs, an ability to source equipment locally, and a high population density ensures that FTTR installation in China is considerably cheaper than in Western markets, the figure is still high considering that, in 2023, the average monthly broadband subscriber ARPU for all three of China's ISPs stood between US$6 and US$7.

China Unicom, the smallest of the three state ISPs and perhaps the most desperate for the opportunity to gain a technological edge over its rivals, pounced first and launched FTTR commercially in 2021. Although China Mobile and China Telecom also subsequently entered the FTTR market, China Unicom's first-mover advantage helped the ISP capture the lion's share of FTTR growth throughout 2022 and 2023, resulting in the company ending 2023 with over half of all of Mainland China's FTTR subscribers (6 million out of 11.4 million). The year 2024 has seen all three ISPs invest heavily in FTTR, and while at the end of 2Q 2024 China Unicom had maintained its lead with 9.1 million Mainland Chinese FTTR subscribers (45.5% of a 20 million total), the margin has narrowed, with China Mobile's subscriber base having increased 296.4% Year-over-Year (YOY) to reach 5.05 million, and China Telecom's soaring over 720% YoY to reach 6 million. FTTR has been harnessed by China Unicom to not only help raise the ARPU of its high-end subscribers by US$4 a month, but perhaps more importantly, reduce subscriber churn by locking in customers with long-term multi-year contracts. Yet, despite these early successes, below the surface there are concerns that FTTR growth cannot be sustained, and that ISPs will struggle to attain strong Return on Investment (ROI) for their investments. It has been reported that demand is still far short of China Unicom's expectations, and it is now struggling to offload stockpiles of equipment before it becomes outdated. Some also question the long-term viability of FTTR's economic model, arguing that favorable ROI has only been possible with the support of local government subsidies that were implemented in the belief that a boost in equipment procurement and installation work stemming from FTTR rollouts will help stimulate the economy. Moreover, now that all three ISPs are fully embracing FTTR and contesting for customers, price wars are sure to intensify, which will further squeeze margins and drag down ARPU.

A second emerging battleground between Chinese ISPs is 50G-PON. Whereas FTTR improves performance by deepening fiber penetration in the home, 50G-PON involves upgrading the underlying PON technology of the fiber broadband network, enabling downlink speeds 5X that of the most advanced 10 Gigabit PON (XG-PON) technology currently deployed in China. In contrast to China Unicom, which tied its fortunes to FTTR in the belief that it would provide a competitive advantage, China's second largest ISP, China Telecom, wagered that demonstrating industry leadership in 50G-PON was its best path to gaining an innovative edge over its rivals. China Telecom was one of the original initiators of the 50G-PON standard within the International Telecommunications Union Telecommunication Standardization Sector (ITU-T) in 2016, and since then, the company has played a pivotal role in standardizing the technology, including leading the completion of the standard for the coexistence of Gigabit PON (GPON), XG-PON, and 50G-PON in September 2022. China Telecom has also led the industry in 50G-PON trials and pilots, and in March 2024, launched the world's first live 50G-PON network covering thousands of users in Shanghai's Yangpu district. Although China Mobile and China Unicom are also developing their own 50G-PON strategies, China Telecom plans to cement its lead in the market by becoming the first to embark on large-scale commercialization of 50G-PON by the end of 2025. The ISP, no doubt, hopes that this will translate into healthy subscriber and revenue growth.

As can be expected for a leading-edge technology still in its incubation period, 50G-PON is currently extremely expensive, with the cost of a 50G-PON ONU currently sitting around US$2,000, compared to just US$100 for a 10-Gigabit Symmetric-PON (XGS-PON) Optical Network Unit (ONU). Although this price is expected to fall swiftly as adoption gathers pace and economies of scale kick in, early deployments in 2025 and 2026 will require ISPs to make large initial investments, which may not be recouped for many years. Thus, it is expected that government support will play a pivotal role in incentivizing the first deployments. This may include local government subsidies or policies designed to facilitate the achievement of infrastructure modernization targets, such as the goals for increasing 50G-PON networks included in the Shanghai government's 2023-2026 strategy. Yet, even with this stimulus, it is not clear exactly which consumer applications will require 50G-PON, or how much additional value 50G-PON can offer consumers over 10G-PON. These concerns explain China Unicom's hesitant approach to 50G-PON, with the ISP choosing instead to focus most of its resources on FTTR.

As we have seen, a combination of fierce market competition, a desire to demonstrate leading-edge innovation, and government incentives are driving a fresh wave of broadband innovation in China. Yet, these dynamics are specific to Mainland China, with other nations facing their own set of market drivers and challenges. What does this mean for the future of FTTR and 50G-PON outside of China? Do the idiosyncrasies of the Chinese market mean that it alone is ripe for these latest innovations? Or are the value propositions of FTTR and 50G-PON so attractive that we can expect to see them rapidly adopted worldwide in the years to come?

Starting with FTTR, this is a technology that, in many ways, is uniquely suited for the Mainland Chinese market. This is, in part, because the country's high population density coupled with low labor and equipment costs ensure that FTTR installations are significantly more cost-effective in China than in other markets. Yet, this is not the only factor, as FTTR also offers a compelling solution to China's lack of unlicensed access to the 6 GHz spectrum. In contrast to all other advanced economies, which have already or intend to release segments of the 6 Gigahertz (GHz) band for unlicensed Wi-Fi use, the Chinese Ministry of Industry and Information Technology (MIIT) has instead chosen to reserve the band for licensed cellular use. While this decision does support the country's 5G/6G industry with additional spectrum resources, helping to maintain China's world-leading position in developing these strategically important technologies, it also deprives the country's Wi-Fi industry of much needed extra spectrum capacity. This poses serious consequences for Wi-Fi Mesh, an innovative Wi-Fi technology that involves deploying multiple wirelessly connected nodes throughout the home to improve Wi-Fi coverage and performance. Whereas in the United States and Europe the wireless backhaul for these nodes can use the readily available 6 GHz band, freeing up the 2.4 GHz and 5 GHz spectrums solely for communications, in China Wi-Fi Mesh backhaul must rely on 2.4 GHz and 5 GHz, limiting capacity for communications and increasing the potential of network interference. Therefore, in China, FTTR serves as an effective tool to overcome this challenge by replacing what would have been a wireless 6 GHz backhaul between nodes with what is essentially a fiber backhaul.

Given that, unlike China, most other major economies have access to portions of the 6 GHz spectrum, and that lower population densities alongside higher labor and equipment costs make FTTR installations considerably less economical, it is perhaps not surprising that, to date, the reception for FTTR in markets beside China has been lukewarm. For example, Brazilian ISP Oi has only managed to gain several thousand customers since launching the service with Huawei equipment 2 years ago, and the company has the modest target of just 10,000 new customers in 2025. Reflecting the present concentration of FTTR opportunities within Mainland China, the only equipment Original Design Manufacturers (ODMs) to bring FTTR solutions to market are the country's leading vendors Huawei and ZTE. Going forward, ABI Research anticipates that residential FTTR deployments will struggle to gain traction in markets outside of China any time before the end of this decade, as many ISPs are still preoccupied with completing their FTTH upgrades and they will have low confidence in the ROI potential of FTTR. Those FTTR opportunities that do exist will be found in high-end enterprise environments facing existing spectrum congestion and interference challenges, and burdened with a high density of users.

The prospects for 50G-PON outside China are more optimistic, although the adoption time frame will be significantly slower. To date, there have already been numerous 50G-PON trials and pilots in multiple countries from an array of different vendors, including Huawei in France, ZTE in Italy, and the U.S., Nokia in the state of Oklahoma and Calix in Nebraska. Additionally, other equipment vendors have plans to initiate trials in the coming months, such as Adtran in the United Kingdom. The wide range of vendors active in 50G-PON, both from Mainland China and the West, highlights how the 50G-PON ecosystem is considerably more diverse than that of FTTR, which will help allay any potential customer concerns about being dependent on a limited number of suppliers. The cost barrier that exists today will also gradually reduce later in the decade, as the scaling up of 50G-PON first in China will help drive down the price of equipment internationally. Some even believe that as early as 2027 the cost of a 50G-PON ONU could be as low as just double that of an XGS-PON ONU. Should these price decreases be realized, then 50G-PON will become an attractive option for ISPs worldwide, particularly those in advanced economies, when they conduct their routine network upgrades. This is because unlike FTTR, which requires engineers to enter individual homes to physically lay the extended fiber networks, the labor costs involved in upgrading broadband infrastructure to 50G-PON would be roughly the same as upgrading it to an earlier PON variant, such as XGS-PON. Therefore, should 50G-PON prices reach reasonable levels and compelling 50G-PON use cases emerge, ISPs will gravitate toward deploying the latest 50G-PON technology over earlier variants to future-proof their investments and further differentiate their networks from those of the competition. That said, regardless of any price reductions, most ISPs will remain hesitant to invest until these 50G-PON use cases do arrive. This is where the divergence lies between China and the international market for 50G-PON. Whereas ISPs in China are currently powering ahead with 50G-PON infrastructure upgrades prior to the arrival of applications, in most international markets, ISPs will first wait for the applications before committing to large-scale deployments.