Andrey Gidaspov:  Mr. Shen, could you please share your opinion on the big picture and overall dynamics of the China mobile market?

James Shen:  There are two major mobile operators in China, China Mobile and China Unicom.  China Mobile is much bigger than China Unicom in terms of subscriber base.  While China Mobile is operating a GSM network only, China Unicom has both CDMA and GSM networks.  In June we had about 152 million mobile subscribers, both in GSM and CDMA.

Considering that the majority of the Chinese population still lives in rural areas, these numbers are pretty high.  While rural areas are a “hot topic”, the penetration in major cities, such as Beijing, Shanghai and Guangzhou reached saturation, and either near or over 100%.  This means that currently all mobile operators are shifting their focus to rural areas. 

In terms of other operators, there are China Telecom and China Netcom are using PHS and CDMA-450 to extend their wireline networks.  Both of them have a substantial number of subscribers.

AG: Mr. Shen, can you comment on 3G licenses in China?

JS:  Nobody can comment, because no one has any idea, as it’s up to the Chinese government to decide.  As you know, TD-SCDMA commercial trials have been successfully deployed.  Operators have announced that they plan to procure TD-SCDMA enabled phones. 

Once TD-SCDMA is ripe for the market, another two technology standards (WCDMA and CDMA-2000 1x) will have an opportunity.

One important thing I want to add is that about several weeks ago, the Chinese government officially announced that in addition to TD-SCDMA, WCDMA and CDMA 2000 are also officially approved as a 3G standard in China. 

But I think that the key for issuance of 3G licenses is TD-SCDMA maturity.  It is key to let TD-SCDMA have the foothold in the Chinese mobile market.  Now it has been launched and has its users, and this is encouraging.  You know that WCDMA has been deployed for several years, as well as CDMA-2000, and they have had enough time to become mature technologies.  TD-SCDMA is new and needs some more time to reach that level.  So nobody continues to say “it won’t make it.”

Let’s help make TD-SCDMA happen!  Then everyone will win.

AG: We all heard rumors that China Unicom will be split, and its CDMA business will be given to one of two Chinese fixed line operators.  Can you comment on that?

JS:  Our interest in our daily operation is to continue our support for CDMA.  I personally think that CDMA will work well, and it has played a very important role in the Chinese market.  CDMA-2000 1x has a higher data speed, and you can basically experiment on 3G service offerings, such as music downloads, games, etc. before the official 3G services start.

My understanding is that China Unicom was established by the Chinese government to encourage competition between the carriers for better services and lower tariff.  Otherwise, if there were just one big monopoly, then there would be no competition. 

And so we have competition because of Unicom.  It gives pressure to everyone, and causes everyone to improve their operations.

In this regard, China Unicom has a lot of services for its customers and it’s a very innovative company.  And because it is such a dynamic company, it actually pressured CM to improve their services as well.  Maybe they did not realize it, but because China Unicom is there to compete, China Mobile actually gained a lot as well.

AG: Can you provide some examples of your innovative spirit?

JS: Our core competency – China Unicom wants to continuously innovate.  I will give you some examples of China Unicom’s innovative ways of development on the China mobile market. China Unicom introduced a “dual mode-simultaneous on” mobile phone in China, and it has been a great success.  Again, China Unicom initiated that, and we felt that was important for our customers, especially when there are two major carriers on the market.  Basically it provides better coverage and international roaming abilities.

We as an operator actually believe that there is no need to promote mobile number portability in China.  Look, here is my phone, and you can see these two letters -- “G” (GSM) and “C” (CDMA) letters.  And I have two numbers, a China Mobile number with GSM and China Unicom with CDMA.

If I want to make a call, I can choose which network I want to use, depending on the network coverage.  In some areas China Mobile has better coverage.  So you can constantly check and see where the better coverage is.  For example, in my house the CDMA signal is not stable, so I had to buy a China Mobile card to be able to talk.

Now we are moving towards an even bigger concept, which is called the World Phone project.  I know that TELSTRA, an Australian mobile operator, has implemented dual mode operation. 

Among true innovations that I can demonstrate is our uiOne mobile phone, which has as its key feature “service on the idle screen.” 

We are working with vendors and software developers on that and are at the end stage of negotiations.

AG: What would you say about the killer-application in China, is this just SMS and voice?

JS:  I believe that SMS will retain its growth.  Take SMS for example: SMS innovative solutions are developing. 

AG: People talk about mobile search, mobile advertisement.  Who will be the next Google in the wireless arena?

JS: I see that an SMS-based mobile search has every reason to be successful.  And it works easily.  One just need to send keywords, say “a 5-star hotel,” to a number that can be easily remembered, say, 222, and push the short message.  The keyword reaches the search engine, and after the target is found, there is a short message push-back with the result of the search.

Killer applications include ringtones and ring back tones, which certainly hit the #1 spot in China Unicom.

The challenge that we as an operator are constantly facing, is how to improve the end-user experience.  And the best example is RT, where our subscriber can easily associate himself with a certain piece of music, and have immediate satisfaction.  That’s its killer function – “easy and recognizable”.

So I tend to believe that a user-push is an attractive technology.  On the contrary, games are harder to sell.  To sell a new game, we need to spend a lot of time educating the customer, convincing him to use that game.

In terms of moving internet gamers into the mobile field, we face great difficulties. You see, the mobile game experience gives you that “anywhere-anytime” angle, and you play 2 minutes there – 10 minutes here.  What you lack in mobile mode is the experience of a large screen that on-line gamers prefer.  So I’d say that sales of games are not that fantastic, as MMS, wallpaper, RBT.

With regards to DRM I feel that it’s less critical for mobile networks, as the transaction happens within a closed and secure Internet network.

Overall we, at China Unicom, believe that non-voice services are becoming critical for survival of an operator.  With the decline of voice service revenues, VAS is the way to go and helps our ARPU to grow.

In terms of concrete figures, in 2006 CU VAS share in the overall revenues was about 18%, and this year we expect it to reach 23%.

IVR also is in demand, and we at CU do use it quite a bit for different entertainment services, such as popular voting for TV shows.

In terms of mobile video, you know that Qualcomm has successfully launched Media Flow at Verizon, Cingular and AT&T networks.  And it works excellently.

Now in China, standards of mobile TV are an issue.  Who will define it, carrier or broadcaster, that’s the question.  However, what is obvious is that carriers certainly have much more experience in delivering consumer-oriented services.  Now we see that there will be an authentic Chinese standard for mobile video.

With regards to popular mobile phone models, I can show you my phone.  This is a Samsung-579, which is extremely popular in China now, despite its high price. In China it costs about USD 700.00.  It is a dual-simultaneous handset.

Otherwise, China Unicom is working with all vendors, such as ZTE, Huawei, Amoi and Haier.  In terms of CDMA phone market share, Samsung is number one, and Motorola and LG are in 2nd and 3rd places in China.

AG: Now let us move to the exciting project – the Unicom-BREW joint venture.  What are the results of these four years? What can you be proud of? What are your key products and services?

JS:  A Unicom-BREW joint venture between Qualcomm and China Unicom was created in 2003.  The main mission of it is to help to promote BREW-based VAS in China.  46 people are working in the company. Today BREW-based services are on the rise.  Some 10 million BREW-enabled phones were sold in China, and 5 million downloaded services at least once. 

BREW covers all kinds of applications, including games, video, live-TV streaming, IM (QQ), productivity type applications, an English dictionary, news, and e-books.  We also are proud of enterprise solutions.  For example, 30,000 policemen in China use mobile phones to connect to a criminal record database using our solution.  They can check a person’s ID, see if the license plate belongs to a stolen car, etc.

Another example is our Mobile Resource Management program which is widely used in the FMCG industry by sales people of Coca Cola, Nestle and others.  Salespeople using our LBS services can quickly view their stock and deliver their goods on time.

These companies’ marketing departments can get real data on goods movements and sales.  Coca Cola salespeople can actually gather competitors’ data and quickly send a message: “Hey, there are stacks of PEPSI in the corner shop selling fast, while Coke is missing here, quick, deliver!”  These kinds of useful things can be done with our system.

And we market these solutions together with developers.  We actually go on lots of road shows and meetings and demonstrate what a particular program can do to ease the burden for a concrete company.  When a customer expresses an interest in that, they would also ask about voice package options to go with it.  And we provide some lucrative propositions that allow us to outsmart the competition.

We have AGPS, which is a combination of satellite and cellular networks allowing customers to receive great navigation solutions.

There are some 1,200 on-line applications and more than 200 developers all over China, who work on creating and mastering applications. 

One of the hottest applications that we provide is on-line trading, and you know how crazy Chinese are about trading stocks!  Because we provide a stable, fast and secure connection, many trading agencies are working with China Unicom.

As you know, when trading, people need an immediate response.  And the speed must be fast to deliver the service on time.  Our CDMA-2000 1x network offers 135Kbs in peak hours. 

Like China Mobile, we are also developing our own IM solution, which is now in a trial phase.  Understanding that it is in fact a competition between a CP and operator, nevertheless, we feel that it is right to promote our own solution.  An interesting feature that we have created for CU’s IM is that you can actually get in touch with contacts from your address book stored in the phone, and not just with your IM buddies.  In other words you can SMS, IM and voice your contacts in a simple integrated way.

AG: Many Russian mobile content providers and developers are looking into expanding into the Chinese market. What is your recipe for their success in China?

JS:  First, I would welcome any Russian CP to partner with us.  I know about the great products they can offer and we will be happy to see new partners.

In general, there are two ways of cooperation.  The easiest one is to offer the best and unique products, then find a reliable Chinese partner, Unicom-BREW for example.  This Chinese partner would localize the content, and get it published on the operator’s deck.  Revenue share with Unicom-BREW varies greatly.  I would like to emphasize that if you have a solid and unique offering, you definitely get a better rate.

So you can sign an agreement for one year, see how your product is doing, and if you feel strong enough, go to option two.

Option two is opening an office in China, hiring local staff and trying to connect with operators directly.  This I believe is a better option for bigger companies.

As far as popular content for China is concerned, it is ring tones, ring back tones and unique games or user-generated community platforms.

AG: What is the secret of your success?

JS: I don’t think that I am so successful.  My way is to be a decent person first.  And business comes second.  And in business I try to be honest and trustworthy.  These are my basic principles, and people appreciate it.  Because they know that if I promise, I deliver. I always bring straightforwardness first.

Aside from that, work hard, gather new knowledge.  Also, on the innovation side, I strongly believe that it doesn’t come from the top; it comes from the grass roots level.  So people must be curious, see little things, and implement them to strike big.

For example, I love to go to mobile phone retail stores and check what is new, how people react to various phone models, what they actually want to see.  And when I travel I do the same, so that I can catch the difference.

AG: Thank you very much for your interview!