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TD-SCDMA = Based 3 6 Mobile Business Value Proposition andAllianceWei yuan', Mingzhi Liz

School of Economics and Management,TsinghuaUniversity, Beijing, 100084 China1yuanw@em.tsinghua.du.cn,21imzh@em.tsinghua.edu.cn

Abstmct-.TD-SCDMA,which was developed and promotedby China, is one of the third-generation (3G)mobiletelec0"unicati0ns t a ion standards, together withCDMAuN)o and WCDMA. Building competitive advantagebased on the TD-SCDMA tandard is believed to have thepotential of making China move up the value chain in itsmobile telecommunication industry. This paper analyzes th edements of the evolving mobile business value chain andemphasizes the importance of building alliance among all theindustry players, standard setting organizations andgovernment agencies.

Keywords: TDSCDMA; Value chain;Nodes;AllianceI. INTRODUCTION

3G has dramatically improved the capability of mobilewireless transmission. Th e once simplex mobilecommunication industry falls into complicated situationwith many new markets emerging and new players enteringthe markets. It is important to clearly understand thestructure of the industry and the elements of the evolvingvalue chain, especially the one based on the TD-SCDMAstandards, since it is a new standard on which a whole newvalue chain is to be built.

In the first section of the paper we describe thebackground of TD-SCDMA development. It depicts thehstory of TD-SCDMA, from being researched anddeveloped to tests of the system. We can learn thatTD-SCDMA marks a milestone for the China mobilecomm unication industry.

In the next section, this paper analyzes the structure ofthe value proposition of TD-SCDMA. In the stage of 2Gbeing dominant in the market,when voice communicationis the main service of mobile communication ndustry, thereare three nodes on the value chain. Since 3G enables dataservice, the traditional value chain evolve s and new m arketsemerge an d new playe rs enter the markets.

in the last section of the paper, we compare TD-SCDMAwith the other two standards--WCDMA and CDMA 2000,from which we find out the technical advantages ofTD-SCDMA. However, there are still some factors that maypu t TD-SCDMA n an inferior position. Then we bringforward some critical problems that TD-SCDMA has toovercome. Lastly, we propose some solutions to theproblems from the perspective of building the TD-SCDMA

This research has been fund ed by the NationalNatural ScienceFoundation of China (ProjectNumber 70231010and 70321001).

based value chain: joint efforts from firms at differentlayers, industry associations and government agencies willbe critical for the realization of thebusiness value.

II. BACKGROUND OF TD-SCDMADEVELOPMENTIn 1997, the ITU called for proposals for IMT-2000standards. In the same year, Datang's SCDMA system - awireless access technology - passed the state-level test and

the former Ministry of Post and Telecommunications0decided to propose the Chinese 3G standard on he basis ofSCDMA. In May 1998,a group of engineers began to draftthe proposal of TD-SCDMA, which was later submitted tothe ITU['].TABLE ITIMELINEOF TD-SCDMA

~~ EVENT- _______TIMEat the World Radio Conference (WRC) of theMay, 2000

Dec 12', 2000Mar l@, 2001

ITU,TD-SCDMA wa s accepted as one of thethree 3G transmission standards.TD-SCDMAechnology form was initiated.TD-SCDMA standard was accepted by3GPP(Third Generation Partnership Project)andwas included in 3GPP's4thRelease.The govemment of China and Germany agreedto advance 29 cooperative projects includingTD-SCDMA.TD-SCDMA passed th e fmt phase test ofMTnet.China's Minishy of Information Technologypublicized the 479' document for the frequencyallocation for TD-SCDMA,tndustry Alliance ofTD-SCDMA nitiated.Siemens Mobile and Huawei invested in a jointventure to develop the technology and productof TD-SCDMA

Nov. 2001Feb. 2002 Intertest-net succeed.May, 2002Oct 23d, 2002Oct 3@, 2002Aug, 2003Dec. 2003 TZle lndustry M i m e of TD-SCDMA ad 14members.Global GSM Association an d TD-SCDMAAlliance affiied to cooperation.

The Industry Alliance of TD-SCDMA had 21members.Jun. 2004Apr, 2M15

On 5 November 1999, TD-SCDMA, together withSC-TDMA (UMC-136), MC-TDMA (EP-DECT),MC-CDMA (CDMA2000), DS-CDMA (WCDMA), W ~ Saccepted a i radio interface standards by the ITU-R. In May2000, at the World Radio Conference (WRC) of the ITU,TD-SCDMA was accepted as on e of the three 3Gtransmission standards, together with CDMA2000 an d

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W-CDMA (Wideband CDMA). On 16 March 2001,TD-SCDMA made another breakthrough: at the 11thplenary session of 3GPP (Third Generation PartnershipProject), all technical schemes of TD-SCDMA standardwere accepted by 3GPP and were included in 3GPPs 4thRelease[. This indicates that TD-SCDMA has not onlybeen accepted by the ITU, but also by an industry allianceof operators an d vendors13].TD-SCDMA marks a milestone for the Chinesetelecommunications industry, as it is the very firsttelecommunication standard proposed by China to beinternationally accepted. As GSM and CDMA havedominated the 2G market, Chinese vendors have to paytremendously high patent fees to foreign intellectualproperty rights owners. According to some recent statistics,such payments reached over 10 billion Yuan (US$1.21billion) by the middle of 2ooO[41.Apparently, all this costcan be avoided because of TD-SCDMA.The potential andindirect benefit fromTD-SCDMA can be predicted too.

FII. TH E VALUE CHAIN OF TD-SCDMAIn the forepart of 2G period,voice communication is themain service of mobile communication industq in China.There are three nodes on the value chain: equipment andsoftware manufacturers, network operators and handsetmanufacturers (see Fig.1). h addition to setting up jointventures and importing equipment, the Chinese governmenthas provided favorable support to domestic manufacturers.In the mid 1990s, several domestic manufacturers werewell established, including Julong, Datang, Zhongxing(ZTE) an d Huawei. The dominant operators in China areChina Mobile and China Unicom, the former is operatingGSM network and the latter is operating both CDMA andGSM networks. Most of the terminal handset manufacturersset partnership with domestic manufactures, such asMotorola with Huawei, Ericsson with Julong. Therelationship between the former two nodes is dso alwaysvery tight. The network operators usually have closecooperation with several equipment producers.

.

Equipment and softwaremanufacture

Network operators

Handsets manufacturersJ Iig. : the traditional value chain of mobile wirelessWith the technical improvement, some data serviceemerged with the applications of GPRS an d WAF, su ch asMonternet Program and E-mail service. According to a

market research sponsored by China Mobile, the mobile

data service most in demand is e-maiI[51.However he realgrowth of mobile data services actually lies in the shortmessage service (SMS). There are wo reasons: on one side,SMS has several advantages, such as convenience andbeing economical; one the other side, the transmit rate ofmobile wireless is too much lower than that of Internetwhich customers have got used to, so the new data servicescant be well developed.As TD-SCDMA significantly improves the rate of datatransmission, it is possible to offer both data and voiceservices. Many data services are available, such as MobileIntranetWxtranet, Multimedia Messaging Service, MobileInternet and location based services. Therefore, newmarkets emerge and new players enter the markets. Someprovide network connectivity, some provide middlewareand others provide contents that will be transferred in themobile network. The players m the same nc#frniay providediffer& scrvicc. For instance, some players providecontent for m-bank; others provide information form-commerce[61.

Since new nodes emerge in the network and the samenode can be divided into different types of operation, thetraditional value chain evolves. There are five nodes in theevolving value chain: application and content provider,navigation&middleware and connectivity, software andequipment manufacture, network operator, customer (seeFig.2).

ApplicationsIIocluding.co n en t sumliers)Navigation&middlewave&

Connectivim

Software and equipmentmanufacturesNetwork operatorsI

Handsets or user interface

Fig.2: the evolving value chain of mobile wirelessContent and application providers offer different kinds ofdata services to drive the contents and applications fromwireline to mobile wireless world. Since TD-SCDMAenables both voice and data communication with propertransmit rate, more and more customers are seeking out

information, uch as integrated messages, targeted businesscontent and entertainment resources, through new channels(Web sites, bookmarks and picture messages) rather thantraditional channels (radio, TV and print). Some of them se tup websites (www.mentemet.com, www3.caishow.com) for

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customers to browse all the available content andapplications.The downstream players of the evolving value chain canbe called as content and application enablers. They help tomake the content and applications suited for mobilewireless transmitting. Some of them adapt the content to arapidly expanding mobile subscriber base on multipledevices and air interfaces. Some of them transfom thecontent to the format that can be transmitted through mobilewireless worId. Some of them develop wireless platformsand utility applications to give users access to content fromthe wireline world. Others use conversion tools to createportals that deliver content suitable to mobile wirelessdevices. Mobile wireless content enablers can be broadlyclassified into four categories: service bureaus, middlewareand content delivery applications, portals, and systemsintegrators and consultants[].

IV. ALLIANCE AMONG THE PLAYERSNew markets and new entrants have pricked up the

competition. The competition is especially apparent amongthe different standards-TD-SCDMA, CDMA2OOO andWCDMA. ach nodes of the value chain have to choosewhich standard to follow. China Mobile prefers WCDMAthat can be evolved from a GSM network much more easily,while China Unicom prefers CDMA2000 that can beevolved from CDMA. Because this movement from 2G to3G is a chance for the operators to increase their marketshare, more operators such as China Telecom and ChinaTietong want .to enter the mobile wireless universe.However, the new operators choice, even the players whocan have the pie is uncertain. But it is sure that thecompetition among network operators will k much morefurious.TD-SCDMA still has some advantages. Compared withWCDMA and CDMA2000, TD-SCDMA has certaindistinguis hing characteristics]. First, the application ofsmart antenna brings many advantages: with the low chiprate of 1.28Mbit.k TD-SCDMA can significantly improvethe efficiency of spectrum usage; it saves the energy andimproves the power efficiency of the base stations; theantenna arrays strengthen the reliability of the base station;as smart antennae use an array of small power amplifiers,which are much cheaper than a single high power amplifier,the cost of base stations can be reduced dram aticd y. Next,as the expectation that 3G is mainly used for downloadingcontents from wireless portals, TD-SCDMA uses twoasymmetric bands for uploading and downloading traffic.Third, the application of software-defined radio reduces thesize and cost of the system. And on the other hand, it mayserve to overcome Chinas weakness in chip manufacturingtechnology. Th e last and most important feature ofTD-SCDMA is that it can enable a smooth transition fromcurrent GSM system to future 3G systems. Th eTD-SCDMA is designed as a dual band and dual modesystem[].

AI I these features strengthen the competence ofTD-SCDMA. t the same time,TD-SCDMA was proposedtwo years later than CDMA2000 and WCDMA. Itsdevelopment of facility drops behind other countrys. Boththese facts affect the scde of the TD-SCDMA basednetwork to expand.Therefore, TD-SCDMA faces some critical problems:how can TD-SCDMA step up and build up its own valuechain before CDMA2000 an d WCDMA dominating theChinese mobile communication market? GSM and CDMAboth have mature vahe chains and their coverage is far andwide. However, TD-SCDMA is at the jumping-off p i n tand has no industrial foundation. How can it find a footholdsomewhere and compete with the other two? Sometechnology advantages of TD-SCDMA need other nodes ofthe value chain to support. How can TD-SCDMA make useof those advantages and transfer them to its owncompetitive advantage?Firstly, besides speeding up technology improvement,TD-SCDMA can try to win -th e support from thegovernment. For example, delaying the license grantingproperly can leave TD-SCDMA time for technologyimprovement. Also, in the allocation of 3G frequency,Chinas Ministry of Information Technology has reserved155M fo r TD-SCDMA, &d 60M fo r WCDMA andCDMA2000 respectivelyo1.Without doubt, such strongsupport endows TD-SDMA with attractive competence.Secondly, China should search partners to accelerate thedevelopment of TD-SCDMA, rather than letting Datang doit alone. Then Datang can not only acquire enough capitalbut also have an interest group. If some foreign companiesare in the interest group, it helps to spread TD-SCDMA inforeign market. In the interim of development from 2G to 3G , the standards TD-SCDMA has to compete with areWCDMA, CDMA2OO0, GSM and CDMA. SinceTD-SCDMA can bk transited from GSM system, there isindirect cooperative relationship among GSM, WCDMAan d TD-SCDMA. Therefore., they can cooperate with eachother to compete w ith the other two standards.Except for the competition among the network op erators,the players of the other four nodes also face many choicesbecause of the different standards. For instance, the terminalmanufactures have to decide their handsets to fit whichmode or to be dual modes. There is competition in the samenodes of the value chain. For example, the contentproviders can specialize in entertainment resources orbusiness service. They may provide integrated services too.Therefore, setting up a value chain for TD-SCDMA is alsoa process to attract players from the elements of the othervalue chain, such as that of GSM or WCDMA.TD-SCDMA hould integrate its technology advantages,strategic advantages and cooperation advantages to amactplayers in the nodes to get alliance. It will strengthen thepower of TD-SCDMA industry and is beneficial to thedevelopment of the nodes of the value chain.Alliance will make better use of the technology

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advantages of TD-SCDMA. According to the informationmentioned above, TD-SCDMA supports both GSM an d 3Gservices"']. Only when the handsets have functionssupporting these characteristics can TDiSCDMA transfersthis technology into competitive advantages. However,without alliance the handsets may be differentiated by theirterminal manufactures and lose such functions.Alliance also avoids some problem caused byincompatibility. For example, Japanese handsets for i-modeand those in Taiwan are convincing example and

counterexample concerning image download. The sizes ofthe screen of handsets for i-mode in Japan are the same, sothe customers can send the images downloaded to eachother. This is beneficial to the diffusion of the i-mode. Onthe contrary, due to the different sizes of the screen of thehandsets in Taiwan, mages download service there meetswith block. So whether the modes of handsets arecompatible with each other may affect themselves becauseof network externality. Then the development of upstreamnodes may be affected thereby.

The setting of content enablers affects the enthusiasm ofthe content providers to a degree. In the famous i-mode case,it provides a platform upon which content providers supplythe content, either for free or for a small premium fee,which is set at a maximum of 300 Yen per month. NT TDoCoMo shares traffic revenue related to content with theproviders of the content, and typically keeps a 9 per centcommission fee. This has provided a strong incentive forcontent providers. As a result, a large amount of Japanesecontents is now available. In April 2000, for example, 4.48application alliance partner companies and 8,023 voluntaryi-mode Internet websites, including 20 search engines, havecontent provision contracts with NTT DoCoMo. Theavailability of all of this content has attracted more andmore subscribers. As more subscribers sign up for i-mode,more content providers are enticed to provide more content.A positive feedback process is thus established['21.The process for each node to profit indeed is the processfor the whole value chain to profit. The players in the samenode need to come to an agreement in some aspects. Th edifferent nodes of the value chain need to ally with each toconform to the same object in order to avoid conflict ofinterest. Further more; the players can consolidate their

long-term relationship with upstream or downstreamthrough the alliance.V. CONCLUSIONS

3G brings great improvement to mobile communicationindustry and the value chain evolves. It is also a chance forthe industry in China to stride because of TD-SCDMA.Challenge is the concomitant of chance. TD-SCDMA has tose t up its own value chain and overcome the problems inthe mobile communication world that dominated by GSMand CDMA. The industry alliance among the industryplayers, standard setting organizations and governmentagencies is a strong weapon of TD-SCDMA and Chinamobile communication industry. In October 2002, eightfamous domestic firms including Datang, Huawei andLenovo initiate the industry alliance of TD-SCDMA. InApril 2005, the alliance has 21 members that cover all thenodes of the value chain of the indu~try ' '~].D-SCDMA inChina is speeding up its paces. .

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