Yesterday, China Mobile tumbled 3.3%, the most since September 2014 after the company posted its first annual profit drop in 14 years amid rising spending. The company, the world’s largest mobile carrier by subscribers has been spending more to promote its 4G network in a bid to increase demand for data sales, which contributed to the drag on profits.

Higher costs in a bid to shift users into 4G
China Mobile’s net profit fell 10.2% from the previous year to RMB 109.3bn despite a 1.8% increase in operating revenue to RMB 641.4bn as a result of rising costs.

China Mobile has been spending more on promoting its 4G network, launching incentive programs to migrate its 2G subscribers to its high-speed 4G network launched in December. Out of its 800mn mobile subscribers, half are 4G subscribers. China Mobile is betting that subscribers will use larger amounts of data as more people connect using applications like WeChat that are carried on a user's data plan to avoid the SMS charges that were formerly lucrative sources of revenue for mobile carriers. To build up the network needed to create that shift of its subscribers into 4G, China Mobile said capital spending will peak in 2014 and 2015 before declining in 2016. For this year, the company project capital spending to drop 6.5% from RMB 213.5bn to RMB 199.7bn.

…but company will hand out lower subsidies
China Mobile however, has cut spending on subsidies by as much as 29% last year and is looking to cut its sales and marketing budget by 20% this year.

According to Bloomberg, the Chinese government had told China’s three mobile carriers to cut the amount they spend on subsidies and advertising for devices such as the iPhone.

In October when China Mobile released the iPhone 6 and 6 Plus, it offered no direct subsidies for the hardware, although discounts were given on calling plans.

Source: Macquarie Research - 20 Mar 2015