Slow progress in rural markets and the declining popularity of fixed-line telephones increasingly squeezed China Netcom Group Corp (Hong Kong) Ltd in the first half of the year.

And the delayed issue of the mainland's first batch of third-generation (3G) licences, which China Netcom is confident it will secure, also dampened its outlook, analysts said.

The mainland's second-biggest fixed-line phone firm posted a 1.7 percent fall in first-half earnings yesterday as more users switched to mobile phones.

China Netcom, the smallest of the mainland's big four telephone companies, said it earned 5.82 billion yuan (US$727.5 million) for the six months ended on June 30, versus 5.92 billion yuan (US$740 million) a year ago.

Slow uptake of new users was blamed for the sluggishness, said analysts.

The company saw its number of telephone users increase by 4.7 percent to 119.4 million in the first half, reflecting a setback in its expansion into rural areas where it earlier had planned to generate the bulk of its revenue.

The mainland remains the world's largest telecom market, with 426.37 million mobile subscribers and 365.3 million fixed-line users at the end of June, official data shows.

China Netcom said it's still confident it will get a 3G licence, which could help a turnaround by diversifying into the lucrative mobile business.

Chief Executive Officer Zuo Xunsheng said Beijing has given the firm a clear message to develop into an "all-round" operator.

But some analysts said the first batch of 3G licences may not be released until early 2007, making the firm's outlook somewhat bleak.

And China Netcom now seems to be pinning high hopes on its IPTV service, which could probably become a big profit engine, as the mainland's IT companies and broadcasters are promoting the product to a young, Internet-loving generation.

Its broadband subscribers increased by 28.6 percent from the previous year to 13.506 million. Revenue from broadband and other Internet-related services amounted to 5.34 billion yuan (US$667 million), an increase of 33.3 percent.

By the end of June, the company saw its IPTV subscribers reach 85,800, up 48.1 percent from the end of 2005.

Zuo also said yesterday the company's disposal of Asia Netcom, a Hong Kong-listed subsidiary, was completed on Tuesday.

China Netcom hoped to reap exceptional earnings from the US$168.84 million transaction between it and the consortium led by Ashmore Emerging Markets Liquid Investment and Spinnaker Global Opportunity fund.

"We expect to obtain additional earnings of more than 1 billion yuan (US$125 million) from the deal within the year," said China Netcom's Chief Financial Officer Li Fushen.

As for cooperation with Hong Kong's dominant phone company PCCW, in which China Netcom has a 20-per-cent stake, Zuo said it would team up with PCCW to develop a 3G and IPTV network in the future. He also vowed to strengthen the real estate business with PCCW.

PCCW Chairman Richard Li has sold his controlling stake to high-profile local banker Francis Leung in July, who vowed to strengthen ties with Netcom.

(China Daily August 24, 2006)