NEW YORK (Trefis) -- China's smartphone market is poised to grow by leaps and bounds as low-cost smartphones make an entry into the market and the carriers subsidize even expensive handsets such as Apple's (AAPL) iPhone.

As a sign of growing demand, the mobile Internet market is booming with purchases made through mobile devices in the first quarter of 2012 already matching the same for the whole of last year.

According to data group Analysys International, data for the first quarter of 2012 showed that mobile shopping climbed to 10.5 billion yuan and accounted for more than a third of all revenues generated by the mobile Internet market.

The surging demand for data is a good opportunity for the incumbent Chinese telecom providers such as China Unicom ( CHU - Get Report) , China Telecom ( CHA - Get Report) and particularly, China Mobile ( CHL) to tap their huge second-generation, or 2G, subscriber base and drive the demand for more lucrative 3G data services.

China Mobile is not only China's largest wireless services provider but also the world's largest. It has a subscriber base of over 665 million, more than three times as many as its nearest competitor, China Unicom. We believe that this huge subscriber base is what gives China Mobile a better opportunity than rivals to tap the surge in demand for 3G in coming years. (See our our full analysis for China Mobile's stock.)

Growing 3G Adoption Drives China Mobile's Value

3G services have driven the ARPU levels of many carriers in the developed world. Carriers including Verizon ( VZ - Get Report), AT&T ( T - Get Report) and Sprint ( S - Get Report) in the U.S. have seen rapid growth in mobile data revenues over the past few years, driven by growing demand for 3G-capable smartphones.

This has come even as voice ARPUs have declined, a trend that can be seen in the Chinese telecom market as well. China Mobile's voice ARPU levels have declined from around $7.40 in 2007 to about $6.50 in 2011, by our estimates.

With voice ARPU on the wane, Chinese telecom operators have started pushing 3G-capable smartphones to drive data ARPU levels. 3G penetration is at a low 15% currently, so the opportunity to push 3G is immense.

As can be seen from the Chinese telecom data released each month, the carriers are now adding more number of 3G subscribers than 2G. China Mobile, which is more than six times the size of Verizon with over 665 million mobile subscribers currently, stands to gain heavily from this transition. Increasing 3G adoption will serve to boost its already increasing data ARPU levels further, more than compensating for the fall in voice ARPUs as a result.

But the Chinese behemoth hasn't been able to capitalize on its huge 2G subscriber base as well as it should have. As of May, China Mobile's 3G subscriber base stood at around 64 million which translates to a 3G penetration of just under 10%. This compares poorly to the industry-wide average of more than 16% in China.

A major reason for that has been its homegrown TD-SCDMA 3G network which is incompatible with most smartphones currently available, including the iPhone. This requires handset vendors to come out with specially crafted phones for the carrier's proprietary network which has proved to be a huge deterrent.

We believe that Qualcomm's ( QCOM - Get Report) recent announcement of a baseband chip that supports China Mobile's networks will finally make it easier for Apple as well as other vendors to release compatible smartphones on the world's largest carrier. (See "Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal.") A possible launch of the iPhone 5 on China Mobile later this year could be the much anticipated tipping point for the carrier in its bid to drive 3G adoption rates.

Near-Term Margin Pressures

However, the carrier will have to bear a huge subsidy burden to drive the demand for 3G smartphones. Having a huge subscriber base to promote 3G to is no doubt a good opportunity, but the subsequent near-term subsidy pressures could be huge if 3G demand inflates suddenly.

So far, China Mobile hasn't had to subsidize much due to the dearth of smartphones that run on its 3G network; but, looking at how much China Unicom's margins have taken a hit over the last few years due to the subsidy burden, the margin pressures could be huge. China Unicom's mobile Ebitda margins have nearly halved in the last three years as subsidies for smartphones such as the iPhone ate into profits.

Since China Mobile's mobile voice and Internet services division accounts for about 30% of our $59 price estimate, such margin pressures could weigh heavily on the stock in the near term. It will therefore be important for China Mobile to manage the near-term margin pressures well so that it can reap the benefits of an increase in data consumption later.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.