Mobile substitution continues to take its toll on China’s fixed-line market, with Netcom posting a first half 5.4% fall in net profit on flat revenues.

Announcing a net profit of 6.71 billion ($1.0b), on 41.5 billion yuan sales, Netcom pointed to the growing contribution of broadband and ICT services, now accounting for 32.0% of revenue, up 8.9 points from a year ago.

Chairman Zhang Chunjiang said the Chinese telecom market had taken a “drastic turn” in 2006 and this had continued in 2007, with further price-cutting by cellcos. “The first half of 2007 witnessed escalating imbalances in the competitive landscape in China’s telecommunications industry and intensifying mobile substitution,” he said.

Netcom’s monthly telephone rental income declined 22.4% for the period. Local voice minutes slipped 9.5% and domestic long distance voice minutes also declined slightly.

Broadband subs rose 32% from 12.97 million a year ago to 17.12 million, and broadband revenue lifted 33.8% to 6.6 billion yuan. Broadband ARPU was up 3.4% to 67.4 yuan per month.

The company also improved the total number of fixed-line subs, up 1.1 million in the first half to 115.1 million. Free cash flow was 13.3% higher at 8.1 billion yuan, thanks to lower capital spending, which was reduced 16.2% to 8.45 billion yuan.

Zhang said the new area of enterprise ICT services now made up 3.5% of total revenue, offering hosting, IT and network outsourcing to government departments, universities and hospitals.CEO Zuo Xunsheng said Netcom would review tariffs and resource allocation and carry out “further market segmentation” to reverse the decline in local voice traffic. The focus for the rest of 2007 would be on broadband access, the PC-TV home network model, value-added services and ICT services, he said.