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Backoffice & OSS
PTC 07: China Booms And Booms
The Subscriber Party Continues – As Does Policy Uncertainty
by Stephen McClelland
There seems just no stopping it. At the last count, China had
over 830 million fixed and mobile subscribers by the end of
2006, heaping on around 19.6 million fixed and 66.6 million
mobile subscribers during the year. And far from a more-
means-less revenue scenario, the total revenues of the
service provider industry rose 25% too. The tremendous
growth, says Hui Pan of IGI Inc, and long time China watcher,
has been made up of enormous infrastructural investments –
around USD 25 billion per year – which will almost certainly
continue into 2007. Pan presented his findings at the opening
session of the ChinaTel 2007 conference held in conjunction
with the first major meeting of the telecom year, PTC 07 in
Honolulu.
The numbers remain mind-numblingly large in whatever
telecom sub-sector is counted: Steve Rich, an associate
attorney with Paul Hastings, reports that the market was worth
USD 68 billion in 2005. “China has the world’s largest
broadband market,” says Rich, whilst according to IGI’s Pan,
there were over 132 million internet users at the end of 2006
with 77 million broadband users mid-year. Whilst dial-up
subscriber head count has now flattened, the first half of last
year saw nearly 13 million new broadband subscribers says
Pan.
Policy puzzle
Yet beneath the extraordinary growth of China’s telecom
networks, major uncertainty remains, particularly in the policy
domain. A Telecom Law that was supposed to be the
foundation stone for all telecom regulation in the country still
has not been enacted and, even in draft form, has not even
been made public. This has been no modest delay: China
watchers have waited more than a decade for one to appear.
The gap – as far as foreign investors and operators at least
wanting to set up in the country – means a massive question
mark over their business. And, just as troubling, the actual 3G
license situation which the telecom world has been awaiting
for years remains equally undecided.
“We think this year is the year,” says Pan. “[The government]
can’t postpone this further because next year is the Beijing
Olympics [a major showcase of China].” Pan continues: “TD-
SCDMA is closer to commercialization, and we expect that no
later than middle of this year licenses will be issued. This will
lead to massive increase in infrastructure spending,”
concludes Pan.
But policy and regulatory issues continue to dominate the
landscape. “There is a highly uncertain legal environment,”
says Paul Hastings’ Rich. “It is a sort of like Waiting-for-
Godot [situation]. Rich says the Telecom Law may indeed
come to pass in 2007, but “we were hearing the same thing in
2006.”
Rich says even what might be included in the final Law
remains unclear but he says published reports suggest that
the law will address the following issues: structure and
responsibility of telecom regulator; market entry of players;
interconnection of telecom networks; monitoring and review of
telecom service fees; network construction; network security,
and probably, anti-trust legislation.
Meanwhile, says Rich, MII, China’s Ministry of Information
Industry (and main telecom regulator), has been releasing
other documentation that have make some sense of the
developing regulatory climate but have obscured other parts,
and in any case, would still need an underlying Telecom Act to
function.
As part of WTO obligations, China has been gradually
allowing foreign investors entry into its market and as part of
this so-called Foreign Invested Telecommunications
Enterprise (FITE) regime which permits service providers to
have significant, although minority, stakes in joint venture
service providers.
However, foreign investors have flagged their unhappiness
with what they see as a slow and cumbersome licensing
procedure. “We are looking at a pretty significant time frame
to get a value added services (VAS) license,” says Paul
Hastings’ Rich. Some 30 foreign companies have reportedly
applied for VAS licenses but only 5 licensed FITEs had
resulted by the end of 2006. And the stakeholding limits –
reaching 49% (or at most 50% depending on the particular
telecom sub-sector involved), and then only after a term
restriction – also continues to irk foreign players.
There are other more recent rulings, says Rich, that may
continue to seriously affect joint ventures with foreign
investors. One new MII circular issued last year, he says,
suggests that intellectual property used by value added
operators in China must be legally owned by such
operators: “this is difficult if you are trying to retain control of
your intellectual property (since previously foreign investors
would license such IP to the joint venture) but it could be one
of the biggest risks that you might face in terms of what
happens to your intellectual property if things go bad.”
Waiting for 3G?
As well as what Rich calls “substantial risk [that] remains
particularly in the requirements that foreign operators hold
minority positions”, he says “there are lingering concerns
about a major sector restructuring and 3G license awards.”
On the 3G front, the delayed licensing round has clearly
impacted industry development for domestic suppliers who
been forced to rely on overseas markets to make progress,
even though 2G is still making enormous headway. But the
delayed licensing situation of 3G might even prove to be of
advantage to other technologies, such as WiMAX, says Berge
Ayvazian, Chief Strategy Officer of the Yankee Group. Whilst
no one is suggesting a replacement to 3G, Ayvazian says he
is confident of substantial uptake of WiMAX for backhaul
applications in the country, particularly in the less developed
western provinces. “WiMAX licenses are being awarded on a
provincial level to drive availability of broadband internet
access,” says Ayvazian.
He adds: “Chinacomm, a small company never mentioned in
any presentation, has obtained licenses to deploy 802.16d
fixed wireless broadband access in 29 cities at 3.5GHz.”
Nevertheless, Ayvazian says he is predicting a “culture clash”
in the post-3G environment if operators are thinking seriously
about 4G and its business models, especially if 3G proves
less successful than hoped, and WiMAX-like technologies will
be waiting in the wings.
Youth is the age
None of this seems to bother the Chinese consumer who
continues to climb aboard the communication bandwagon with
gusto. And the numbers continue to ramp up even with
cutting edge services. China Telecom USA’ Luis Fiallo points
out that a critical market will be the internet usage by age
group with the age groups in the 18-24 and 25-30 accounting
for 50% of total internet usage. This age group is getting
increasing disposable income and exposure to their own
culture and foreign travel, says Fiallo: “WAP usage has grown
from 9 million users in 2002 to 72 million in 2005…online
gaming is a huge market 11 hours per month and play from
home…demand for foreign content continues to grow.” IGI’s
Pan says on available information, Chinese consumers will
want even more advanced services tomorrow such as peer to
peer video and IP telephony.
All of this is forcing partnerships to spring up around the
industry. China Netcom has already created a major JV with
internet portal Sina. But one of the many policy restrictions
that abound in China is the confusion between the regulatory
position of telecom and broadcasting. The two areas feature
an ongoing regulatory turf war between MII and its
broadcasting counterpart, SARFT.
DSL broadband has a fair wind; not only are incomes rising in
the major conurbations, but it is offered at highly competitive
prices (less than USD 12 per month). And there are other
advantages too. Much of China’s extensive copper plant in
China is newly installed with a short loop length (less than
3km) that makes broadband service delivery increasingly
economic. By contrast, although there are 135 million CATV
users in the country making China the world’s single largest
CATV market, policy restrictions have limited growth of this as
a residential broadband access conduit.
Infrastructure rush
All of this demand clearly has driven what seems to be an
ever increasing rate of infrastructure deployment. Fiallo of
China Telecom USA says it is happening and breakneck
speed: “MPLS is a very big thing, and the second thing is
Ethernet which is still nascent but the fact that Chinese are
demanding these things is important.” Fiallo also points out
that the Chinese are committed to remedying another long-
standing inhibitor: customer services. One major multi-billion
dollar development, he says, is a service class capable next
generation infrastructure called CN2, designed for business
class users using MPLS.” Fiallo says this is China
Telecom’s “progressive strategic transformation” designed to
enable convergence and covering 194 cites across the
country. Capable of being a major 3G backbone, the network
is also supporting content applications and IPTV trials. Fiallo
says China Telecom has also developed its own navigation
tools and searching capability.
Transform and outsource
Certainly, for China’s major carriers, the internal message
seems to be one of business transformation from basic
network operator to integrated information provider, say
observers, essentially modelled on the western practice,
except that it is happening much more rapidly. The
transformation says Wai Chan of Infosys, an outsourcing
provider, can be summarized in two areas: “business
transformation and a push towards being customer centric
where [the operators] see themselves as an integrator of
internet applications, and a one-stop shop for telecom
services; on the network level, they are shifting more towards
an IP core network environment so they are gradually
migrating from a legacy network to an integrated network.”
The trend is likely that companies will see in the IT and
telecom sectors that China might be an effective back office,
much in the manner that India has established a reputation.
There is also the opportunity for the Chinese market itself to
engage in outsourcing to expand business. “IT outsourcing is
expected to take off in [next 3 to 5 years”” says Chan. “From
what I have seen so far, outsourcing will be the trend.”
Multimedia is the message
Back at the consumer end, multimedia remains a key focus
of interest in the Chinese market and the country is expected
to make a major push to showcase its expertise next year to
create a ‘Digital Olympics’. In spite of regulatory problems
that occur in the Chinese communications market,
broadcasting regulator SARFT seems to have given a green
light and major push to mobile TV in an effort to get it into
the marketplace by the time the Games begin.
IPTV is another focus of interest, and operator executives
suggest it will become a major focus for fixed line carriers with
substantial revenue potential. At present there are four IPTV
license holders in the country: Shanghai Media Group (SMG),
CCTV.com, Southern Media Corp, and China Radio
International and carriers involved must work under present
regulatory conditions with one of these to offer IPTV services.
China Telecom, for example, partnered with SMG to launch
the country’s first IPTV service in Shanghai in 2005.
IPTV in China is showing promising performance, agrees
Qiang Li, of UTStarcom, a vendor involved in several projects
in China and Japan and partner of SMG. Currently, says Li,
one project involving China Netcom at Harbin has about
80000 subscribers and 58 channels, 2 days time shift TV, and
5000 hours of VOD content and uses MPEG-4 ASP at 2Mbps
delivery.
Another project involving China Telecom has a more
sophisticated network, set up in September last year. The first
phase of this project calls for 58 live TV channels, plus 9
virtual channels, and the media type is H.264 at 1.6Mps. It
has approximately 110 000 users.
Consumer response to IPTV says Li has been positive – and
intriguing. “We saw that time-shifted TV is the most popular
application” he says, particularly for reality programming
tackling various social and legal issues. “The VOD take rate is
much higher than expected,” he continues, “we have seen
60% in some cases whereas the standard in the past has
been 10%.” Li acknowledges however that ARPU in China
will “take time to climb up”. China may also implement its
own standards – IPTV remains a fragmented market
standards-wise worldwide, says Li.
What about FTTH?
But not all is plain sailing in China, acknowledges Bill Bu from
the FTTH Engineering R&D Center at the Hebei Institute at
Tsinghua University. The FTTH market is confusing, he
admits. People were expecting it to take off in 2006 but it has
not happened, he candidly points out. Bu’s explanation? A
policy dilemma as a result of regulatory difficulties and the
consequent inability of the industry to prove triple play
services; telcos are not directly able to provide video services
and other players not able to provide telecom services.
Bu says this policy split is severing hindering the uptake of
FTTH as the inability for a single operator to fully supply true
triple play services ensuring that FTTH remains unattractive
for them. He estimates that there are only 20000 true FTTH-
enabled households in the country, compared with 600000 in
the US and at least 7 million in Japan. The Chinese figure
might even be undergoing a slight decline as some small
trials are ended, Bu suggests. But his proposed solution is a
novel one: the FTTH community in China is encouraging a
requirement that FTTH be incorporated into the building codes
for new upper end residential apartment units, a policy he
says would guarantee take up in the country for advanced
broadband services.
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