As Director of MFC Insight, Peter Lovelock brings a long background in telecommunications and Internet research, analysis and consulting. He has worked extensively on regulatory assessment, implementation and execution projects, as well as due diligence and market entry strategic guidance projects in China and Asia. His PhD (1993–97) was on the subject of telecom and infrastructure policy-making in East Asia, focused on China. During 1997–98, Dr Lovelock worked as a policy analyst at the United Nation’s International Telecommunication Union (ITU) in Geneva. During this period he was a contributing author to a range of the ITU’s research publications, including World Telecommunications Development Report 1998, Challenges to the Network, and Worldwide Telecommunications Regulatory Trends (6 volumes). He has written extensively on both the telecoms and media industries, including chapters in Telecommunications in Asia, the IEC’s Annual Review of Communications, and Sage Publication’s The Handbook of New Media, along with contributions to Telecommunications Policy and Politique Internationale among others. Peter is the Deputy Director of the Telecommunications Research Project at the University of Hong Kong (www.trp.hku.hk) and a partner in the quarterly Telecoms InfoTechnology Forums (TIF).
China’s telecommunications is still a nearly monopolistic market. Nevertheless, network growth, market development, industry restructuring and domestic liberalization are breathtaking. However, the industry and its controlling policy-makers are at a crossroads trying to sustain growth, meet the nation’s access requirements, embrace new technologies and promote network value. The continued use of licensing and regulatory control to promote a market-directed telecom industry seems likely. Although this may appear contradictory, it is not, and will provide ample opportunity for foreign service providers.
China remains an overtly controlled telecommunications market. There are several reasons for this: • Security concerns – for years the military controlled spectrum allocation; • Propaganda concerns – controlling the media remains important to the Communist Party; and • Domestic industry concerns – telecoms is seen as a ‘pillar industry’ for economic development. As a result, the perception of China as a monopolized market lingers. And yet, during the period of July 2001, China was already the world’s largest mobile market – at least in terms of official number of registered subscribers – and the second largest fixed – line market. China has the world’s biggest GSM network; it is currently building the biggest GPRS network(s) and is storming ahead with development of a CDMA network. In terms of directly-controlled subscriber population, China Mobile is the world’s largest mobile carrier. And, if current subscriber trends continue, China Unicom will likely also become one of the industry’s superpowers (Fig. 1, left side). Off a low base, and lagging in development a little, China was nevertheless transmitting well over one billion SMSs per month by the end of 2001, and with an estimated 14 billion SMSs sent through 2001, had well exceeded earlier forecasts of 10 billion (Fig. 1, right side). Big Numbers As a result of the numbers, China threatens to become the ‘world’s wireless market laboratory’, to invoke a phrase currently getting much play in China. With one of the world’s three anointed 3G standards, TD-SCDMA, as well as one of the key wireless interfaces, a dramatic push to develop wireless broadband (be it through GPRS trials or through W-LAN (802.11) deployment in major urban areas such as Shanghai and Beijing), all of the world’s major mobile companies are looking for an entry into the market and for what will work in the market. But, China becoming the world’s wireless laboratory at such a distinctive time of industry transition is not a given. China, in both mobile and fixed telephony, remains a hardware (infra– structure)-oriented market, not a software- or services-oriented market. At least not yet! It is not yet even a demand-driven market, nor a revenue or transactions-oriented market, but rather is still in transition from being the classic supply-led market. Just as basic subscriber uptake forecasts (across all communications areas) have usually been conservative, so too can market size estimates be comparatively disappointing. In 1996, as part of its Ninth Five-Year Plan, for instance, the government estimated that by the year 2000, the number of mobile subscribers in China would be 18 million. This turned out to be off by a factor of almost 5. Similar conservatism is displayed in Table 1, outlining the uptake of mobile data services. The figures, which come from one of the Ministry of Information Industry’s (MII) research institutes, are based on a market projection of some 150 million mobile subscribers by the year 2005. This number was, in fact, already hit by early 2002. Current industry estimates would suggest a subscriber base in China by 2005 of about 300–350 million. Forecasting by MFC Insight suggests that even this figure is too low, and that a figure of 418 million will be closer to the mark. Moreover, the projected proportional take-up rate of these value-added – mobile data – services appears unduly conservative. Recalculations based on a somewhat healthier take up rate suggest a quite lucrative industry sector emerging rapidly (Table 2). Finding Value: Monternet and the New Service Platforms Nevertheless, China remains a supply-driven market that has very little experience with a value – driven market proposition. This is still a facilities – based telecom market, where there has been – to date – no real emergence of resale, let alone retail-oriented value-added services. That the mandate is shifting, and opportunities now exist, can be seen with China Mobile’s – clumsy – development of its Monternet scheme. Almost directly lifted from NTT DoCoMo’s i-mode platform, the initiative demonstrates that the carrier is looking for models to emulate but has – as yet – no real feel for implementing a service platform in the China market. A similar story can be told of Unicom. At a time of industry transition then, the Chinese carriers were not highly experienced at finding and developing value. This should be no surprise, for it has not been their mandate up until now. Under the guidance of a patrician government, the Chinese telecoms industry as a whole has run out an extremely successful network development programme, wherein getting citizens hooked up has been the aim. As the telecom carriers are spun out as corporate enterprises to fend for themselves, that mandate is changing. However, this comes at a time of falling ARPU, dramatically declining handset prices and emerging competition. In this environment, a sustained focus on simple subscriber growth could be extremely detrimental, and there therefore exists significant opportunity for outside partners to facilitate a healthy transition. A Competitive Environment While it is true that stark barriers remain to foreign carrier participation, at the domestic level, competition has increased dramatically in almost all areas and is now quite fierce. Almost overnight, China moved from being a cosy duopoly with limited market competition in all but the mobile sector, to having a multitude of licensed carriers. Moreover, this process has been ongoing (dramatically so) for some years now. In 1999, in an effort to break the dominance of China Telecom, the government split the incumbent into four separate business units, spinning off the mobile business, paging business and satellite business, and establishing the China Mobile Corporation, the Guoxin Corporation and the China Satellite Corporation. The subsequent focus on IP telephony, data services and broadband development further pried the market ope. Today there are eight carriers in China licensed to provide basic services (Table 3). While China Unicom is the only fully licensed carrier, all carriers are eyeing prospective future mobile licences as a means of generating revenues and establishing themselves as a partner for incoming foreign partners. Table 3: China’s Telecom Carriers At the end of 2001, the MII announced that China Telecom would be restructured along geographic lines into north and south entities, with the northern portion absorbing China Netcom and Jitong. The carrier restructuring resulted in a 5+1 solution: China Telecom, China Netcom, China Mobile, China Unicom, and China Railcom, with ChinaSat as the +1 part of the equation (Table 4). Compounding the process, MII Minister Wu in early-2002 then stated that China would have four ‘fully integrated carriers’ (although it would take roughly two years for the carriers to be fully licensed). What has become apparent is that the new, emerging, telecom service industry is being formed to receive foreign investment and simultaneously dominate the sector against foreign entrance. Conclusion What is driving this policy structure? The so-called informatization of China’s economy is one of the government’s top priorities; and informatization requires a strong, advanced telecom market. In building a strong telecom base, the Chinese government has played an integral role as co-ordinator of the market, promoting and sustaining one of the world’s largest network rollouts (and corresponding subscriber uptake) via a strict regulatory and licensing structure. It was the government-directed plan of development that grew China’s telecom market at an exponential rate, creating the world’s largest mobile market and second largest fixed – line market by mid-2001. This appears to be a fundamental priority within senior policy circles. In 2002, China’s telecom infrastructure is at two stages: the fixed and GSM trunk networks on the more developed eastern seaboard have met basic access requirements but must now increase subscriber value and value in the network; meanwhile the trunk networks linking the central, western, northern and southern regions of the country are still focused upon fulfilling basic access requirements. In addition, a new CDMA network is being deployed and the advent of next – generation networks looms. This combination of needing to: 1) meet basic access and connectivity requirements, 2) deploy new technology, and 3) supply value to the networks, is compelling the Chinese government to craft a new role for itself within the nation’s informatization agenda. To meet basic access needs, the government will continue to act the role of co-ordinator, drafting national policy. The pressing objective of adding value to the networks, however, cannot be met through government-directed planning; this is one area that needs to be propelled by the market. The Chinese government recognizes this need for value and also recognizes the need for a market-oriented value-added service market. However, it believes that it still has an important role to play in this transition. The government will continue to use its proven method of strict regulations and licensing to promote the creation of a market-directed telecom industry. While this approach of promoting access by limiting participation may appear contradictory, it is not. The ultimate objective behind every licensing will be the creation of sustainable market-directed business models. Limiting participation allows the government to be heavily involved in monitoring who participates in these developments and the method of participation. Certain developments now dominating industry focus, such as convergence, broadband deployment and access, will help the government fill access needs and add value to the industry. To ensure the rapid and efficient development of broadband, the government will take the initiative to lead the industry’s growth and even spearhead the industry’s transition to a market-directed model. Examples of this government-controlled transition are seen in the trial customer premise network licensing: trial 3.5GHz bids for licensing, trial LMDS licensing, and trial cable TV content transmission initiatives. While each of these issues are viewed by market players as a serious means of curtailing developments, in fact the government’s desired end result is ‘leap-frog development’. Past experience suggests that the government will indeed be able to promote access via limited participation.