The Real Telecom Battleground in China is Multimedia

By Dali Yang

(4/5/99) As American and Chinese negotiators haggle hard over terms for China’s entry into the World Trade Organization (WTO), a key area of contention has been the telecommunications industry. This is one of the few bastions of state monopoly and profits that the Chinese government has fought hard to keep sheltered. Yet, even as China promises to allow foreigners to invest directly in telecom services, a closer look at this vital sector suggests the real drivers for change have come and will continue to come from within China. Developments in the telecom industry illustrate well the transformation in China’s economic governance.

When US telephony was still dominated by AT&T, the Chinese telecom industry was controlled by the Ministry of Posts and Telecommunications (MPT). The MPT put its emphasis on control rather than service. Its management was semi-military and a home phone was then a privilege to be granted based on bureaucratic rank.

China’s reforms soon convinced MPT leaders that the telephone was its jackpot. In the 1980s it began to charge an installation fee for anyone willing to pay. The fee was more than what most people earned in a year but there was still a long waiting list in the early 1990s. In the meantime, phone rates have been among the highest in the world.

Taking AT&T to Heart

Such easy money attracted competitors. Whereas MCI fought AT&T in the courts, China had no law governing telecommunications and still does not. Instead, the first competitors against the MPT’s China Telecom relied on their bureaucratic muscle and a strong argument. Whereas AT&T argued that its monopoly was justified on universal service, the MPT could not do the same because only a tiny percentage of the Chinese population had a home telephone. Thus several government ministries as well as the military argued that they could use their surplus network capacity to serve the pent-up demand. Thus China Unicom was born in 1994.

A key element of Unicom’s battle with China Telecom has been technology. In the early 1990s, Telecom introduced cellular phone service using analogy technology. To compete with Telecom, Unicom launched its cellular services using digital GSM technology. This prompted Telecom to speed up its own adoption of the GSM standard. As a result, China’s 20-plus million cellular customers have access to one of the world’s most advanced digital networks. More recently, China Unicom has eagerly sought out CDMA technology as a new weapon in its battle with Telecom.

Bureaucratic support and new technology have so far not been enough for Unicom to thrive. Taking AT&T’s history to heart, China Telecom has made Unicom’s life as miserable as possible. It has lowered prices where it directly competed with Unicom and delayed interconnections for Unicom’s investments. Though Unicom’s bureaucratic backers used their co-equal status with the MPT to veto a draft Telecommunications Law that would have given the MPT too much power, the MPT had de facto regulatory power. Even after MPT merged with the Ministry of Electronics, one of Unicom’s supporters, to form the Ministry of Information Industry, the MII continued to champion monopoly.

The Challenge to China Telecom

While China Telecom has maintained its dominance in both fixed line and cellular services, it has rapidly lost the war of public relations. Consumers and the media have complained bitterly about Telecom’s high prices, including international calls that cost far more than in other countries. In 1998, a retired Chinese professor gained national sympathy when he likened China Telecom’s collection of the huge telephone installation fee to the hypothetical case of railways charging a separate fee for building railways.

Netizens in China’s internet chat rooms argue that China Telecom’s high charges for going online are killing China’s nascent internet companies as most internet users can afford to send or receive e-mail but not much else.

Such arguments have captured the imagination of Premier Zhu Rongji, who has since assuming office worked tirelessly to stimulate demand by reducing exorbitant fees and power prices for rural consumers. Overriding MII Minister’s Wu Jichuan’s defense of monopoly, Zhu has vowed to bring telecom charges down more rapidly and believe more competition will help achieve such a goal. As a result, China Telecom will be broken up into four companies of fixed telecommunications, mobile communications, paging and satellite communications.

Yet the real challenger for China Telecom may be coming from cable television operators. In the past few years, under a mandate issued in 1990 by the State Council, China's regional television broadcasters have aggressively promoted cable television as the future of state-controlled media and of steady revenue.

Cable on the Rise

There has been a dramatic acceleration of cable TV infrastructural building. The number of cable television subscribers has risen from 13 million in 1990 to more than 80 million in 1998, far exceeding earlier projections. In urban areas such as Beijing, Guangzhou, and Shanghai, cable television subscribership has reached more than half of the households. In 1998, the disparate regional cable TV networks were interconnected into one national fiber-optic network under the auspices of the State Administration of Radio, Film, and Television (SARFT).

The MPT quickly became concerned about cable's aggressive expansion. In 1996, the MPT appealed to the State Council for authorization to integrate the cable and telecom networks. Both Shanghai and the province of Hainan did adopt the MPT model of division of labor between telecommunications and broadcasting. Under this model, broadcasters leased lines from telecom operators. Soon, however, the broadcasters realized that the telecom monopoly was killing them with high leasing fees.

In the meantime, the broadcasters have been eyeing telecommunications developments in other countries. This is because, with digital technology, the same fiber-optic cable that is presently used to carry cable television signals can also be made to carry telephone calls, transmit data, and offer video and internet services. In the UK, phone customers already can buy their phone services from cable operators. Unfortunately, an experiment by a Shandong cable operator to offer telephone services floundered in the absence of cooperation from the telecom operator.

85 Yuan per Month

The arrival of data communications seems to provide cable operators with the crucial opening to directly compete with China Telecom. Whereas connections via China Telecom are presently slow and expensive, some regional cable operators have begun to offer fast and inexpensive internet services. In Jiangsu, an internet user can enjoy unlimited and high-speed access to the internet for just 85 yuan (US$10.25) per month. Meanwhile, the Chinese Academy of Sciences, the State Administration of Radio and Television, the Ministry of Railways have begun to build China’s high-speed internet to compete with China Telecom.

As an indication of the competition to be unleashed, the cable industry decided in March to establish the China Cable TV Network Group Co. in preparation for the breakup of China Telecom. Once Telecom is broken up, it would be hard for telecom regulators to refuse Cable’s entry into telecom services. With its huge subscriber base, Cable may very likely emerge as the most formidable competitor to China Telecom.

It is the duty of American negotiators to get the best deal for American investors. So far the Chinese side has agreed to eventually allow foreign investors to take up to 35 percent of a telecom company (the American side wants 51%). This is a major concession given that telecommunications "deregulation" has been a recent phenomenon even in the United States and the Chinese side has had to overcome a tradition of central planning.

The Real War

Nevertheless, no matter how much the Chinese leadership will open up the telecom industry to foreign investment, the real war for the future of the Chinese telecom industry is being fought within China.

The structure of government interests and the emergence of new technology augur well for competition. Though Chinese multimedia remains at a nascent stage, it appears that China, being relatively free from the regulatory stranglehold, may yet enter the era of multimedia faster than many developed countries.

Originally appeared in www.chinaonline.com April 5, 1999.