Beyond cost savings, IP telephony technology will change the communications industry as new features and applications are developped
Photo:Clarent Corporation . (ITU 000060)
In less than a year, IP telephony in China had moved from a de facto illegal status to the centre of telecommunications development, and prospectively as one of the world's largest markets. What happened?
China's IP telephony market formally opened on 28 April 1999, with the Ministry of Information Industry (MII) issuing licences to government-affiliated telecommunication bodies: China Telecom, China Unicom, and Jitong Communications. These licences covered a six-month trial phase in a total of 26 selected cities (see Table 1).
To understand the government's push for an IP telephony network alternative, various forces of Internet development in the country need to be put into context. By 1995, China already had an Internet "grey market". The imminent arrival of commercial Internet access, its convergence with existing data traffic, its perceived importance to sustained economic development, along with the types of content that were being transmitted, motivated the government to commercialize access to the Internet (see Figure 1). It also motivated the Ministry of Posts and Telecommunications (now the MII) to refocus its attention on the Internet having underestimated its early significance.
Photo:Clarent Corporation . (ITU 000060)
Within two years, the Ministry of Posts and Telecommunications had achieved its goal of market dominance. But its implementation of a centralized network administration meant that by 1998 there was once again a grey market in the provision of various Net-based services mainly by Internet service providers, computer shops, and local cable television networks. Certain networks were successfully bypassing China Telecom's ATM network.
One interesting element of the grey market activity is the tale of two brothers in the southern Chinese province of Fujian. In 1998, the Chen brothers had begun offering IP telephone services through their computer store in the city of Fuzhou, but soon saw their equipment seized for operating illegally. The Internet phone service offered by the Chens from their store allowed customers to make international calls at half the rate charged by mainstream operators.
In their defence, the brothers pointed out that the only telecommunication regulations which appeared to directly relate to their service were the 1993 Provisional Arrangement for the Approval and Regulation of Decentralized Telecommunications Services. This Arrangement contained a list of so-called value-added services, for which a licence was required. The brothers argued that as computer services were not listed, they could not be considered a telecommunication service. While the Chens lost their original hearing, they won their appeal at an appellate court, where local officials agreed with them that offering IP telephony service was not explicitly prohibited under existing administrative rules and regulations.
With the gate now opened there was widespread recognition that a ban on IP telephony would be a difficult position to maintain. Almost overnight there was a change of attitude from blocking IP telephony (in much the same way that call-back operators had been banned) to making it a key part of the government's emerging telephony, data and Internet agendas. By year-end 2000, China's public telecommunications switching capacity is expected to exceed 180 million circuits, making it the world's largest network.
Using IP telephony as a lever to liberalize the international services market in China has prompted aggressive roll-out plans. China Telecom was the first of the three carriers to launch services in an initial roll-out covering 25 cities. The roll-out was fairly small in financial terms, with the two-million dollar project utilizing 100 E1 connections (E1 being the European digital signal level 1) with a capacity of 2.048 Mbit/s. However, using VocalTec equipment (both hardware and software), the network was rated as one of the fastest IP telephony roll-outs to date, taking just two months. To build a circuit-switched network of comparable size and capacity would have taken one and a half years and cost three times the amount. By November 1999, the company had increased from 16 to 50 the number of countries to which its IP telephone cards provide service.
By contrast, in terms of investment, China Unicom had stated that it would invest USD 241 million during 1999 to complete its IP telephony trial in 12 test cities and build up a data and computer network covering as many as 90 additional cities.
Between June and November 1999, China Unicom had acquired nearly 700000 customers through its 12-city trial programme. Its network reached full capacity in only 80 days instead of the six months predicted at the start of the operations. China Unicom, for example, plans to have IP telephony gateways in 250 of China's biggest cities by year-end 2000. It publicly aspires to a 50 per cent share of China's international direct dial traffic by 2003. With a customer base in excess of 2 million cellular phone subscribers, China Unicom did, however, stand to benefit enormously given that it had previously collected no revenue for outgoing international calls. Initially though, China Unicom was required to carry IP telephony traffic over China Telecom's digital data network until its own IP backbone (built in association with strategic supplier Cisco) was completed.
During the trial phase, the three companies issued IP telephone cards with face values of CNY* 50, 100, 200, 300 and 500. The cards contained a unique account number for use from any phone from within the service areas of the respective companies. To access the service, a user entered the local access number of the vendor, account number, area code, and telephone number. The telephone charges were then deducted from the account.
At Jitong's sales offices in Shanghai, more than 2000 people lined up (some of them from as early as 02h00) to buy the IP telephony cards when they went on sale on 19 May 1999. From June to August 1999, the total revenue from sales of IP telephone cards was estimated at USD 35 million, with an annual potential of 150-200 million. Jitong employed a small army of people through 15 sales agencies to "market" their cards and, in their first month of service, was able to sell some 50 000 in just five cities. Yet, compared with Jitong's strong IP sales force, China Telecom's IP cards sales were like "the shy blossom of roses". China Telecom set up only one sales counter at the Beijing Long-distance Telephone Exchange Bureau, and issued only a very limited number of IP cards. While the cards sold out quickly, the difference in emphasis and effect was telling. Even with limited attention to the market, the Beijing Telecom office had over 500 people a day signing up for telephone service during the first two days after the announcement. Previously, the office handled about 20 telephone subscriptions per day.
China Netcom was the fourth carrier to be licensed to try out IP telephony services. The company launched these services across 15 cities in October 1999. One of its first commercial offerings later that year was pre-paid VoIP telephony to the Chinese expatriate community in the United States and Japan.
At the end of 1999, MII announced that new Internet regulations were being drafted for submission to the State Council and that existing IP telephony licences would be extended and new ones awarded, once these regulations were published.
On 30 March 2000, MII granted licences to China Telecom, China Unicom, Jitong and China Netcom for commercial operations of IP telephony services. It also indicated that another licence would be granted to China Mobile for the provision of IP telephony services using the wireless application protocol (WAP).
The MII's initial pricing structure for the trial
phase showed the potential consumer appeal of IP telephony. The price pressure from IP telephony
on traditional telephone services had already been made clear when, on 28 February 2000, the MII
announced major price reductions in existing telephone service and installation fees.
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Internet gatekeepers Main providers of Internet access to the publicChina Public Computer Network (ChinaNet) is run by the operator of China's national public telephone network China Telecom and is the dominant Internet access provider. Often referred to as the 163 Network after the number users dial to gain access to it (see "Going on-line in Beijing"), ChinaNet is also the effective international gatekeeper by virtue of the fact that all networks must go through China Telecom's international telecommunications access. China Public Multimedia Network (169 Network), more often known by its dial-up access number, 169, is an attempt by the government to build a China-specific content platform for domestic users. Effectively, an America Online style platform, it does not provide direct access to the Internet, but rather creates a Chinese intranet, allowing the government to provide cheaper access and Chinese-language content. Golden Bridge Network (GBNet) provides the commercial alternative to ChinaNet. Run by Jitong, a State-owned company formerly linked with the now abolished Ministry of Electronics Industry, GBNet has focused primarily on the corporate market. China's Education and Research Network (CERNET) is the principal academic network. It is centred upon Beijing's prestigious Qinghua University and links together the universities, schools and education and research institutes. It is still technically distinct from the main public network in such a way that websites which are blocked by the government on ChinaNet will often be accessible from CERNET. China Science and Technology Network (CSTNet) is similar to CERNET, but significantly smaller in scale: it connects subsidiaries of the Chinese Academy of Sciences. |
During the initial trial stages, domestic long- distance
charges were levied at USD 0.04 per minute, while international long-distance calls were charged
at USD 0.58 per minute. Long-distance calls to Hong Kong, Macau and Taiwan were charged in two
ways. When calling from mainland China (except Shenzhen) to Hong Kong, from mainland China
(except Zhongshan and Zhuhai) to Macau, or from mainland China to Taiwan, the charge was USD
0.30 per minute. When calling from Shenzhen to Hong Kong, or from Zhongshan or Zhuhai to Macau,
the charges were USD 0.18 per minute.
Photo: Lars Ålström (ITU 980146)
Since the trial phase, the IP telephony market in China has been expanding at a rapid pace
Several technical issues appeared early in the trial phase, but were quickly resolved. Firstly, there was limited access capability (in cities where the service was available), so that certain customers had to dial local long-distance for access, thereby incurring higher charges. This problem was dealt with by the provision of national access numbers. Secondly, all three networks experienced serious traffic congestion and dropped calls as they failed to cope with the levels of traffic — particularly during peak periods. As a result of the traffic load and slow response time, a high percentage of calls were not picked up on the first attempt. The gateway for Beijing Telecom, for example, had to go through a capacity upgrade only weeks after the service was introduced. Finally, voice quality was poor because of deep compression, traffic load, and possibly lost packets. These problems were alleviated after network expansion and new management tools were implemented by all three service providers.
The MII is expected to extend IP telephony services across the country and to grant licences to other groups such as the Ministry of Railways, Shenzhen China Motion Company, as well as Posts and Telecommunications Administrations (either under their own domains or, more likely, under a sub-domain of China Telecom) and perhaps the State Administration of Radio Film and TV. Government estimates already suggest that the IP telephony market will amount to some USD 12.2 billion by 2002.
There is a general consensus that IP telephony based on packet-switching technology will eventually replace the traditional telephone techno-logy. To this end, the government has established an IP telephony standards group, consisting of 27 domestic telecommunications research institutes and equipment manufacturers to:
Since the trial phase, the IP telephony market in China has been expanding at a rapid pace. Ironically, by the start of 2000, with the government ready to open the market to new competing licensees, many within the three existing competitors — China Unicom, Jitong and China Netcom — already questioned the basic business proposition for IP telephony in the country. A recent revision of China Telecom's prices meant that all three competitors were looking for replacement revenue streams with long-term growth potential. Nobody doubted the importance of IP services, nor that voice traffic in China would increasingly be IP traffic. However, IP telephony as a stand-alone business proposition has rapidly become questionable.
This article appeared in ITU News in October 2000. The full case study is available here