Two years ago, Beijing banned telephone products that use both the internet and traditional phone networks to place calls. This wasn’t good news for voice-over-internet-protocol (VOIP) products, which do exactly that.
The VOIP ban was supposed to give China’s carriers a leg up in the face of the disruptive effects of the internet, which places calls more cheaply than telephone networks.
Yet VOIP products like Skype, for example, continued to spread, albeit through computer-to-computer use.
“[The carriers] are trying to hold up the migration to an internet model until they have the infrastructure,” said Fritz Ringling, an analyst at Insight Research in the US. “They are trying to milk this monopoly as long as they can.”
According to CCID Consulting, a Hong Kong-based telecoms consultancy, China Telecom loses US$286 million a year in potential fixed-line revenue by also offering broadband internet access, which by extension lets users place VOIP calls.
Even regulations are less benign these days. In February, the Ministry of Information Industry (MII) mandated considerable discounts for mobile phone roaming charges.
“For the telephone networks, the economics are not getting any better,” said Ringling.
A telecom industry restructuring is widely expected that should put all the carriers on a stronger footing. China may then become a more welcoming market for VOIP products.
VOIP providers typically use a business model based on the distribution of broadband internet users in a country. Providers tend to focus on cities with deeper broadband penetration before moving to outlying areas.
“[This strategy] will be easier to implement after the restructuring,” said Mark Natkin, managing director of Marbridge Consulting in Beijing.
China had nearly 70 million broadband internet users at the end of February, according to the MII. The country also has 556 million mobile phone users – the most in the world – and 364 million fixed-line subscribers. All are potential VOIP users.
Interest from overseas
Foreign VOIP firms are lining up to take a crack at China’s liberalizing telecom market. One example is Freshtel, an Australian provider of retail and wholesale VOIP products. The company has some 315,000 customers in the UK, hundreds of thousands of users in Australia and is now looking to expand across Asia.
Freshtel chief executive Rhonda O’Donnell said the plan is to enter China by the end of the year.
“The opportunity is as big as the number of people there are, and more and more people are getting access to communications,” she said.
O’Donnell was appointed chief executive last July partly because she has a background in Asia – she was Novell’s Asia Pacific head. The rest of her top executives also come with knowledge of the region.
“A number of companies are not successful because they assume that … they can just walk in and do business, and that’s not the way it works.”