Such explosive growth is not accidental. Until early last year, China was the only major country in the world still maintaining a monopoly in long-distance services. High tariffs, especially for international calls, have significantly suppressed traffic volume and created public outrage. Private entrepreneurs, as well as powerful state-owned enterprises (SOEs), were aggressively looking for ways to squeeze into this lucrative market, but were always thwarted by China Telecom. Furthermore, even if the regulator (Ministry of Information Industries – MII) wanted to introduce competition into the long-distance market, it was expected that it would take years, if not decades, of debate to overcome the fiercely defensive China Telecom.

On the other hand, Internet services in China have been a competitive value-added service from day one. By early 1999, technology for carrying voice over the Internet had matured, while underground long-distance operators utilizing this technology began to mushroom throughout the country, “stealing” more and more traffic (and revenue) from China Telecom. In March 1999, a local subsidiary of China Telecom in Fujian Province confiscated the equipment of two brothers and took them to court. China Telecom first won the lawsuit, but the verdict was overturned on appeal by the brothers to a higher court. The reason: at that time there was no regulatory definition of such a service.

Such an outcome brought great pressure to bear on the MII. In a great hurry, since there was obviously no way to stop such a service, it was decided to officially start VoIP as a new service under ministry control on an experimental basis. Thus, VoIP started with only the top three state-owned operators (China Telecom, China Unicom and Jitong). Such a decision was welcomed by consumers and telecom competitors, while China Telecom tried to limit the growth of VoIP by publishing ads questioning the quality of the service. In addition, China Telecom gave the job of providing VoIP service to its traditional long-distance departments. As a result, its service became the most hard-to-get and worst among the three rivals. However, consumers soon began to realize that not only was VoIP much cheaper, but the quality was better than traditional routes. In less than a year, the number of VoIP operators increased to five, with the addition of China Netcom and China Mobile Group. A year after the VoIP experiment started, the MII designated it as a normal service. China Telecom finally began to seriously look into providing a more decent VoIP service, while it was also forced to lower the pricing of its traditional long-distance services.

To define IP telephony as a new service was a strategic move of China’s telecom regulator. There was intensive, often heated debate when this decision was made. People who defined it as a new service now jokingly recall this move as a “conspiracy”. Of course we knew VoIP was merely a new technology, instead of a new service, just like digitally switched voice communication is not a new service compared with analog switching. However, by defining VoIP as a new service, we got around all the legal obstacles. Instead of spending over a decade like the United States on debating whether the long-distance market should have competition, China Telecom’s monopoly was effectively broken overnight. A new era thus began without even being noticed.

However, the implication of China’s VoIP policy goes far beyond breaking China Telecom’s monopoly. Compared with the traditional long-distance service, which establishes a dedicated connection, VoIP transmits voice over the network by using Internet protocol (IP) and packet switching. This format not only significantly increases bandwidth efficiency, but also paves the way for the convergence of voice, video and data, thus widely recognized as the evolutionary direction of the 21st century information highway. The key to this evolution: a “killer application” for IP-based packet switching must be found that is both profitable and has massive volume.

In most developed countries, since long-distance services have long been under severe competition and have thus become less profitable, hope is now being placed on the rapid increase of data services. However, since China’s economy is still struggling to make the transition from the old Soviet-style management towards a market economy, data services still have a limited volume and their high growth together with handsome profitability seems to be remote.

Therefore, the explosive growth of VoIP provides a golden opportunity for the evolution of China’s public network. Although the price of the VoIP long-distance service is less than one-third of its traditional counterparts, because of the monopoly-created tariff imbalance, this service is still extremely profitable. Furthermore, China already has over 180 million fixed and mobile telephones, compared with roughly 10 million Internet users. Thus, VoIP naturally becomes China’s “killer application” to lead the evolution towards an IP-based packet-switched public network. For example, it has been reported that China Unicom and China Netcom have both decided to build their entire networks based on IP instead of the traditional circuit-switching technology. Since voice is still the most basic and moneymaking service around the world, it is predicted that China has thus obtained a significant advantage from VoIP. The reason: After leapfrogging over crossbar switching and microwave transmission by going directly into digital and fiber, it is now possible that China will take the lead in the worldwide race towards convergence of voice, video and data because of its VoIP policy.

Dr. Kaili Kan, Dean - School of Business Management, Beijing University of Posts & Telecommunications (BUPT)

(CIIC 01/05/2001)