GRUPOS DE INTERÉS DEL ÁREA DE INFLUENCIA DEL LOTE Z-54

The IP Telephony case studies form part of a series of telecommunication case studies produced under the New Initiatives Programme of the Secretary-General of the International Telecommunication Union (ITU). Further detail on the socio-economic profile of the countries and the status of the Internet and of the telecommunications sector can be found in extended versions of the cases—including an additional case study on Hungary—at the ITU website at <http://www.itu.int/iptel/>.

* _{The China IP Telephony case study has been prepared by Dr. Peter Lovelock <mailto:[email protected]>.}

* _{The Colombia IP Telephony case study has been prepared by Gustavo Peña-Quiñones <[email protected]>, with the} assistance of Agustina Guerrero, <[email protected]>

* _{The Peru IP Telephony case study has been prepared by Arturo Briceno (<[email protected]>) of Strategic Policy Research} <http://www.spri.com>, with the collaboration of of OSIPTEL.

* _{The Thailand IP Telephony case study was prepared by K.K. Gunawardana and William Withers (<[email protected]>)of the ITU} Regional Office in Bangkok, Thailand and Somkiat Tangkitvanich, of the Thailand Development Research Institute.

A1. C

A1.1 Introduction

In the latter part of the 1990s, many small computer and ISP outlets across China used the country’s network backbone to provide domestic long distance and international calls to the public, and in some cases at less than half the rate charged by the incumbent, China Telecom. Yet, despite an abundance of network infrastructure, the Ministry of Information Industry (MII), via its leading telecom enterprise, China Telecom, had until 1998, steadfastly resisted the proliferation of IP Telephony services – implying that such services were not legal and then clamping down on anyone who tried to provide them.1

When, however, the prosecution failed and they realised that their position was untenable, China Telecom rapidly embarked upon a dramatic turnaround. Government officials at the MII created a new licensing framework for Internet telephony operators, limited in the first instance to the government-affiliated telecom bodies – China Telecom, China Unicom and Jitong. They also focused the newly licensed carrier, China Netcom, on IP services and they galvanized China Telecom to undertake the largest roll-out of an IP Telephony platform in the world.

Almost overnight the government had swung around from blocking IP Telephony (in much the same way that they had banned callback operators) to driving it out as a central plank of their emerging telephony, data and Internet agendas.

China’s IP Telephony market formally opened on April 28, 1999, with the MII issuing licenses to China Telecom, China Unicom, and Jitong to begin six-month periods of operation in a total of 26 cities. This was later extended into the new year. In so doing, the legalization of IP Telephony ended what was still effectively a de facto long distance and legal international monopoly held by China Telecom.

China Telecom was the first of the three carriers to launch services in an initial roll-out comprising 25 cities. 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 1.5 years and cost three times the amount. Unicom launched its IP Telephony trial in 12 test cities, acquiring nearly 700’000 customers between June and November 1999. The company plans to have IP Telephony gateways in 250 of China’s biggest cities by the end of 2000. Unicom’s 12-city trial network reached full capacity in only 80 days instead of the predicted six months.

During the trial, the three companies issued IP Telephony telephone cards. The cards contained a unique account number for use from any phone from within the service areas of the respective companies. At Jitong’s sales offices in Shanghai more than 2’000 people lined up—some of them from as early as 2 a.m.— 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 phone cards was estimated at US$35 million, with an annual potential of US$150- 200 million. China Telecom instead set up only one sales counter at the Beijing Long distance Telephone Exchange Bureau, and issued only a very limited number of IP cards. Even with their limited attention to the market, the Beijing Telecom office had over 500 people per day sign up for telephone service during the first two days following the announcement. Previously the office had handled about 20 telephone subscriptions per day.

Since the trial, the IP Telephony market in China has been expanding at a rapid pace. The MII has predicted that the market size of China's IP network will reach US$12 billion by the end of 2000.2 _{Ironically, by the} start of 2000, with the government ready to open the market to new competing licensees, many inside of the three existing competitors—Unicom, Jitong and Netcom—already questioned the basic business proposition for IP Telephony in the country. A recent China Telecom price revision meant that all three 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.