VOIP IN CHINA - NOT UNTIL CHINA's TELECOM

UNCLAS SECTION 01 OF 02 BEIJING 012988

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STATE PASS USTR
USTR FOR STRATFORD/WINTER/MCCARTIN/GRIER
USTR FOR MCHALE/WINELAND
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT
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SENSITIVE
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E.O. 12958: N/A
TAGS: ETRD EINV ECPS PGOV ASEC WTRO CH
SUBJECT: VOIP IN CHINA - NOT UNTIL CHINA's TELECOM
COMPANIES ARE READY


1. (SBU) Summary: Enthusiasm in China for Voice Over
Internet Protocol (VoIP) was evidenced by over 1,400
registered attendees at a June 14-16 China VoIP Conference
& Expo in Beijing. While VoIP technology is mature and
software like Skype is but a download away, China's VoIP
companies are faced with not only regulatory, security and
legal obstacles but also by the fact that China Telecom is
exerting massive pressure on the Chinese Government to rein
in VoIP. End Summary.

The Conference
--------------


2. (U) Organized by the Hong Kong based InfoEx World
Services, the June 14-16 China VoIP Conference & Expo in
Beijing included Chinese Government officials such as
senior officials from the Ministry of Information Industry
(MII) and from the Chinese Academy of Telecommunications
Research, as well business representatives such as senior
managers from China Telecom, Unicom, Netcom and hardware
producers such as Intel, IBM, Avaya, ZTE and UTStarcom.
Most strikingly, the organizer of the conference confirmed
that many of the attendees were in their twenties or
thirties with most running their own small (around ten
people) niche companies.

VoIP: A History and Why It Scares the Chinese Government
-------------- --------------


3. (U) VoIP is the routing of voice conversations over the
Internet. The concept of VoIP has been around since the
early 70's and today's version is the commercialization of
a Network Voice Protocol created for the Department of
Defense's ARPANET in 1973. VoIP uses packet switching
technology where data is cut up into small packages, sent
over several machines and then reconstituted when the data
reaches its destination. This is in contrast to circuit
based technology where a single dedicated line is used for
the duration of a call. It is the nature of packet
switching technology that is the major concern for the
Chinese Government, regulators and watchdogs.

The Problems
--------------


4. (SBU) Mr. Xu Heyuan, Senior Engineer at the Research
Institute of Telecommunications Research of MII, admitted
to Econoff that, despite a ban, VoIP is widely available
and in use in China but that issues of security and
emergency calling still have to be resolved. Mr Xu did not
elaborate as to what kind of security problems need to be
resolved but indicated that content was a factor. In
contrast to security issues he underlined how emergency
calling is the key problem. (Note: Since VoIP uses the
Internet to route calls there is no fixed physical location
for emergencies responders to track calls unless the caller
states an address. End Note.) However the Vice President
(VP) of Germany based semiconductor company Infineon stated
that because packet switching involves the breaking down of
data into tiny unrecognizable pieces of information it is
extremely difficult and astronomically expensive to set up
a system to track and monitor the content of PC to PC
calls. The only way a government can prevent PC to PC
calls is to block users from downloading the software or by
imposing and enforcing strict penalties. China has already
blocked companies like Skype from offering PC to Phone
services by not allowing them to set up gateways in China
and postponing the issuance of operating licenses until at
least 2008. A further obstacle for VoIP is that in order
for it to function effectively a broadband or DSL
connection is optimal. However, outside of China's larger
cities broadband is not widely available leading to quality
of service issues.


BEIJING 00012988 002 OF 002


Stacking the Deck
--------------


5. (SBU) The Infineon VP and the Asia Pacific VP for Intel
both stated that the Chinese Government has purposely yet
to offer any clear guidance, either legal or regulatory,
concerning the deployment of VoIP service in China.
Financially, it is much cheaper to maintain a VoIP network
but companies like China Telecom are stalling VoIP from
becoming a mass market product for two reasons. First,
they have to recoup the massive investments they made to
build up a traditional circuit based telephony
infrastructure in China. Second, the government is giving
domestic telcos time to build up the necessary
technological and marketing know-how before launching their
own VoIP services. The Intel VP said that allowingthe
liberalization of the market at this timewould create the
legal platform for foreign cmpanies like Skype to press
the government for equal market access before the domestic
tecos are ready t enter the fray. As a result, China
Telecom, backed by the State-owned Asset Supervision and
Administration Commission (SASAC) has pushed MII to block
PC to Phone services in China but also made sure that this
edict is not enforced for domestic companies. Thus, this
opaque equation means that the VoIP market in China can
thrive "illegally" with the charge being led by the five
domestic telecom companies - China Telecom, China Netcom,
China Unicom, China Mobile and China Railcom.

The Real Deal
--------------


6. (SBU) According to the Chief Technology Officer of U.S.
media gateway company Cantata, there are over 4,000
underground VoIP operators in China not including the major
telcos that offer their own tiered calling services. He
explained that these underground VoIP sellers go to
companies and sell them the technology and hardware to
allow companies or individuals to access existing telecom
lines via the VoIP route. Meanwhile, China Telecom has
also begun running VoIP trials, but in order to make sure
that its bottom line is not affected, these trials are
being conducted in rival China Netcom's operating
territories. Furthermore, the domestic telcos are fooling
their customers by pitching traditional telephony services
in the guise of VoIP services. (Note: Accessing this VoIP
service is done by buying an access card available at many
retail stores in Chinese cities. End Note). However, the
quality of this service is deliberately poor allowing the
telcos to both pitch their more expensive premium services
and to also dampen the enthusiasm for VoIP until they are
ready to launch it themselves as such. And launch it
themselves they will.

The Future of VoIP
--------------


7. (SBU) The Asia Pacific VP for Intel believes that VoIP
has a bright future in China. The technology has already
been deployed in many countries around the world and VoIP
offers Chinese telecom companies a clear path to reduce
their operating costs and to create a stream of cheap Value
Added Services. He went on to say that as broadband in
China becomes more widely available customers will benefit
from the lower cost per call that VoIP offers. He predicts
that when they are ready the telcos will tell their
customers that the technology has now improved and will
present high quality VoIP as either part of triple or quad
play media packages or a single service such as Vonnage and
Skype now offer in the United States.

Randt