China's telecoms companies and broadcasters are gearing up for a battle to tap into IPTV, a new-generation online television service, which could be a potentially lucrative business.

The situation underlines an increasing convergence of the telecoms, Internet and broadcasting sectors in China, which is posing a major challenge for regulators.

IPTV, or Internet Protocol (IP) Television, enables broadband Internet users to access TV broadcasting services, including both live streaming services and video on demand (VOD) services using their computers.

Subscribers can also use a TV set, via a set-top box to access IPTV, also dubbed Internet TV.

Jumping on bandwagon

China Telecom plans to launch large-scale promotions of IPTV in most cities in the country this year, following the launch of the Internet TV service in Shanghai last August, in co-operation with a subsidiary of China Central Television (CCTV).

Tiantian Online, a joint venture of China Netcom, US venture capitalist IDG and other strategic investors, last May gained an online broadcasting licence, the first of its kind in the country, to broadcast audio and visual programmes on the Internet.

Netcom is the biggest shareholder in the venture.

Netcom is also partnering CCTV's Internet TV division and a radio station in Beijing to promote IPTV services.

CCTV has said it expects to recruit 600,000 IPTV subscribers this year.

The jumping onto the IPTV bandwagon underscores an emerging big money-spinner for telecoms operators, equipment and software makers and broadcasters.

The IPTV service will be a rapidly growing business in the next five years, says Wu Yiqun, an analyst with research house IDC China.

It will be fuelled by a large base of TV service subscribers, a booming broadband Internet market, and increasing development of technologies as well as a major drive by set-top box makers, the analyst said.

China now has about 100 million cable TV subscribers and nearly 23 million broadband Internet users.

Analysts expect the country's broadband users to hit the 40 million mark this year.

"IPTV will definitely be a big hit in the Chinese market," Wu said.

"In 2005-06, we'll see the market grow four times year-on-year annually in terms of the number of subscribers," Wu said.

IDC forecasts the number of IPTV subscribers will exceed 8 million in 2008 compared to less than 20,000 in 2003.

Wu said IPTV has become a new revenue generator for broadband operators in developed countries and regions.

According to an executive with Hong Kong's fixed-line carrier PCCW, the firm has seen the number of its IPTV subscribers soar to 350,000 by November from 3,000 in September 2003 when the service was launched.

Now 40 per cent of PCCW's broadband subscribers are using the broadband TV service.

US telecoms operator SBC Communications has said it plans to launch an IPTV service late this year with a three-year network deployment cost of about US$4 billion.

SBC aims to recruit 18 million IPTV subscribers by 2007.

China's No 2 telecoms gear maker ZTE Corp last year won a US$22.5 million contract to provide equipment to an IPTV network in India.

Wei Zheng, marketing director of the broadband access product division at ZTE, said broadband users are facing a major challenge to develop new service offerings to generate revenues from the broadband boom.

"If people subscribe to the broadband service just in order to read news and check e-mails, the broadband boom cannot be sustained," said Wei.

IPTV is providing operators with a chance to increase ARPU (average revenue per user), a widely watched industry barometer, she said.

IPTV benefits both telecom operators and broadcasters, said Beijing-based research house eShip Consulting.

"IPTV can help telecoms operators enlarge their broadband subscription base and generate revenues from related value-added services," the firm said in a research note.

"Broadcasters, helped by IPTV, can increase the household penetration of their TV programmes, and make money from it."

CCTV and China Telecom charge 30 yuan (US$3.60) per month per user to subscribe to the IPTV service in Shanghai.

Hard road ahead

Despite the rosy prospects of the IPTV service, operators face several major challenges in running the business in the country, analysts said.

Current government policies may be thwarting the development of IPTV, says Chen Jinqiao, director of the Institute of Telecommunications Policy of the China Academy of Telecommunications Research.

According to a regulation issued by the State Council in 1999, telecoms operators and broadcasters are forbidden from entering each other's turf.

"The regulation is still effective," Chen said.

Although Tiantian Online has been licensed by the State Administration of Radio, Film and Television (SARFT) to provide online broadcasting offerings, it does not necessarily signal the ministry is ready to ease its grip on licensing, analysts said.

Under current regulations, broadcasting online any audio or visual media products made by telecoms operators, should be considered illegal.

In December last year, a Beijing newspaper reported that China Communications Co Ltd, a nationwide telecoms operator, would soon secure an online broadcasting licence to set up a nationwide online TV station.

But the SARFT denied the report, saying it never received the application and any private investment in the country's TV stations is illegal.

Regulatory risks still loom large in the development of IPTV business, analysts said.

"The prospects of IPTV business largely lie in how much wider the regulators will open the Internet TV sector," said eShip Consulting.

As IPTV is a combination of telecoms and broadcasting offerings, which ministry should oversee the IPTV business may be also a headache for the government, analysts said.

Due to increasing industry convergence, industry professionals have been calling for the establishment of a super-supervision body which combines the functions of the Ministry of Information Industry and SARFT.

The establishment of such a body may help fill the policy vacuum.

But a draft of the country's telecoms law does not mention such an arrangement.

Besides IPTV, mobile TV in which TV programmes are broadcast on mobile phones, is also gaining traction worldwide which could also be a challenge for regulators.

The National Association of Lawyers proposed the arrangement when the ministry asked the association for opinions on the draft late last year.

It remains unknown whether such a proposal has been accepted.

"It's irreversible that services and technologies will converge," Chen said.

"It will be against the trend for different networks to be regulated by different bodies."

However, with the development of IPTV technology, regulatory barriers would be eventually torn down, Chen said.

Internal competitions

Chen expects a "competitive co-operation" will shape up between telecoms operators and broadcasters in the IPTV business.

But such a tie-up may be fragile as each tries to gain the upper hand, analysts said.

For example, how to institute a reasonable business model and a revenue-sharing scheme which is acceptable to both parties, may be a tough job, they said.

A large number of specialized TV production firms are needed to boost IPTV, according to Tan Yajun, deputy general manager of Technical Department at China Tietong, a minor fixed-line operator.

"Specialized media productions firms, especially those focusing on entertainment programmes, will play a vital part in the success of IPTV business," Tan said.

The SARFT and the Ministry of Commerce last November announced a temporary regulation, allowing foreign broadcasters to form joint ventures or co-operative companies with Chinese partners to produce and sell broadcasting and TV programmes.

That would help foreign media firms tap into the IPTV gold mine.