The Chinese Government seems unlikely to release regulations on voice over Internet protocol (VoIP) telephony soon, yet the government's acquiesce leaves much hope that businesses will develop traditional fixed-line telephony rapidly.

"It's not so optimistic," Xu Junqi, a researcher of China Academy of Telecommunications Research, a think-tank under the Ministry of Information Industry (MII), told China Business Weekly last week. "MII has yet to put VoIP research on its agenda."

Xu stated that the institute is only studying VoIP development abroad.

VoIP is an emerging telephony service. It offers PC-to-PC or landline-to-PC telephony services, including local and long-distance calls, at an attractive price.

Long-distance calls made over VoIP can be as much as 70 per cent cheaper than calls on traditional networks.

"It may take some time before the government finds out a way to balance the interest generated by the traditional telephony and VoIP," said Zhang Ying, an analyst with Beijing-based research house Analysys International.

"The government actually takes a mutual stance on the new technology, leaving its future to how the market grows," Zhang said.

Concurring, Xu said it is quite similar to the case of personal handy services (PHS), or (xiaolingtong), in China.

"The government will legitimize VoIP as its market penetration grows," Xu said, "but the market is still in its infancy, and they are watching."

MII demanded the suspension of VoIP services across the country in September.

China's fixed-line carriers, China Telecom and China Netcom, launched VoIP business services with local Internet service providers (ISPs) earlier this year, and it expanded rapidly in large cities including Beijing and Shanghai.

Business reached a climax in late August when Beijing Telecom, with ISP Great Wall Broadband, introduced a VoIP service charging only 3 fen (0.36 US cents) per minute.

Even so, China Telecom and China Netcom still can offer long-distance VoIP services, operated under their long-distance licences.

Meanwhile, ISPs are circumventing the regulatory grey area by co-operating with these carriers to run VoIP service.

Chinese mobile ISP Tom Online launched its PC-to-PC VoIP service last month, in partnership with European VoIP provider Skype Technologies.

A Tom Online spokesperson said it was in preliminary talks with carriers to offer VoIP to telephones some time next year.

Other large Chinese ISPs, including NetEease.com and Tencent are making similar in-roads.

"Regulators are giving in to VoIP services as it knows the only way to solve the problems is by doing it," said Xu.

Experts agree that a major problem is the classification of VoIP; whether to be a basic service or a value-added one.

Most envisage it is a value-added service.

"PC-to-PC VoIP definitely falls into the category of a value-added service, with only ISPs involved," said Zhang.

Existing regulations are still vague in classifying PC-to-phone VoIP, which entails fixed-line telecoms carriers and ISPs, a grey area for regulation, he explained.

Value-added services are open to foreign investment and are subject to less rigorous licensing procedures than basic services, such as fixed-line and wireless telephony.

Both Zhang and Xu agree that PC-to-phone business should be defined as value-added service.

"VoIP is immature in both technology and business models. It cannot be classified as a basic service," Xu said.

"The government needs to provide a unified bottom line for charging VoIP to avoid vicious price wars between ISPs if VoIP is classified as a value-added service, which many ISPs are legitimatized to enter," said Zhang.

Fixed-line carriers are concerned that their declining profit margins in traditional telephony services as VoIP begins to blossom.

"So far, there are little direct clashes between the two businesses," Zhang added.

Surprisingly or not, the two fixed-line carriers are self-contradictory in their attitude towards the service, said Zhang.

Although they are unwilling to see VoIP eat into its traditional long-distance telephony market, both China Telecom, in the south, and China Netcom, in the north, welcome VoIP service in each other's turf, he said.

Vincent Fu, principle analyst for Asia-Pacific telecoms of world-leading market research house Gartner, was quoted saying that long-distance calls made over VoIP would grow to 80-90 per cent of the long-distance traffic by 2008, eroding traditional circuit-switch networks share to 10 per cent.

In the United States, where the government is most active in promoting VoIP service, the market penetration is expected to reach 30 per cent within three years, as indicated by a report released by market researcher Mercer.

In Europe, VoIP-based applications and services will account for 13 per cent of the total telephony market in terms of revenues.

Telecoms regulators in South Korea and Japan, however, still remain cautious over VoIP services.

(Business Weekly 11/16/2004 page15)