VZCZCXRO4130
RR RUEHCN RUEHGH
DE RUEHBJ #2988/01 1710339
ZNR UUUUU ZZH
R 200339Z JUN 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9634
RUCPDOC/USDOC WASHDC
INFO RUEHCN/AMCONSUL CHENGDU 6579
RUEHGZ/AMCONSUL GUANGZHOU 0854
RUEHHK/AMCONSUL HONG KONG 7679
RUEHGH/AMCONSUL SHANGHAI 4993
RUEHSH/AMCONSUL SHENYANG 6387
RUEHIN/AIT TAIPEI 5733
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 1185

UNCLAS SECTION 01 OF 02 BEIJING 012988 
 
SIPDIS 
 
USDOC FOR DAS LEVINE AND 4420/ITA/MAC/CEA/MCQUEEN 
STATE PASS USTR 
USTR FOR STRATFORD/WINTER/MCCARTIN/GRIER 
USTR FOR MCHALE/WINELAND 
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT 
TREASURY FOR OASIA/ISA-DOHNER AND KOEPKE 
GENEVA PASS USTR 
 
SENSITIVE 
SIPDIS 
 
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