VZCZCXRO2479
RR RUEHCN RUEHGH
DE RUEHBJ #3684/01 1790032
ZNR UUUUU ZZH
R 280032Z JUN 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 0437
RUCPDOC/USDOC WASHDC
INFO RUEHCN/AMCONSUL CHENGDU 6646
RUEHGZ/AMCONSUL GUANGZHOU 0928
RUEHHK/AMCONSUL HONG KONG 7730
RUEHGH/AMCONSUL SHANGHAI 5108
RUEHSH/AMCONSUL SHENYANG 6441
RUEHIN/AIT TAIPEI 5764
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 1206

UNCLAS SECTION 01 OF 02 BEIJING 013684 
 
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:  A CASE STUDY OF CHINA'S INTERNECINE PROFIT 
WARS 
 
REF: STATE 12988 
 
¶1. (SBU) Summary:  In an informal interview during the June 
14-16 China VoIP Conference & Expo in Beijing with Dr. Kan 
Kaili, Director of the Policy and Development Institute of 
Information Industries at Beijing University of Post and 
Telecommunications, he likened the profit wars between 
China's major telecom players as an internecine fight 
guided by the bottom line, profit quotas, and the need to 
please both Beijing Central Government officials and 
company headquarters.   End Summary. 
 
 
¶2. (SBU) In a candid analysis of the future of Voice Over 
Internet Protocol (VoIP) in China, Dr. Kan, a very 
influential Stanford PhD and former Deputy Director of the 
Economic and Technological Development Research Center for 
the now disbanded Ministry of Post and Telecommunications, 
said that VoIP is alive and well and being exploited by 
China's major telcos as just another tool to increase 
profit margins or in some cases to meet monthly profit 
quotas.  In essence, what the consumer wants really has 
nothing to do with Chinese telcos' business practices. 
 
The Landscape 
------------- 
 
¶3. (SBU) China Telecom, which has more than 244 thousand 
employees, is the largest fixed service telecommunications 
provider in China with USD 21.20 billion in revenue and 
around 202 million customers in 2005.  The company provides 
services in the west and south of China, including the 
municipalities of Shanghai and Chongqing, the provinces of 
Guangdong, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, 
Sichuan, Hubei, Hunan, Hainan, Guizhou, Yunnan, Shaanxi, 
Gansu and Qinghai and the autonomous regions of Guangxi 
Zhuang, Ningxia Hui and Xinjiang Uygur.  Its main rival, 
China Netcom, was formed after a 2001 decision to split 
China Telecom and break its monopolistic hold over China's 
fixed line phones services.  China Netcom provides services 
in the north of China, including Beijing, Tianjin, Hebei, 
Henan, Shandong, Liaoning, as well as in Shanghai and 
Guangdong.  The company, with more than 138 thousand 
employees, had USD 10.90 billion in revenue in 2005.  China 
Telecom controls 70 percent of the backbone network while 
Netcom controls 30 percent. 
 
¶4. (SBU) China Telecom and Netcom are state-owned 
enterprises (SOE) and parts of their companies are listed 
on the New York Stock Exchange.  Dr. Kan said that the 
creation of the State-owned Asset Supervision and 
Administration Commission (SASAC) has made SOEs more 
powerful and it is understood that these companies can 
engage in whatever business activities they wish without 
fear of antagonizing a ministry such as the Ministry of 
Information Industry (MII).  (Note: While the power of 
these companies is well known, MII still regulates the 
industry and determines when and who, for example, will 
receive 3G or VoIP licenses.  The great power of SASAC over 
the SOEs was exemplified when they shuffled the presidents 
of all the telcos like a deck of cards.  End Note.) 
 
VOIP: Just Another Tool to Make Money 
------------------------------------- 
 
¶5. (SBU) VoIP currently remains unregulated in China and is 
neither legal nor illegal.  Nevertheless, to date, the 
Chinese Government has exhibited policies and practices 
that are stifling the growth of any non-domestic VoIP 
providers.  A recent decree that halts the issuance of VoIP 
licenses until 2008 serves as an example of how much power 
a company like China Telecom can wield over the legal and 
regulatory environment.  In the meanwhile, China Telecom 
and Netcom are using VoIP to boost their own revenue 
 
BEIJING 00013684  002 OF 002 
 
 
streams.  Dr Kan explained that both companies are not only 
encroaching on each other's territory but each provincial 
branch is also encroaching on its own siblings' 
territories.  For example, when the general manager of a 
provincial China Telecom branch sees that his branch will 
not meet that month's profit quota he will have no qualms 
about going north to try to get more business by 
undercutting calling rates from a province that Netcom 
controls.  This is done by using VoIP to offer cheaper 
domestic calling rates and services than Netcom's fixed 
lines network.  Meanwhile, the rivalry does not stop there 
because that same branch will also try to take business 
away from another province that China Telecom already 
controls.  Dr. Kan said that the low cost of VoIP 
technology has given regional companies another tool to 
increase their revenue streams or meet pre-set quotas.  He 
added that while this may look like chaotic business 
practices, everybody is making money so the powers that be 
in Beijing are happy with the status quo. 
 
The Future 
---------- 
 
¶6. (SBU) In answering a question about the future of VoIP, 
Dr Kan said that VoIP is widely available and popular in 
China and that in the end MII will have no choice but to 
legalize it.  He exemplified this by pointing out that up 
until 1999 IP telephony was illegal in China but in a 
manner similar to VoIP was widely available.  The 
government then had no choice but to legalize it and he 
predicted that VoIP will follow the same path.  He 
concluded by wondering if American companies could really 
survive in such a business environment in China. 
 
Randt