Even with help from local Internet companies, Skype and other outfits face challenges in getting through to the mainland.
In a setback for the likes of VoIP pioneers such as Skype Technologies, the Chinese government is reportedly close to banning paid-for calls between computers and conventional telephones for at least two years.
In its effort to break into the Chinese market, Skype seems to have plugged into some good connections. The Internet phone company did not try to go it alone in the mainland, where regulators tightly control the Net, and the government has restricted foreign investment in the telecom industry. Instead, Skype in 2004 formed a joint venture with Tom Online, a Beijing-based provider of Internet services owned by Li Ka-shing, the Hong Kong billionaire who has done business successfully in China for years.
Unlike China’s limitations on other types of technology to quash dissent — such as its restrictions on Google and Yahoo — its focus on VoIP might be more strategic than political, noted Gartner analyst Ron Cowles. "China is known for having firm control on its industries, and on the telecom industry in particular," he said.
Speaking to the Financial Times, Wang Leilei, the chief executive of Tom Online, said China "is not going to issue VoIP licenses until 2008."
The news, if confirmed by the authorities, will be a blow for Skype and its SkypeOut service. The Luxembourg-based company has been speaking to Chinese telecom operators since last November in an effort to overcome regulatory blocks against its SkypeOut computer-to-phone calling service.
It is likely that China’s actions will delay the launch of SkypeOut, a computer-to-telephone service the company was to roll out in coming months.
SkypeOut allows Skype users to purchase airtime upfront, and then use their computer to call a conventional telephone or mobile phone using VoIP at much cheaper rates than traditional fixed-line calls.
The big fear for Chinese carriers is that the SkypeOut service would undermine their core earnings. China has two major fixed-line telecoms carriers, China Telecom and China Netcom Corporation. It also has two major mobile operators, China Mobile and China Unicom, as well as two minor players, China Satcom and China Railcom. The Chinese government has majority ownership of all of these players.
In discussing the news, Wang seemed as if he was distancing his company from Skype somewhat, noting that revenue from SkypeOut was not important to Tom Online because the portal had not invested much in it so far.
Sure, Skype has done fairly well with simple PC-to-PC calling and has won government permission for that. The company, owned by online auctioneer eBay, has about 9 million registered users in China using its Voice over Internet Protocol (VoIP) service. But Skype does not make any money off of those calls, since it allows its users to call other members free of charge. Skype remains barred from offering the service on which it does make money–calls from PCs to a phone or vice-versa.
For the Chinese telecom operators however, voice is still their principle revenue earner and, due to the relatively high cost of telephone calls in China, combined with the low average wage, VoIP has been viewed as potentially a hugely attractive technology for the country.
Disappointing, Not Surprising:
Although Skype had been making moves indicating its desire for expansion in the country, including the deal with Tom Online, the company has seen resistance in China for at least the last six months.
The China Telecom block stopped VoIP calls to standard telephones, but left computer-to-computer call service unaffected.
China’s largest telco, China Telecom, began blocking some types of calls make with Skype in September. Although the service was not being offered at the time in mainland China, users registered for the service from outside the country in order to use it.
Some analysts have noted that China Telecom was threatened with revenue loss and was concerned that Skype would reduce the number of traditional, fee-based long distance calls.
Strategy and Politics:
China Telecom has already blocked Skype in Shenzhen, and has told customers there that the SkypeOut service is illegal. There were also reports late last year that a US-based company, Verso Technologies, was about to sell or had already sold an "anti-Skype filtering system to a leading Chinese operator," although Skype denied that this was the case.
"Since VoIP is a disruptive technology, they are going to restrict it until they can figure out how to control it."
Many other countries are facing the same dilemma, albeit to a lesser degree, he added. Licensing schemes that allow telecom providers to profit from VoIP are being considered worldwide, and Mexico already has created a plan that ties VoIP and the country’s telecom industry together.
Call Waiting:
One reason for the slide is VoIP. The big telecom operators have permission to offer phone-to-phone VoIP calls, and that has given them room to cut their prices — but it also hits their profits. China Netcom, for instance, reported a 15% drop in long-distance revenue in the first half of last year, says Fang Meiqin, an analyst with BDA China, a research firm in Beijing. And that is with the VoIP market still officially off-limits to many would-be competitors. "If the market opened, the long-distance revenues would drop even further," says Fang. "This would have a terrible impact on the [state-owned] operators."
The latest numbers from China Telecom provided a reminder of what is at stake. The largest fixed-line operator in the country, China Telecom on Mar. 22 reported its full-year results for 2005, and they were not good. Sales grew 5% to $21 billion, but profits failed to keep pace, dropping slightly to $3.5 billion. It was the first fall in China Telecom earnings in five years, and came after the company had to slash prices in the face of steep competition from other operators.
Secret Conversations:
Another point of concern for China is that VoIP calls from computers are hard to monitor. That is because with VoIP, sounds are chopped up into little chunks of data that get sent over the Internet and reassembled at the other end. Once they are traveling across the Net, these packets of phone-call data are hard to distinguish from e-mail, photos, or anything else.
Even so, VoIP is gradually building momentum in China. Despite the restrictions, some callers with high-speed Net service skip the PC and simply hook their phones into a broadband line to call each other. "They do not have licenses, but they do it secretly," says Fang, who estimates that there are more than 100 companies in China offering such black-market VoIP services.
"How do you tell the difference between someone doing online banking and having a phone conversation?" asks Andrew R. Coward, chief technology officer in the Asia-Pacific region for Juniper Networks. Regulators, he adds, "can make assumptions about the traffic based on the source and the destination, but it would be a very hard decision to block that traffic because you are not sure it is voice traffic."
As China tightens its controls, though, it is likely that VoIP use simply will go underground and flourish there, Cowles added.
At the moment Skype is said to have approximately nine million users in China, and, while its users can use its free computer-to-computer telephony service, calls are limited to only five minutes.