China Struggles to Become IPTV World Leader

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By Alan Breznick

Alan Breznick, a veteran business journalist and analyst, is the editor of Cable Digital News and a frequent contributor to other communications industry publications.

Despite tight content restrictions, dueling government agencies and an outdated telecom and cable infrastructure badly in need of an overhaul, the world's largest TV market stands poised to become the world's largest IPTV market over the next few years.

Market researchers and tech equipment suppliers say that China—by far the global leader with an estimated 355 million to 380 million TV households and at least 105 million cable subscribers—should also become the global leader in IPTV homes by the end of the decade. Even though the IPTV business has gotten off to a slow start, some of these researchers believe that IP-delivered video could take off in China by 2008 as the nation's cable operators complete digitizing all of their major systems and the country's two phone giants advance from their current round of market trials to actual commercial deployments.

“China really is a greenfield market in a lot of ways,“ says Mike Caldwell, senior director of product management for ARRIS, one of many U.S. cable tech vendors now trolling for business in China. “There's a lot of green field.”

Many major hurdles must still be overcome, however, before the IPTV business can blossom in China. The biggest obstacles include uncertain and conflicting government regulatory policies, tight content controls, an immature broadband infrastructure, the huge cost of massive plant upgrades, low broadband penetration, and high prices in a complex, confusing market.

“Nascent is the word to bear in mind with China,” says James Belcher, a senior analyst at eMarketer, a New York-based research consulting firm that tracks broadband and TV markets around the globe. “Every time someone looks at China, they get dollar or yen signs in their minds.” But, he notes, “it's [the IPTV market is] just getting off the ground and there are a lot of factors to consider.”

Due to all these factors, experts' forecasts about the growth of the market range all over the map. In one of the most bullish recent forecasts, for example, In-Stat projects that China will have as many as 18.2 million IPTV subscribers by 2010, up from no more than 100,000 subscribers at the end of last year. The market research firm, which estimates that the nation will end 2006 with 340,000 IPTV customers, believes that subscriber growth will particularly pick up in the last three years of the decade. It also projects that IPTV set-top box shipments will jump from 100,000 units last year to 8.7 million units by 2010.

Yet such other market watchers as Kagan Research and Informa Telecoms & Media are not nearly as optimistic. For instance, the normally bullish Kagan predicts that Chinese cable and telecom IP video providers will boast no more than slightly over 4.2 million subscribers by the end of 2010, up from 65,000 at the end of 2005.

Nevertheless, all the experts agree that China should become the biggest IPTV market on the planet in four years' time, if for no other reason than the huge size of the nation itself. Even relying on Kagan's low-ball estimate, the country would still have more IP video users in four years than either the U.S. or Japan, which are widely expected to be the two other biggest players in the business by then.

“In terms of multi-channel infrastructure, it's a gold mine,” says Ben Reneker, a senior analyst at Kagan Research in Monterey, CA. “The problem is that it's a gated gold mine.”

Reneker and other market analysts say the Chinese government bears the greatest blame for the country's slow development of IPTV to date. They cite the government's reluctance to issue more than a handful of IPTV test licenses to the nation's two major telecom firms, China Netcom and China Telecom. Under those test licenses, China Netcom has launched capped market trials in such northern regions as Harbin Province, while China Telecom has rolled out trial IPTV services in such southern areas as Shanghai.

Analysts also emphasize the strict video programming restrictions that the government's powerful State Administration of Radio, Film and Television (SARFT) has imposed on phone companies, cable operators, satellite TV providers and broadcasters alike, particularly concerning the use of foreign content. For instance, SARFT has mandated that no more than 40% of the animation shown on Chinese TV can be produced outside the country.

“A compelling service needs compelling content,”" notes Ben Macklin, another senior analyst for eMarketer based in Australia. “Will China be prepared to relax its foreign content laws to allow IPTV providers to offer a differentiated product? It seems unlikely in the foreseeable future.”

Furthermore, analysts note the bureaucratic battles now taking place between SARFT and the Ministry of Information Industry (MII), another powerful government agency that regulates China's telecom and Internet markets. While MII appears to favor letting the phone companies expand into the TV business, SARFT wants to keep tight control over which companies can offer programming and what they can offer.

“In Chinese politics, you have two different governing bodies with no interest in convergence,” Reneker says. “So essentially you have a turf war… It's [the IPTV market is] caught in a bit of a regulatory gridlock.”

Beyond the regulatory turf battles, the experts cite the sorry condition of much of China's cable and telecom plant. In a nation with 2 million miles of cable lines alone, much of the plant lacks the capacity to carry such advanced services as video-on-demand (VOD), high-definition TV (HDTV), digital video recording (DVR) and other digital and interactive services.

Chinese market experts point to the country's low broadband penetration rates as one other major constraint on the development of IPTV. Although the nation ended last year with an estimated 36.9 million high-speed data households, making it the second largest broadband market in the world behind the U.S., its penetration rate still lags behind at a lowly 10%. Chinese cable operators account for just 4.1 million of these homes while China Telecom and China Netcom account for the rest, according to eMarketer.

“Cable TV is available to some 120 million households in China,” Macklin notes. “But much of it is in need of an upgrade, so cable Internet has yet to garner many subscribers.”

Plus, as noted earlier, many of these high-speed data homes don't enjoy particularly high-speed data service. Industry experts say most Chinese broadband networks deliver top data download speeds of just 512 kilobits per second (kbps) to 1 Megabit per second (Mbps). That's not fast enough to support HDTV or various other IPTV services.

Even with all these obstacles, though, market analysts expect the Chinese IPTV market to start growing by leaps and bounds soon, thanks largely to the Olympics. With China due to host the 2008 Summer Olympic Games in Beijing, the Chinese government is heavily focused on bringing the cable, broadcasting and telecom industries into the 21st Century in time for the Games' bright spotlight.

As a result, the government has kicked off a massive nationwide drive to digitize the country's cable systems. In what's been called the largest cable upgrade in history, plans call for upgrading all of China's major cities and provincial capitals to digital cable first, followed by the small and mid-sized cities, the more rural counties and then finally the most outlying areas by 2015.

In line with this effort, cable operators have been offering free digital cable set-top boxes to subscribers to drive adoption. China ended last year with just 2.4 million digital subscribers, giving it less than a 3% digital penetration rate, according to Kagan. But the market research firm expects that number to jump to 7.0 million subscribers by the end of this year and 20.8 million by the close of 2008.

“The onset of digital cable is very early there,” says Seth Kenvin, vice president of strategic marketing for BigBand Networks. “But it's also being accelerated.” Like such other U.S. tech vendors as ARRIS, Tandberg Television and Harmonic, BigBand has been a big beneficiary of the country's digital cable push, snagging digital video equipment deals with seven Chinese cable operators in the past year.

The Chinese government is also pushing cable and telecom providers to boost the speeds of their cable modem and DSL lines in time for the Olympics. For instance, China Telecom, the nation's largest DSL provider with 15.8 million subscribers, is upgrading its national broadband network and aims to triple or quadruple its Internet speeds by 2008.

“The 2008 Olympics have driven a stake in the ground for the Chinese government,” Caldwell says. “They want the top 25 cities to be fully rolled out by 2008.”

While the bureaucratic struggles over IPTV trials continue, cable and telecom providers are trying to get around that roadblock by concentrating on a related service, VOD. In particular, China Telecom and China Netcom are focusing on IP-VOD, with each launching on-demand market trials in a number of cities. Both telecom providers are promoting the services as broadband supplements, not TV offerings, to avoid the long reach of SARFT.

Reneker estimates that more than 500,000 broadband homes now have IP-VOD set-top boxes in China. In contrast, he estimates that there are no more than 65,000 homes with pure IPTV service.

“Therefore we have 10 times as many households that are IP-VOD, laying a very strong foundation for IPTV service once the regulatory situation is resolved,” he says. “The telcos realize this is a big opportunity for them.”

In response, Chinese cable operators are pursuing digital VOD. Unable to offer much in the way of digital programming tiers because of the government's restrictions on foreign content and mandate to keep cable costs down, they're turning to VOD programming packages to drive customer demand for digital video service. “I think that the economic case for breaking the gridlock will come from cable VOD,” Reneker says.