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China Awakening Slowly to New Service's Promise


BEIJING — For local consumers exasperated with the hidebound state telecommunications monopoly, China Telecom, the recent official launch of Internet telephone services in China comes as a welcome change. But it's not exactly a revolution.

On April 1, after a nine-month trial period in 14 major cities, the Ministry of Information Industry licensed China Telecom, along with its main competitor, China Unicom, Internet service provider Jitong Communications and broadband network builder China Netcom, to provide Internet protocol, or IP, phone services. Though the firms compete for customers, all four are state-owned.

Nevertheless, China's government has decided that Net phones are a cost-effective supplement to traditional phone services, especially in a vast country where laying land lines is impractical and unprofitable.

"IP phone services alone can't break the state's monopoly. That task will be left to future technologies," said Ning Xianfu, a general manager at Jitong. "But Internet telephony has lowered calling prices, which is good for ordinary citizens and good for economic development."

Calling the U.S. from China--where prices for telephone calls are still set by the government--costs about $2 a minute, while a call in the opposite direction costs 65 cents a minute. By contrast, an IP phone call from China to the U.S. costs about 10 cents a minute.

While no precise figures are available, Jitong claims to hold the largest share of China's IP phone market. The firm says roughly half its revenue comes from IP phone services, especially its popular IP phone cards. Jitong is also one of China's major Internet service providers and builders of ATM networks.

China has about one phone--fixed or mobile--for every 10 of its 1.3 billion citizens, and roughly one Chinese in a hundred owns a computer.

"Jitong is different from the other players," said Eric Li, a director at Claydon Gescher Associates, a Beijing-based telecommunications and media consulting company. "They're a small state-owned enterprise, they're highly focused, and they want to provide a good service."

China Unicom, meanwhile, has moved to become a major player in the IP telephony business in China by becoming a partner of Concert, the joint venture of AT&T and British Telecom that is creating a clearinghouse to allow phone companies to carry cut-rate calls to other countries via the Internet. Concert now claims nearly 100 such partners around the globe.

China Telecom, on the other hand, is still as much a bureaucracy as it is a corporation.

"To them, there are no customers; there is no service. There is only their monopoly, which guarantees their private interests and their welfare benefits," Li said.

Indeed, until recently, customers who wanted phones in their homes had to pay China Telecom $600--a princely sum for most Chinese--and then wait three months for installation.

Although the government split up China Telecom last year into smaller regional and service-specific firms, competition remains weak. China Telecom retains control over most of the country's telecommunications infrastructure and maintains a cozy relationship with the industry's regulator, the Ministry of Information Industry.

Industry analysts say that if China Telecom had a choice, it might not be in the IP phone business at all. But the firm is unwilling to simply give up its customer base. The downside of being a state monopoly is that you can't just rake in the cash--you have to promote the state's policies as well.

Beijing has decided that to revive its unprofitable state-owned industries and stand up to competition from foreign firms, it must build the nation's information economy. And it is sold on the benefits of convergence among telecommunications and computer networks.

The Chinese government's decision to permit Internet telephone services went through a long and controversial process. The issue attracted intense media attention last year with a landmark case in the coastal city of Fuzhou, where two enterprising brothers, Chen Zhui and Chen Yan, offered a special perk to their store's customers: free Internet phone calls to the U.S. for up to five minutes.

The brothers' service was popular until January 1998, when the police confiscated their computer and subpoenaed them on "suspicion of illegal telecommunications services." In fact, the police had been prompted to act by the Fuzhou branch of China Telecom.

The brothers sued the police and lost. When they appealed to a higher court, both sides called a multitude of expert witnesses to debate the nature of Internet telephony. How was the Internet version different from traditional telecommunications? What were its implications for technological and social progress?

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