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Ferocious FttH Competition in China

Paul Budde

Most of the discussions, analyses and comments regarding the strategic issues in telecommunication are still focussed on the mature markets in Europe and North America, where there are well-established policies and regulations with institutions that have been in existence for many decades.

Occasionally one hears claims that we are reverting back to old telecoms policies and regulations, as, for example, was the case with the FCC proposal for its Title II legislation. Most commentators wrongly label this as net neutrality legislation, but it actually has far more to do with competition regulation. In this case the intent is to ensure that broadband access can be under more scrutiny by the FCC, so that if the incumbents are deemed to behave in a monopolistic way the FCC will, with the new legislation, have the tools to intervene. This pussyfooting around the monopolistic nature of the American broadband access market — something that is clear to all — is increasingly what is taking place in the telecoms market in 2015.

The reality is that in most developed markets there is still a lack of broadband access competition — the incumbents are as powerful in the access market as they were two decades ago. So, with so few strategic changes happening in these markets it might be interesting to see what we can learn from markets elsewhere.

The most competitive market at the moment is probably the Chinese market. In the absence of decades-old legal telecoms structures and regulations — and with perhaps the most competitive people in the world operating in markets with very little effective oversight — we do see some real cowboy stuff happening here, and I am certainly not advocating that we should follow the Chinese way of competition. Nevertheless it is very interesting to observe this market.

Let's look at the fixed telecoms market in China, and the FttH market in particular.

What we are seeing here are hundreds, if not thousands, of small companies falling over each other to link individual households in thousands of new, and even not so new, apartment blocks to an FttH service. Those who have travelled through China will no doubt have seen these large complexes of multi-apartment buildings, housing sometimes tens of thousands of people within one estate.

It is interesting to see the broadbanding scenarios that are playing out here. It resembles the situation that occurred in Korea in the early 00s (and look at how that country has been leading the broadband world ever since).

Within the private estates in China the current property law trumps the telecom regulation — that is, it is private property.

China Telecom and Unicom, as public utilities, can lay fibre on public property until they reach the kerb of these private estates. For them to go further — to lay fibre into the homes — requires them to enter the private estates, and for this they need to get permission from estate owners or managers.

Some of these estate managers do provide access to their properties and work with the leading telcos China Telecom and Unicom. Some of them charge to have fibre laid across their estates; others lay their own fibre and then lease it back to the telcos; and some of them lay their own fibre and become an ISP on their own.

This has resulted in hundreds, and indeed thousands, of mini-ISPs popping up all over, many affiliated with estate builders and managers.

Technically, this is not legal, as only basic telecom licence-holders such as the incumbents China Telecom and Unicom (as well as other licensed companies) can lay fibre. But these companies did it anyway. Therefore, in the beginning of the year the Chinese government, through the Ministry of Industry and Information Technology (MIIT), made plans to issue a new licence for the last mile, mainly to legitimise a market norm that used to fly under the radar.

This legal opening leads in many cases to a large number of smaller players installing their own cabinets in the basement of the apartment building; some do this professionally, others do it in a completely shonky way — at that level there is little or no oversight. From here they pull their own cables to the units they have been able to sell their services to. There could be a dozen of more providers in one single apartment building.

With little effective oversight all kinds of deals are done with the building owners to get access to their residents. A typical FttH service of around 20MB/s will cost the equivalent of $8 a month.

Existing copper and coax networks are operating under slightly different regulations. In order for a new building to be "certified" as ready for occupation, the owner need to guarantee a certain minimum of basic utilities, including water pipes, electricity grid and copper wire. As such, the incumbents get access to the buildings (without any special permission) but this is for copper cables only so if they want to put in a DSLAM, they would still end up negotiating with the estate managers and as such similar 'cowboy' activities as mentioned above occur here as well. However, the real game in town is FttH.

While all the large network operators also install their own cabinets the smaller companies can in most cases offer more competitive prices than the incumbents. Furthermore the Central Government has set national targets for FttH installations and it is probable that the incumbents will not be able to reach these targets; so they let these smaller companies in on the business in order to do so.

Obviously the way this business works in China would not be acceptable in more developed markets and would certainly not be possible under the well-established rules and regulations in those countries. Sales practices that are often used in China, which include actively boycotting competitors, interfering with their services, using questionable network equipment, and illegal business deals, would not be acceptable in other markets.

Nevertheless 'the system' works and more customers are linked to FttH in China than anywhere else in the world, and at prices that customers in the developed world can only dream of.

At the same time, more countries should look to China for elements of these developments that could apply to their markets, where most of the incumbents are reluctant to build FttH networks, not necessarily because it can't be done, but because they want to protect their incumbent networks.

Despite all the unsound elements you can point to in the Chinese rollout, this country will soon lead the digital economy. They know — as do we — that the key to a lower cost economy is digital and that the sooner people can be connected to an FttH infrastructure the sooner that new economy will kick in. High-speed broadband access is the key and, albeit in sometimes questionable ways, China is building this at a very rapid pace.

At the same time, it is obvious that all of those thousands of small players can't survive, so massive consolidation is taking place, and over time this will increase the level of professionalism in the market and, heaven forbid, could lead to a more monopolistic environment, similar to the ones that are hampering competition and innovation in the developed market.

By Paul Budde, Managing Director of Paul Budde Communication Paul is also a contributor of the Paul Budde Communication blog located hereVisit Page
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