Article Summary

Article Summary

The popularity of computer-to-telephone call services is expanding at a phenomenal rate, threatening traditional phone companies' profits. Skype, a European based telephony company that offers this service is amongst the leaders in the field and has formed a joint venture with a Chinese company with the hopes of being able to capitalize on this emerging market.

However, the telecom companies in mainland China are aggressively pursuing the systematic removal of these types of services. China's Ministry of Information Industries has developed policies which allow only six players, all of them Chinese companies to offer VoIP services, practically outlawing any other companies from entering the market place. However, many industry analysts note that China is facing an uphill battle. Voice over internet protocol or VoIP as it is more commonly known, can be accessed by anyone with an internet connection and access to a foreign operator.

With the governments blessing, China's largest fixed line operator, China Telecom, has been blocking computer-to-telephone and computer-to-computer services as well as blacklisting and denying service to users of Skype.

In the last year alone, VoIP accounted for 46% of all long-distance calls in China, up 5% from the previous year, while traditional, land based telephone providers saw their market share fall to 29%.

The government has already decided that very few operating licenses will be awarded to foreign companies, and the success of international players will rest solely on their ability to establish agreements that provide revenue sharing with domestic operators.

Emerging Technology in the Telephone Market Place

Voice over Internet Protocol (VoIP as is shall be referred to henceforth) is an emerging technology that allows anyone with a broadband internet connection to make phone calls to other computers, or phone lines, to anywhere in the world at a fraction of the cost ( Federal Communications Commission, 2005).

While a large number of businesses throughout China are still regulated by the government, the last decade or so has seen some dramatic shifts to privatization. Western and European countries have been drooling at the prospects of having access to a billion plus new consumers, and the telecom industry is no different. Microsoft and Skype, a European internet telephony company, have already begun operations in mainland China, providing various types of internet services Mure, 2005).

In conjunction with TOM Online, an internet portal based in China, Skype began offering it VoIP services to internet users, much to the chagrin of domestic long-distance providers, and with good reason.

China Telecom, the nations' largest provider of internet and phone based services had revenues related to long distance charges of $1.805 billion (USD) in the first half of 2005, compared to $1.858 billion for the first half of 2004, a drop of almost 3% (United Press International, 2005).

Long-distance revenue accounts for almost 20% of China Telecom's annual revenue, and with an estimated 100 million internet user in mainland China alone, domestic telecom companies are worried that profits will slide even further once the new technology gains widespread acceptance (United Press). For example, a long-distance call from China to New York costs about 8 yuan, or one US dollar per minute, compared to roughly 0.3 yuan or $0.03 USD. These numbers alone give the telecom giants plenty to worry about, but they are not defenceless in their quest to prevent more users from switching over to the services provided by foreign companies such as Skype.

In conjunction with the government, particularly the Ministry of Information Industries, the domestic telecom companies are enacting measures to ensure their long-term survival and competitive advantage. Amongst these measures is the means to monitor and control online data volume, "so if someone is making a phone call over a China Telecom broadband connection it will be disconnected" (China Telecom seeks to block VoIP. 2005). Customers that are caught using the illegal service also face criminal charges or denial of service for their regular phone and internet services, which are all political tactics designed to dissuade users from using other forms or service.

In 2004, the Chinese government enacted legislation that deemed computer-to-telephone type calls, such as those offered by Skype are illegal, in order "to protect so-called market order" (United Press International). Although the Chinese market is slowly opening up to allow foreign entry, international managers much still remember the fact that there is much political risk when entering China, which is still Communist controlled. In this case, Skype, faces large operating risks by trying to establish themselves in China. Due to domestic pressure from Chinese telecom companies, and the desire to protect domestic industries, the government implemented various methods to hamper the foreign companies' operations (Czinkota, 2004).

Because the system of law in China favours domestic operations, international managers must consider that they will not have an easy run at competing with some companies within the country. Even domestic companies are experiencing difficulties in introducing this new form of technology. So far, only six firms have been granted operating licenses for VoIP services and in order to minimize head-to-head competition amongst domestic telecom companies,