Calling the Shots in Shanghai's Telecom Industry

Overall, mobile services in Shanghai have surpassed fixed-line services both in terms of subscribers and revenues according to the report. Further, residential fixed-line subscribers have come close to the saturation point, being rapidly replaced by business customers.

From Fixed-line to Value-added

The development of Shanghai's telecom infrastructure has been achieved by several years of investment and construction; as a result, today capacity can meet demand. Shanghai investment is now focused on delivering integrated and more efficient services, rather than on fixed asset investment. Much of the city has fibre optic cabling, and Shanghai now has an established data communication network, covering broadband ATM and IP services, two-way cable television network, international Internet bandwidth access and IP network dial-up server ports and router ports.

With much of the infrastructure in place, there is evidence that service providers are beginning to devise imaginative marketing efforts based on customer segmentation, service integration and adoption of new technology. In response to national service standards issued by the MII, the Bureau suggests that Shanghai operators are developing brand strategies to strengthen core competencies and compete on service levels, quality and customized services, rather than simply competing on price.

For example, the report refers to virtual private networks (VPN) for business customers, fixed-line SMS and news subscription services for residential customers, and multi-media services (MMS) carrying text, voice, video and interactive services for mobile communications customers.

Regulatory Environment

At the heart of the Bureau's approach to regulating the local telecom industry is a three-layer conceptual framework of “regulation by the government; self-discipline by the industry; and supervision by consumers”. This model draws from the MII's own regulations designed to administer better service levels.

The Shanghai Bureau's role as local regulator has been to implement complementary and detailed local rules pursuant to the national legislation. The Bureau states that its regulatory agenda is to “ensure fair competition and protect consumer interest”, in particular by placing emphasis on market access, tariffs, interconnection, network security, service levels, resource management and numbering allocation.

Post-WTO Reform

Nevertheless, the Bureau does have some unique “Shanghai characteristics”. In terms of post-WTO market reform, Shanghai has so far only opened up value-added telecom services to foreign investment, but has indicated its intention to extend this to mobile and fixed-line services.

In any event, under national law foreign participation in joint venture value-added services is limited to 49% equity, increasing to a maximum shareholding of 50% by December 11 2003. The Bureau announced that to provide for greater market access, it has reviewed four applications relating to foreign participation in the telecom industry.

However, the Bureau appears to acknowledge that access to foreign capital may be desirable. Along with multiple sources of finance and more complex financing structures, foreign participation will mean local telecom operators having to embrace increased competition and to learn better financial, marketing and risk management techniques from foreign companies.

Like the MII, the Bureau has been keen to facilitate network interconnection, including the formation of a working group, convening various expert panels, holding regular industry meetings, and establishing a dispute resolution mechanism. In particular, the report notes that the Shanghai Bureau has worked to improve SMS interconnection between Shanghai Mobile and Shanghai Unicom.

The Future

It is estimated that by 2005, non-voice services will comprise more than 15% of all business revenues. In addition, customized products, dedicated data services and broadband applications will continue to provide growth revenue streams for Shanghai's telecom sector. Looking further ahead, there is an increasing prospect of convergence within the telecom, computer and cable TV networks – taking advantage of developments in fibre-optic cabling, advanced routing and switching technology, and common IP-based software and operating standards. Such convergence will erode the traditional physical and business boundaries between voice, data and graphic platforms, as well as create many legal challenges for Shanghai's regulators as they grapple with the demands of their supervisory and licensing functions.

By Nancy Leigh, Baker & McKenzie, Hong Kong