Analysis: China Telecom breakup

The splitting into two of China Telecommunication (Group) Corp. (China Telecom), the largest telecom carrier in China, does not necessarily mean an end to its monopoly and the start of increased competition among telecom players in China. Instead, it might simply mean the birth of two monopolies and the opening of a can of worms in terms of regulatory issues, analysts said.

"The China Telecom breakup is no doubt significant and controversial," said Duncan Clark, a partner at BDA (China) Ltd, an Internet and telecommunication consultancy in China. For a start, China Telecom, which announced that it was going to split into two geographic regions -- north and south -- and merge with China Netcom Corp. Ltd. in the north, will be faced with the onerous task of sorting out shareholdings between the companies, he said.

The transition between the companies will also be an issue that the telecom carriers need to address. "There are the quality service issues such as ensuring smooth delivery of service when the company is split," said Renee Gamble, Beijing-based market analyst for telecommunication at the International Data Corp. (IDC) Asia-Pacific. Also, there is no evidence that the breakup will deliver competition to the telecommunication sector in China, she said.

"In theory, the (operator) in the north can compete with the (operator) in the south," but there remain a lot of regulatory considerations that need to be cleared up before active competition can take place, Clark said. Last mile connection costs impede competition further because new entrants will have difficulty in raising capital for them, he said.

The Chinese government needs to beef up the telecommunication regulatory body for dealing with issues that pertain to regulating the size of carriers, if the breakup is to encourage competition. "It's actually a good excuse for the telecommunications sector in China to do some mopping up," Clark said. "There will be spring cleaning across the board and the telecom industry is heading towards a major restructuring."

In terms of competition, industry observers are not convinced that restructuring China Telecom will change the Chinese telecom sector. "We'll wait and see what goes on in pricing (the telecom services)," Gamble said, adding that at the moment, the Ministry of Information Industry still exerts a heavy hand in deciding how telecom carriers price their services.

"The timing (of the split) is interesting, especially with China's entry into WTO looming, and China Netcom being the only Chinese carrier with significant foreign investment," Gamble said. "Even with WTO membership, the door is not going to swing wide open to a flood of foreign investment... and it will be a gradual reform."

So far, the "winner" in the breakup appears to be China Netcom, which is partially owned by Rupert Murdoch's News Corp. "News Corp. people are probably rubbing their hands, pleased with themselves," IDC's Gamble said. The New York-based company had initially invested in China Netcom earlier this year, hoping to get a piece of the pie from China's broadband entertainment and information business.

While there has been speculation that there will be consolidation among the smaller, but still significant telecom players in China, the impact on the industry is dependent on the role the Chinese government takes in managing the mergers, the analysts said. They added that the China Telecom breakup marks the beginning of a shakeup in the telecommunication industry to come.

China Telecom can be reached via their Web site at www.chinatelecom.com.cn/.