|Issue:||Asia-Pacific II 2003|
|Topic:||VSAT Broadband in China|
|Author:||Michael J Santos|
|Title:||Vice President, Strategic Business Development|
|Organisation:||Chinacast Technology Ltd|
Michael J Santos is the Vice-president for Strategic Business Development at Chinacast Technology Ltd. He is responsible for corporate strategy, business alliances, mergers and acquisitions and fundraising activities. He has over 18 years of international experience in the field of satellite communications, mobile and fixed wireless and LAN/WAN networking. Before joining Chinacast Technology Mr Santos was the Senior Director, Asia-Pacific, for Hughes Network Systems International. At Hughes he established the Asia/Pacific regional office in Taiwan and opened HNS regional offices in Indonesia, Thailand, the Philippines, Japan and Australia and took a lead role in Hughes’ investments in ChinaCast. Mr Santos has a Bachelor of Science in Electrical Engineering and a Master of Science Degree in Telecommunications and Computer Science from The George Washington University in Washington, D.C.
China’s telecom market, in terms of total fixed and mobile subscribers, is now the world’s largest, despite its small share of China’s overall telecom market revenue. China’s satellite sector and more specifically the VSAT (Very Small Aperture Terminal) segment, is growing at over twice the annual rate of the overall telecom market. The market has been driven by the need for corporate communications, distance learning, rural telephony and paging and fuelled by the rapidly dropping prices for equipment and services.
China VSAT Market Background China’s telecom landscape has been totally transformed during the past 10 years. As recently as the mid 1990s, getting a home telephone in China was a costly proposition and could take months. Fast-forward a few years to 2003 and the landscape has totally changed. China’s telecom carriers now generate annual revenue of over US$54 billion dollars and are growing at a rate of 11 per cent. There are now over 358 million total telecom subscribers (191 million fixed and 167 million mobile) and getting a mobile phone is as easy as going to a convenience store. Similarly, China’s satellite VSAT sector has also been growing by leaps and bounds, reflecting the overall telecom industry growth, both in the drivers for its growth and in the challenges that it now faces in sustaining that growth. The first VSATs were installed in China in the early 1990s, when the government allowed certain ministries to install networks. But it wasn’t until 1997, when the government issued 26 licences to commercial VSAT operators that the market really took off. In 2001 and 2002, the government allocated an additional 18 VSAT licences – mostly to private investors – to facilitate the growth of the nation’s broadband infrastructure. VSAT Market Status Very Small Aperture Terminal (VSAT) satellite networks, which typically have satellite dish sizes anywhere from 75cm to 1.8m in diameter, provide wireless, high-speed data, video and voice services from geo-synchronous satellites. They were originally installed in the mid-1980s in the United States for large-scale corporate data networks, such as Wal-Mart, General Motors and Chevron, as an economical solution to replace terrestrial leased lines. The reasons for this were two-fold: the US Federal Communications Commission (FCC) relaxed regulatory rules regarding the licensing of satellite dishes and rapid advances in digital satellite technology made VSAT networks affordable for the Fortune 500 – the same two reasons driving the growth of China’s VSAT market today. There are now over 750,000 VSATs installed worldwide. Prices for two-way terminals are currently as low as US$1,300, compared to US$15,000 in the mid 1980. Although predominantly used for corporate data networks, VSATs also provide broadband Internet access, distance learning, video conferencing, rural telephony and links for remote monitoring applications. At the end of 2002, there were 44 VSAT operators in China; 21 of these are private companies and 23 state-owned companies. The service revenue for these operators totaled US$102 million, a 28 per cent increase from 2001. Still, this represents less than one per cent of total telecom service revenue in China compared to seven per cent in the US. The graph below shows the overall VSAT growth over the past five years. VSAT operators in China typically fall into one of the following categories: telecom service operators – such as ChinaSat, Jitong and Unicom that primarily provide paging, rural telephony and terrestrial line backup services to complement China’s fixed line network. These operators were some of the first to set up VSAT networks but are now in decline due to the rapid proliferation of fibre between the major cities and the closing down of paging networks closed user group networks – for government ministries or corporate networks such as the Shanghai Stock Exchange, Shenzen Stock Exchange and Yunnan Tobacco. These networks are primarily built solely for use by a particular government agency or corporate entity and do not sell services to other companies. The stock exchange networks, which are the most profitable, are among the largest VSAT networks in China, with each network having from 1,000 to 2,000 two-way VSAT sites shared hub service operators – these provide services to both state-run and private companies for banking, lottery and distance learning applications. Key players in this space include CITIC Guoan, Shanghai VSAT, Orient Satellite and ChinaCast (Shuangwei), to name a few. These operators usually are either wholly or partly privately funded and represent the bulk of the future of the China VSAT broadband market. As mentioned above, the key VSAT applications over the past several years in China include corporate intranet/ extranets, rural telephony and paging networks, which were provided primarily by the telecom service and closed user group operators The newer shared hub service operators, with their injection of private capital and market oriented focus, are expanding the VSAT market by tapping into new broadband market segments such as interactive distance learning, multimedia streaming and multicasting for educational institutions, Fortune 500 companies and government agencies. Since 2000, these new operators have accounted for almost all of the growth of the VSAT market. Market Trends There are several key market trends that bode well for the growth of the VSAT market in China: the rapid increase in price/performance of satellite equipment, strong growth of the internet/data comm market, the adoption of new IT applications such as CRM, ERP, etc. and IT/network outsourcing services and the opening up of telecom private competition and foreign investment regulations. As mentioned above, VSAT hardware has dropped dramatically in price over the past several years, dropping by almost 50 per cent just in the past three years. In addition, the glut of satellite transponders over Asia has brought the cost of renting transponders, which account for almost 30 per cent of a typical VSAT operator’s monthly costs- down by another 25 per cent. These cost savings have almost halved the cost of VSAT tariffs in China, making the service much more affordable for many companies and making it a viable alternative to existing terrestrial services. Many enterprises are converting their old legacy applications to IP-based intranets/extranets and adding advanced corporate information systems such as customer relationship management (CRM), enterprise resource planning (EFP), corporate training and business television. Another key growth market is in the education sector. The government has recently granted 66 universities distance learning licenses to expand the number of seats available to the 80 million college age students who cannot be accommodated due to existing resource limitations at the country’s 1,100 universities. These licensed universities are now using VSAT services to educate over 100,000 off-campus students using interactive video, voice and data applications. These new high bandwidth applications require all users be connected to the network with point to multipoint, broadband connections, which makes satellite ideal. In addition, many capital budgets have been cut, thereby making outsourcing the network a more economical solution. The new VSAT shared hub operators are thus seeing lots of demand for managed network services. Typically, the operators install all network hardware, software, manage and maintain the network all for one low monthly fee. Finally, with the recent granting of some 18 new VSAT operator licences over the past three years and China’s ascent into the World Trade Organisation, a competitive landscape is emerging, heated up by the entrance of foreign investment and marketing expertise. Challenges Ahead Though the market has come a long way over the past 10 years, like nearly every other sector of the Chinese economy, China’s telecom industry is still struggling to overcome its state-owned, central-planned economy of the past. The main challenges to continued growth and competitiveness in the VSAT industry include lack of regulatory transparency, access to capital and competition from the incumbent terrestrial carriers and marketing expertise. The key telecom regulator for all telecom services in China is the Ministry of Information Industries (MII). Though technically separate from the carriers, MII is still a government ministry and the government is still the majority shareholder in all five major operators, China Telecom, Netcom, China Mobile, Unicom and Railcom. Key decisions are still made entirely behind closed doors. This lack of regulatory transparency has in the past inhibited investment in satellite projects by making the barriers to entry too high, which in turn limits access to capital. Of course the chief challenge to the growth of the VSAT market is the competition from the incumbent terrestrial carriers. This is not unique to China but to VSAT carriers in general. Unfortunately in China, most VSAT operators have a hard time with the ‘four Ps’ of marketing (product, placement, promotion, price) and thus are constantly waging cutthroat pricing competitions with the terrestrial players. Part of the problem is the fact that management in Chinese telecoms is dominated by engineers, who tend to overlook important issues in operation such as marketing. They need to acquire the ideas and expertise from executives with experience in IT, finance and other globally competitive industries. VSAT operators need to better understand the inherent benefits of satellite technology, the business models that work and develop products and distribution strategies that target the key verticals that will pay for these services, not just beat each other to death over price and selling services at less than the cost. Conclusion Similar to what happened in the US and Europe, over the next several years the number of VSAT operators in China will tend to consolidate. Today’s multitude of small/medium operators will dwindle and leave only three to five large-scale VSAT operators. This market consolidation, along with the continued influx of foreign investment and competition, will make VSAT services much more competitive with the terrestrial carriers’ managed network offerings and expand the market. In addition, there will be continued reduction in the fixed and variable costs of VSAT networks and growth of emerging IP voice and video applications. This will further expand market opportunities, especially given the government’s plans to open the education market and to spur economic development and investment in the vast rural western part of the country. Moreover, within the next 24 months, the next generation of broadband satellite systems such as ShinSat’s IP-Star, Hughes Spaceway and Wildblue will provide a five to ten fold increase in bandwidth/price performance further increasing the addressable market. China’s telecom regulators and VSAT executives will need to demonstrate even greater flexibility and adaptability to maintain growth and stay competitive in a quickly changing environment. But with 1.3 billion consumers, seven per cent annual GDP growth and low penetration of VSAT services, the glass looks quite half-full.