China's Tri-networks Convergence Market Speeds Up

CCID Consulting (HKSE:08235)’s latest research report examines the development and great potential of China’s emerging Tri-networks Convergence market

BEIJING — Following the high popularity of 3G and Internet of Things, Tri-networks Convergence has enjoyed great media coverage since the second half of 2009. The term refers to the convergence of the Internet, the telecommunications network and the broadcasting network, with an ultimate goal of sharing Internet resources and forming a high-speed broadband basic information platform. Tri-networks Convergence draws us a picture in which we could play interactive Internet games on the TV set as well as watch TV programs and order high-definition videos on the computer and mobile phone.

In July 2010, China’s Ministry of Industry and Information released the list of first-batch pilot cities for Tri-networks Convergence, marking the initiation of Tri-networks Convergence in China.

Tri-networks Convergence becomes the will of the state

In China, the concept of Tri-networks Convergence was first proposed at a state-level information technology meeting in 1997. However, due to technology and management mechanism limitations, the plans were never executed. In 2008, the State Council began to promote Tri-networks Convergence in the face of the financial crisis, in an effort to accelerate the development of China’s information technology industry. At a State Council meeting presided by Premier Wen Jiabao on January 13, 2010, decisions were made on accelerating the convergence of the telecommunications, broadcasting and Internet networks, and a timetable and guidelines for a pilot scheme were settled.

After a six-month debate, the first batch of 12 pilot cities were announced, namely Harbin, Beijing, Dalian, Qingdao, Nanjing, Shanghai, Hangzhou, Wuhan, Xiamen, Shenzhen, Mianyang and the Changsha-Zhuzhou-Xiangtan Cluster. The five qualifications of the pilot cities were: (1) a completed two-way network upgrade of the local cable network; (2) a minimum of 1 million cable users; (3) a relatively large market with diversified audio and video demand; (4) preferably having one or more listed cable network companies to provide fund support for convergence at provincial and even national levels; (5) a completed privatization of the local Cable TV network.

Convergence is speeding up

The current large-scale Tri-networks Convergence businesses include Digital TV, IPTV and Mobile TV, which feature relatively high maturity and a large size of customer base. By the end of 2009, the number of China’s Digital TV users amounted to 61.99 million, and the figures for IPTV and Mobile TV were 4.37 million and 4.26 million respectively. However, significant problems still abounded. As for Digital TV, the total number of China’s Cable TV users stood at 174 million in 2009, however only 38 percent of them had access to Digital TV and less than 18 percent of them completed the two-way network upgrade. While for IPTV, the user growth were far slower than expected due to the constraints on the issue of licenses, Meanwhile, Mobile TV had a much smaller number of users in comparison with other value-added mobile businesses on account of its poor user experience and high cost.

Network construction and innovation will be priorities in 2011

Currently, the biggest barrier to Tri-networks Convergence is the poor condition of the network construction with an inferior bandwidth. Therefore, CCID Consulting believes that an upgrade of the Cable TV network and telecommunications networks will be necessary. It is estimated that investment in network equipment will total approximately RMB 300 billion in the coming years, creating huge opportunities for the equipment providers.

Apart from network construction innovation will be another priority this year. The existing businesses are not diversified enough to fully bring out the advantages of business convergence. The value-added telecommunications businesses feature a relatively high diversity and wide applications, however value-added businesses at the end of TV terminals are still rare, which may see a rapid growth with the accelerating two-way network upgrade. Taobao on TV jointly launched by Hangzhou Wasu and Taobao can be a good example.