Canadian Economic History Final

How Institutional Settings matter Tri-networks integration and IPTV

Student ID No. 1310511012 Student Name Zhang Qiyue (Emily) School Suzhou University Major Field International Finance Advisor Sam Yu Date Janurary 2016

How Institutional Settings matter Tri-networks integration and IPTV

Abstracts: This paper will first make a brief introduction on IPTV industry and its present status of development in China. The promotion of IPTV is affected not only by the technology and market demand, but also by the regulatory policy. Policy barriers caused by yield game between telecom operators and State Administration of Radio, Film and Television (SARFT) about profit allocation hindered the development of IPTV. We use the Stackelberg model to analyze the yield game between telecom operators and SARFT.
With deep integration between the industry, the traditional regulatory framework should also advance with the times, be replaced by a more flexible integration framework, so as to promote the development of IPTV and other integration of services. However, the pace of development is far below expectations in China. Many experts pointed out that there were few technical problems existing in IPTV, which leaves the main crux to its institutional settings.
We will also discuss how institutional settings matter the industry, find out proper regulations to achieve sustainable economic growth by learning from the experiences in other countries. Finally we make the conclusion that in the phase of developing, lax control policy is more favorable for IPTV expanding.
Key words: IPTV; telecom operator; SARFT; regulation

Literature Review
Several researches have been done to the how institutional settings affect the development of IPTV before.
Kijoo Le, in his research paper: “Influential Factors on Diffusion of IPTV Services” (2012) introduced the history of IPTV in different countries, and analyzed a variety of factors would influence the IPTV industry, among them the government policy played a decisive role.
Wang and Yan in their article “Effect of Regulatory Policies on the Development of IPTV” (2007) mainly focused on regulatory policy of IPTV in Asia, especially in Hongkong, Japan and South Korea. They also pointed out that these countries faced similar problems in the development process, which is the old regulatory policy cannot solve the competition problems between industries. Wan(2013) described the situation of IPTV in China with data analysis, she made a conclusion that although China have made remarkable achievements in recent years, the current situation is still not optimistic in the long term.
While Wu shared his opinion in “Communication Information News” (2005) said “there were few technical problems existing in IPTV, the main crux is institutional settings”. That’s why I choose this industry to discuss. Song, Jiang and Sohn(2009) did research on competition relationships between different industries, they thought Yield game between telecom operators and SARFT hindered the IPTV business. Qin and Xin(2008) in their article used Stackelberg Model to explain that SARFT is the leader firm and telecom operator is the followers firm. Wu, Zhang and Li in their “Analysis of Asymmetric competition of Oligopoly in IPTV” also indicated this point. (2002)
Finally, I find some articles about how to solve these policy problems. Both Wang(2006) and Xu(2010) concerned that the IPTV developing history of South Korea is very similar to China, and we should learn some experience from them. While Lily Gou, in her article “Analysis of IPTV Policy in the First Year of Convergence of Three networks”(2010) figured out that it is difficult to draft certain policies because whether IPTV industry should be defined as TV services or value-added telecom services still in uncertain in the world.

Introduction
I: Industry profile
Recent decades, the Chinese Government has introduced several policies to promote the development of Internet Protocol television (IPTV), which is the most typical product created by Tri-networks integration technology.
IPTV, Internet Protocol television, is a new television services. The new industry relies on the integration of Internet, telecom operators and SARFT, which is called “tri-networks integration”, instead of being delivered through traditional terrestrial, satellite signal, and cable television formats. Unlike downloaded media, IPTV offers the ability to stream the media in smaller batches, directly from the source. As a result, a client media player can begin playing the data before the entire file has been transmitted. (International Telecommunication Union, 2006)
At present, China's telecommunications industry is expanding rapidly. Users’ demand for information services has increased, especially broadband video information. In other words, China has basically met the conditions to develop IPTV.

II: Government policy
Since the concept of tri-networks integration was first proposed in 1998, the Chinese government has been committed to the promotion of triple play technology.
April 15, 2009, the State Council promulgated the "electronic information industry restructuring and revitalization plan”. This particular plan is a response to the international financial crisis, which aimed to ensure the stable development of electronic information industry, speed up structural adjustment and promote industrial upgrading. Then the China network television (CNTV) officially launched on December 28, 2009.
In 2010, the State Council executive meeting published the schedule and diagram for the convergence of three networks. Within the same year, the government has announced the first and second batches of “triple play” pilot areas, 54 regions and cities joined the ranks of the pilot. (No.35 Document of State Council, 2010)
In 2015, the State Council executive meeting published a new plan said that the pilot phase of the task has been basically completed already, and it was time to expand the business of telecom operators and SARFT to the national scope.

Discussion
I: Influence on the development of IPTV
The datas of number of IPTV users in recent 5 years are given in Appendix 1, from the Ministry of Industry and Information Technology.
According to Appendix 1, the amount of IPTV users is relatively small before 2010, only about 8 million. After the government documents being published, the IPTV industry has experienced a blowout growth in the next 2 years. The number in 2012 was 23 million, nearly tripled the size of what it was in 2010. As of January 2014, the national IPTV subscribers reached more than 30 million.
According to Appendix 2, the development of IPTV business in different areas is obvious, while the eastern region occupies an absolute advantage. The numbers of IPTV users in eastern, central and western regions are, respectively, 1729.2, 500.7, 684.4 million, accounting for respectively 59.3%, 17.2% and 23.5%.
Compared with the beginning of the pilot, t1he number of IPTV users increased more than 5 times. However, there was a sharp downward trend for the growing rate of uses’ number in 2013 and 2014, only 23.6% and 18.3% respectively. Furthermore, compared with the total number of Internet broadband access users in basic telecom enterprises from Appendix 3, about 208 million, the development of IPTV is not optimistic. It means that among every 6 mounted fixed broadband households, only one access to the IPTV.
From the analysis of data above, we can see that government policies indeed have great positive influence on the development of IPTV. But we also cannot ignore that IPTV, for its part, had been drifting for a few years. It was pointed out that there were few technical problems existing in IPTV, which leaves the main crux to its regulatory system and institutional settings. (Wan, 2013)

II: Institutional settings problems
Yield game between telecom operators and SARFT
The yield game between two camps started in the 90's of last century. In order to ease the contradiction, in 1999, the State Council regulated, to prohibited the mutual penetration of the two major industries, SARFT was not allowed to set foot in the telecommunications business, but also cleared that the telecommunications sector shall not operate the radio and television services.( No.82 Document of State Council, 2010, 1999) So, in the past, broadcasting and telecommunications are operating independently.
In the view of telecommunications industry, IPTV is Protocol TV Internet, is “TV over IP ". Telecommunications industry is more inclined to directly translate IPTV as "network TV". The positioning of the video content service provided by the broadband network belongs to the category of the telecommunication value-added service. (Luo, 2007)
In the view of SARTF, IPTV is Personal TV Interactive, is “IP over TV". SARTF tend to translate IPTV as “interactive television”. Its positioning is the application of television services in a variety of network transmission channels, just the supplement and extension of traditional television. So it should be included in the content of the regulatory system.（Huang&Shang, 2007）
Expert figured out that the government policy led to monopoly in the television industry by SARFT, which slow down the development of IPTV. (Zhang, 2005) SARFT published the "About emergency notice of prosecute Guangxi Telecom unauthorized launch IPTV services " (2010). Then Guangxi SARFT immediately claimed to stop Guangxi Telecom’s unauthorized IPTV business. IPTV program source and business from 14 municipal telecommunications company in Guangxi region have all been stopped. In view of the "Guangxi incident", in order to achieve sustainable growth, the key point is to carry out a proper policy to solve the competition between telecom operator and SARFT.

III: Stackelberg Model analysis
The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. In game theory terms, the players of this game are a leader and a follower and they compete on quantity. (Stackelberg, 1934)
Now government cleared that the settlement of IPTV service requires a license issued by SARFT. (No.97 Document of State Council, 2015). It is obvious that SARFT is the leader firm and telecom operator is the followers firm. According to the research done by Qin and Xin in 2008, they assumed the proportion of income loss is K, calculate subgame perfect Nash equilibrium. When SARFT and telecom operator hit the best yield level, k is between 0 to 1/3.
(1) In the case of two-side access, which means the mutual penetration of the two major industries is allowed, if the K value tends to 1/3, then the telecom operators will give up the plan to provide the content of the program.
(2) In the case of one-side access, which means only SARFT can be access to telecommunications business, if the K value between (1/4, 1/3), then the telecom operators will give up the requirements of the content access.
Because in the early development of IPTV, k value is far less than the bottom line of 1/4, telecom operators are eager to lift the control over contents; And the K value is far less than 1/3, so operators have to provide their own program content to the IPTV platform, so as to achieve the maximization of business income.
Thus, for a long period of time in the future, lift the control over content restrictions, and create a relaxed policy environment will be the main issue to influence the smooth development of telecom operators IPTV business.

IV: Experience of other countries
America
As early as 1934, the United States set up a unified regulatory agencies - FCC, The Telecommunications Act of 1996, the abolished the telecommunications and cable television industry between mutual exclusion constraints, from a legal point of view, the United States allowed telecom operators to provide TV business by any means. But the IPTV business progress is not fast, by the end of July, 2006, Verizon’s number of IPTV users is about 100 thousand (data source: Verizon).
The main factors that affect the development of IPTV is the authority management. In December 20, 2006, the United States FCC adopted a new rule “Report and Order and Further Notice of Proposed Rulemaking”. The rule is favorable for the telecommunications company to provide video services. It prohibits franchise organization rejecting an application for a licence unreasonably. FCC thinks the current franchise video’s application process is unreasonable, in order to eliminate these cable TV market barriers, to encourage investment in broadband infrastructure, the new rules requires that local franchises must give approval or rejection of the traditional telecommunications company's video licensing applications within 90 days, and approve or reject a video licence for a new television provider that has not yet been licensed for cable operation within 180 days. New franchise rules prohibit local government requiring more stringent of video new entrants than traditional cable television company. In addition, the new rules require the municipal authorities to charge the new video service providers particular licensing fees.
FCC new rules is the further clarify of two-side access policy, it avoids the telecommunication companies suffering from unfair treatment brought by competition of interests, so as to encourage telecom operators to promote the IPTV business.

South Korea
South Korea has faced a problem in the development of the IPTV industry caused by the separation of supervision, which is closely similar with the situation of current integration industry in China.
On December 28, 2007 South Korean National Assembly passed a bill on IPTV service that allows fixed-line operators to provide IPTV programs. The bill made two points clear: First, South Korea's broadcasters can provide nationwide IPTV service, but not more than one-third of the market share; second, South Korea's fixed-line operators can provide IPTV service without additional subsidiary company. (IPTV Act, 2007) The South Korean government also set up a new regulatory agency, which had jurisdiction over the two areas. Previously, trade barriers have caused a negative impact on the launch of IPTV in Korea, while bill was passed, the Korean telecommunications and broadcasting industry barriers were broken.

Conclusion
According to the discussion part above, we can see that the current government institutional settings improved the launch of IPTV. After the government documents being published, the IPTV industry has experienced a blowout growth from 2010 to 2012. However, the data analysis also shows that it may not achieve a sustainable growth in the future. And we find that there were few technical problems existing in IPTV, which leaves the main crux to its regulatory system and institutional settings. Impact of regulatory policies on IPTV is fundamental. It is mainly reflected in the access and services division of IPTV, the former decide whether telecom companies can operate IPTV, the latter decide how to manage it.
The competition between telecom operators and SARFT has last for many years, both of them want to achieve the initiative control of IPTV. Now the government policy led to monopoly in the television industry by SARFT, and SARFT played a decisive role in the supervision of the network television, while the telecommunications sector is in a weak position, which discourage telecom operators from operating IPTV and slow down the development process.
Whether IPTV should regulated be as a television services, or a value-added telecom services? Or it is necessary to re-enact a new regulation system for the integration of business? The industry has not reach an agreement, and it should be determined according to the actual situation of each country.
So we make the conclusion that the Chinese government should take these 3 main solutions:
Deregulation, allowing the bidirectional symmetrical access of telecom operators and SARFT
Establishing the supervision system suitable for China's national conditions
The government can learn from foreign experience, set up a regulatory agency above the Ministry of information industry and the State Administration of radio and television, gather the telecommunications, SARFT and the Internet into a unified regulatory framework for integrated management.
Formulating policies to promote cooperation in telecom operators and SARTF
Both of them should give more consideration to absolute returns after cooperation rather than relative returns, so that they can avoid vicious competition.
Overall, to achieve the sustainable development of IPTV, national institutional settings are the key, and lax control policy is more favorable for IPTV expanding. On the basis of the department of existing large pattern remains the same, government can start the IPTV service trial in urban areas with relative weak conflicts of interest, then gradually extended successful experience to the whole nation.

Appendix
|The number of IPTV users in China (2009-2014 million people) |
|Year |2009 |2010 |2011 |2012 |2013 |2014 |
|Quantity(million people) |4.7 |8 |13.5 |23 |28.42 |33.63 |

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(Data source: website of Ministry of Industry and Information Technology http://www.miit.gov.cn/)

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(Data source: National Bureau of Statistics of the People's Republic of China)

(Data source: website of Ministry of Industry and Information Technology http://www.miit.gov.cn/)

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