Thursday, April 05, 2007
‘MIDDLE MAN' GIVES CONNECTION
By Robin Kwong in Hong Kong
Thursday, April 05, 2007, FT
China's telecommunications sector is notoriously difficult for foreign companies, but Hong Kong-based Citic 1616 believes it has found a foothold – by staying at the edges of the market.
The company, which started eight years ago as a reseller of international line capacity, now helps to connect Chinese telecoms operators with their international counterparts through its hub service.
This business highlights one way in which a foreign company has been able to profit from China's growing telecoms market – now the world's largest in terms of subscribers – while largely avoiding regulatory pitfalls and direct competition with local operators.
“We are not operating inside China as operators do, but right at the international gateway,” says chief executive, Norman Yuen.
Citic 1616, a start-up bought by China's state-backed conglomerate Citic Pacific in 2000 now planning a $270m initial public offering in Hong Kong, acts as a middle man between telecoms operators. The company provides connections between its clients – some 240 operators in 50 countries around the world – helping them to reduce the costs of handling international traffic.
One of Citic 1616's main selling points, Mr Yuen says, is its ability to work with different technical standards and protocols. For example, there are 12 different standards for seemingly simple SMS text messages.
Mr Yuen says Citic 1616 handled 1.2bn outbound SMS messages from China last year. “To send those out of China [without going through Citic 1616], the operators would need a commercial and industry interface with some 200 operators around the world.”
The company has also expanded into channelling data and providing roaming and other mobile phone services. It has prepared for what Mr Yuen calls the “imminent” launch of third-generation mobile phone services on the mainland by building a platform capable of handling all three 3G standards – WCDMA, CDMA2000 and the China-backed TD-SCDMA.
“The platform will be nearly ‘plug-and-play' for the three different standards,” he says. “So there is no risk on our side.”
Mr Yuen says that Citic 1616's strength lies in its software and its large scale. “We have a big and very good database that directs the routing of traffic,” he says.
That database was developed by the company and is now bearing fruit, Mr Yuen adds. “We are now at a harvesting stage.”
Citic 1616 is betting that, as China's economy opens to the world and its consumers grow wealthier, cross-border telecoms and data traffic will also grow.
There were 369m fixed-line accounts in China at the end of 2006, equivalent to a 28 per cent penetration rate of the country's population - well short of Hong Kong's 55.6 per cent. Mobile penetration was just 35.3 per cent, a far cry from Hong Kong, where there are more mobiles than people.
“In the near term, our business growth will be underpinned by the growth of the Chinese telecoms industry,” Mr Yuen says.
However, opaque regulations and the dominance of state-owned telecoms companies – such as fixed-line operators China Telecom and China Netcom and wireless operator China Mobile – can make it difficult and risky to try to profit directly from that growth.
The difficulty lies not in entering the market, but in the lack of certainty about how it will operate in the future.
“There is no guarantee that the rules of the game won't change halfway through the process,” says Ross O'Brien, managing director of Intercedent, a Hong Kong-based telecoms consultancy.
Tom Online, which is controlled by the Hong Kong tycoon Li Ka-shing, was one of several companies that fell victim to such regulatory uncertainty last year. Tom Online's shares plummeted 60 per cent last year after China Mobile tightened rules on how mobile phone content is provided.
Mr Yuen said Citic 1616 was largely able to avoid such pitfalls because it provided services to telecoms operators instead of dealing directly with end-users.
“This means that there is no need for us to clash with the regulatory authorities,” Mr Yuen says. “Our positioning is quite unique.”
Citic 1616 is, however, competing against telecoms operators that find it easier to connect directly with each other.
Russia-based TransTeleCom Company, which has signed interconnection agreements with several Chinese operators, is expecting to double its international revenue this year on the back of increased demand before the 2008 Olympic Games in Beijing. The group is expecting to sign an agreement with China Telecom this year.
Igor Kelshev, senior vice-president for international sales and marketing, says that TransTeleCom deals directly with telecoms operators in China.
“Co-operation with telecoms operators in China has moved ahead quickly,” he said. “There is no reason for the [Chinese] government to oppose us either, since we help Chinese operators provide better international services and connectivity.”
While acknowledging the competition, Mr Yuen says that operators still turn to Citic 1616 when traffic overflows the original bilateral agreement. The company is also an independent third party because it is not tied to any particular telecoms operator.
“If you have overflow [traffic], would you rather send that over to your competitor or to an independent party like us?” Mr Yuen asks. ¶ 2:05 AM
Thursday, April 05, 2007, FT
China's telecommunications sector is notoriously difficult for foreign companies, but Hong Kong-based Citic 1616 believes it has found a foothold – by staying at the edges of the market.
The company, which started eight years ago as a reseller of international line capacity, now helps to connect Chinese telecoms operators with their international counterparts through its hub service.
This business highlights one way in which a foreign company has been able to profit from China's growing telecoms market – now the world's largest in terms of subscribers – while largely avoiding regulatory pitfalls and direct competition with local operators.
“We are not operating inside China as operators do, but right at the international gateway,” says chief executive, Norman Yuen.
Citic 1616, a start-up bought by China's state-backed conglomerate Citic Pacific in 2000 now planning a $270m initial public offering in Hong Kong, acts as a middle man between telecoms operators. The company provides connections between its clients – some 240 operators in 50 countries around the world – helping them to reduce the costs of handling international traffic.
One of Citic 1616's main selling points, Mr Yuen says, is its ability to work with different technical standards and protocols. For example, there are 12 different standards for seemingly simple SMS text messages.
Mr Yuen says Citic 1616 handled 1.2bn outbound SMS messages from China last year. “To send those out of China [without going through Citic 1616], the operators would need a commercial and industry interface with some 200 operators around the world.”
The company has also expanded into channelling data and providing roaming and other mobile phone services. It has prepared for what Mr Yuen calls the “imminent” launch of third-generation mobile phone services on the mainland by building a platform capable of handling all three 3G standards – WCDMA, CDMA2000 and the China-backed TD-SCDMA.
“The platform will be nearly ‘plug-and-play' for the three different standards,” he says. “So there is no risk on our side.”
Mr Yuen says that Citic 1616's strength lies in its software and its large scale. “We have a big and very good database that directs the routing of traffic,” he says.
That database was developed by the company and is now bearing fruit, Mr Yuen adds. “We are now at a harvesting stage.”
Citic 1616 is betting that, as China's economy opens to the world and its consumers grow wealthier, cross-border telecoms and data traffic will also grow.
There were 369m fixed-line accounts in China at the end of 2006, equivalent to a 28 per cent penetration rate of the country's population - well short of Hong Kong's 55.6 per cent. Mobile penetration was just 35.3 per cent, a far cry from Hong Kong, where there are more mobiles than people.
“In the near term, our business growth will be underpinned by the growth of the Chinese telecoms industry,” Mr Yuen says.
However, opaque regulations and the dominance of state-owned telecoms companies – such as fixed-line operators China Telecom and China Netcom and wireless operator China Mobile – can make it difficult and risky to try to profit directly from that growth.
The difficulty lies not in entering the market, but in the lack of certainty about how it will operate in the future.
“There is no guarantee that the rules of the game won't change halfway through the process,” says Ross O'Brien, managing director of Intercedent, a Hong Kong-based telecoms consultancy.
Tom Online, which is controlled by the Hong Kong tycoon Li Ka-shing, was one of several companies that fell victim to such regulatory uncertainty last year. Tom Online's shares plummeted 60 per cent last year after China Mobile tightened rules on how mobile phone content is provided.
Mr Yuen said Citic 1616 was largely able to avoid such pitfalls because it provided services to telecoms operators instead of dealing directly with end-users.
“This means that there is no need for us to clash with the regulatory authorities,” Mr Yuen says. “Our positioning is quite unique.”
Citic 1616 is, however, competing against telecoms operators that find it easier to connect directly with each other.
Russia-based TransTeleCom Company, which has signed interconnection agreements with several Chinese operators, is expecting to double its international revenue this year on the back of increased demand before the 2008 Olympic Games in Beijing. The group is expecting to sign an agreement with China Telecom this year.
Igor Kelshev, senior vice-president for international sales and marketing, says that TransTeleCom deals directly with telecoms operators in China.
“Co-operation with telecoms operators in China has moved ahead quickly,” he said. “There is no reason for the [Chinese] government to oppose us either, since we help Chinese operators provide better international services and connectivity.”
While acknowledging the competition, Mr Yuen says that operators still turn to Citic 1616 when traffic overflows the original bilateral agreement. The company is also an independent third party because it is not tied to any particular telecoms operator.
“If you have overflow [traffic], would you rather send that over to your competitor or to an independent party like us?” Mr Yuen asks. ¶ 2:05 AM
