DSL Prime: China as Number One

China's top ILEC has more subscribers than the entire U.S., and almost all use DSL. China also leads the world in DSL manufacturing, and is moving upmarket into engineering.

by Dave Burstein of DSL Prime and Future of TV [September 7, 2006]

"We spotted the intrusion but we thought it was just the NSA guys again"
—John Packowski , joking about the AT&T site break-in that took 19,000 credit cards.

China will soon pass the U.S. as the country with the most broadband users, probably mid-2007 at 55 million to 60 million. Almost all is DSL. China Telecom's 23.5 million subscribers are more than the entire U.S.; China Netcom 13.5 million makes them the world's second largest DSL carrier. China also has 365 million land lines and 426 million wireless subscribers. China's economy is on the fastest rise in history, growing twice as fast as West Germany's "economic miracle" or any period in U.S. history.

These extraordinary results were achieved by well regulated monopolies, an alternate strategy to the (often weak) competition in the West. Chinese telcos are government controlled beyond the dreams of any free market regulator. CEOs follow government orders or are sacked, with the CEOs leaving CT and CN last year. Competition can serve consumers well, but so can effective regulation. Empirically, the world leaders were built with strong regulation in France, Korea, Japan—and China.

Wireless is taking over, however, and CT and CN both reported profits dropped. Landline counts are virtually flat and total minutes of talking is down. VSNL in India is similarly struggling. Around the world, landline phones are in inexorable decline, with DSL and IP TV only a partial salvation.

Ignoring competition and the wireless switch just cut down DT CEO Kai-Uwe Ricke. T-Systems CEO Lothar Pauly and T-Mobile CEO Rene Obermann are taking more authority, and Ricke has leaked to the press he'll resign when his contract is up next year.

German broadband penetration at 30 percent is a third lower than France or the UK because DT, from 2001 through 2005, had the highest prices. That is the key reason Matthias Kurth encouraged competition, and DT wasn't ready. As Ricke notes, "I confess that we did not count on the intensity of the competition in Germany." DSL-Team.de adds that DT has lost a million customers, a problem for which they weren't prepared.

Say hello to the round fellow with a beard at KBRO in New York this week and VON next week. Sorry I can't make it to Vancouver for the always strong IEC BBWF, where the DSL Forum will have an initiative.

China as number one
Three years ago, the U.S. had 20 million broadband users, more than twice as many as China. In the last six months, China has added 7.5 million to 45 million and the U.S. 5.1 million to 50 million. Four more quarters at those rates will take China past the U.S. in total broadband subs.

Ovum's Kevin Lee expects the crossover to come sooner. "If the growth momentum continues, I believe this number can be reached as early as end of this year." Many Chinese apartment buildings include a broadband LAN as part of the service and are not included in the official numbers, further narrowing today's gap.

DSL dominates in China. China Telecom has 25.3 million DSL lines, China Netcom 13.5 million, and China Tietong over 2 million. That's nearly twice the U.S. total.

The majority of DSL manufacturing has moved to China in the last five years. The largest DSLAM maker, Alcatel, has moved manufacturing from North Carolina to Alcatel Shanghai Bell, and Huawei is a growing number two. Most modems are also manufactured in China, even if the name on the box is Siemens or Alcatel. An increasing proportion of DSL engineering now comes from China as well. Key Alcatel work on AT&T Lightspeed is performed in inland China.

The China-U.S. gap will only widen. Only 12 percent of Chinese homes have broadband, while 45 percent do in the U.S. China Netcom expects DSL growth to accelerate as they move quickly to triple play now that the government is giving permission.

Good-bye, DSL.net
MegaPath buys biggest East Coast DSL independent
A billion dollar company in the boom years but never profitable, DSL.net maintains a network of 350 CO cages, most in key Verizon cities. These were built by NAS with several hundred million dollars provided by SBC when it was considering competing with Verizon.

NAS ultimately sold to DSL.net, but neither NAS nor DSL.net were able to find enough customers to support the network. Ironically, DSL.net was originally founded to serve "second and third tier cities", a business that never proved out. Retained earnings built up over the years were negative $361 million. Sales had fallen almost in half, to less than $10 million in the latest quarter.

MegaPath is covering $13 million in debt and will provide some working capital. CEO David Struwas will continue with the merged firm, likely to be rapidly integrated into MegaPath after the deal closes later this year. MegaPath is run by the team from Netifice led by Craig Young, who took over the company earlier this year but choose to operate under MegaPath name. They offer business telecom services, mostly through Covad, and report sales running at a $125 million annual pace.

Copyright 2006 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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