Broadband China in Three Years: China Telecom Forced to Change
Morning summary on February 18 (Chen Baoliang) Three years ago on February 16, China Telecom launched the "Broadband China, Optical City" strategic project nationwide. The project goal set by China Telecom Chairman Wang Xiaochu was: to achieve full fiber-optic deployment in all cities within three years, with maximum access bandwidth of 100M. Meanwhile, China Telecom broadband users' access bandwidth would increase tenfold within 3 to 5 years, with tariffs entering a "jump period" in about 3 years.
Three years later, China Telecom has basically achieved all goals except the "tariff jump." However, Wang Xiaochu may not have anticipated at the time that Broadband China would successively expose a series of problems—either unforeseen or exceeding initial risk assessments. Of course, he also could not have imagined that the national broadband strategy, which should have served as a trump card, would be delayed time and again, even becoming a burden to operators, and ultimately concluding in such a compromised manner.
Over the past three years, Broadband China may have traversed every detour possible. Today, Broadband China remains the same Broadband China, but its positioning and significance have diverged greatly from China Telecom's original intentions.
An Ill-Prepared Battle
After August 2010, China Telecom conducted "Optical City" pilot projects in Shanghai, Jiangsu, and other regions, deploying FTTH. "The reason was simple: to counter China Mobile's low-price competition," recalled a senior executive from Jiangsu Telecom's Network Construction Department. At the time, China Mobile, having absorbed Tietong, began pushing into the fixed-line market with low-price broadband offerings. "The prices were clearly loss-making, making it impossible to compete head-on. FTTH provided us with a differentiated route." In the Optical City pilots, FTTH not only helped China Telecom avoid price war risks but also drove integrated business growth through brand premium. As the ultimate access goal, FTTH was clearly more prestigious, and broadband bundling could drive 3G business growth. China Telecom's "My e-Home" was the most successful bundling package in China, including broadband, 3G, and IPTV.
Of course, FTTH was not the only measure to counter China Mobile's competition. At the end of 2010, China Telecom conducted a nationwide broadband egress cleanup, prohibiting provincial subsidiaries from selling broadband access to Tietong, affecting nearly ten million Tietong users whose speeds became snail-paced.
On February 16, 2011, China Telecom launched the "Broadband China, Optical City" strategy nationwide, a year widely dubbed "Year One of FTTH" by industry insiders. In April 2011, all provincial operators except Beijing formulated annual FTTH coverage and subscriber plans. Coinciding with the fading of the 3G boom, operators naturally shifted their construction focus to broadband. Fiber-to-the-home thus resounded across the country.
However, as experts noted at the time, "Building environments vary greatly across Chinese regions, making it difficult to formulate unified construction plans and standards for FTTH." What China Telecom Group could coordinate seemed limited to annual development targets for each province. In fact, apart from Shanghai, most provinces had virtually no FTTH experience—from capital budgeting down to installation and maintenance details, everything was lacking. But with changes in China Telecom Group's broadband assessment—"only FTTH users count toward KPIs; FTTB and DSL are no longer included"—Broadband China, structured around FTTH, was rolled out nationwide amid this inadequate preparation. Since 2011, issues with FTTH investment returns and quality have been continuously exposed, forcing China Telecom to learn on the battlefield and refine its top-level design.
At the end of 2011, China Unicom piloted fiber-to-the-home projects in Beijing and Tianjin, launching "Optical World, Wo Broadband" in February 2012. This "follower" also traversed the same detours as China Telecom.
Several Major Drawbacks of FTTH
Low FTTH activation rates were the first challenge operators faced. Until the second half of 2012, China Telecom's FTTH activation rate had still not exceeded 10%. Despite seemingly massive coverage, fewer than 10% of users were actually using the service, naturally leading to extremely low investment returns.
At the strategy's inception, China Telecom formulated a "thin coverage" strategy to address low activation rates, delivering initial construction to building corridors or floors, with installation technicians completing in-home installation after user subscription. "Thin coverage" saved initial costs but also brought the hassle of secondary construction later—essentially a reluctant compromise given low activation rates.
After low returns, operators quickly encountered FTTH's "high investment." "In 2011, just entering the third quarter, many local companies had already exhausted their annual budgets," a knowledgeable equipment vendor source told reporters. "Local companies either self-raised funds or delayed final payments." In fact, since 2011, Broadband China has never escaped funding difficulties, with the "money crunch" intensifying. Wei Leping, director of China Telecom's Science and Technology Committee, often said when discussing his FTTH research: "Provincial leaders always say ONT terminals are too expensive and need price cuts."
Telecom operators, naturally, would not follow internet companies in "burning cash." At the end of 2011, a senior Shanghai Telecom executive told reporters: "We've actually been applying the brakes on FTTH for some time." As the national FTTH leader, Shanghai Telecom was almost the only provincial company confident in FTTH.
However, Shanghai Telecom's sober thinking was not adopted by other provinces, partly due to group assessment requirements and partly due to the "anti-monopoly" and "fake broadband" controversies at the time.
On November 9, 2011, Li Qing, deputy director of the NDRC's Price Supervision and Anti-Monopoly Bureau, revealed on CCTV's midday "News 30 Minutes" that the NDRC was investigating China Telecom and China Unicom for monopolistic behavior in the internet access market. This was the first time enforcement agencies had investigated state-owned enterprises since the Anti-Monopoly Law took effect in 2008, though the NDRC has yet to publicly conclude on the monopoly question. In December, internet data center DCCI released its "China Broadband User Survey" report, claiming the vast majority of Chinese users were using "fake broadband."
Suddenly, the entire nation was discussing monopoly and fake broadband, while operators at the center of the storm could only remain silent. But operators also turned grievance into motivation, seeking strategic support from the state. At the end of 2011, mainstream industry media were calling for a national broadband strategy, with People's Posts and Telecommunications News publishing an article titled "The National Broadband Strategy Can Wait No Longer."
Fortunately, the national broadband strategy finally emerged after much anticipation, but only partially unveiled.
The Watershed Between Frenzy and Sobriety
In retrospect, it is difficult to judge whether the national strategy was truly a stroke of luck for operators.
In 2012, the Two Sessions hotly debated the broadband strategy, with the State Council instructing eight ministries to jointly draft the national broadband strategy, named the "Broadband China Strategy" implementation plan, scheduled for release in September 2012. However, this strategy, involving multiple departments, seemed doomed from the start, delayed repeatedly until finally released on August 17, 2013—11 months behind schedule—by which time the industry chain and operators seemed to regard it as "chicken ribs."
Because during the frenzied year of 2012, operators and the industry chain striving for the national broadband strategy had exhausted their enthusiasm, with broadband fever at the time no less intense than today's 4G. "At the time, operators and MIIT all wanted to strike while the iron was hot, quickly produce results to accelerate the strategy's release and secure maximum benefits for the communications industry—mainly funding," an industry expert recalled with a laugh. "Unfortunately, national will has never shifted because of operators."
On March 30, 2012, MIIT launched the Broadband Speed-Up and Popularization Project, with overall goals of "building optical networks, increasing speeds, promoting popularization, expanding applications, reducing tariffs, and benefiting people's livelihoods," targeting 35 million new FTTH coverage households, over 50% of users with 4M+ speeds, and 20 million new broadband users in 2012.
This campaign was also built on the FTTH framework. Operators who had just wanted to brake were back on the acceleration track.
In 2012, Zhao Maiqing, then general manager of Hebei Telecom, famously said: "This year, there are only two things: 3G and FTTH." In 2012, Hebei Telecom spared no effort in FTTH, ranking among the top nationally in FTTH subscriber numbers and broadband speeds. However, at the end of 2012, China Telecom Group expressed extreme dissatisfaction with Hebei Telecom's FTTH projects.
"The most direct reason was our poor investment returns," a Hebei Telecom insider told reporters. In 2012, Hebei Telecom positioned its FTTH strategy toward townships and densely populated rural areas. "First, to avoid various obstacles from competing with Unicom in urban areas; second, because township pipeline and line resources are abundant, making construction convenient and efficient," the insider explained. "We cooperated with many local contracted construction teams, using them for business expansion and even fiber-to-the-home installation, mainly to meet targets."
In the first half of 2012, Hebei Telecom's coverage and subscriber numbers grew rapidly. But in the second half, due to an incomplete installation and maintenance system, FTTH network quality issues frequently arose, with rising user complaint rates. Moreover, the overly broad initial scope caused total construction costs to exceed budget, and the difficulty of assessing investment returns became increasingly apparent. In 2013, Hebei Telecom had to readjust its FTTH strategy: contracting the front and emphasizing investment returns.
Hebei Telecom was not an isolated case. In 2012, to ensure task completion, operators from group to provincial and municipal levels progressively inflated targets when delegating tasks. Many provinces could only adopt strategies similar to Hebei Telecom's. Some provinces even forced copper-line users to migrate to FTTH, pulling out copper cables from buildings constructed in the past three years and replacing them with FTTH. Through these desperate efforts, operators actually completed 49 million FTTH coverage households in 2012, far exceeding the 35 million target. However, national broadband users grew by only 25 million in 2012. Diminishing marginal returns on investment is an iron law in every industry, but operators seemingly never took it seriously—this looked more like a political task.
As listed companies, operators ultimately had to pay for this campaign with market results. In mid-2012, Wang Xiaochu was questioned by investment bank analysts in Europe about FTTH return on investment, responding that China Telecom would cut some low-return projects. In August, China Telecom held an internal group meeting where Wang Xiaochu explicitly required: reducing or stopping broadband speed-up projects in central, western, and rural areas, focusing construction on high-return cities. With profits declining year after year, operators could indeed not afford such extravagance. This meeting can be seen as the watershed of Broadband China.
Clearly, by this point China Telecom had ceased pinning hopes on the national strategy. Not coincidentally, China Unicom also cut its 2013 broadband budget at the end of 2012 and further reduced construction funds reported by some provincial companies in 2013. Broadband China was gradually returning to market principles.
From the day the national strategy surfaced, operators never stopped calling for strategic funding. In April 2012, MIIT organized industry experts to discuss in Jiangsu a proposal to allocate a portion of the three operators' annual tax revenue as strategic funding, but the plan was rejected by the Ministry of Finance. Subsequently, the national strategy was delayed repeatedly, and strategic funding gradually faded into silence.
In early 2013, MIIT held a broadband speed-up and popularization summary conference, where Wang Xiaochu complained: "In urban areas, huge investments struggle to generate new revenue; real estate and property management companies still frequently charge operators high entry fees and broadband revenue commissions for accessing residential communities and commercial buildings. In rural areas, operators suffer losses on new broadband networks, increasing corporate investment and cost pressures." By this point, China Telecom had traversed all the detours of Broadband China.
In August, the national strategy was released, proposing the launch of a universal service fund. But an operator insider commented on the universal service fund: "Who wants it? They offered it years ago and we didn't take it. Without the universal service fund, we can still lose money but gain goodwill; with it, we'd definitely lose money and lose the goodwill too." In his view, the fund's ultimate outcome would inevitably be "operators still bear the lion's share, with the state subsidizing only a small portion—better not to have it at all."
Of course, beyond funding, the national strategy required relevant departments to optimize property barriers, urban construction planning, environmental approval, and other aspects of communications infrastructure, but these all involve complex and intertwined interests, making "the outcome uncertain."
Perhaps the national strategy will eventually mature and benefit future generations; but from the start, operators hoped it would deliver immediate results and current benefits. Disappointed operators had to reposition Broadband China. Having traversed all the detours, operators might finally reconsider market economics.
Necessity Is the Mother of Change
The earliest advocates of transformation who put it into practice were industry chain vendors. Over the past two years, the economic pressures borne by operators have been indirectly transferred to them, leaving them gasping for breath.
Necessity is the mother of change. However, compared to operators lost in the fog, many vendors found it relatively easier to see these mistakes for what they were. For an already mature broadband industry, further development space was simply about increasing revenue and reducing costs.
"If operators can't make money from this broadband speed-up, then our days will be tough. It's a simple truth." China Telecom's 2012 PON centralized procurement was a direct reflection of this truth.
This centralized procurement round made all the enterprises that had been frantically following the operators taste bitter defeat—the cost reductions brought by "economies of scale" fell far short of the operators' price-cutting demands. What remains memorable is that Huawei, the king of the broadband domain, secured less than 10% of the winning bids this time, and for the first time in its history, ZTE went out of its way in press releases to comment on Huawei: "Our friend and competitor didn't even get 10% of the share this time." Perhaps ZTE would later envy Huawei—Wei Leping, then Director of the China Telecom Science and Technology Committee, later told reporters: "ZTE loses 20 yuan for every ONU it sells." The larger the order, the greater the loss.
By this time, forward-thinking enterprises had already woken up. In 2012, in a world dominated by FTTH, Huawei returned to basics and began promoting its VDSL2 technology. That year, Huawei's broadband marketing focused on only one solution—Vectoring. According to reports, Vectoring could fully leverage existing copper infrastructure, reduce upgrade costs, and outperform FTTH in terms of activation speeds.
At the time, Vectoring could indeed change the broadband predicament, but unfortunately, China—the world's largest broadband market—showed no interest in this technology. A China Telecom expert told reporters: "The technology is good, but the Group no longer evaluates performance based on copper lines, so very few people use it." He sighed to reporters: "You should report more on this—performance evaluation should be based on speed and quality, not on superficial metrics like access technology."
In 2013, experts including those from regulatory authorities gradually shifted their stance, beginning to support "coexistence of multiple access technologies." Meanwhile, Alcatel-Lucent and FiberHome also began loudly promoting their VDSL2 solutions. However, the operators' evaluation methods remained unchanged: only FTTH subscribers counted toward performance assessments. The operators' massive scale and rigid mechanisms limited their ability to turn around, and the "one-size-fits-all fiber-over-copper" approach proved difficult to change effectively. To date, only Guangdong Telecom has commercially deployed VDSL2.
In 2014, LTE was approaching. Wei Leping had predicted that China Telecom might cut 50% of its broadband budget to subsidize LTE. Perhaps "even a hero is stumped by a single cent"—once operators feel the pain, they may reconsider copper lines.
Of course, saving money alone is not enough. Since 2012, China Telecom and China Unicom have been seeking new profit space for broadband, as ARPU values have been declining at a visible rate, and living off existing resources is not a sustainable prospect.
Initially, operators placed their hopes on IPTV, but unfortunately, IPTV not only failed to bring added value—operators even had to divert a portion of broadband revenue to subsidize BesTV. Ai Qiyi's Vice President Duan Youqiao once commented on IPTV: "It's inferior to broadcast TV for live content and inferior to OTT for interactivity—it's destined to achieve little."
From mid-2012, operators such as Tianjin Unicom began experimenting with OTT TV partnerships, offering higher-quality video content with revenue shared between both parties. Currently, all three major operators have made OTT TV a business priority, and it is gradually gaining momentum.
Worth mentioning is that, among the "cooperation with Internet enterprises" initiatives, the intelligent speed-boost service from Fujian Telecom stood out. The team first appeared at the 2011 International Telecommunication Exhibition, where its intelligent speed-boost service became a highlight of that year's show. In August 2012, building on the intelligent speed-boost foundation, the team partnered with Xunlei to launch the "Tianyi Light Speed" service, which grew to over 40,000 users within one year, contributed over 10 million yuan in annual revenue, and lifted broadband ARPU by more than 10 yuan. Even more promising, this cooperation model could be replicated with other Internet companies. China Telecom has now officially issued documents to roll out the "Tianyi Light Speed" business model across all 31 provinces, and the China Telecom–OTT cooperation platform has taken initial shape.
Three years into Broadband China, China Telecom—having endured countless setbacks—has essentially fulfilled its original commitments and now seems to have opened up a new frontier for itself. However, this new battlefield is also built within the FTTH framework. Whether China Telecom will once again take a detour remains to be seen.
Looking back, the first two years of Broadband China were almost entirely focused on FTTH hardware construction, with very little attention paid to FTTH management and operations—or rather, whether China's telecom environment is capable of absorbing FTTH and providing operators with strong momentum for ultra-broadband. This is the fundamental disconnect between FTTH and operations. To date, the world has experienced four waves of FTTH deployment; the first two ended in failure, and the third, initiated by Verizon, has yet to reach a definitive verdict. As the fourth wave of global FTTH, will Broadband China succeed? Only time will tell.