All eyes on China’s giant appetite for home cooking

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With a total population of more than 1.3 billion, China’s potential broadband subscriber base is formidable. However, the current broadband saturation rate is just a fraction of the total population. The few who do have broadband service are receiving it via an architecture in which fiber is deployed only as far as the building, then combined with DSL (typically ADSL) or LAN capability to deliver services to subscribers within the building. ADSL is severely limited in terms of bandwidth, providing <1 Mbit/sec per subscriber, which is insufficient for emerging applications like IPTV. As such, Chinese carriers have begun to think seriously about deploying an FTTH architecture all the way to individual apartments.

There are several factors driving the need for FTTH in China, the first being the sheer density of the population. As of the first quarter of this year, there were approximately 344 million wireless subscribers and just under 300 million wireline voice subscribers, reports Michael Kunigonis, broadband market development manager at Corning (Corning, NY) and chairman of the Fiber to the Home Council’s International Committee. However, Kunigonis estimates there were fewer than 30 million broadband subscribers at that time.

Moreover, the bulk of the Chinese population lives in multitenant units (MTUs). According to KMI Research (Providence), 85% of the households in China’s 22 largest cities live in apartments or other types of MTUs. “Most of the apartment buildings are centered around courtyards, and fiber has been deployed there over the last five to 10 years-but not lit,” explains Bill Zakowski, vice president of business development at Amedia Networks (Eatontown, NJ), provider of active point-to-point FTTH equipment that enables carriers to run one fiber to every home. “As the price of electronics has come down, they see this as an opportunity to light the fiber and really help their population get access to data and information.”

“It makes sense for China to migrate toward fiber,” adds Jeremy Lange, sales vice president for the Asian market at FlexLight Networks (Atlanta). “China has a problem, and that is the copper in the ground-there’s not a lot of it and it’s not of very good quality.” However, Lange is quick to note that in terms of deploying a nationwide fiber network to deliver high-bandwidth services to residential customers, China lags far behind Japan.

The upcoming 2008 Olympics in Beijing has also motivated carriers to take a closer look at FTTX architectures, since the influx of visitors to the country is expected to drive traffic levels that the current infrastructure cannot support. Finally, the promise of IPTV has prompted carriers like China Telecom and China Netcom-both of which recently announced their intent to offer the service-to investigate an architecture that would deliver fiber directly to the subscribers’ home or apartment unit, whether it be PON or point-to-point. “Right now there’s a lot of interest,” confirms Kunigonis, “and it’s responsible interest.”

That said, most of the sources contacted here believe that any mass deployment of FTTH in China is still several years away. According to Ping Xie, vice president of engineering at NeoPhotonics (San Jose), which recently merged with Shenzhen, China-based Photon Technology Co., the biggest hurdle to FTTH deployment is the absence of a national broadband policy-particularly for the regulation of IPTV.Th 189144

While Japan leads the Asian market today in terms of FTTX equipment consumption, China is poised to eclipse all other Asian countries by 2010, when its total ONT/ONU demand will reach 13.5 million units.

China has two regulatory bodies, the Ministry of Information Industry (MII) and the State Administration of Radio, Film, and Television (SARFT), which are roughly equivalent to the FCC in the United States. MII regulates telecommunications services, including voice and data, while SARFT regulates video. Just as carriers in the U.S. must receive a franchise license to distribute video content, so too do Chinese carriers face restrictions on their ability to deliver video services.

“It’s technically illegal for Chinese carriers to offer video service,” notes Kunigonis, “so they will either be looking for workarounds or they will be looking to figure out from a legal regulatory standpoint how they can offer those services.”

Three years ago, the Chinese government separated the broadcast providers from the content providers in an attempt to increase competition. “Right now, the TV stations can only do broadcast, and the content provider is a separate unit,” explains Xie. “I think the government is being very careful in terms of how to slice the cake. They are evaluating the options. In terms of the China FTTX market, a major part hinges on the government side.”

Many of these issues may be addressed in the much anticipated Telecom Law, slated for ratification by the National People’s Congress, China’s legislative body, during its 2006 session. “No one knows at this point because it’s all kept under wraps in China, but it’s possible that the Telecom Law could address convergent services, triple play services in a wireline network,” says Kunigonis. “That could provide the clarity carriers need to be able to move forward in a more aggressive manner to offer those convergent services. It could be a potential tripwire for additional broadband access development in China.”

Even in a favorable regulatory environment, Chinese carriers must figure out how to turn a profit on services that do not generate much revenue as they are currently constructed. In China, subscribers’ willingness to pay for services is 1/10th what it is in the United States. Today’s subscribers pay somewhere between 10 and 30 RMB (around $2-$4) per month on voice services and an average of 20 RMB (under $3) for video services, notes Kunigonis.

Broadband is the highest-margin product for Chinese carriers, adds Kunigonis, who reports seeing numbers ranging from 70 to 150 RMB, or just under $10 to almost $20. “But you’re still looking at $40 at most if you put all those services in a bundle,” he warns. “That obviously stresses the business model for converged services in China.”

From an architectural standpoint, it remains to be seen whether China will adopt an active, point-to-point strategy, a PON strategy, or some variant of the currently deployed fiber to the building (FTTB) combined with DSL or LAN capability. But assuming China does adopt a PON architecture-and many industry insiders believe it will-then it isn’t too early to begin speculating which flavor of PON the carriers might embrace. The early frontrunners appear to be GEPON (known as EPON in the U.S.) and GPON.

“BPON technology is fading out,” contends Eyal Shraga, vice president of product management at FlexLight. “Everywhere in the world, we see only competition against EPON. It has kind of been decided that the States, Western Europe, and Africa will go GPON, and in Japan, they are leaning toward [G]EPON. But in China, there is a battle between [G]EPON and GPON.”

NeoPhotonics’ Xie confirms that GEPON has taken the lead in China, with what he calls “an overwhelming majority” of the field trials currently underway focused on GEPON technology. However, the two technologies may not be mutually exclusive. “The current demand is for GEPON, but eventually it might migrate to GPON, mainly because the quality of service is guaranteed with GPON,” he notes. “Also, security is much better with GPON. How long GEPON will have, I think that part is still unclear.”

GEPON is the dominant protocol in China today partly because the GPON standards have not been solidified, says Xie. Moreover, the technology is not quite ready since the chip suppliers are still tweaking their devices. In the interim, “the price point per user for GPON is much higher than GEPON, so GPON doesn’t make economic sense yet,” he says.

Michael Howard, principal analyst and co-founder of Infonetics Research (San Jose), reports that he has visited China three times this year to speak with vendors, including Huawei and ZTE. “It’s not conclusive, but all the data we get is that [China] will go GPON,” he contends. The primary reason: GPON provides 2.5 Gbits/sec to spread among however many subscribers, while GEPON offers 1 Gbit/sec.

Like Xie, Howard believes the Chinese carriers will embrace GPON technology when it becomes cost-effective to do so. “The value proposition or the cost equation for a carrier to buy equipment and support high-priced services doesn’t work over there,” he says. “The prices have to be low, and therefore the cost of the equipment has to be low.”

Faraj Alaei, chief executive of Fremont, CA-based Centillium Communications, agrees that China will eventually adopt a PON architecture, though he believes the economics support the widespread adoption of GEPON instead. “GEPON seems to be very popular in Asia [read: Japan] because of its IP nature and because frankly you can do it a lot cheaper than building an ATM PON,” he notes, adding that there is a 3:1 price advantage in favor of IP-based PON architectures. “If you’re in the access business, a 3:1 cost penalty is difficult to ignore. IP PONs or Ethernet PONs give you everything you need. There is no limitation to the types of services you can deliver over them, and it gives you the cost advantage. As the forerunners of [G]EPON, the Japanese are out there to prove that. It is my belief that as other service providers around the world start coming to grips with what [Japan] is doing with IP-based PONs, I think you’re going to see a lot of minds changed.”

Also hoping to change a few minds is Amedia Networks, which recently nabbed its first contract, a $9-million deal with Tai Long Communications, a Chinese CLEC. The contract was awarded after an extensive trial in Chengdu, where Amedia’s QoStream line of active Ethernet equipment was deployed in central offices and homes to deliver voice, video, and data services.

“Active solutions provide a greater level of security because they are not broadcast-and-select,” notes Zakowski. “In addition to the privacy you get by having a logical point-to-point connection, you also have the ability to deliver greater amounts of bandwidth. We can deliver up to 100 Mbits/sec guaranteed in both the upstream and downstream direction to each subscriber. The PON systems, for example, are limited because it’s a shared media.”

Despite the immaturity of the market, several U.S. vendors have won contracts or are participating in field trials in China today. At SuperComm in June, Mike Dagenais, president and CEO of GPON vendor Optical Solutions (Minneapolis), confirmed that his company was in the midst of trials in the Middle East, Europe, and China. Fellow GPON vendor Terawave Communications (Haywood, CA) used SuperComm to announce its recent win with Capinfo, a broadband service provider in Beijing.

World Wide Packets (Spokane Valley, WA), meanwhile, was among the first U.S. vendors to be selected for an FTTH contract in China. The company inked a deal with broadband provider Great Wall Broadband Network Service Co. (GWBN) in April 2004. GWBN is using World Wide Packets’ LightningEdge family of active Ethernet equipment to provide data, voice, and video-both video on demand and IPTV-services.

FlexLight has also made inroads into China thanks to its recent deal with China Netcom (CNC), the country’s second-largest service provider. China Netcom selected FlexLight’s Optimate GPON equipment to deliver converged services to 21 cities in Shanghai Province. Including the CNC deployment, FlexLight confirms that it currently has four networks up and running in China.

While the FTTH market in China can best be described as nascent, Kunigonis notes that there is interest at the carrier, municipal, and real estate developer level. And in all of these areas, there is some type of trial activity taking place. “Due to the scale of China and the scale of the broadband market, just the investment the Chinese have placed in the last decade in telecommunications networks, it is a market for vendors to look at and to watch to see when FTTH is going to emerge as an en masse deployed technology and architecture,” he says. “This will probably happen in the next few years.”

There is certainly plenty of incentive for U.S. vendors to keep their eyes on China in the interim. According to Richard Mack, vice president and general manager of KMI Research, broadband subscribers will top 165 million by 2010, and more than one-third will be fiber-fed (i.e., FTTB in combination with DSL or LAN capabilities) or linked with FTTH technologies. At that rate, the FTTX market in China should eclipse that of other countries by a large margin.

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