The Ministry of Industry and Information Technology (MIIT) issued on 10 December 2010 a notice calling on the general public to report on any "illegal" voice over internet protocol telephony services (VoIP). The notice has caused much concern amongst existing users and operators of VoIP services in China.

What is VoIP?

Generally, VoIP refers to services which allow users to make or receive telephone calls using internet connection instead of a "conventional" telephone line. VoIP has been significantly developed and popularised in recent years owing to the prevalence of internet protocol technology.

Existing regulatory framework for VoIP in China

It should perhaps be noted at the outset that it is not completely "legal" to provide VoIP services in China. That said, under the current PRC telecom regulatory regime, "lawful" VoIP services do bear a more restrictive meaning. Under the "Telecommunications Business Classification Catalogue",* the business of "IP Telephony" only encompasses (i) Phone-to-Phone, and (ii) PC-to-Phone type of VoIP services, to be provided jointly using telephone networks and IP networks. The Classification Catalogue also designates IP Telephony as a "basic telecommunications business" (BTB).

On the up side, as a telecom business that is explicitly referred to in the Classification Catalogue, it is in theory possible for an operator to apply to the MIIT for a telecom licence to provide IP Telephony services in China.

In practice, however, the number of operators licensed to provide IP Telephony service in China is very limited. This is largely because current PRC law imposes a number of stringent requirements on prospective BTB licensees and their investors, including:

  • at least 51% of the equity interest in a BTB telecom licensee must be owned by the state; and
  • the minimum registered capital is set at RMB1 billion for a provincial licence and RMB 10 billion for a cross-provincial licence.

For foreign investors that are interested in investing in a BTB licensee, the key foreign investor must also have relevant telecom operation experience (i.e. it must already be a basic telecom operator in its home jurisdiction).

The above requirements pose real challenges to all prospective investors, domestic and foreign alike as these requirements are not easily satisfied. Coupled with this is the existing policy of the PRC Government that the basic telecom service market is not to be opened up in the same pace as the value-added telecom service market. This is reflected in the limited number of basic telecom business licences that have been granted since 2003.

To date, only four operators have been formally licensed to provide IP Telephony services: China Telecom, China Unicom, China Tietong and China Mobile. In short, from the regulator's perspective and pursuant to applicable PRC law, the only "legal" IP Telephony service are the phone-to-phone and PC-to-phone type of VoIP services provided by the four state-owned telecom operators.

Press reports on statements made by the MIIT following the issuance of the December notice appear to suggest that main targets of this crackdown were online crimes and fraud committed through VoIP services. The press reports however indicate that the MIIT official would not comment on what exactly constituted illegal VoIP services.

Is PC-to-PC VoIP service legal?

This leaves in question the legality of a type of VoIP service which is also widely provided and used in China. This is the PC-to-PC VoIP service. As mentioned above, the scope of VoIP service as defined in the Classification Catalogue leaves out internet based or PC-to-PC type of VoIP service.

Ambiguities in PRC law are not novel. The ambiguities created by the existing regulatory framework for VoIP do call into question the legality of PC-to-PC VoIP services.

It is of course open to operators and investors to take an aggressive interpretation of the ambiguities and that since PRC law does not prohibit PC-to-PC VoIP service and neither does the Classification Catalogue refer to this type of VoIP service, this service can be provided in China.

A more conservative and risk-averse approach would be that since the Classification Catalogue does not expressly refer to such type of VoIP service, it is not possible to apply for a formal telecom licence to provide such service.

A third, and perhaps, more pragmatic approach is to apply for some form of telecom licence for telecom services which potentially could cover PC-to-PC type of VoIP service. According to this view, the internet content licence could be such a licence The advantage of choosing this licence is also that since it is a value-added telecom business licence, it is subject to less stringent requirements, both for domestic operators and foreign investors alike. Whether this pragmatic view is shared by the regulator in China is currently difficult to verify.

Business as usual?

In light of the recent notice, the begging questions remain to be: is PC-to-PC VoIP service a "legal" service and is it possible for new operators to formally apply for a telecom licence to provide IP Telephony (as defined under the Classification Catalogue) if the crackdown is only against online crimes and fraud.

The answers to the above questions may be revealed once the formal crackdown is initiated. For existing and new operators that are not the four state-owned telecom operators, any regulatory guidance resulting from the enforcement will only be zealously embraced.

Other recent e-bulletins on PRC telecom regulatory developments:

"Latest notice from the Ministry of Commerce on internet sales by FIEs- a true relaxation?" on 13 September 2010, a copy is available here.

"A prelude to breaking the monopoly in the telecom industry in China?" on 11 October 2010, a copy is available here.