Decision revealed on Thursday

In a decision revealed on Thursday, China's Ministry of Information and Industry Innovation announced a crackdown on the illegal provision of voice-over-Internet protocol-VoIP (Voice over Internet Protocol)-telephone services.

The time of the announcement

At the time of the announcement, a MIIT spokesperson told the South China Morning Post that only the state's China Mobile, China Telecom, and China Unicom may offer VoIP in China.  "The regulator's mindset will never change," said Professor Kan Kaili of the Beijing University of Posts and Telecommunications to the Hong Kong paper.  "The officials are obsessed with ideas on how to protect the state giants, to put it more exactly than considering the interest of the masses."

Beijing's regulators these days are not bashful in their attempts to protect state profits.  China is the only country in the world banning VoIP services, Kan notes.  As he says, "It's outrageous and ridiculous."

But in every way predictable.  China's telecom regulators have historically been tenacious in their defense of state operators.  Clearly, the VoIP rule, when it is enforced, will severely undermine foreign operators and their 20 million clients in China.  Skype, partially owned by eBay, will be affected the most, especially because it is gearing up for an anticipated $1 billion initial public offering this year.  In addition, last week's news is another setback for Microsoft, which has tried to work cooperatively with Beijing, and Google, which offers Google Talk.

The Ministry of Information

The Ministry of Information and Industry Technology certainly did not care about the effect of the rules on foreign operators because, no matter how poorly Beijing treated them in the past, they nearly always came back for more punishment.  And because foreign companies were for the most part afraid of alienating Chinese regulators, foreign governments have not been able to protect them as then as they could have.

The biggest victim of the new rules, nevertheless, will be China itself.  The Ministry, when it gets around to enforcing its regulations, will as well target the hundred or so local providers that nevertheless offer internet telephony without possessing the licenses to do so.  Some of these operators may in the long run get permits, now the regulators will even so make sure that the three big telecom companies are, as in the past, insulated from competition.

Yet the most disturbing effect of the VoIP announcement is not its ultimate effect on competition in the Chinese telecom market.  Taking everything into account, market players nearly always overwhelm regulators eventually, especially in China where enforcement is often spotty.  The most disturbing aspect is that Beijing is once again issuing rules that are as impractical as they are regressive.

These ill-advised rules mean there is a lot riding on the Ministry's attempt to hand the VoIP market to China's three state telecom giants.  It is not just the revenue streams from cut-rate services that are at stake.   If MIIT bureaucrats succeed in their ill-advised internet telephony plans, we can expect them henceforth to be furthermore ambitious in trying to wall China off from the rest of the world.