(The second in a series)

On the surface – and even several layers down – there appears to be very little about the Chinese IPTV market that applies to the U.S.

After all, the Chinese companies that are delivering IPTV are all government-owned, including the two China telecom operators, China Netcom in the North and China Telecom in the South, and the IPTV licensees, led by the first national IPTV license holder, Shanghai Media Group (SMG). Although it isn’t entirely clear what government subsidies might be flowing through the operators, the fact that the Chinese government is backing their IPTV initiative takes away some of the profit pressures that U.S. operators face. Both China Netcom and China Telecom are able to operate their services with average revenues per user (ARPU) of less than $10 a month, something a U.S. operator could not do.

“The basic motivations are really different,” said Steven Hawley, senior IPTV analyst with Multimedia Research Group. “We assume there is a profit motive and there are a lot of content competitors who make money off content. In China, everything is state sponsored and locally produced. The ARPU is in single digits even for a full range of services. There is not a lot of money to be made in that market. From a revenue perspective, the two markets are very different.”

“The government has said they want to be world leaders, and they are willing to fund it,” said Danny Briere, president of the TeleChoice consultancy.

Just as importantly, Hawley added, the structure of the Chinese IPTV market is also different. In China, as in countries such as the U.K. and France, the telecom network operators aren’t allowed to own content and bundle it with their network operations as U.S. cable companies and now telecom companies do.

“Unbundled local loops are off the table in the U.S.,” he said. “If someone wants to compete, have to build their own or partner with the cable company, which isn’t happening. This approach has really hamstrung the U.S. market. If you look at a market like France, where there are seven or eight companies, all using France Telecom’s infrastructure, there is much more IPTV available.”

The Chinese operators also are delivering service in a market starved for content, where there is no satellite service and cable TV is provided by thousands of small cable operators, many municipally owned, and none approaching the kind of service taken for granted by cable consumers in the U.S. Where U.S. service providers have to deliver a more robust video product from the outset, the Chinese can get started with a more modest video offering and still look better than the existing service.

“Competition adds another level of cost to the product, just to keep up with the Jones,” Briere said. “The competition is much stiffer in the U.S. and it creates some table stakes the Chinese don’t have.”

Content licensing and control issues are also different in China. Both the China Netcom and the China Telecom offerings are delivered over an integrated infrastructure, and feature network-based digital video recording capabilities, which are not legal in the U.S. following the March court decision against Cablevision, in a lawsuit brought by a group of content providers.

By delivering network-based DVR services, UTStarcom’s RollingStream broadband TV and video-on-demand system enables the Chinese to deploy set-top boxes that require less storage and are much less expensive than the high-end set-top boxes that are part of Uverse, FiOS and other U.S. offerings.

“All of us technology-oriented people like the idea of using complicated consumer devices for TV,” Hawley said. “UTStarcom is out there with a $15 to $20 set-top box – in some parts of the world, that’s expensive, but here it’s almost a giveaway. They are being pushed by markets that don’t tolerate expensive CPE, and that could really change the equation in the U.S. IPTV is imminently possible and quite acceptable if you are willing to forego some fancy services.”

“They don’t see themselves as sacrificing storage [on a local drive] because they don’t have the copyright laws that prevent them from doing things in the network,” Briere added.

But perhaps the greatest difference between the way the Chinese view IPTV and the way the service is being viewed in the U.S. is more fundamental. In China, it’s the Internet part of IPTV that may have the most impact, not the video entertainment piece.

“For them, it’s more about interactivity,” said Brian Caskey, vice president of worldwide marketing for UTStarcom. “They want to click on the TV to vote in a reality show. They are looking at this as a new means of communication. And for some households, the TV absolutely becomes the way they will surf the Internet. We think that television will drive broadband growth and subsequently Internet access.”

Ownership of personal computers is much lower in China and in nearby countries such as India, so IPTV can represent a means of access to Internet-based information and social networking services. SMG is already offering a service to consumers who want to upload their own video content, said Minnie Huang, CTO of BesTV, the IPTV joint venture of SMG and China Telecom.

“We call it Personal TV – you have your own space for your pictures and user up-loaded content,” she said. “We screen out content that is not healthy, but the other user content is loaded, and everyone can see it. You can then rate the content by giving it stars. Eventually, the set-top box will have a USB port and you will upload the content from there.”

BesTV also is working with local banks to develop a bill-paying service and is prototyping a service that lets investors in the red-hot Chinese stock market track their stock portfolios. With health-care a major concern in the country, BesTV is also working on a service that would allow consumers to get health care advice and to make doctors’ appointments.

“China is probably one of the few countries, if not the only country, in the world where TV is not the killer app,” Briere said. “With censorship, the paucity of Hollywood content that is allowed, their content is more staid. So they are putting a much greater emphasis on next-generation applications, and in those applications, they are probably in advance of the rest of the world.”

Under the terms of the partnership with their IPTV license-holder, SMG, both China Telecom and China Netcom can develop their own value-added services such as personal videoconferencing. Within its Hangzhou facility, UTStarcom is developing videophones and IP cameras that can be offered as separate devices or integrated into the service to deliver a person-to-person video service. It is also developing a telephone handset that can work as the remote control for the set-top box.

“They had things over there I haven’t seen over here, like the telephone remote control and videophone calling,” Briere said. “I think we can learn a lot. We have gotten into this mode where the Asian companies are doing a lot of neat stuff first – wireless, WiBRO and now the IPTV next-gen apps are interesting to watch in China.”

Briere believes having an integrated end-to-end IPTV system that is built to scale has enabled the Chinese to more rapidly roll out their service.

“That’s been one of the major challenges in the U.S., the integration of all the pieces of the technology,” he said. “That’s been the challenge for AT&T and its major vendors, Alcatel-Lucent and Microsoft, and it’s been the challenge for smaller telcos as well. Eighty percent of the problems have been involved in end-to-end integration.”

But it’s uncertain U.S. companies would adopt the Chinese approach.

“I would think some smaller telcos would be interested in what UTStarcom and the Chinese are doing,” Hawley said.

To date, UTStarcom hasn’t been focused on the U.S. market, primarily because it sees such great opportunities elsewhere, including in China, India and Latin America, Caskey said, but the company isn’t closing the door on the U.S.

(Coming next: UTStarcom and its IPTV plans)