China Makes Updates to Catalog of Telecommunication Business
Source: Ron Cai, Alan Huang
Overview
On Dec. 28, 2015, the Ministry of Industry and Information Technology of the People’s Republic of China (“MIIT”) issued the Catalog of Telecommunication Business (2015 Edition) (the “2015 Edition”), which will take effect on March 1, 2016.
The Catalog of Telecommunication Business defines and classifies almost all types of telecommunication and online business in China, and functions as the basis for the regulation of China’s telecommunication and online industry. Which category a specific telecom business falls into will determine which requirements on licensing, qualification, approval, and filings it will be subject to.
The 2015 Catalog will supersede the current version of the Catalog of Telecommunication Business enacted in 2003 (the “2003 Catalog”). In 2013, MIIT released a draft version of the Category of Telecommunication Business to solicit public comments, and the 2015 Catalog is an update based on that version.
Like the 2003 Catalog, the 2015 Catalog divides the telecommunication and online business into two big classes: basic telecommunication business (“BTB”) and value-added telecommunication business (“VATB”). BTB is a highly regulated industry and difficult, if not impossible, for foreign investors to enter (e.g., foreign investors are prohibited from owning over 49% equity in any BTB enterprise). This advisory focuses on the important changes in VATB, which covers most hot topics in telecom and online business, such as cloud computing, mobile apps, and e-commerce.
Changes in general
As compared with the 2003 Catalog, the 2015 Catalog adopts the following changes in VATB:
Adds more detailed sub-categories under “B25: information service (ICP)”;
Adds “internet resource collaboration service” into “B11: internet data center service (IDC)”;
Takes “B12: content distribution network service (CDN)” out of IDC, and lists as a separate category;
Adds “B26-1: internet domain name resolution service (DNS)”; and
Lists “domestic call center” and “off-shore call center” as two separate sub-categories.
Cloud computing
Generally speaking, cloud computing, including IaaS, PaaS, and SaaS, is likely to be regulated under Category “B11: IDC” in the 2015 Catalog.
For IaaS, it provides access to virtual infrastructures and capacities in the cloud, which fits the traditional concept of IDC service that leases equipment, space, connection, and bandwidth.
For PaaS and SaaS, a new sub-category, “internet resource collaboration service”, is added into “B11: IDC” in the 2015 Catalog. The feature of this sub-category is “access to and usage of the equipment and resource in IDC whenever needed” to provide services such as “data storage, operation management, internet application development and deployment”. PaaS is typically defined as collaboration of resources in the cloud to provide an environment for software development. So PaaS is most likely covered in this category.
For SaaS, there may be two scenarios. From a conservative point of view, since cloud service software has data storage and/or operation management functions, such SaaS is very likely to fall into “internet resource collaboration service” under “B11: IDC”. For other SaaS that fits into the definition of “B25: information service” below, arguably, IDC license may not be required.
So far, MIIT has not issued an IDC license to a foreign-invested enterprise (except one or two from Hong Kong). Thus, the expanded coverage in the IDC category seems to raise the bar higher for foreign investors to enter the cloud computing business in China, particularly for SaaS and PaaS. Since such a “total elimination” of foreign players from the cloud computing business in China, including SaaS and PaaS, could be too drastic, hopefully IDC licenses will become easier to obtain, so that foreign-invested enterprises have opportunities to legally operate in the Chinese cloud computing market.
Mobile apps
The 2015 Catalog expands “B25: information service” to include five sub-categories:
Information publication platform and delivery service (e.g., app stores, press websites)
Information search and inquiry service (e.g., search engines);
Information community service (e.g., social media websites, blogs, and online games);
Information instant exchange service (e.g., instant messages); and
Information protection and processing service (e.g., filtering and ant-virus services).
As long as the service provided falls into the above sub-categories, the business operator will likely be subject to the VATB regulation, regardless of whether the services are provided via websites or mobile devices. This would mean that mobile application operators who provide such services must obtain VATB licenses. Currently, most mobile application operators have not obtained VATB licenses.
E-Commerce
The 2015 Catalog broadly defines “B21: online data processing and transaction processing” to cover all kinds of application platforms on public networks or internet that processes online data or transactions. Compared with the 2003 Catalog, the 2015 Catalog allows more flexibility for this category to cover the various new models of e-commerce that have emerged lately or will be developed in the future.
Conclusion
The 2015 Catalog aims to classify telecom and online business based on the nature of the services offered, instead of the type of network technology it works on. It creates more regulatory barriers for foreign investors that plan to enter into the Chinese telecom and online business. It is unclear whether it will be easier to obtain some licenses, such as an IDC license. In terms of license requirements, it is also unclear whether there is a grace period and grandfathering treatment for existing players in the market, particularly those that are invested in by foreign entities, or those that are listed in the overseas markets.
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