04 January 2016

Commentary on Significant Revisions of VATS Definitions in the Telecommunication Services Classification Catalogue (2015)

By Wang Rui (partner), Ge Yibo(Associate)

After considering submissions from the public and government departments on the previous draft in 2013[1], the Ministry of Industry and Information Technology (“MIIT”) issued the Telecommunication Services Classification Catalogue (2015) (《电信业务分类目录(2015版)》) (“2015 Catalogue”) on December 28, 2015.  The 2015 Catalogue will take effect from March 1, 2016.

Under the regulatory framework for the telecom industry, the Telecommunication Services Classification Catalogue functions not only as the fundamental technical document for authorities issuing telecom service licenses and regulating the market, but also as an important guide for telecom related enterprises to manage their operational activities.  During the last decade, the development environment and business models in China’s telecom industry have changed significantly. New technologies and new businesses, especially the Internet cloud computing and big data, have been developing rapidly. The existing Telecommunication Services Classification Catalogue (2003 Version) (“2003 Catalogue”)[2], can no longer satisfy the needs of telecom administration and industrial development in the emerging market. 

This article reviews and compares the value-added telecom services (“VATS”) set out in the 2015 Catalogue with those in the 2003 Catalogue. The article highlights key changes in three VATS categories that may significantly affect the “Internet+”, cloud computing and big data industries. 

Revisions to VATS Classification in the 2015 Catalogue

The 2015 Catalogue VATS classifications are based on the shared characteristics of the various services, rather than the types of communication networks used for data and information transmission.  There are ten categories of VATS in the 2015 Catalogue: (i) Internet Data Center Services, (ii) Content Distribution Network Services, (iii) Domestic Internet Protocol Virtual Private Network Services, (iv) Internet Access Services, (v) Online Data Processing and Transaction Processing Services, (vi) Domestic Multi-party Communication Services, (vii) Store and Forward Services, (viii) Call Center Services, (ix) Information Services, and (x) Coding and Protocol Conversion Services. 

Taking into account various features of the services (including economic scale effects, degree of influence on the telecom market, and requirements of information security management), VATS are divided into Type I VATS (i.e. services “mainly based on facilities and resources”) and Type II VATS (i.e. services “mainly based on public platforms”) and they will be regulated accordingly.  For example, VATS services (e.g. Internet Data Center Services, Content Distribution Network Services, Domestic Internet Protocol Virtual Private Network Services, and Internet Access Services) which are primarily provided to enterprise users, closely attached to basic infrastructure and telecom resources, and have significant importance  to national information security and public order, are categorized  Type I VATS.  VATS services (e.g. Online Data Processing and Transaction Processing Services and Information Services), which are mainly provided to the general public, have significant economic scale, and are closely related to consumer rights and privacy protection are category Type II VATS. Medium and small-sized enterprises are encouraged to participate competitively in the development of Type II VATS services.  The requirements for market access and information security for Type II VATS are expected to be lower than those for Type I VATS. 

Compared with the descriptions for VATS in the 2003 Catalogue, the 2015 Catalogue has the following important changes: 

  • In order to categorize Internet related services in a more detailed way, the 2015 Catalogue adds Internet Domain Name Resolution Services as a new category, and divides the Information Services into more detailed sub-categories; 
  • In order to create greater space for new business development and adapt to the rapid growth of cloud computing and CDN services, the 2015 Catalogue categorizes  “internet resources collaboration services” as “Internet Data Center Services”.  Moreover, in order to support the development of internet-based streaming video businesses and IP TV, the 2015 Catalogue separates “Content Distribution Network Services” from “Internet Data Center Services” and lists it as an independent category; 
  • In order to implement the policy of opening up telecom services to private capital, the 2015 Catalogue clarifies that “cellular mobile communication services provided by way of resale” shall be regulated under the rules of VATS; and
  • In order to adapt to the needs of further opening up offshore call center services[3], the 2015 Catalogue further divides “Call Center Services” into “Domestic Call Center Services” and “Offshore Call Center Services”. 

The table below tracks the specific revisions that the 2015 Catalogue makes to the VATS classifications in the 2003 Catalogue.

Revisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom CatalogueRevisions of VATS in the 2015 Telecom Catalogue

Revisions to Three VATS Categories

For enterprises engaging in the business of cloud computing, big data and/or e-commerce, the revisions in the 2015 Catalogue to Information Services, Internet Data Center Services and Online Data Processing and Transaction Processing Services are particularly worth noting.  These revisions are made to address new technology and service models in the industry, and to reflect the telecom administrative authorities’ most updated regulatory approaches towards the relevant business activities.

1. Expanding the service scope and detailing the sub-categories of Information Services 

The business models that might be regulated as Information Services include: news websites, BBS, client services, mobile newspapers, app stores, search engines, SaaS, social networks, blogs, broadcasters, Weibo, virtual social communities, chat rooms, online games, instant communication (text, picture, audio or video), interactive voice services, internet-based end-to-end real time voice services, client virus scanning, information protection, and spam blocking. 

In the 2003 Catalogue, Information Services were divided into sub-categories in accordance with the types of basic communication networks through which the information services were provided.  Accordingly, operators providing information services through fixed networks, mobile networks or the Internet were required to apply for operation licenses for the relevant sub-categories of the Information Service (e.g. the so-called Fixed Network License, SP License or ICP License).

However, due to the development of network communication technology, especially the integration of different types of network communication methods, the method of describing and classifying Information Services by communication network media can no longer satisfy the needs of industry development and government administration. 

For example, in a service model that only provides information services through mobile APPs, the information might be transferred through both public communication networks (e.g. 3G/4G networks) and the Internet at the same time.  Thus, due to limited administrative resources and difficulties in identifying the underlying network technologies, in practice the telecom administrative authorities have not required relevant service operators to hold any telecom operation licenses.  In the 2015 Catalogue, however, Information Services are divided into five sub-categories on the basis of the specific service models, and, more particularly, in accordance with the technical features of how the particular information services are organized and delivered. 

These five sub-categories of Information Services are: (i) “information distribution platform and delivery services” (e.g. news websites, BBS, client services, mobile newspapers, and app stores), (ii) “information search and inquiry services” (e.g. search engines), (iii) “information community services” (e.g. social networks, blogs, broadcasters, Weibo, virtual communities, chat rooms and online games), (iv) “information instant interaction services” (e.g. instant communication, interactive voice services, internet-based end-to-end real time voice services), and (v) “information protection and processing services” (e.g. client information and content protection, and spam blocking).

Accordingly, after the 2015 Catalogue takes effect, operators providing information services only through mobile APPs as discussed above will be required to apply for the relevant operation licenses in accordance with the contents of the information services provided in the APPs. 

In addition, the 2015 Catalogue also provides guidance for the classification of some “cloud services”.  Since the key functions of these cloud services are to provide end users with various information, software and apps that are deployed in the cloud, such services may fall into the category of Information Services.  As for many virus scanning programs operated online (e.g. Panda Security), which enable users to access virus checking and deletion services through the internet from cloud, these programs may fall into the sub-category of “information protection and processing services” and be regulated accordingly.

2. Adding Content Relating to the Internet Resources Collaboration Services; Expanding the Scope of Internet Data Center Services

Accompanied by rapid development of cloud computing technology, services that are based on data center facilities, and can be realized through the flexible deployment, sharing and collaboration of resources via the Internet have been going through continuous innovation.  PaaS of cloud computing (e.g. Google’s AppEngine) began to develop.  Following this trend, the 2015 Catalogue adds content related to the “internet resources collaboration services” to cover business models related to PaaS.  Moreover, many SaaS services (e.g. Microsoft’s Office Online) now can enable the users to conduct data processing and storage, and other collaborative use of Internet resources in the cloud in the manner of readily available, use as needed, highly expandable, and collaboration and co-sharing.  

Thus, these SaaS services may be regulated as the “internet resources collaboration services”.  As a result of information security concerns and various other factors, the 2015 Catalogue places “internet resources collaboration services” in the “Internet Data Center Services” category for regulation. 

In addition, since the core characteristics of IaaS by cloud computing (e.g. Amazon’s Elastic Compute Cloud) are enabling users to obtain leasing and maintenance services for data center systems, server devices, storage space, communication lines and outlet bandwidth that are typically virtual and deployed in the cloud, these services will very likely be regulated as Internet Data Center Services. 

3. Expanding the Scope of Online Data Processing and Transaction Processing Services

The 2015 Catalogue deletes the descriptions and definitions for the three sub-categories of the Online Data Processing and Transaction Processing Services as set forth in 2003 Catalogue (i.e. “transaction processing services”, “electronic data exchange services”, and “network/electronic device data processing services”).  
We consider these revisions are made to adapt to market developments in recent years (e.g. e-commerce models have been diversifying, and “Internet of things” business models have been innovating).  Deleting the descriptions and definitions of these specific sub-categories will not only facilitate necessary and timely regulatory measures by government over the newly emerged businesses in the e-commerce area, but also leave room and “flexibility” for  possible policy adjustments within newly-established free trade zones in China. 

Arrangements for the Transition Period before the 2015 Catalogue Takes Effect

Starting from March 1, 2016, the telecom administrative authorities will examine applications for telecom operation licenses in accordance with the 2015 Catalogue. The telecom operation licenses that have been issued before the effectiveness of the 2015 Catalogue will remain valid within their licensed scope and period. Operators intending or needing to change their operation licenses may apply for a new one during the currency of their existing license.  Based on our experience, to smooth the post-2015 Catalogue license examination and approval, telecom administrative authorities are expected to adjust their approach to license applications for certain service categories (e.g. by adjusting the content of application material and the degree of authenticity examination) during the transition period.  

Special thanks to Dr. Haibo Hu from the China Academy of Information and Communications Technology/Telecommunication Planning Research Institute Telecommunication Industry Research Department, and Ms. Miao Wang from the KWM Hong Kong Office for their contribution to this article.

 (This article was originally written in Chinese, and the English version is a translation)

Editor’s note: This article was first published on Chinalawinght.com

[1]Telecommunication Services Classification Catalogue (2013 Version) (for public comments) (《电信业务分类目录(2013版)(征求意见稿)》) was published by MIIT on May 23, 2013 to solicit public opinion.

[2]The 2003 Catalogue was issued on March 25, 2003, with the purpose of implementing China’s WTO commitment to open up telecom service sectors.

[3]In line with the development trend of offshore outsourcing, offshore call center services (in which both the customers and service recipient are located overseas) have been fully opened up to foreign investment in certain cities on a trial basis.

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