Abstract

Various Standards Impede STB Market Growth

There are nearly 400 million analog TVs in use in China. Converting all of these analog TVs to digital by 2015 will create annual demand for STBs that will average over 30 million units.

Despite the strong potential for market growth, there has been no dramatic increase in STB sales. One of the main reasons for this slow growth is the government's failure to establish a unified standard for STBs. When establishing a digital cable TV network, network operators formulate their own specifications for STBs, with specific requirements covering key functions such as conditional access and middleware. The adoption of different standards has created a situation where the STBs produced for different operators are not compatible with one another, making it difficult to achieve economies of scale in STB production.

The Chinese government has responded to this problem by introducing a requirement that CA and other key functions must be embedded on a removable smart card. This card can be used in different STB models, eliminating the need to produce a different STB model for each CA system. Therefore, manufacturers can increase their production volume and build economies of scale to reduce production costs.

This new policy has advantages not only for STB manufacturers but also for cable operators, who will be able to distribute STBs to their subscribers more rapidly and at lower cost. Operators will be able to focus on selling the smart cards rather than the entire STB to their subscribers. This approach allows cable operators to concentrate on developing new value-added services, and consumers will be able to choose the desired STB without needed to worry about the specifications of the STB.

High Digital TV Subscriber Growth but Low Profit Margin

The process of converting analog cable TV to digital is proceeding rapidly in China. The first round of the conversion process has already been completed in several cities and regions, including Qingdao, Guangxi, Hangzhou, Shenzhen, Dalian, Taiyuan, and Mianyang. Network conversion is underway in several other regions, including Guangdong, Shandong, and Shanxi provinces; digitalization has already moved beyond the pilot project stage into the first stage of nationwide adoption.

Bi-directional transmission and interactivity will be two of the most important features of the digital TV era. In the future, being able to respond to subscribers' commands - so that they can access the value-added services they need - will be a basic requirement for STBs. Unfortunately, operators such as Qingdao Cable TV Network have been more interested in building up the subscriber base as rapidly as possible, and have failed to adopt the mechanisms needed for bi-directional transmission and interactive services. As a result, these operators now have to implement an expensive second round of STB deployment to replace existing STBs.

The main reason why the digital-to-analog conversion has been so slow in China's more developed regions - such as Shanghai, Beijing and Zhejiang - is that operators in these areas have yet to come up with a profitable business model for digital cable TV. If operators continue to rely on the traditional monthly fee for cable TV service, then even if they charge subscribers 30 RMB (US$3.8) a month they will not be making much of a profit, and may find it hard to recoup their initial investment. Chinese operators currently secure funding support from the government, and then convert whole districts to digital one at a time by distributing free STBs to subscribers. This strategy has made it possible to implement the conversion to digital quite rapidly; however, leveraging these new digital cable TV networks to create higher value-added services will be more important to Chinese cable operators.

Appendix

List of Companies