When Chinese diving star Tian Liang plunged to gold in the men's springboard event in Sydney, he inadvertently set Chinese telecommunications on a new course. The year was 2000, and the country had 70 million mobile phone owners who used their phones almost exclusively for making phone calls. Most of them had "second generation", or 2G, phones that were, in theory, capable of (slowly) accessing the internet through their GSM networks, although no one was sure how to get them to actually use it. Then, during the Summer Olympics in Sydney, a few internet portal companies began sending "good news" updates straight to users' phones via SMS whenever a Chinese athlete won a medal, with China Mobile, the country's largest operator, going along with the scheme.

China won a record 59 medals that September, and people around the country kept up with the events they missed on TV through text message reminders on their phones. The idea was a runaway success, and eyes were opened to the enormous potential of SMS - not mobile browsing - in the Chinese market. Seven years on, China has over 460 million mobile subscribers who collectively send more than a billion short messages each day. Texting is by far the most popular wireless value-added service (WVAS) in the land, with colour ring-back tones (CRBTs) - those snippets of music that play on the other end of the line as you wait for a friend to answer - far back in second place.

Next summer, if all goes according to plan, the Summer Olympics in Beijing will be the coming-out party for China's long-awaited third-generation (3G) mobile networks. Discussions began before Sydney 2000 was over but the process of bringing it to fruition has been fraught with hiccups and delays. Operators and service providers are crossing their fingers that Olympic fever will once again manifest itself in a wave of enthusiastic - and profitable - use of mobile technology.

"Chinese people are crazy for the Olympics," says Fang Meiqin, a principal analyst at BDA, a telecom consultancy. "[The games] should be able to help drive the popularity of multimedia services."

"There will be a big push in the early days to get people to try some of the advanced services, like video," says Sage Brennan, research director of JLM Pacific Epoch. He notes that internet video-sharing sites like YouTube and its Chinese counterpart Tudou have already done most of the work in popularising video streaming, as well as user-driven content.

Still, there are no guarantees that the faster, more data-intensive mobile services that 3G networks make possible will be as readily accepted as SMS. If anything, the fate of these services is as uncertain as ever.

On one hand, critics can point to markets such as Europe and the United States, where 3G networks have had several years to gain acceptance but have yet to impress.

"Personally, I think 3G is an excessive technology," says Vincent Dong, chief analyst at the Beijing-based Norson Telecom Consulting. But ultimately, he adds, he thinks it is an important important step for the continued development China's telecommunications industry.

This is not idle talk; the sector accounts for an ever larger part of the economy as it continues to outstrip the country's own gross domestic product growth - in 2006 it grew by 11.7 percent to the economy's 10.7 percent. Revenues, at US$83.8 billion (?62.6 billion), accounted for 3.1 percent of China's GDP.

But for the government, the essential precondition of next-generation mobile technology is a network based on its own domestically developed 3G standard, TD-SCDMA. China, rankled by the hundreds of millions of dollars it has had to pay in royalty fees to foreign technology owners throughout the 1G and 2G eras, is keen to turn this standard into a technology that can be exported to the developing world.

To achieve this, TD-SCDMA must first work at home, and withstand competition from established foreign 3G standards like WCDMA, which is common in European markets, and CDMA 2000 EV-DO, which is used in North America. It has received plenty of assistance from the government so far. China's telecom regulator, the Ministry of Information Industry (MII), is waiting at least until a TD-SCDMA network is up and running in China before it grants operators licences for other 3G networks.

Setbacks in the long, complicated testing process have been holding back TD-SCDMA's debut, and with it the launch of 3G in China, for some time now.

"We've been hearing the same things for four or five years now," says Dave Carini of Maverick China, a telecom-focused research firm. "Basically, [it's] 'TD-SCDMA works, whatever the government wants to be done with it will happen' - but the fact that nothing's happened so far throws up a lot of red flags."

Time to get tested

China Mobile, with its deep coffers - it is the world's largest telecom operator by subscribers and market capitalisation - will likely be required to run a TD-SCDMA network. It has said it will award bids this month, worth US$2.6 billion (?1.9 billion) in all, to trusted companies to build network infrastructure in eight major cities around the country. Most of the bidders are thought to be locals like ZTE and Datang Mobile, but foreign firms like Ericsson and Sino-foreign joint ventures like Huawei-Siemens and China Putian-Nokia are also likely involved.

Once the networks are built, commercial tests - the beginning of TD-SCDMA's deployment - are slated to start in October.

In the meantime, the competing 3G standards have had time to mature in other markets. The world's equipment makers - including Chinese stars Huawei and ZTE - have developed an extensive range of products for both WCDMA and CDMA 2000 EV-DO. From handsets to mobile broadband cards for laptop computers, shop shelves are filling and prices falling. Meanwhile, vendors have only come up with a handful of models for the Chinese standard.

But with more developed, established standards around the corner, what are the benefits to being an "anchor" company for such an unproven technology?

"Partly it's a relationship-building thing," explains Pacific Epoch's Brennan. "But also, it's experience - if TD-SCDMA takes off, and it gets a big push from the powers that be and people begin to latch onto it, they want to be able to make sure that they can run it."

Still, by most accounts TD-SCDMA will be a tough sell. Since its networks are being built from scratch, it will necessarily cover a smaller area than WCDMA or CDMA 2000 EV-DO, which have only to upgrade from the existing GSM and CDMA networks owned by China Mobile and China Unicom, respectively.

Many analysts predict niche uses for the standard. "I don't think anyone thinks China Mobile wants TD-SCDMA," says Carini. "They may have minor uses for it, but it's never been used before, and whoever ends up with it will have to fix it to a large degree - it won't be 100 percent ready to go."

The transition to 3G networks will coincide with another sea change in China's telecom industry - the restructuring of the four state-owned operators: China Mobile, China Unicom, China Telecom and China Netcom. The MII has announced that, in the interests of greater competition, it will allow both Telecom and Netcom, which are essentially confined to fixed-line and broadband services, to begin operating mobile networks.

Levelling the field

This move is necessary to curb the lopsided dominance of China Mobile, Carini says. While China Telecom and China Netcom have seen fixed-line subscriber bases plateau (see chart) and prospects for growth dry up as consumers forego landlines and go straight to using mobile handsets full-time, China Unicom "couldn't get its act together" and China Mobile proceeded from strength to strength.

"They've moved from looking at themselves as a leader in China to seeing themselves as a global leader," he says, referring to China Mobile. "They've moved into the elite group."

There is talk of sharing, buying and merging networks, and theories abound on exactly how the restructuring process - which Brennan reckons will happen sometime after the Communist Party's National Congress this September - will play out.

"Unlike in Western countries, this is all happening behind closed doors, so it is impossible to know exactly what is going to happen," Carini notes.

BDA's Fang thinks the most likely scenario is one where China Telecom buys China Mobile's GSM network to convert to WCDMA, China Netcom merges with China Unicom to run a CDMA 2000 1x EV-DO network and China Mobile adopts TD-SCDMA. Carini believes that while TD-SCDMA is something of an albatross for China Mobile, there will be nothing preventing it from running a WCDMA network alongside it.

The medium or the message? Mobile phones - which can turn into video or still cameras, microphones, televisions and videoconferencing units only more readily with 3G technology - will further blur of the line between media and communications. This is bound to unsettle Chinese regulators. While this has already been happening in other markets, with media companies veering onto telecoms' turf and vice versa, China is "a special situation", says Fang, "because of the strict censorship controls held by the government." At the very least, the trend portends to create conflicts between the MII and the chief media regulator, the State Administration of TV, Radio and Film (SARFT) over influence in mobile media. Fang expects the two bodies will eventually have to merge. Carini is less sanguine. "The government is reacting, not leading," he says. "If you want to know how well they're controlling [mobile and online media], it's about as well as they're controlling the pirated DVD market."

Where the money is: 3G content Third-generation phones excel at transferring large amounts of data at high speeds - but what good is that if there's nothing to download? Even in the absence of ready-to-go content, 3G may still hold an appeal on price - voice, which is used more efficiently with 3G, will actually become cheaper. "Voice will always be the biggest money maker," says Sage Brennan, research director at JLM Pacific Epoch. "With 3G, you can just shove more of it onto one network."

But to further entice subscribers to switch to 3G services, telecom operators are rushing to develop platforms to accommodate media of all kinds, while getting content providers and equipment makers on board. SMS messaging will be far from obsolete - it's a quick, easy and nearly universally compatible service - but multimedia messages, video conferencing, and other modes of chatting could gain popularity with improved speed and ease of use.

Last year, Nokia agreed to pre-install China Mobile's Femoo instant messaging client and Google's mobile search engine, on a customised series of handsets. China Mobile, the 800-pound gorilla of the mainland's telecom scene, combines third-party deals through its Monternet service, which charges a 15 percent commission for inclusion, with its own in-house content. The company is said to be focusing on mobile TV, music and integrated mobile e-commerce.

Access denied: Foreign operators locked out For equipment makers, China's telecom market is very much open. They are free to invest and set up wholly foreign-owned manufacturing enterprises, and just about all have done so to great effect - for confirmation take a look at the brand names of the best-selling handsets. This being China, there is naturally pressure on prices, but nevertheless it remains an extremely good market for major equipment vendors.

For service providers, however, the picture is the exact opposite.

"The market is basically closed," says Patrick Horgan, the chairman of the European Chamber of Commerce in China's IT and Telecom Working Group. There is supposed to have been an opening of services to foreign "direct equity participation", he says, but it was quickly limited by qualifying regulations like the Foreign-Invested Telecommunications Enterprise Regulation (FITE), which defines exactly how foreign companies can participate.

"After five years since accession, it's fairly clear that the opening has been more notional than genuine," Horgan says. Subscribers are still limited to a small group of state-owned monopolies for both mobile and fixed-line phone services. Even virtual operators like Virgin Mobile, which in other markets run networks but do not own the infrastructure, are not allowed in, notes Dave Carini of telecom research firm Maverick China.

"There is no real possibility for meaningful foreign market access," says Horgan, pointing out that Chinese service providers have been free to expand into other markets, as in the case of China Mobile's US$700 million (?520 million) investment in Pakistan's Paktel. When pressed, he says, authorities usually point to Vodafone's 3.31 percent stake in China Mobile's Hong Kong listing, and Telefonica, which has about 10 percent of China Netcom's listed equity..

Value-added services (VAS) - not perceived as such a strategic sector in the highest levels of government - has been opened to private-sector participation. But of the 16,000 or so VAS providers in China, fewer than 10 are foreign-invested by the normal means (meaning it is sufficiently difficult that most foreign firms prefer investing from off-shore). "It is still more or less exclusively domestic preserve," Horgan says.

The main issues for equipment vendors are standards and intellectual property. It is "absolutely the norm" for Chinese manufacturers making 2G telephone equipment not to pay for that technology, Horgan says.

The type approvals process - getting products approved for the Chinese market - tends to favour local companies. "Some components that are considered optional in other markets are mandatory in China", Horgan says, meaning that foreign vendors must do extra testing, and modify handset models specifically for China. "The effect is to protect Chinese manufacturers бн while Chinese manufacturers face no such barriers in other markets."