During the past year, China’s Value Added Services (“VAS”) industry has experienced large scale administrative reform, in which, based on the complaints of hundreds of customers about misleading practices, unfair pricing, inappropriate content and illegal behavior, many companies received administrative punishment from the Ministry of Information Industries (“MII”), acting as telecommunications supervisor, and had their contracts terminated by the basic telecommunications carriers. These corrective actions have, for a time, re-normalized the market; however, the VAS regulatory framework, and especially its shortcomings, has attracted widespread attention. This has led to the need for the development of a new policy better suited to changing circumstances and the evolving marketplace. With respect to such a policy, China and the U.S. can learn from each other. The key questions addressed by this paper in this regard are set forth below. China’s VAS existing regulatory policy is actually a dual structure, in which the MII is only the nominal regulator and the basic telecommunications operators (equivalent to the U.S. incumbent local exchange carriers) have de facto both business and supervisory authority. The MII is limited both by the absence of an effective supervisory mechanism and by the absence of an unambiguous and explicit regulatory authority. This causes difficulties in the operation of the regulatory mechanism as well as with the healthy functioning of competition and collaboration in the VAS market. Under Chinese law, the basic telecom carriers are supposed to be equal partners with VAS providers, but in the business reality, they have so much power as to be able to make the rules and punish or control VAS providers at their pleasure and for their benefit. This paper shows the likely failure of the current regulatory framework in the context of the evolving Chinese VAS market. Using the existing situation as a foundation for seeking a new policy, this paper surveys the overall regulatory environment and VAS market in China, and how it is adapting (or not) to new services, especially those offered over broadband/Internet networks. The relationship between VAS providers and regulation is critically analyzed. The example of the U.S. will be presented by way of comparison, with an emphasis on strengths and weaknesses, challenges, and options. The comparison will make use of an integrative framework that considers the forces of policy, technology and markets. In addition, the notion of industry self-regulation is considered. This paper addresses several important policy issues: the recognition of challenges of the evolving VAS market; the role of regulation in relation to VAS; the role of, and potential for, industry self-regulation; the relationship of carriers to regulators regarding VAS; the balance of power between VAS services and carriers; the future health of the Chinese VAS industry, and its importance as a model outside the U.S. In conclusion, recommendations are made for a modern approach to regulation of VAS in China, and a parallel is drawn with the debate over “Network Neutrality” in the U.S. which suggests that the U.S. could learn from the Chinese experience
