China goes High Definition

Worldwide sales indicate that the user community is almost as enthusiastic about HD systems as the vendors. This is also true in the Chinese market, which we believe will adopt HD at the same rate, or even faster than western countries for two main reasons.
First, there is an existing pool of high-end customers that have MPEG2/4 broadband systems developed by domestic Chinese companies. Introduced around 2000, these proprietary systems were called “high definition” in Chinese and deliver DVD quality video at 2-8 Mbps. We estimate that broadband units accounted for almost half of all video endpoint revenues in 2002 and a quarter of the units sold. Sales of broadband units have been relatively flat, but stable since that time. These customers already have ample bandwidth to run HD videoconferencing and now they have a clear path to upgrade.

Second, the replacement cycle for government videoconferencing systems is approximately five years. Many 1st and 2nd tier customers have upgraded their systems in 2007 and the first half of 2008, and we expect this trend to continue after the Olympics. Locally produced and imported H.323 standards-based high definition systems provide an opportunity to “future proof” the network for at least another five years with the added benefit of being interoperable with other H.323 video systems, unlike the broadband products.

The advent of HD videoconferencing may be more disruptive to the Chinese market more than other regional markets due to the number of Chinese vendors that have focused on the broadband segment. We believe that users can no longer justify purchasing broadband systems now that they are clearly out of date. The end-user will ultimately be the major beneficiary of this change, gaining better video at any bandwidth and better interoperability at lower prices than the original broadband units sold for 5 years ago.