As IPTV fever takes hold in North America and Europe, there are increasing signs that it's rapidly spreading to the world's biggest single potential market, China (see SBC: IPTV's Day Has Come and Europe Tunes In to IPTV).

With broadband penetration increasing rapidly (25.8 million subscribers, including 17 million DSL users, at the end of 2004, a rise of 35 percent in the second half of the year, according to Point Topic Ltd.) and service providers launching services, vendors are latching on to the market's enormous potential (see Orca Finds IPTV Partner in China, Chinese Firms Strike IPTV Deal, and Report: DSL Subs Top 100M).

IPTV equipment provider Optibase Ltd. (Nasdaq: OBAS), which has offices in Beijing, has already registered success with one of the country's biggest carriers, China Netcom Corp. Ltd. (NYSE: CN; Hong Kong: 0906). (See Optibase Enables IPTV in China .)

The operator is using Optibase's MovieMaker 400 encoder to translate satellite feeds into MPEG-4 streams, which are then transported across the carrier's network and delivered to televisions and PCs across a DSL connection.

And one of Optibase's encoding system rivals, Tut Systems Inc. (Nasdaq: TUTS), has struck a distribution deal with Chinese equipment giant Huawei Technologies Co. Ltd. that gives it a route into the Chinese market. And IPTV middleware provider, Orca Interactive Ltd., has forged a partnership with Hewlett-Packard Co.'s (NYSE: HPQ) HP China Consulting & Integration Services to target China's service providers (see Orca Finds IPTV Partner in China).

Orca's VP of marketing, Yosi Glick, says his company's software was recently installed at two Chinese carriers, including "one of the country's two major fixed-line providers." That would mean Netcom or China Telecommunications Corp. (NYSE: CHA). The other engagement is with a smaller FTTH operator.

"IPTV is going to get a major boost in China in the next few years," reckons Glick, who believes the country's cable operators will also look to move towards IPTV systems. "All the market projections neglect the prospect that cable operators will move to IPTV systems sooner or later -- most likely sooner."

Glick adds that Orca is seeing competition in China from some small local players and from in-house developments at the carriers, but that "we're also starting to see Huawei, and UTStarcom will be a serious competitor with its integrated systems." (See UTStarcom, Myrio Have Their IPTV .)

The near-term opportunities for these companies are relatively limited, however, as the market is still embryonic. That's set to change over the next few years, though. According to IDC there will likely be fewer than 300,000 IPTV subscribers in China by the end of 2005, but this figure is due to grow quickly to reach 9 million in 2008.

"IPTV provides tremendous opportunity to broadband service providers," writes IDC China senior analyst Michael Yan in a report on broadband services. "Content providers are the keys for the success of the whole value chain in providing IPTV service," he adds, echoing the thoughts of others in the sector (see Content Deals May Swing IPTV Acceptance).

While they work on their content strategies, China's major carriers are taking their first IPTV steps. Leading fixed-line operator China Telecom is already offering services and plans to launch broadcast TV over broadband in every major city in southern China by the end of 2005 (see China Telecom Launches IPTV).

In order to provide suitable end-user equipment as it rolls out its services, the carrier has signed up consumer electronics firm Changhong to develop IPTV sets and IP video phones.

China Telecom argues that its service, called ChinaVnet, is just one of many broadband services and can therefore be provided under its remit from telecom regulator, the Ministry of Information Industry (MII), rather than requiring additional clearance from another government body, the State Administration of Radio, Film, and TV (SARFT).

There's a turf war brewing between the MII and SARFT as to which administration should be issuing IPTV licenses, but with the upper echelons of government focused on developments and licensing issues in the 3G mobile sector, little attention is likely to be given to IPTV for a while. In the meantime, the major operators and broadcast players are looking to forge ahead and let regulations catch up later.

One carrier with regulatory clearance from SARFT is China Netcom, which has formed an IPTV joint venture, Tiantian Online, with a number of overseas investors.

As part of its service rollout, Netcom is offering IPTV to 50,000 broadband customers in the Tangshan metropolitan area, and is believed to be developing further expansion with the help of Hong Kong operator PCCW Ltd. (NYSE: PCW; Hong Kong: 0008), in which Netcom took a 20 percent stake earlier this year (see China Netcom Invests in PCCW).

PCCW is one of the IPTV pioneers, having signed up 416,000 subscribers to its Now TV service by the end of 2004 (see IPTV Tidbits: Microsoft, China & More, PCCW Expands IPTV Deal With Tut, and PCCW Uses Tandberg for IPTV).

And it's not just the major carriers launching services. Online portals, such as Chinavb are adding TV channels to their offerings.

— Ray Le Maistre, International News Editor, Light Reading, and Mike Newlands, freelance writer