1. CHINA NETCOM BUSINESS PLAN UPDATEDecember 14, 1999 - Beijing
2. TODAY’S OBJECTIVESReview the overall analysis of regulation, competition, and market development
Discuss the specific implications for CNC strategy
Review the specific draft business models for CNC
How we might attack the business, carrier, and IDD/DLD markets
What key trade-offs we need to make
What are the key success factors and assumptions?
Discuss the initial economics of these business models, and of CNC overall
Discuss the specific next steps in two key areas:
How to finalize and endorse the overall CNC business model
How to move forward with the refined financials, organization design, and the plan for implementation
3. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
4. KEY CNC STRATEGIC PRINCIPLESThe objective of these principles is to provide further clarity in the development and evaluation of the CNC business model
These will be revisited and refined as the project progresses
Our development of business models will seek to be aligned with the principles
Strategic principles and key assumptions will be considered in the following aspects
CNC shareholders
Backbone business
Local access business
International gateway business
Regulatory strategy
Competitive strategy
Marketing strategy
5. CNC SHAREHOLDERSPrinciples:
Leverage shareholders’ concerted vision in creating a new generation IP broadband communication infrastructure and a profitable, successful company
Leverage shareholders’ existing backbone assets, local access assets, research capabilities and local government relationships to secure time-to-market and create competitive advantage
Set a model of a new type of “SOE”, as efficient as the best of the FIE/private companies; beat shareholders’ expectations by delivering high return
Assumptions:
CAS: strong interest in seeing CNC successful and profitable quickly, stands ready for favorable regulatory influence and research support; wants opportunities for networking R&D
MOR and SARFT: extensive backbone and access assets and ROW
main focus on using MOR for right of way, helping them participate in telecom
will not use SARFT local CATV in the near term, but they are a key user of the backbone
Leverage CATV’s city backbone
MOR will continue to favor CNC over Unicom, provided CNC meets the expectation as a profit center for MOR
Shanghai Municipal Gov't: Eager to make Shanghai as China’s test ground for building high-tech infrastructure (e.g. the integration of telecom, CATV, Internet)
in particular, testing HFC to deliver broadband internet
one issue: SPT and ATT JV; how to handle?
6. BACKBONE BUSINESSPrinciples:
Target advanced backbone among 15 key cities in Eastern China; start with 2 cores from shareholders but quickly build own network
Use backbone for a variety of wholesale and retail voice and data services
Maintain the leading edge IP/packet network, both for technological superiority and to fulfill shareholder mission
Maintain the best cost position, using ROWs, purchasing clout, right technology
Build reserve capacity/conduit to deter others
Assumptions:
The costs of construction and ROW will be the majority of new network costs
virtually all of the network will use MOR or SARFT right of way
Network will be IP or packet in nature
Deployment plan will keep costs low, build out quickly, and create good position
lay large number of conduits in one time
later fill, light up, and color fiber strands
lease out conduit/fiber/bandwidth to maximize return (utilization)
7. LOCAL ACCESS BUSINESSPrinciples:
Be very focused in local deployment, targeting priority business areas only
Emphasize broadband to the customer, using FTTB and LMDS where logical
Seek strong local market share, especially in new data services growth areas
Differentiate from China Telecom by superior services, quality, responsiveness
Build strong local team to enable fast service response
Emphasize “end to end” network ownership and management
Assumptions:
SH, BJ, GZ, and SZ business districts as targets for the near term
These account for the vast majority of business telecom demand
Need to set specific estimates for timing and sequence of deployment
Assume that CNC will have access to key city ROW, such as subway systems
Will need specific assumptions about the ease and cost of hooking up buildings
Assume that primary emphasis will be on FTTB, but that LMDS can play an important role, especially in initial deployment and in secondary cities
Will need specific assumptions about timing of adding secondary cities
8. INTERNATIONAL GATEWAY BUSINESSPrinciples:
CNC will be one of few players with a full international license
Vital to enable CNC to provide end-to-end services, global data services, and higher margin IDD service
HK gateway link may be strategically important
Assumptions:
HK as one of the key location for international connection
a major traffic destination
a major relay location
International voice remains highly profitable segment in medium term future
Expect high growth together with steep price drop in international services
Actively plan ahead for joining international sub-oceanic cable consortium
9. REGULATORY STRATEGYPrinciples:
Must actively lobby for favorable regulatory decisions, together with shareholders
provide regulators with international benchmarking for best practices
align CNC objectives with fair competition, and public interests
have effective senior management focus on lobbying issues
Be careful about committing investment if regulatory issues too uncertain
Ensure CNC strategy addresses national economic development priorities
Pay careful attention to managing relations with China Telecom
Expected WTO in 2000 will imply greater opening of the market in the future
Assumptions:
At least a 2-3 year window when CNC can continue to enjoy favorable policy treatment, while also working to straighten out regulatory issues at local level
Many key regulations remain in grey areas, where CNC can play a role in shaping the policy
Will need to make specific assumptions on a number of regulatory issues, and develop several scenarios
Assume that CT and Unicom are the only full service competitors, but several niche players
WTO will introduce FDI into China’s telecom market by 2002, but infrastructure play remain tightly controlled (still limited competition) until 2004/5
may be opportunity for some form of partnership with foreign telcos
10. COMPETITIVE STRATEGYPrinciples:
Focus on the best service quality, supply what customers’ need, avoid competing on price
Build both “highways” and “tollbooths”
Prepare for rapidly changing industry structure
Be careful in positioning toward China Telecom:
complementary and addressing unmet needs
growing the whole market
The only viable alternative to China Telecom for carriers
The only true “end to end” network across China, with clear central management
Assumptions:
Technology leads to continual change in industry structure
The decentralized nature and business oriented behaviors of China Telecom enables CNC to partner at the local level
High opportunity for CNC to fill China Telecom product/service backlog
Unicom will be a threat to start a “price war”
Various niche players emerge in later years, more threat than (carrier) opportunity for CNC
11. MARKETING STRATEGYPrinciples:
For local access, will target medium and large businesses in targeted buildings
For backbone, provide carrier services
For international, support other businesses and also offer IDD and refiling, etc.
In all areas, emphasize quality, service, end to end, etc.
Get a few key customers early; prove ourselves and then build further
Assumptions:
Carrier and large and medium sized corporations are the key focus
especially those in telecom-intensive industries
Assume a growing demand for business telecom services
will need both high and low growth scenarios
Need to validate the willingness of key customers to switch, and their anticipated areas of future demand growth
IP phone still the source of revenue in the near future
Dial-up ISP (171) may conflict with ISP carrier interests, but could also serve as strategic inroad for future 3G(1)
(1) Not in scope of this project
12. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
13. REGULATORY HIGHLIGHTSOur key assumptions:
MII regards CNC’s IP-based license as Full Service license, but lacks clear regulatory documentation. In case of local interpretation difference, MII is willing to clarify on behalf of CNC
e.g. ambiguity on local fixed line (CNC number)
CNC will be granted International Gateway license by 1Q 2000
CNC IP network protected by the current fixed/mobile interconnect regulation
CNC not required to meet specific coverage targets for the near future (2-3 years)
The market will be opened up gradually, with FDI increasing:
more value added service providers by 2003
more I-Phone providers by 2001
no new Full Service providers till 2004/2005
Account settlement specific for I-Phone will be regulated after the trial stage ends. It will be lower than the RMB0.14/min rate for basic telecom networks on a per call basis
Equal access by prefix/pre-select in 1 year; number portability may take another 1-2 years at least
CNC will have LMDS spectrum
CNC anticipates a well-intentioned regulator, with varied degrees of control over local incumbent practice
None of these assumptions are “guaranteed;” CNC must fight aggressively for them
14. KEY REGULATORY ISSUES AND IMPLICATIONSService licenses
Full Service license interpretation
Interconnect enforcement
Account settlement
Pricing and rebalancing
ROW and access
Frequency spectrum allocation and fees
Universal Service Obligation
Equal Access
Numbering and portabilityIGW license important to competitiveness,
size of customer base and # of partners
MII notification on each instance adds delay to CNC local interconnection
Time to market in each city affected, detract CNC resources
Future Interconnect economics
Future price competitiveness vs. other players (e.g. CT)
economics; price competitiveness vs. CT
Case-by-case local coordination and negotiation delay local access build-out; may also be expensive to obtain
Time to market for local access build-out by LMDS access solutions
Subsidizing incumbent for USO affect cost structure of new entrants
Unable to reach CT local line customer
Medium term implication: on-net voice not targeted for the near 4-5 years3 full service carrier including CNC
More licenses for value-added service providers (type II)
MII supports CNC IP based license as Full Service License
But lack of clear documentation may cause confusion at local level
Based on cooperation of carriers
Arbitration/settlement process exist but time consuming
Mild punishment, law suit as last resort
For current IP-phone trial, fees not settled
Likely future settlement: LD carrier pays local PSTN operator RMB0.14/min
Price floor likely specified for incumbent by regulation
No imminent initiative for rebalancing
Legally feasible for public telecom carrier (e.g. CNC)
Practice will have to coordinate with municipalities and infrastructure building
Controlled by MII in co-ordination with PTAs
Frequency not likely to be auctioned
USO for incumbent with contribution from new entrant
2-3 years before transparent and equitable approach
Prefix based solution provided by regulation in 1 year
Number as national resources controlled centrally
Fee will be collected for occupation of number resource
2-3 years before portability regulationsImpact on CNCHighest/
ImmediateHigh/
Medium TermKey issuesAssumptionImplication to CNC
15. KEY REGULATORY BODIES AND RESPONSIBILITIESOther depts, e.g SETCVarious law making bodiesNPCState CouncilDept. of Radio Frequency AdministrationTelecom Administration BureauOther depts.Provincial Telecom Administration BureauChina
Telecom
National
CompanyMunicipal Level Telecom Administration BureauTelecom Operating Entities:
e.g. CT fixed lineProvincial governmentMIIAdministrationOperationsNationalProvincialMunicipalityDrafting, passing of telecom laws and statues, e.g. China Telecoms Law
International, National and Inter-Provincial scope license granting
Highest level of regulatory enforcement/ arbitration
International Gateway administration
National level telecom resources control (e.g. numbers, frequency spectrums)
Provincial level telecom administration
Provincial level license granting
Provincial level regulatory enforcement focus on coordination
In the process of splitting operation and administration
A number of Municipal Level TABs are yet to be created
Limited enforcement power
Operation and administration not separate
Settle interconnect and other disputes
When not settled by provincial & municipal coordination, propagate up to provincial level and MII…PTAsPTBSource: Pyramid Research; BCG analysis
16. KEY LICENSE ASPECTS AND IMPLICATION TO CNCFull Service and International
Value added services
ownership
Geographic scope
Duration
license fees
Performance targets
TechnologyKey AspectsNumber of licenses tightly controlled: at most 3 in 2003, including CNC
CNC full service license expected 1Q 2000
International licenses tightly controlled: at most 4 in 2003, including CNC
CNC IGW license expected by EOY1999
More than 4 value-added service licenses possible
Control-share foreign ownership not allowed in basic telecom and public data transport services
Up to 50% of FDI in value added service providers
Intra provincial services under control of provincial TABs
No limit
Regulation will require license fees
Regulation will specify clear service buildout targets
Regulations will be technology neutral
But will give preference to new technologyAssumptionsCurrent regulation only cover interconnection between 7 types of licensed basic telecom carriers (e.g. NLD, local, wireless, international)
With IP-phone license, CNC needs to negotiate with CT local branches city by city
CNC IP based bandwidth wholesale service not covered in published regulation, adds delay in local negotiation
Number of potential customers for carrier’s carrier services
Speed of establishment and coverage of targeted customer for carrier’s carrier service
Financial strength of new entrant customers
Intra-provincial LMDS service require application in each targeted area
Competitor’s ability to lockout key service areas
Limited degree of impact on economics
Adds planning and local coordination pressure to CNC local access solutions
CNC IP/DWDM backbone receive positive influenceImplication to CNC
17. NATURE, SCOPE AND NUMBER OF LICENSESSource: BCG analysisVSAT transport serviceInternationalNLDOn-net voiceIP backboneIP-phone (including international)WirelessPagingVAS
(e.g.ISP,
VPN)Service natureOwning satellite
Maintain satellite channel
VSAT base stationsOwnership & operation of international gateways
Interconnect with foreign carriers
Leasing IDD channels and linesBuilding & operating of national switches and trunk lines
Maintaining POP is nationwide
Provide basic voice & data national transportOwnership & operation of local access networks
Ownership of last mile
Provide basic local voice/data transport and access to NLD/IDDBuilding and leasing of broadband IP based backbone transport capacityProvide IP based voice service
No requirement in infrastructure building
Including international IP based LDBuilding & operation of local BSC network
Provide wireless voice services
Interconnect with national transport carrierBuilding & operation of Local Paging Networks
Interconnect with national transport carrierWith or without building & operation of local network
Offer web-hosting, VPN, call center services, etc.ScopeNational coverageCross international point of presence
Service national transport carriersCross provincial boarders
Have access to international PO connects
Service local PSTNsCovers local service areas, (e.g. cities municipalities)Cross provincial boarders
Access to international points of connectCovers 12-25 trail cities
Access to international points of connect Covers local service areas: cities municipalitiesMajority in local scope
4 national coveragePrimarily in local scopeNo. of future
licensesRemain 3 for the next 6 years (CT, Unicom, and CNC) 3 In the next 6 years (CT, Unicom, CNC)3 In the next 6 years (CT, Unicom, CNC)4~5 in 1-2 years5-6 possible in the next 1~2 yearsMultiple licenses
possible in the next 4-5 yearsNumerous national scope licenses
possible in the next 2 yearsNumerous more licenses (with FDI) possible in the next 2 yearsLicense controlled byMIIMIIMIIMIIMIIMIIMIIPrimarily by provincial governmentProvincial governmentNo. of current licenses13223
(CT, Unicom,
CNC)4
Trail stage22 national scope;
multiple localUnlimitedBasic telecom servicesRemain 1 for the next 6 years
18. INTERCONNECTION ISSUES AND IMPLICATION TO CNCKey IssuesAssumptionsImplication to CNCObligation clearly specified by regulation for interconnection between 7 types of telecom network licensed operators
CNC’s IP broadband network receive equivalent protection
MII sets technical specification of interconnect solutions
Clear provision on cost and ownership of technical asset
From time of written request, interconnect complete within:
2 months if only CO data modification is involved
4 months if capacity expansion needed
7 months if new POI (1) needed
Time frame not strictly adhered to, varies from 4-6 months
Dispute settled primary via coordination
Arbitrated by MII and local government
Violation fine is very low (30,000 RMB max per offense)
Possible to claim for compensation due to non-cooperation of incumbents (the last resort)
RMB0.07/min for PSTN access of each end of call path
Settlement for IP based will follow scheme when trial finishes
Incumbents provide cabinet room and conduit access
In case there’s no excess conduit capacity, incumbent has to provide feasible expansion plan
Local practice will vary
Incumbent charges rental fee for conduit access
Incumbent charges for leased line needed for interconnect
Infrastructure and network investment related to interconnect are responsibility of both parties, separated from POIIncumbent obligation to interconnect
Interconnect timeframe
Enforcement
Account settlement
Access and collocation
Charges and feesIf CNC network is not covered by regulation, local negotiation will leave loophole for incumbent and add delay
Incumbent local practice varies, add complexity and delay to project
Incumbent can take advantage of timeframe loopholes, add delays at local level
Central control over local TAB(2) varies due to varied degree of separation, lead to different degree of just and resolution timeframe
Upward propagation to MII time consuming, adding delays to resolution
Future economics: up to 30% of revenue paid to PSTN based on 0.30/min IP rate
Incumbent can take advantage of capacity constraints to delay interconnect at local level
Some incumbent local branches require CNC to pay for investment, ownership goes to incumbent, adds cost to CNC serviceNote 1: Point Of Interconnect
2: Telecommunications Administration Bureau
19. CLEAR GUIDANCE FOR INTERCONNECT ALREADY PUBLISHED, LOCAL PTA OBLIGED TO FOLLOWLocal PTA can be resistant, also its organization not suitable for quick execution
The policy decision requesting local PTAs to corporate with interconnection trickles from top down: the central Þ provincial PTA Þ city PTA
City PTA before implementation will generally ask for lead time for verification with upper levels. E.g. in some cases new entrant has to wait for extended time period for this process
Under the Market Department’s coordination, there are up to 18 independent departments within each city PTA to cooperate for the execution and resource planning of interconnect
Each of these department can add delay to the process, lead times add up
In case of insufficient resource, the requesting and approval process for expansion / upgrade is even longer
Local PTA can easily use resource constraint as an excuse for delay in interconnection
… But interconnection is feasible
CNC has so far been able to reach interconnect contract at provincial levels
Most PTAs in CNC’s target cities displayed timely cooperation
In order to ensure quick execution, CNC should
Understand and incorporate into planning process the status of incumbent network resources
Give lead time in planning and communicating intention to interconnect with the incumbent
Build strong communication channel with all levels of PTAs
Co-ordinate for good timing across all levels; parallel processing to minimize time needed and clear bottleneckBACKUP
20. THE PROCESS OF LOCAL INTERCONNECT IS GENERALY SMOOTH But There’s Great Difficulty in Some CitiesInterconnect in major cities is smooth
e.g. BJ, SH, GZ
Great difficulty in some cities
e.g. WuhanFast agreement reached
From negotiation to implementation usually takes 2-3 weeks
Takes 4-6 month to complete negotiation
Issues:
- local CT branch attempted to curtail CNC by forbidding connections of multiple lines at CNC level
Resolution:
- resort to regulatory provision to reach IP phone interconnect agreement
- push off multiple line issue as future negotiation agendaBACKUP
21. TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (I)CurrentLikely scenarios for Y2000End userCustomer pays local PTA for PSTN usage
e.g. RMB 0.1 every 3 min to PTA
No settlement paid by CNC to PTA
Customer pays local PTA for PSTN usage
e.g. RMB 0.1 every 3 min to PTA
No settlement paid by CNC to PTA
CNC pays RMB0.14/min to PTA for both origination and terminationCNC charges customer IP-phone carrier rate
e.g. RMB 0.3/min paid to CNC (debit from prepaid IP phone card)
CNC charges customer IP-phone carrier rate
e.g. RMB 0.3/min
Per minute IP rate ¥0.44/min paid to CNC
otherwise CNC see margin reducingNo settlement
No settlement
No settlementCNCCNCEnd userPTASwitchSHPSTNSwitchCNC backbone(1)SwitchSwitchBJPSTNPTATransmission
(paid by CNC)Fees:12Transmission
(paid by CNC)Note 1: Currently leased from CT. Own backbone by July 2000Example
Inter-
connectionBackup
22. TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (II)Example: National Long DistanceBackupCNC pays
PTACNC pays
PTAKeep
IP-phone price the sameCustomer
pays PTA(1)IP-phone priceCustomer
pays PTAIP-phone priceNew IP-phone
priceCurrent IP-phone Trial Stage scenario: no settlementCNC Alternative ICNC Alternative IIPossible scenario
for 2000: no settlement1RMB/minNote 1: PTA charges customer on 3 minute units, RMB0.18 per 3 min. Calculation for this example uses average per minute rate of RMB0.06, assuming customer calls long enough duration.
Source: BJ PTAPossible scenario
for 2000: RMB0.14/min
settlement rate for both origination and termination ends2Increase IP price to cover settlement cost
Customer doesn’t pay PTA but perceive IP-phone price increase
CNC maintain current IP-phone revenueKeep IP price same
Customer doesn’t pay PTA nor perceive IP-phone price increase
CNC pays PTA out of IP-phone income
CNC revenue = 54% of current IP-phone revenue0.30.440.360.36CNC retains 100% of IP-phone price as revenueCNC retains 100% of IP-phone price as revenueThe RMB0.14/min settlement rate specified by current regulation is based on traditional fixed line economics. CNC would lobby for new settlement rate specific to IP-phone economics
23. KEY PRICING REGULATION ISSUES AND IMPLICATION TO CNCKey IssuesAssumptionsImplication to CNCRegulation follows cost-based pricing guideline
Carriers obliged to publish accounting data assisting pricing regulation
Price floor specified for incumbent
New entrant has flexible price range around incumbent rate
Local, NLD, IDD, wireless, satellite
National leased lines
Price Bureau within each provincial government sets prices according to local standard of living and inflation rates
Local PTAs will have autonomy
Since local networks have been built by local PTA investments, local PTA has strong influence on local price levelsGeneral pricing rules
Differential Treatment
Central control
Local control / Geographic practice
Usually high initial CNC cost position due to leasing access and settlement
Short term uncertainty in price based competitiveness
Some flexibility in pricing of CNC product offering
Advantageous long term competition capability over incumbent
Clarity in pricing is favorable to CNC
But limits CNC pricing flexibility
Disadvantageous local price based competitive position in some geographies
Varied cost structure across geographies complicates product management process, difficult for CNC to have consistent pricing, and hence, image.
24. LEASED LINE COST HIGHEST AMONG INTERCONNECT COSTSApproximately RMB 134K/month to Link up One CityItemCost per month (in RMB1,000)Leased line to local PTA
Capacity: 2 M bps
Number of channels: 30
Domestic LD transport(1)
Total for connecting up one city
Leased line to international gateway
E1 capacity
Total for IDD from one city9
100-150
109 - 159 Þ 134 average
320
454 average(1) Before CNC backbone construction completes, bandwidth for this segment is leased from China TelecomBackup
25. ROW AND ISSUES RELATED TO BULIDING LOCAL LOOPKey IssuesAssumptionsImplication to CNCTheoretically, CNC can assume privileged access to public resources, e.g. bridges and roads
There is no specific definition of ROW in most localities
In practice, there’s no free access
On time fee charged for digging as high as RMB 20K per km reimbursement to local municipalities
Labor account for 5-10% of total cost
Conduits in bridges and commercial buildings owned by municipal governments
Conduits in residential area largely owned by CT
Conduit access auctioned by local government when building completes
Once auctioned, additional conduits can not be easily added for 4-5 years
Utility privilege
Access fees and cost
Ownership & control
SchedulingTheoretical utility privilege does not guarantee local cooperation
Local access to conduit in most cities primarily rely on renting from resource holders e.g. CT, utilities etc.
Negotiation of rental largely on a case-by-case basis
Case-by-case negotiation will delay local loop buildout
Conduit access rights have to be purchased back from exiting holders
Planning and coordination needed to fit schedule
26. FREQUENCY FOR WIRELESS BB NEED TO BE ALLOCATEDCurrently Only Narrow Band Wireless Spectrum AssignedKey IssuesAssumptionsImplication to CNCNo clear regulation available and fierce competition expected in frequency bands for LMDS (25-38GHz)
1890-1900MHz and 1960-1980MHz reserved for FDD Mode WLL
1900-1920 reserved for cordless standards e.g. DECT
Wireless datacom in 821-825 and 866-870MHz range, NO voice traffic is permitted in this range
Frequency management policies implemented by local DTAs, in conjunction with PTAs and PTBs
Local frequency allocation is issued after PTA test and MII examination, a process of 6 - 12 months
Allocation remains fixed for 3-5 years on average
Frequency policies handled by local DTAs, problems resolved locally and appealed to MII
1975-1980MHz band occupied by DGT’s wireless access network in SH, BJ, GZ, SZ, FZ and Xiamen
1890-1895 and 1970-1975MHz occupied by Unicom in CD, TJ and CQ
Local wireless access licenses need to be obtained from local PTAs
Primarily to be controlled instead of frequency auctions
No overall regulation backing onetime solution
Roof top access and building access depend on case-by-case negotiations with property ownersFrequency band allocation
Administration of frequencies
License of service
Frequency fees
Roof top accessReserved frequency and available LMDS modulation affects viability and quality of CNC access solutions
Long circle of frequency allocation process will impact time-to-market for CNC solutions
Occupied frequency spectrums in key target cities expect to take long cycle of negotiation and migration
Cost of local wireless access solutions
local license application cycle delay and variation
Will introduce delays in key cities e.g. BJ, SH and GZ
Time to market to key target customers
27. OTHER REGULATIONS AND OBLIGATIONSKey IssuesLikely scenarioImplication to CNCLess transparent practices likely to remain for 4 -5 years before equitable policies are made
During the interim, incumbent is subsidized for USO by other carriers, reflected in account settlement prices: RMB0.07/min instead of RMB0.044/min
New entrant not expected to be obligated
… Instead indirectly participate in paying incumbent subsidy via higher prices
Expect to be thoroughly addressed over 1-2 years time
Regulation provides general end user right to choose LD carrier, access provider to assign default LD carrier
Enforcement is responsibility of local TAB within provincial governments
Technical solution requirement for incumbent not specified
Numbers, as national telecom resources, regulated by MII and local TABs, granted via allocation or auction
Regulation will specify coverage, service targets and timeframe
Regulation will specify usage fee for assigned numbers
Specific regulations and technical solutions not likely in 2-3 years
Currently no carrier has portability practicesUniversal Service Obligation
Equal Access
Numbering plan
Number portabilityIndirect USO subsidy affects price-based competitive capability and economics
Non-transparent USO contribution practices creates loopholes for incumbent to predate pricing
Customers’ willingness to switch carrier
Unprotected numbering resources affect viability of future CNC offerings
Timeframe requirement adds planning pressure and difficulty to solution
Customers’ willingness to switch carrier
28. KEY CNC BUSINESS OBJECTIVES AND CORRESPONDING REGULATORY IMPERATIVESThe Carrier’s Carrier, Enterprise Solutions and Offnet Voice business models require CNC to achieve the following business objectives, and hence actively lobby for favorable regulations3(3)333Carrier’s CarrierEnterprise SolutionsOff-net VoiceFiber local access solutionOff-net voice interconnect solutionLMDS broadband wireless access solutionBusiness ObjectiveImportant to realizing business model
29. OBTAIN FREQUENCY SPECTRUM IN 6 MONTHS TIME FRAMETo Ensure LMDS Solution Is Available Before June 2000Frequency Assignment
Feasibility Trial
Roof Top Access
Service License
Frequency FeeAdvocate MII to reserve the suitable 25-38GHz frequency range for LMDS applications. Clarity in provision should be obtained in the near future.
Advocate MII to sub-allocate suitable LMDS frequency spectrum to carriers in the near future
- finish national level planning for number of carriers
- provide a short list of alternatives to determine allocation scheme sub-bands within the feasible 25-38 range to planned carriers
e.g. 25 - 25.5GHz range reserved for CNC
or specific frequency spectrum auction plan
- frequency allocation should have nationwide coverage, not geography specific
Advocate MII to set specific migration procedure for occupied frequency spectrum with timeframe specified
Feasibility for LMDS solution should be technology specific instead of carrier specific(1), MII should publish acceptable solutions based on previous trials to avoid duplication of effort
Obtain approval from MII for feasibility trial in one key city (e.g. BJ or SH) for two considerations
- control of trail time frame
- early customer lock-in
Obtain carrier utility right and compensation procedure that has nationwide application from MII, avoid case-by-case cooperation
Obtain nationwide applicable service provider license based on spectrum allocation
Advocate MII to set frequency usage fee based on number of operational base-stations, multiplied by a per base-station feeKey Issues For
The LMDS Business ObjectiveCNC Imperatives deploying LMDS In 15 major citiesLMDSCNC
PriorityHighest/
ImmediateHigh/
Medium TermNote 1: Unicom will start trial in ChengDu before EOY1999, expected to finish trial around June 2000.
30. OBTAIN REGULATORY SUPPORT FOR UTILITY PREVILEGEAvoid Case-by-case Local Negotiation to Ensure Quick DeploymentFiber Local
AccessCNC
PriorityHighest/
ImmediateHigh/
Medium TermUtility privilege & ROW
Compensation fees for digging
Building Access
Scheduling for future access and capacityObtain specific regulation defining CNC’s utility right and obligation
Obtain specific regulation from MII for cooperation procedure with municipalities for access
- advocate MII to coordinate with Municipal Governments in 5 key cities for trial of cooperation procedure
- fix regulation based on trial for application in other cities
Obtain regulation governing cooperation timeframe
Advocate MII to coordinate with Municipal Governments in key cities for overall compensation produce and fee determination based on indicative indexes (e.g. Real Estate Index held by statistical institutions)
Obtain specific regulation based on result of MII coordination, for application in other cities
For Municipal Government controlled bridges and commercial buildings
- advocate regulation to include specific provisions for
obligation of building operator for conduit and equipment room access
conduit leasing fee scheme guideline
conduit provision timeframe
For China Telecom controlled buildings and residential areas, advocate regulation for access similar to that of interconnection
Advocate regulation for civil planning authorities to publish info and procedures in
- conduit capacity and auctioning and fees
- conduit ownership and transferring and fees
- regulation should specify guideline for fee determinationKey Issues For The Fiber Local Access Business ObjectiveCNC Imperatives In Building Fiber Access in 5 Key Cities
31. OBTAIN STRONG ENFORCEMENT AND FAIR SETTLEMENT RATETo Ensure Optimal Economics, Also Obtain Equal Access ProvisionsOffnet VoiceCNC
PriorityHighest/
ImmediateHigh/
Medium TermInterconnect Enforcement
Account Settlement
Equal Access
Advocate serious punishment clauses that are adhered to by all players and geographies, overseen by independent party
Advocate for specific regulation for access pricing based on incremental cost of network, eliminate incumbent predatory charge for interconnection
Advocate speed up of restructuring of incumbent’s organization to facilitate competition and cooperation
Advocate for new settlement scheme different from the current settlement for fixed/mobile telecom network interconnection
- clarify with regulation making body that economics difference between IP and traditional calls
- advocate settlement rate lower than the current RMB0.14/min rate specified for traditional network interconnection
- use international benchmark and LRIC (Long run incremental rate)
Advocate completion of new settlement regulation before current trial stage ends
Regulation for Prefixed Based equal access (e.g. same length prefix for all players) should be implemented within short time frame of less than 1 year
Advocate regulation for technology investment requirement for all carriers to provide solution to identify caller
- enables user to avoid dialing long prefixes
- enable enterprise users that demand differential service to have different priority treatmentKey Issues For The Off-net Voice Business ObjectiveCNC Imperatives In Offering Off-net Voice
32. SUMMARY: KEY REGULATORY RELATED CNC IMPERATIVESService licenses
Interconnect Enforcement
ROW and access
Frequency spectrum allocation and fees
Universal Service Obligation
Termination settlement
Equal Access
Numbering and portability
Granting of International gateway license and clarification of CNC full service license
Clarification of equal interconnect privilege for IP broadband network (e.g. CNC’s)
Serious punishment clauses that are adhered to by all players and geographies, oversaw by independent party
Access pricing based on incremental cost of network, eliminate incumbent predatory charge for interconnection
Restructuring of incumbents organization to facilitate competition and cooperation
Specific regulation defining new telecom entrants’ utility right and obligation, and cooperation procedure with municipalities for access
Overall compensation settlement produce and amount determination based on indicative indexes (e.g. Real Estate Index held by statistical institutions)
Specific allocation of 25-38GHz spectrum for LMDS applications
Approval of six-month CNC LMDS trial in target city e.g. BJ or SH
Specific procedures for occupied frequency spectrum reallocation/migration
Guidelines and procedures for local frequency resource allocation and fees
Transparent USO contribution regulation, eliminate indirect subsidy by higher price
Accounting separation of incumbent along business line and geography
Reporting and accounting procedure for Cost Based Settlement
Specific regulation governing responsibility and obligation for investment in equal access solutions
Public number resource allocation/auction/ transfer proceduresKey issuesCNC imperatives, key areas to advocateCNC
PriorityHighest/
ImmediateHigh/
Medium Term
33. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
34. KEY FINDINGS IN MARKET ASSESSMENT (I)1998 telecom market size estimated at RMB 239 BN, grow at 19% CAGR to RMB 676 BN in 2004
DLD/ILD voice at RMB 67 BN, with 6% CAGR growth to RMB 93 BN in 2004
Total datacom at RMB 24 BN, with 36% CAGR growth to RMB 154 BN in 2004
Offnet voice (IP-phone) represents the major opportunity near-term, market size passing 30% volume by year 2004; but window for CNC closing as competition intensifies and price declines
Datacom growth solid mid-long term, fueled by emerging services (conservatively estimated to be over 20% of total datacom by 2004)
Geographically, demand highly concentrated in top cities
Voice market 199 Bn in year 1998, 64% in top 60 cities
Data market 24 Bn in year 1998, 46% in top 4 cities
35. KEY FINDINGS IN MARKET ASSESSMENT (II)Business customer consumes 54% of voice market, 97% of data market
Large, medium enterprises are bulk users in the business sector (55% of Toa voice, >95% of total data)
Financial services, high tech, professional services, int'l trade, and top general manufacturing firms identified as major telecom
Telecom service quality and service levels are the key purchasing criteria among key (large and medium)customers
Carrier market at RMB 15 BN in 1998, grow at 10% CAGR to RMB 27 BN in 2004
ISP and mobile the main carrier segments: over 90% of total carrier market
36. CONTENTKey strategic principles
Regulatory overview
Market overview
Demand forecast
Geographic segmentation
Customer segmentation
Competition overview
Business models
Next steps
37. DEMAND MODELING METHODOLOGYProduct ACURRENT MARKET SIZE
By productProduct BProduct C.
.
.Driver 1Driver 2Driver 3Growth driversForecast using
Historical trend
Foreign benchmark
China-specific adjustmentProduct AProduct BProduct C.
.
.Driver 1Driver 2Driver 3FUTURE MARKET SIZE
By productIterationsIterations/ verify modelShare assumptions by product by year
Competitive environment
Foreign benchmark
Geographic coverageCNC REVENUE
by productFill in gapsBreakdown to growth drivers, test formulae/ relationship
38. 2004 TELECOM MARKET PROJECTED TO BE RMB 676 BNData And Internet Services Are The Growth Engine Going ForwardData(2)Internet(3)Other (4)(RMB Bn)99’-04’
CAGR (%)Voice (1)
Data (2)
Internet (3)
Other (4)55%
10%
0%
35%239TotalVoice (1)(1) Voice services include local, domestic long-distance (on-net & off-net), and international long distance (on-net & off-net, including Hong Kong, Macau and Taiwan)
(2) Data services include leased lines (mobile and paging operators, ISPs & business) and access ports
(3) Internet services include internet access (broadband & narrowband), web hosting / collocation, and other emerging services
(4) Other services include the sale and lease of dark fiber / conduits, mobile, and paging
Source: BCG analysis31236344150658767610%25%102%23%19%48%
9%
1%
42%46%
9%
2%
43%41%
10%
3%
45%39%
11%
5%
45%36%
12%
7%
44%34%
13%
10%
43%Telecom Market Size
39. 1998 TELECOM MARKET IS RMB 239 BNMarket Size
(RMB Bn)Local (63)DLD (48)ILD (18)Leased lines(0)
(23)Internet
access (1)Mobile (69)Paging (15)97’ - 99’ CAGR(0) Estimated
(1) Voice services include local, domestic long-distance (on-net & off-net), and international long distance (on-net & off-net, including Hong Kong, Macau and Taiwan)
(2) Data services include leased lines (mobile and paging operators, ISPs & business) and access ports; leased lines market estimated with CNC’s team inputs
(3) Internet services include internet access (broadband & narrowband), web hosting / collocation, and other emerging services
(4) Other services include the sale and lease of dark fiber / conduits, mobile, and paging
Source: China Telecom annual reports; CNC team inputs; BCG analysis(1)(2) (3)(4)38%23%20%Overall - 27%Backup
40. MARKET FORECASTBackup
41. BACKUP: DRIVERS AND ASSUMPTIONSBackupTo be updated
42. DATA AND INTERNET SERVICES SHOW SUBSTANTIAL POTENTIAL FOR GROWTH: 37% CAGR 1999-2004Leased Lines - ISPLeased Lines - BusinessMarket Size
(RMB Bn)24TotalLeased Lines - Mobile99’-04’
CAGRAccess PortsInternet AccessWeb Hosting / CollocationOther Emerging ServicesLeased Lines - Paging324160831141544%41%1%39%152%69%136%(1)(1) 01’-04’ CAGR
(2) 00’-04’ CAGR
Source: CNC team inputs; foreign benchmarks; BCG analysis84%(2)37%
43. EMERGING DATA SERVICES WILL ACCOUNT FOR MORE THAN 20% OF THE TOTAL DATA SERVICES MARKET BY 2004Existing data services marketEmerging data services marketTotal data services marketRMB BnYearRMB BnYearRMB BnYear99’-04’
CAGREmergingExisting99’-04’
CAGR99’-04’
CAGR31%238%37%Source: CNC team inputs; foreign benchmarks; BCG analysis
44. THE EMERGING SERVICES MARKET IS EXPERIENCING TREMENDOUS GROWTHMarket size (RMB Bn)Estimated emerging data services
Portal
Broadband - content
Broadband - network applications
IP VPN
Web Hosting /Collocation(1)(1) Listed separately in CNC market analysis
Source: BCG estimatesExamplesBackup
45. Emerging servicesOpportunities and challenges for CNCExpected market size in 2004 (RMB BN)Web hosting / collocation(1)Fit with CNC’s strategy as a leading backbone provider
Build relationship with large businesses
Need to develop specific capabilities, e.g. e-commerce applications, security
May lead to future application hosting opportunities5PortalB2B represents huge business values; opportunities to build relationship with large businesses; but first-mover advantage is important, competition may be fierce and market will eventually be dominated by a few big players
B2C portals’ target are end consumers; may not be the most profitable option for CNC16
(B2B: 5
B2C: 11)Broadband contentContent development not our priority
May form strategic partnerships with content providers; improve customer retention2Total emerging services market expected to reach RMB 32B by 2004, or more than 20% of the total data / Internet services marketIP VPNFit with CNC’s strategy as a leading backbone provider
Part of a complete product bundle (including Internet access, web hosting); help to build relationship and reduce churn
Need to address concerns including network security, end-to-end service1(1) Listed as “existing’ service in CNC market analysis
Source: international benchmarks; Morgan Stanley; BCG analysisBroadband network applications
(e.g. video telephony)Fit with CNC’s strategy as a leading backbone provider
Need to address issues including network performance and QoS-level guarantee1A NUMBER OF EMERGING SERVICES WILL BECOME ATTRACTIVE OPTIONS OF PRODUCT OFFERINGS FOR CNCBackup
46. CARRIER: EXPECTED SHARESCompetitorKey strengths / weaknesses20002004Expected shareCNCIP/DWDM backbone, bandwidth and cost leadership
Strike for excellent service and value for money
Weakness: late-starter<1%7%
mobile bb 26%
addr. ISP 15% China Telecom
Voice services
Satellite communicationsExtensive existing backbone
Existing local access, captive demand
Weakness: legacy system makes it difficult to cut down costs80%65%Existing coverage / user base
Weakness: bandwidth constraint5%5%UnicomEarly mover to market
Nearly complete coverage in 150 cities
Captive mobile demand
Weakness: In-fighting board, acrimonious relationship with CT10%20%JitongSolution primarily based on VSAT coverage, bandwidth constraint
Existing bandwidth primarily occupied by own IP phone service
Questionable excess bandwidth for resale5%3%Rationale / BenchmarkMobile operators
A high percentage of the leased line demand in local lines (80%), but CNC will have a relatively low share in local lines (~1%). For backbone, expect by 2004 about 40% will be IP-based and CNC will have a 65% share (as a dominant IP-backbone provider)
ISPs
Expect by 2004 about 70% of the market will be addressable (instead of being captive by China Telecom). Since there will probably be at least 5 to 6 backbone operators at that time, we expect about a 15% share out of this.
Paging operators
Not CNC prioritySource: CNC team inputs; BCG analysis
47. LARGE / MEDIUM BUSINESSES: EXPECTED SHARESCompetitorKey strengths / weaknesses20002004Expected shareCNCMultiple alternatives to ensure rollout/coverage in local access to targeted customers
Able to capitalize on different local practice at CT , and partnership with MOR
Need to build up capability & share quickly1%15%China Telecom
Voice services
Satellite communicationsIncumbent: existing customer base
Extensive coverage in local loop
Weakness: service back log, bureaucracy drags service quality
Legacy system in backbone, hinders ability to offer lower price/high bandwidth services74%55%Coverage/bandwidth limited
Weakness: bandwidth constraint in later years5%5%UnicomEarly to market, built local access in TJ/CQ/SC
Weakness: continuous management problems10%15%JitongAggressively going after market from current ISP base
Weakness: bandwidth constraint (VSAT-based solution)10%10%Rationale / BenchmarkIn 2000, CNC coverage and time-to-market limits share achievable
By 2004, expect CNC coverage of over 80% of the business demand, with overall share of around 20% in the business leased lines and Internet access markets.
Also expect to aggressively go into the web hosting/ coll, reaching 15% share by 2004. For other emerging data and Internet services, expect to get a 5% share due to the nature of more fragmented competition.Source: CNC team inputs; BCG analysis
48. OFF-NET VOICE: EXPECTED SHARESCompetitorKey strengths / weaknessesCNCLow cost based on new technology
Innovative & motivated management team
Favorable regulatory backings
Weakness: late to market, IP voice the only consumer oriented product (lacks synergy)China Telecom
Voice servicesIncumbent / early entrant
Existing coverage
No interconnect hassle
Weakness:
- higher cost position based on existing infrastructure
- cannibalize circuit voice servicesUnicomEarly to market
Synergy with mobile business
Weaknesses:
- initial stage unclear management focus
- Acrimonious relation with CTJitongQuick and successful launch in 1999 ,early to market
Aggressive marketing, high discount to distributors
Weakness: no long-term backbone solution
- satellite network may affect voice quality (latency)20002004Expected share15%28%55%40%15%20%15%12%Rationale / BenchmarkIn 2000, CNC deployment plan will not be as aggressive as our competitors; only about 60% of the IP voice market will be addressable. CNC will have about a 25% market share in these (addressable) areas.
By 2004, expect to cover all key areas. But CNC share will dropp from the peak of 33% in 2002 due to more competitors entering.
Benchmark:
In Hong Kong, 3 new entrants with call-back: 20-30% share in 2 years; i.e., incumbent <=70%; half a year after ISR, incumbent has <50% shareSource: CNC team inputs; BCG analysis
49. SHARE ASSUMPTIONSBackup
50. CNC REVENUE PROJECTIONBackup
51. 20002004CNC shareCNC shareMarket growthMarket growthMarket size RMB 10BRELATIVE ATTRACTIVENESS OF DIFFERENT PRODUCT CATEGORIES CHANGES IN THE NEXT FEW YEARS80%40%0%0%15%30%0%15%30%3000%50%0%300%Emerging dataIP voiceExisting datacomOn-net voiceCarrierOn-net voiceCarrierEmerging dataExisting datacomIP voice
52. CONTENTKey strategic principles
Regulatory overview
Market overview
Demand forecast
Geographic segmentation
Customer segmentation
Competition overview
Business models
Next steps
53. CHINA TELECOM MARKET CONCENTRATED IN TOP CITIESTop 60 Cities Account For 64% of the Voice & Data Market1998 Accumulated Revenue
(RMB Bn )(1) Excluding paging of RMB 14 BN
Source: Pyramid Report; China Statistics Yearbook; BCG analysisBJGZSZNext
11 citiesNext
45 cities223SHChina Total(1)050100150200250010203040506070
54. IP / OFF-NET VOICE REPRESENTS SUBSTANTIAL OPPORTUNITY IN NEAR-TO-MEDIUM TERMIP Voice Market Size (RMB Bn)CNC’s Expected Share (%)Estimated CNC Revenue and Profit (RMB Bn)RevenueLikely Profit(1)YearYearYearMarketShareRevenue / ProfitCNC’s share drops after 2002 when the IP voice market becomes more competitive(1) Estimated using a profit margin of 30% in 1999 down to 10% in 2008; based on foreign benchmarks
Source: CNC team inputs; BCG analysisProfit margin drops as competition intensifies and price decreasesIP voice continues to replace traditional circuit voice in DLD & ILD
55. FOR VOICE MARKET: IDD/MOBILE CONSUMPTION MAJOR SOURCE OF REVENUE IN TOP CITIESMobileSHBJGZSZOther
11 cities45 other citiesRest of ChinaSource: China Telecom; BCG estimate36%1998 voice market size
(RMB Bn)26%11%5%7%7%8%LocalDLDIDD3.12.31.6719.4302.92.42.30.4
0.34.413.8233.219.32.715.11.87.82.767.42.47.62.85.42.86.8BackupTotal: 199
56. GEOGRAPHICALLY EVEN MORE CONCENTRATED FOR DATACOM46% Revenue in Top 4 Cities1998 Data Communications Revenue
(RMB Bn )Source: Pyramid Report; China Statistics Yearbook; BCG analysisBackupNext
11 citiesNext
45 citiesTop
4 citiesChina Total24600+
57. GEOGRAPHIC SEGMENTATIONTop 4Next 11(1)45 others(2)Beijing, Shanghai, Guangzhou, ShenzhenFuzhou, Xiamen, Shijiazhuang, Zhengzhou, Wuhan,
Changsha, Nanjing, Xuzhou, Jinan, Tianjin, Hangzhou
Hefei, Chongqing, Foshan, Jiangmen, Shantou, lanzhou, Guilin, Quanzhou
Nanning, Haikou, Baoding, Daqing, Harbin, Qiqihar, Guiyang, Handan,
Tangshan, Luoyang, Xiangfan, Changchun, Jilin, Nantong, Suzhou, Nanyang,
Changzhou, Wuxi, Yangzhou, Nanchang, Anshan, Dalian, Shenyang, Chengdu,
Jining, Taizhou, Qingdao, Weifang, Weihai, Yantai, Taiyuan, Xian,
Urumqi, Kunming, Ningbo, Shaoxing, WenzhouBackupSample list: actual names of city may differ(1) According to CNC plan (on CNC backbone)
(2) Ranked by total GDP and GDP/cap, expected to correlate with telecom spending level
58. TOP CITIES BOAST HIGHEST TELECOM SPENDING PER CAPITA1998 Annual Telecom Spending Per CapitaRMB /capSH
BJ
GZ
SZ (1)
11 cities
45 citiesMobile525
444
1135
6721
117
60BackupIDDDLDLocalROC22233
256
397
2351
30
124176
200
348(2)
348(2)
66
5526240
187
239(2)
239(2)
105
7734(1) Large non-local/business traveler population base
(2) GZ, SZ estimated under same assumption
59. CONTENTKey strategic principles
Regulatory overview
Market overview
Demand forecast
Geographic segmentation
Customer segmentation
Competition overview
Business models
Next steps
60. BUSINESS CUSTOMERS REPRESENT 54% OF VOICE MARKET, 97% OF DATA MARKETLocal1998 Telecom revenue
(RMB Bn )ResidentialBusinessDLDIDDMobilePagingLeased linesInternetVoiceData35282227315323778230.80.26349186915231Source: China Telecom; Pyramid researchTotal
237
61. 4 BUSINESS CUSTOMER TIERS ARE IDENTIFIED ACCORDING TO MONTHLY TELECOM SPENDINGTier rankingTypical company profileCompany examplesTypical monthly telecom spending per office (RMB K)1Top high tech firm
Top international trade
Top financial institutes
Top news agency and ministry info centerEricsson, Motorola, Sinochem, Bank of China, XingHua News Agent500-10002Financial services companies (regional HO, foreign banks)
FIE/JV professional services companies (e.g. consulting firms, market research firms, law firms)
Medium size international trade firms and advanced general manufacturing companies (e.g. active application of ERP to improve efficiency, several locations in China) ABN AMRO, Pudong Development Bank, BCG, Xi'an Janssen, Tung Tai Food100-5003Local high tech firms (usu. 100-500 employees)
JV professional services companies (usu. Around 50-100 employees)
General manufacturing firms ( typically. 100-500 employees) SH Hua Teng, Nestle, Zhen Fong Electronics,
Gillette
10-100Small companies42-10
62. EACH TIER HAS DISTINCT NEEDS AND EXPECTATIONSTier RankingMost Important telecom needs
Increasing bandwidth
Increasing network coverage
Voice/data system integration
Improving the ability to using the internet for eCommerce
Increasing bandwidth
Increasing network coverage
Introducing new services to improve efficiency
Cost management
Increasing bandwidth
Handling growing demand for internet access
Installing and managing LAN/WAN
Cost management
Increasing bandwidth Products/services needed
Video conferencing
lower cost VPN
better link of wireless and fixed line phones(1)
VPN
Video conferencing
High speed data access to the office from home
Redundancy, to reduce dependence on China Telecom( esp. FS firms)
Lower cost, more reliable access to the foreign countries
Easy adjustment of telecom usage
High speed internet access
Telecom cost tracking system
High speed internet accessService Level expectations
Extensive access network coverage
One stop, flexible services
Detailed service level agreement (e.g. monthly downtime limit, on-site support time)
More responsive support services (e.g. quick fix of leased line problems)
Less lead time/ response time for telecom services (e.g. adding lines or bandwidth)
Less down time for reliable email/data transmission1
2
3
4
(1) Product/services CNC might not provide in near term
63. INDUSTRY TYPE AND CONSUMER TIER ARE HIGHLY CORRELATEDFinancial Services
General Manufacturing
High Tech
Professional
Services
International
Trade
Other industry
local voice, DLD
local data, international data, most of which are real time
Potential needs from ecommerce business involvement
local voice, DLD
local data for management systems, international leased line (for FIE)
Local voice, DLD, IDD (FIE)
local data transmission between HO and branches, international leased line (for FIE)
Extranet, VPN
local voice, DLD, IDD (FIE)
local data, international data(FIE)
local voice, DLD, IDD
local data between HO and branches
Internet, Extranet for ecommerce
local voice, (DLD)
dial up internet
no dedicated leased lineTier 1
Tier 2
Tier 2 (most FIE)
Tier 3 (other advanced)
Tier 1,2 (top FIE)
Tier 3 (local/medium)
Tier 2 (FIE)
Tier 3 (local/medium)
Tier 1 (largest)
Tier 2
Tier 3 or belowIndustry TypesMain Telecom NeedsTypical Tier Ranking
64. LARGE AND MEDIUM ENTERPRISES REPRESENT 62% OF TELECOM SPENDING IN BUSINESS SECTOROver 95% For Data Services48431616Small(1)
(Tier 4 and below)Voice (107)Data (23)1998 Revenue (RMB Bn )(1) Size definition according to China Statistics Yearbook
Source: China Telecom, Pyramid Research, China Statistics Consultants Co., China Statistics Yearbook, BCG estimate61Large(1)
(Tier 1,2,3)Medium(1)
(Tier 3, Tier 4)4,6002042# of companies (‘000)Total: 130
65. EXAMPLE: KEY INDUSTRIES AND COMPANY PROFILECompany nameABN amro bankGangao SecurityPudong development bankXi’an JanssenNestleAdvance ElectricsEricsson (SH)Ericsson (BJ)Hua TengBCGHorizonOverseas tradeCompany nameSHBJBJSinochemEast NetGubei Real EstateBJSHSHSHSHSHSHSHSHSHSHSHTier ranking2222332132421N.A.N.A.Telecom spending RMB per m2/month1472506756202332515033677050N.A.N.A.N.A.Telecom spending RMB per/cap/month 31432000100055640175024024004172000538167N.A.N.A.N.A.OtherTradePSHTGMFSBackupInfo. high wayBJN.A.N.A.N.A.
66. A TYPICAL BUSINESS BUILDING GENERATES ~4.5 MM RMB TELECOM REVENUE PER MONTHBackupTypical Business Building# Company
(by type)1~2 Tier 1
3~5 Tier 2
50-60
Tier 3
~30
Tier 45000m2
15000m2
4000m2
750
250
50
4Typical Spending Per Month (K RMB)1,500
3,000
120===(1) Gross Floor Space
Source: BCG interview, BCG analysisGFS(1): 30,000m2
Occupancy: 80%Average in SH:
3,000 (RMB K)Total: 4,620
(RMB K)either
x
or
x
x
x
67. INTERVIEWS CONDUCTED TO ASSESS CUSTOMER NEEDS AND TRENDS, TO COMPLEMENT AND VERIFY SECONDARY DATAIdentify key customer needs, ensuring CNC supplies what our customers need
Telecom needs in the coming 1 to 3 years
Expected growth in telecom spending
Verify assumptions on key customer segments
Typical customers’ profile (industry type, office size, # of employees, avg. monthly spending, FIE/SOE, etc.)
Typical purchasing decision process/patterns
Test possibility and criteria for customers switching to CNC, hence CNC addressable market and plausible share in a building
Main dissatisfactions toward current telecom service providers
What will make customers be willing to switch? What are their key concerns regarding switching?
Estimate demand for typical business buildings, to enable local access economic modeling
68. IN DEPTH INTERVIEWS REVEAL SIGNIFICANT OPPORTUNITY FOR NEW ENTRANT TELCOSLong process for CT to meet customer requirements, which is fast-growing
On average, expecting 5-10%per account yearly growth in the expenditure on data services; key growth driver in data usage penetration in enterprises
Demand for data services driven by the increasing needs for management tools (e.g. ERP), Internet access, eCommerce capability, etc.
Bandwidth usage for most large companies still relatively low
A few leased lines; mostly 64-128kbps, only a few at 512kbps
Would welcome higher bandwidth at reasonable cost
Major discontent is in response time and service quality
Long lead time to install service, e.g. more than half a year for an international leased line
Never inform consumers of service down-time, take an ‘intolerably long time’ to fix
Big users don’t feel favorably treated when their inquiries processed with residential and small business users’ through a common service number 112
Hence price is not the primary factor for switching to CNC
Quantified service level guarantee and excellent service quality are the key switching factors for big and medium size business usersBackup
69. SERVICE QUALITY & SERVICE LEVEL ARE THE KEY SWITCHING FACTORSEspecially for Tier I & 2 CustomersSwitching CriteriaProduct/
Service quality
Service level
Price
Product offering
Relative maturity as telecom customer
Tier 1Tier 2Tier 3Tier 4Source: BCG interviewImpact on switching decision weak strong
70. CUSTOMER EXPECTING GROWTH IN DATA SERVICES EXPENDITURE“We expect 5-10% increase each year in data services spending mainly because of the using of ERP and the pursuit of ecommerce opportunities.”
- Head of Communications, Sinochem
“Many things will drive up our telecom needs rapidly in the near future: the growth of the company size, the increasing traffic between HQ and branches, the increasing needs for product testing and development, and the development of ecommerce capability. I think our company’s data services expenditure will continue to grow at 5-10% per year.”
- Head of Communications &Network, Shanghai Hua Teng
“We are seeing our trader group expanding at very fast pace. Our telecom spending, especially data services spending, will definitely go up fast (at least more than 15% per year) if our business continues to grow.”
- Branch Manager, GangAo Securities
“Our current MIS system requires more frequent data transmission between sub-branches, branches and the HQ. We are replacing all dial-up with leased line and adding bandwidth. Telecom spending will thus increase.”
- IT DIV. Mgr., Pudong Development BankBackup
71. CUSTOMERS CAN BE WON OVER BY MEETING GROWTH NEED China Telecom’s Slow Pace and Long Cycle is Major Area of DiscontentISPs seeking alternatives to CTBusiness Clients also frustrated“ As we build up strong momentum in customer base growth, having the right capacity at the right time is critical. China Telecom, with their own network development plans, tends to starve us on capacity or to force us to pay in advance for excess capacity.”
- Founder, EastNet
“We want to build our own national brand, but the fact that it takes China Telecom two months every time we need an extra line makes us very difficult to have our own customers. We want another operator who can get us leased lines fast.”
- Manager, Div. Of Customer Develop, Information Highway (IHW)“We’re are fretting over our customers’ complaint about increasing difficulty to access time critical information and perform trades. Our request for bandwidth upgrade were submitted to China Telecom months ago, nothing’s happening.”
- Branch Manager, GangAo Securities
“We need help to easily adjust our usage of telecom services, such as adding lines or bandwidth. CT’s not very responsive to our requests.”
-Head of Communications &Network, Shanghai Hua TengBackup
72. RESPONSE TIME AND MEASURABLE SERVICE QUALITY ARE DIFFERENTIATION FACTORSCustomers need quantifiable metrics“We are not satisfied if the carrier simply gives us qualitative reports about downtime in general - We are interested in quantifiable, detailed MTBF(Mean Time Between Failure) and recovery time reports as measurement of service quality. So far China Telecom failed to deliver on it.”
- IT Manager, Ericsson
“When our Leased Line link is down, we need an expert at the other side to answer our specific questions. The 112 Customer Service number China Telecom provides for both residential and business customers merely adds frustration and delay.”
- IT Manager, Ericsson Beijing HQ
“As one of the biggest telecom users, we will certainly require favorable treatments, like bandwidth guarantee and priority in IP phone processing.”
- IT Manager, SinoChemKey customers require specialized careBackup
73. TELECOM SERVICE QUALITY AND SERVICE LEVELS ARE THE KEY PURCHASING CRITERIA AMONG KEY CUSTOMERSOne-stop, end-to-end solution desiredPrice is important, but not predominant“Multiple carriers had approached us with various service propositions. Our answer is: We’re committed to sign up if it can give us one contact point for a total solution and service agreement.”
- IT Manager, Ericsson
“P&G has clear initiatives in building world wide VPN and driving eCommerce growth. When it comes to data infrastructure, what intolerable is the delay in contract arrangement for each of the building blocks.”
- Manager, Data & Computing Services, P&G
“Lower price may appear attractive. But we won’t consider using services any less reliable than CT’s services - even if they are of much lower price.”
- IT Mgr, Pudong Development Bank
“We are definitely more concerned with the overall telecom service performance and reliability. I would say price is not the primary concern for any financial institutes.”
-MIS Manager, ABN AMRO Bank
“As a trade company, we welcome lower price service providers. But we are not going to make compromise on service levels and qualities. International call over IP is much cheaper than IDD, but is inconvenient to use and the current voice quality is unsatisfactory.”
- IT personnel, Overseas TradeBackup
74. ISP AND MOBILE ARE THE MAJOR CARRIER SEGMENTS(1) Customers include MOR, CATV and other large volume users
Source: Pyramid research; BCG analysisDark Fiber, Conduits & Access Ports(1)
Paging
ISP
MobileN/A
0.2%
46%
5%CAGR (98-05)Carriers’ market size
(RMB Bn )142080.60.60.61.1010203019982005 (projected)0
75. BOTH CHALLENGES AND OPPORTUNITIES FOR CNC TO ADDRESS CARRIERS’ NEEDSISPs looking for alternatives to CT ...
More reliable services (backbone, international gateway)
Broader bandwidth at a reasonable price
Less lead time for adjusting info needs (e.g. adding line/bandwidth)
… also worry about carriers compete directly with ISPs
CNC best positioned to address such needs
But need to address ISP’s concern of CNC’s 171 as competitionISPMobile carriers still concerned with IP voice quality
More lead time expected before toll quality will be achieved and carriers will be willing to lease IP backbone
Tradition link of Mobile Operators with CT weakening over time
Opportunity for CNC, but CNC needs to provide value-for-moneyMobile
76. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
77. COMPETITIVE SUMMARYRegulatory response to WTO development will lead to more open market in general
More emerging (Type II) players in the Value Added Service areas
Emerging players more likely to become CNC customers than competitors
China Telecom’s split along service lines will create cooperation opportunities to CNC
Geographical break-up of China Telecom fixed line services uncertain, opportunity of cooperation for CNC
Break-up may not be complete, as former China Telecom constituents still hold commanding share at least till year 2005
Unicom might emerge as CNC’s arch-rival if internal conflict ends
Jitong has built quick customer response capability based on VSAT platform, but would largely remain as a minor competitive force due to bandwidth constraint
Not excluding cooperation opportunity
Therefore, Initial assessment asserts CNC to target about 20%+ long term share in the Carrier, Large/Medium Enterprise Solutions markets
78. China UnicomCOMPETITIVE LANDSCAPE TODAY: 1999 (I)ResidentialBusinessSegmentsFull-service providersValue Added Service ProvidersCellular
Internet access
Broadband applications
On-net voice
Off-net voice
IP phone
On-net voice
Off-net voice
Internet access
Leased line
VPN / other broadband applicationsMultiple ISP’sLocal
MSOsSatelliteCNCChina
UnicomPagingChina TelecomSatellite
Communications
CorpMobile
Communications
CorpFormer
China
TelecomFormer CT pagingHold license
/ Deploy ?JitongJitongJitongCNCMultiple
ISPsCNC
79. COMPETITIVE LANDSCAPE TODAY: 1999 (II)Competitors In Telecom MarketsTargeted offeringsCarrier’s CarrierSwitchedVoiceAllDLDILDIPLarge/medium business customersChina TelecomChina Telecom SatelliteUnicomJitongCompetitor33333(3)(3)3TJ, CQ, Sichuan333333CNC3333
80. 2 SCENARIOS WILL EMERGE IN COMPETITIVE LANDSCAPEDepend on Interaction of Pro-competitive regulation and FDIPro-competitive Regulation
ImplementationActiveness of FDI
Number of FDI backed players
Intensity of FDI fundingLandscape today
Few basic carriers
Limited number of type II carriers
Low FDI activity
Funding depend on internal resourcesScenario 2: Open Competition
In the VAS area
Controlled number of basic carriers
Numerous active FDI backed regional/Type II playersOpen
CompetitionClosed
CompetitionLatentActiveLikely in 2004Less
likely
in 2004 Scenario 1: Open in all fronts
Multiple CLECs and IXCs
Numerous regional/Type II players
up to 50% FDI
81. MOST LIKELY COMPETITIVE LANDSCAPE IN 2003/4ResidentialBusinessSegmentsFull-service providersValue Added Service ProvidersCellular
Internet access
Broadband applications
On-net voice
Off-net voice
IP phone
On-net voice
Off-net voice
Internet access
Leased line
VPN / other broadband applicationsMultiple ISP’sProvincial
MSOsSatelliteCNCChina
UnicomPagingCT broken into regions
Six regional operating companies for NLD
HQ controls international and data
Satellite
Communications
CorpMobile
Communications
CorpFormer
China
TelecomFormer CT pagingJitongJitongJitongMultiple ISR playersMultiple I-Phone playersMultiple ISR playersMultiple I-Phone playersUtilitiesCATVsMultiple
Regional
PlayersMultiple VANsMultiple ISP’sMultiple
PlayersCNC4-5 more
national
playersCATVs
82. LIKELY SCENARIO MEANS MORE OPPORTUNITY THAN THREAT1-2 type II new entrants in each locality likely allowed by regulation
CNC low cost IP based backbone provide national/international access and transport
Initial market research point to CNC’s aspired one contact services attractive to type II playersNew entrant ISPs, MSOs and Wireless Carriers as potential customerLocal autonomy and separate P&L lead to flexibility in partnership
CT local bandwidth requirement not easily accommodated by national plan due to separate investment ownershipPaging, Wireless, ISP services separated from incumbent as potential customerBecoming more responsive to key customer needs
Starting to form allegiances with new entrants (e.g. CT with Unicom in wireless)
Increasingly focus on building datacoms capabilities in anticipation of demand growth
Building capability to bring quick solutions to key customers (e.g. JT with VSAT)Incumbents building flexibilityOpportunityThreat
83. CHINA TELECOM (I)99%Recent split along service lines, national paging service folded into UnicomBut each former China Telecom constituent still holds dominating share in respective market *:China Mobile Communications Corp.China Telecom
(Voice and Data Services)China Satellite Communications Corp.National Long Distance ServicesInternational Long Distance ServicesBroad-
band
Data ServicesISP
service
(163, 169 China-Net)National / International LevelRegional LevelMunicipality
/ City LevelProvincial
LevelLocal Voice and Data ServicesLikely to further break down into 6 regional companiesLikely to remain as one national entity
VSAT based backbones and local base stationsLikely to remain as one national entity
Holding local GSM networks and frequenciesLikely to remain as one national entityLikely to further break down into 6 regional companies~100%~100%90%80%+95%100%* As of 3Q 1999
84. CHINA TELECOM (II)The fixed line services of China Telecom will likely to be broken up into 6 regional companiesGenerating significant competitive impact to CNCPotential threat:
Separate P&L improve ability to have business focus and cohesive control
FDI cooperation become more feasible
Resulting in overall stronger competitor
CNC expect 4-6 years’ window of opportunity to establish and preempt competitive disadvantage
CT’s huge amount of complexity in control and asset will delay separation process
CT’s management in-flights need to be resolved before significant progress made
Central regulatory maintain tight control on FDI in basic telecom services
Expect only some baby CT could establish successful coop with strong FDIChina TelecomWest China TelecomSouthwest China TelecomNorth China TelecomEast China TelecomSouth China TelecomCentral China TelecomBroken upLocal networks will belong to the region
Uncertain if there will be a separate national long distance carrier
Further breakdown along geographical lines possible
85. CHINA TELECOM (III)Key strength
Unmatched existing infrastructure:
- international gateway in BJ, SH, GZ and SZ;
- 18 International SOC(1); “8X8” national FO backbone of 173,000 km;
- ChinaDDN, ChinaPAC, ChinaFRN, ChinaX.25, ChinaNET comprise national datacom coverage
Holds critical resources in local networks and largest business and residential customer base
Key weakness
Management team and organization not competition ready
Slow to provide total solution in product offering and support, due to multilevel/department control
Competitive move
Reducing tariffs (latest in 3/99) and installation fees (latest reduction up to 50%), led to subscriber base boom; Offer 50% - 70% discount on DLD, eliminated administrative fees
Increasingly try to raise value of each subscriber, e.g. installation of 2nd phone line, VAS
Aggressively investment in datacom: 1998-1999 growth 24%
Improving customer service to key accounts (e.g. Ericsson)
Threat / Opportunities presented to CNC
Before complete and transparent regulatory implementation, strong ties with local telecom administration will remain powerful leverage against new entrants
Currently holds ~100% business customer base, network effect and CT’s initiative to improved service will add difficulty for CNC to persuade switch
After CT split, mobile and ISP service have potential to become customers or partners to CNC
Uncertainty around regional breakup of fixed-line services, if split may present cooperation opportunities(1) Submarine Optical Cables, CT SOC connects to Japan, Korea, Europe (including land cable) and US
86. UNICOMEntrenched new player
The only other GSM carrier besides CT, the only CDMA carrier. Holds ~5% share wireless market
Licensed to operate local service in TJ, CQ and Sichuan province, TJ service rolled out with 10’000 users
Inherited CT’s profitable paging service with RMB14bn in asset value, and 41M subscribers
Received MOR’s telecom assets worth RMB10bn, with 42,000km SDH FO links covering 500 L/M cities
Key strength
Backbone coverage to all major cities nationwide, with self-built intra and inter provincial FO backbones covering 25 provincial capitals, plus the MOR backbone (one of the largest reseller of capacity)
Own access networks in some key cities (e.g Tianjin) enables short time-to-market
Key weakness
Lack of cohesiveness in management and organization
Lack of focus in business strategy and product offering
Competitive move
Sets priority on Datacoms and Mobile network development, and long distance services
Won approval to offer direct Internet access and VPN services to business customers, covering 100 major cities and most of China’s local nets
Recently started wireless local loop trial in CD, targeting commercial service by mid-2000, also begin LMDS trial by EOY 1999
Threat / Opportunities presented to CNC
Emerge as strong competitor to CNC’s targeted business customer base
Uncertainties around possibility for CNC to resell capacity to its mobile services
87. JITONGPrimarily an ISP, with aggressive targets in business market
Holds one of the two existing Internet backbones
National VSAT covering 14 provincial capitals
Key strength
VSAT based solution provides flexibility and quick response to ensure rollout/coverage in local access to targeted customers
International gateway presence in BJ, SH, and SZ
Holds large business and residential datacom user base
Key weakness
Bandwidth with existing primarily VSAT based backbone primarily occupied by its ISP service
Weak management team, lacks clear vision in network building and service offering
Competitive move
Aggressively targeting business customers in key geographies
Aggressively seeking funds for network buildout, planning IPO in early 2000
Threat / Opportunities presented to CNC
Has aggressive plan targeting business customers in key cities, e.g. SH, BJ
Cooperation opportunity likely to exist for CNC IP/DWDM backbone to offer transport capacity
88. HIGH POSSIBILITY FOR COOPERATION AT LOCAL LEVELCompetitorChina Telecom fixed line ServicesChina Telecom Wireless
Unicom (include former CT paging services)MethodProbabilityMethodCNC’s shareRationale/commentsPotential partnershipPotential as carrier customerInterconnect
Leased line for local access100% for VoIP
1999-2000: 50% of targeted cities
2001-2004: 60% of targeted citiesInter-city traffic diverted to CNC backboneInter-city traffic through CNC backbone as backup20% of total CT wireless traffic goes through CNC backboneAt most 5% of inter-city traffic goes through CNC backboneRequired by government, but expect some delay in implementationCT backbone is assumed to be CT wireless’ primary carrier
CNC IP/DWDM back bone as complementary carrier with lower costCNC only complements areas where Unicom cannot cover
CNC as low cost backup solutionJitongCNC backbone provide back-up bandwidth20% of total Jitong trafficJitong’s primarily VSAT based backbone will not meet expansion needCATVHFC as local access partner in major citiesOver 50% possibility in CNC target cities, if fiber availablecarrier customer and fiber leasing
2000-2002: 5 key cities
2003-2004: 15 major provincial capitalsCNC fiber only complements areas SARFT lacks coverage
ISPscarrier customer1999-2000 10%
2000-2004 40%CNC high speed back bone is effective to drive up end user demand
89. CARRIER: EXPECTED SHARESCompetitorKey strengths / weaknesses20002004Expected shareCNCIP/DWDM backbone, bandwidth and cost leadership
Strike for excellent service and value for money
Weakness: late-starter<1%7%
mobile bb 26%
addr. ISP 15% China Telecom
Voice services
Satellite communicationsExtensive existing backbone
Existing local access, captive demand
Weakness: legacy system makes it difficult to cut down costs80%65%Existing coverage / user base
Weakness: bandwidth constraint5%5%UnicomEarly mover to market
Nearly complete coverage in 150 cities
Captive mobile demand
Weakness: In-fighting board, acrimonious relationship with CT10%20%JitongSolution primarily based on VSAT coverage, bandwidth constraint
Existing bandwidth primarily occupied by own IP phone service
Questionable excess bandwidth for resale5%3%Rationale / BenchmarkMobile operators
A high percentage of the leased line demand in local lines (80%), but CNC will have a relatively low share in local lines (~1%). For backbone, expect by 2004 about 40% will be IP-based and CNC will have a 65% share (as a dominant IP-backbone provider)
ISPs
Expect by 2004 about 70% of the market will be addressable (instead of being captive by China Telecom). Since there will probably be at least 5 to 6 backbone operators at that time, we expect about a 15% share out of this.
Paging operators
Not CNC prioritySource: CNC team inputs; BCG analysis
90. LARGE / MEDIUM BUSINESSES: EXPECTED SHARESCompetitorKey strengths / weaknesses20002004Expected shareCNCMultiple alternatives to ensure rollout/coverage in local access to targeted customers
Able to capitalize on different local practice at CT , and partnership with MOR
Need to build up capability & share quickly1%15%China Telecom
Voice services
Satellite communicationsIncumbent: existing customer base
Extensive coverage in local loop
Weakness: service back log, bureaucracy drags service quality
Legacy system in backbone, hinders ability to offer lower price/high bandwidth services74%55%Coverage/bandwidth limited
Weakness: bandwidth constraint in later years5%5%UnicomEarly to market, built local access in TJ/CQ/SC
Weakness: continuous management problems10%15%JitongAggressively going after market from current ISP base
Weakness: bandwidth constraint (VSAT-based solution)10%10%Rationale / BenchmarkIn 2000, CNC coverage and time-to-market limits share achievable
By 2004, expect CNC coverage of over 80% of the business demand, with overall share of around 20% in the business leased lines and Internet access markets.
Also expect to aggressively go into the web hosting/ coll, reaching 15% share by 2004. For other emerging data and Internet services, expect to get a 5% share due to the nature of more fragmented competition.Source: CNC team inputs; BCG analysis
91. OFF-NET VOICE: EXPECTED SHARESCompetitorKey strengths / weaknessesCNCLow cost based on new technology
Innovative & motivated management team
Favorable regulatory backings
Weakness: late to market, IP voice the only consumer oriented product (lacks synergy)China Telecom
Voice servicesIncumbent / early entrant
Existing coverage
No interconnect hassle
Weakness:
- higher cost position based on existing infrastructure
- cannibalize circuit voice servicesUnicomEarly to market
Synergy with mobile business
Weaknesses:
- initial stage unclear management focus
- Acrimonious relation with CTJitongQuick and successful launch in 1999 ,early to market
Aggressive marketing, high discount to distributors
Weakness: no long-term backbone solution
- satellite network may affect voice quality (latency)20002004Expected share15%28%55%40%15%20%15%12%Rationale / BenchmarkIn 2000, CNC deployment plan will not be as aggressive as our competitors; only about 60% of the IP voice market will be addressable. CNC will have about a 25% market share in these (addressable) areas.
By 2004, expect to cover all key areas. But CNC share will dropp from the peak of 33% in 2002 due to more competitors entering.
Benchmark:
In Hong Kong, 3 new entrants with call-back: 20-30% share in 2 years; i.e., incumbent <=70%; half a year after ISR, incumbent has <50% shareSource: CNC team inputs; BCG analysis
92. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
93. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
94. Economic modelingChoice of business models
to pursue and timingRoadmap for pursuing business models and expected financial performance
Integrated approach to CNC business planMajorissuesExpectedoutput
How do the market sizing and share assumptions translate into overall top line revenue for CNC?
What capital investments will be necessary to build out metro and long haul fiber networks?
Predicted cash flow profile by business model and selected scenariosAssessment of
market opportunities
How will China datacom market develop?
How large is the overall opportunity for a new entrant?
Overall market sizing and revenue forecast by product areaRegulatory and competitive
analysis
What type of regulatory environment will evolve in China?
Will equal access for voice and data be granted and when?
What effect will WTO have?
Regulatory mapping and CNC share predictions across scenarios
Strategic implications and capabilities assessmentMETHODOLOGY BEING USED TO DEVELOP BUSINESS MODELS AND OVERALL STRATEGY- Current areas of focus
95. CNC AT A CRITICAL STRATEGIC CROSSROADSPreliminary ConclusionsRecommendations/Decisions to be MadeOffnet VOIP predicted to generate to provide breakeven economics for building backbone1
Wholesale revenue provides significant upside potential
Majority of wholesale revenue relies on access to mobile carriers
Enterprise solutions economics very attractive, but substantial complexity and resources involved
High-bandwidth international gateway critical to success in both wholesale and enterprise
Economic predictions highly sensitive to a set of key assumptions
Accelerate vendor selection and backbone construction; time to market critical
Commitment to utilizing IP/DWDM invlolves risk to mobile carrier business
RFP to vendors should be based on product requirements vs. technology
Staging of investments and service launch must consider tradeoff between quality of service and coverage
Preliminary talks with international carriers should begin ASAP
Scenario modeling will help us decide where to focusOverarching question: Can CNC successfully pursue all
opportunities outlined in the short/medium term? (1) Assuming settlement fees of 10% of revenue
96. Overall approach
Where
How
BUSINESS MODELS SUMMARY: THREE CORE ELEMENTSEnterprise SolutionsCapture datacom growth in key business centers with leading-edge products and superior customer service
Top business districts in major urban areas; only the most dense areas in short term
Focused Deployment
Leverage existing conduits to lay in major urban areas
Superior service and bandwidth
Target CT’s weakness in service and bandwidth
Utilize LMDS in intermediate cities and areas where time to market is critical Wholesale/CarrierTarget mobile carriers and ISPs with backbone transport; consider supplying fixed-line incumbents
Cover POPs in all major calling zones; develop local leased lines network in key locations
Aggressive deployment of backbone infrastructure to provide unparalleled bandwidth
Establish high bandwidth international gateway to differentiate internet access
Superior service with clear positioning
“The clear alternative to CT”
ISPLong distance voiceCapture early revenue from to fund development of subsequent business models
Top 60 POPs by end of year 2000 utilizing mix of leased lines from CT and CNC network
Position offnet voice as first product from “China’s first datacom carrier”
Do not overextend resources in VOIP as it does not fit CNC’s long term strategy
Create “dial-around” solutions for business and interconnect terms- 17930 -
97. Enterprise solutions
POTENTIAL BUSINESS MODELS COVER WIDE RANGE OF PRODUCT/MARKET ALTERNATIVESOpportunity for growthCurrent market sizeWholesale/
carrierConsumer ISP?Domestic and International Long Distance VoiceResidentialMed/large enterprise customersCarriersPotential traffic per consumerProductsEmerging datacomDataVoiceEmerging data
niche
98. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
99. APPROACH TO DOMESTIC AND INTERNATIONAL VOICE BUSINESS MODELObjectivesHypothesized ApproachCapture early revenue from launch of prepaid IP calling cards
“Cash cow” for funding other business model development
Pursue prefix and equal access long distance for business customers as soon as possible to begin establishing relationships
Manage pricing and product life cycle effectively to maximize total margin and avoid investing in declining products
Do not overextend ourselves nor blur our “datacom” imageFight the regulatory battle to ensure favorable approaches to equal access and interconnect
Market calling cards to business customers in the short term for travelling personnel
Emphasize quality image/brand to distinguish from CT and Unicom--position calling card as first step in becoming a next generation full services provider
Establish mechanisms to link marketing expenditures with revenue and margin growth by product to ensure effective investment
Emphasize low cost targeted marketing and loyalty programs
Do not overextend
Always emphasize advanced technology and evolution to full services provision
100. DOMESTIC AND INTERNATIONAL VOICE SUMMARYPreliminary EconomicsPhase I CapEx (2000,2001): ~3.8 B RMB
Fiber/construction: ~2.4 B RMB
IP/DWDM equipment: ~720 M RMB
POP/VOIP: ~530 M RMB
OSS/Network management system: ~100 M RMB
OpEx expected to be ~30% of revenue by 2002
Market share and revenue estimates - 2002
Offnet DLD: 30%
Offnet ILD: 30% ~ $2 B RMB
IP Intl. termination: 27%
5 year NPV: Essentially breakeven considering offnet voice alone1
Key Issues to be AddressedInterconnect agreements with local PTA’s; attempt to obtain blanket policy from MII
International gateway license and connectivity
Settlement charges commensurate with VOIP pricing
Development of business offnet strategy
Scalable “dial-around” solutions in short term
Equal access longer term
Quality of service for voice, must approach switched quality rapidly
Point of diminishing returns for adding VOIP gateways vs. strategic value of providing coverage(1) Highly sensitive to settlement fees
101. LARGE MARKET WITH POTENTIAL TO GAIN SHARE QUICKLYNew entrants typically gain share quicklyExample: IDD and DLD servicesMarket sizeable - off-net traffic accounts for ~15% of total DLD/ILD revenue by 2004Source: China Telecom annual reports; CNC’s team inputs; BCG surveys, analysis & benchmarkingYear after entryOptus (DLD)Tele 2 (DLD)Mercury
(DLD)Hong Kong (IDD)Japan (IDD)US (IDD)(RMB BN)DLD On-NetDLD Off-NetILD On-NetILD Off-Net(%)
102. CAREFUL MANAGEMENT OF PRE-PAID CALLING CARD BUSINESS NECESSARY TO ALIGN WITH LONG TERM STRATEGY Prepaid calling cards call for different capability set and target customers than longer term business models
Focus on consumers will not complement long term vision of providing enterprise solutions
Mass advertising and marketing around a low-cost position may not fit image required for future needs
Three factors important to consider in managing prepaid calling card business
Attempt to position cards in marketing messages as the first product from a company that is building the most advanced network in PRC
Consider selling cards to businesses for their traveling personnel to begin establishing enterprise relationships
Carefully manage product life cycle to begin pulling back marketing investment as wholesale and enterprise business models grow
103. CNC VOIP REVENUE AND MARKET SHARE EXPECTATIONS
Source: CNC’s team inputs; various benchmarks; BCG analysisVoice revenueShare assumptionsCNC Revenue
(RMB BN)Off-Net DLD% of total CNC revenue100%76%37%30%23%16%Off-Net ILDInternational Termination1999
3%
80%
1%
3%
80%
1%
5%
80%
0%Off-Net DLD
Off-net share of total DLD
Geographic coverage of CNC
CNC share within coverage
Off-Net ILD
Off-net share of total ILD
Geographic coverage of CNC
CNC share within coverage
International Termination
IP share of total
Geographic coverage of CNC
CNC share within coverage2000
10%
60%
25%
11%
60%
25%
11%
60%
20%2001
17%
75%
29%
18%
75%
29%
18%
75%
25%2002
23%
90%
33%
26%
90%
33%
24%
90%
30%2003
30%
100%
30%
33%
100%
30%
30%
100%
30%2004
32%
100%
28%
35%
100%
28%
35%
100%
31%
104. PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL (PHASE I BUILDOUT)VOIP Revenue Alone Justifies Building Backbone5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~ -500M RMB5 year IRR:~12%Essentially breakeven economics for operating backbone for VOIP onlyVOIP(2)Backbone constructionBackboneInternational termination
IDD
DLDIP
POP/Access platform
OSSPresent value of cash flows(1) Assuming 15% cost of capital
(2) Including settlement charges estimated at 10% of VOIP revenue, and marketing/sales at 10% of revenue
(3) Backbone OpEx charges allocated 1/3 each to VOIP, wholesale, and enterprise business model economics
Source: BCG benchmark database; industry interviews; BCG analysis
105. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
106. APPROACH TO WHOLESALE/CARRIER BUSINESS MODELObjectivesHypothesized ApproachDevelop wholesale business as traffic generator to improve economics of backbone through higher utilization
Become the wholesale carrier of choice with technologically superior service offerings including high bandwidth international gateway connectivity
Consider wholesaling access to CT, Unicom, and Jitong depending on competitive implications
Superior customer service with clear positioning
“The clear alternative to CT”
Aggressive deployment of backbone infrastructure
Connecting top 15 cities by end of 2000 and expanding to top 50 cities by 2002
Seek partnerships to establish high bandwidth international gateway connectivity--absolutely essential for differentiating CNC offering
Develop interconnection capabilities in all major POPs and mobile basestations in key geographical locations
Wholesale access to incumbent providers where feasible, but do not wholesale sources of competitive advantage (e.g., enhanced data services such as IP VPNs)
Rollout product offering in staged manner to ensure quality of service
Internet connectivity
Mobile interconnect
Access ports to backbone
107. WHOLESALE/CARRIER SUMMARYPreliminary EconomicsPhase I CapEx (2000,2001): ~100 M RMB
ISP access platform: ~50 M RMB
OSS/Provisioning systems: ~50 M RMB
OpEx expected to be ~ 10% of revenue by 20021
Market share and revenue estimates - 2002
Mobile (backbone): 15%
ISPs: 9% ~ 1.1 B RMB
Access ports: 100%2
Dark fiber: 100%2
5 year NPV: ~ $2.1 B RMB
Assumes launch date of 3Q 2000 for leased lines and relatively aggressive mobile shares
Potentially too optimistic
Key Issues to be AddressedBackbone technology platform - QOS for voice vs. lower cost deployment?
High-bandwidth international gateway paramount to differentiating ISP access
Favorable regulatory backing for courting regional CT mobile carriers
Ensuring existing VOIP gateways can serve wholesale needs
Revenue opportunity of wholesaling dark fiber vs. enabling competition
Organizational challenges(1) Including allocation of backbone OpEx
(2) Market estimates based on revenue generation by CNC alone
108. POTENTIAL WHOLESALE CUSTOMERS INCLUDE ISPs, MOBILE OPERATORS, AND FIXED LINE CARRIERS ISPs offer significant potential if CNC can provide superior bandwidth access and to international gateway
Current satisfaction among regional ISPs very low
International gateway license in conjunction with high bandwidth trans-oceanic carrier alliance could provide vastly superior service
Mobile carriers will be searching for lower cost alternatives to carry long distance traffic due to intensifying competition
CNC’s new high capacity VoIP network and international gateway likely to yield lower costs
Fixed line carriers potentially looking for alternatives
Existing long-haul transport infrastructure limited
China Telecom could even be a possible customer given current focus on increasing residential teledensity
109. OVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATEAnticipated Price Decrease in Leased Lines Limits Overall Revenue GrowthLeased Lines - ISPMarket Size (RMB B)15TotalLeased Lines - Mobile99’-04’
CAGRAccess PortsLeased Lines - Paging1818202226284%41%1%152%(1)9%(1) 01’-04’ CAGR
Source: CNC team inputs; foreign benchmarks; BCG analysisDark Fiber68%(1)
110. CARRIERS SEEKING ALTERNATIVES...ISPs definitely seeking alternatives to CTMobile carriers likely to follow“We need a telecom service provider that is not our competitor.”
- Founder, Eastnet
“China Telecom, with their own network development plans, tends to starve us on capacity or to force us to pay in advance for excess capacity.”
- Manager, Infohighway
“The fact that it takes China Telecom two months every time we need an extra line makes it very difficult to have our own customers. We want another operator who can get us leased lines fast.”
- Manager, InfohighwayMobile carriers might consider diverting part of their traffic to alternative service providers with:
more attractive pricing
higher quality service
higher bandwidth
Interviews with regional mobile carriers and Unicom need to be conducted to verify potential
111. …BUT TECHNOLOGICAL LIMITATIONS AND COMPETITIVE CHALLENGE ARE IMPORTANT FACETS TO MANAGECompetitive ChallengeTechnological LimitationsMobile carriers may be hesitant to use VOIP technology for primary applications
Carriers currently addressing sound quality as a major improvement initiative
VOIP has yet to deliver toll-quality voice transmission, even on landline
Mobile carriers may take view that VOIP could further degrade voice quality
China Telecom likely to have advantage in competing share of CT Mobile’s business
Strong former intra-CT connection even after split
Extensive backbone coverage and large TDM based capacity
Unicom Mobile Services’ business as tough targetBuild presence by offering low-cost
trials and backup capacityLobby for clear regulation from MII on
freedom of choice for carriers
112. PREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODELAdditional CapEx and OpEx Minimal5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~2.1B RMB5 year IRR:~ 40%Wholesale critical to enhancing profitability of backboneVOIPBackbone allocationDark Fiber
Access ports
ISPs
Mobile operators
VOIPVOIP
ISP access
OSS(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysisOSS/provisioningPresent value of cash flows8,0007,0005,0001,0006,000-3,000-4,000
113. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
114. APPROACH TO ENTERPRISE SOLUTIONS BUSINESS MODELObjectivesHypothesized ApproachCapture strong share among medium/large business by offering enhanced datacom solutions
Goal to establish clear position as best service/quality provider in major markets
Utilize most cost effective deployment technologies to cover major metro areas
Minimize head-to-head competition by offering differentiated, data-centric products--attempt to drive datacom market
Develop image as fast, responsive solutions provider
Enable competitive advantage for business customers through datacom
For building managers: make their buildings more attractive to tenants
Deployment to target key buildings in major metropolitan areas
Four cities by year 2000/01
Top 15 cities by 2001
Fiber in most dense urban hi-rise areas and LMDS to complement and serve less dense areas
Initial lead products will be low cost voice over IP and high bandwidth internet access
Migration to full datacom solutions as customer base and capabilities grow
Quality customer service more important short term than full product offering
Emphasis on ease of use and fast provisioning versus competitors--exploit CT’s weaknesses
Education of customers on use of datacom products as competitive weapons
Marketing partner with key building managers
115. ENTERPRISE SOLUTIONS SUMMARYPreliminary EconomicsPhase I Capital Investment (2000,2001): ~1.1 B RMB
First four cities (assuming fiber): ~650 M RMB
Additional 11 cities1: ~400 M RMB
OpEx expected to be ~ 40% of revenue by 2002
Market share and revenue estimates - 2002
Offnet Voice2: ~20%
Existing data: ~10% ~ 1.1 B RMB
Emerging data: ~ 5%
5 year NPV: Roughly 1.2 B RMB
Assumes launch date of 3Q 2000 for data services
Likely too optimistic
Key Issues to be AddressedRight of way for existing ducts and digging
Partnership strategy for high bandwidth IGW
Rights to LMDS frequency spectrum
Are the 15 cities designated for Phase I buildout the right 15 cities for local access?
Tradeoff between pure economics by city vs. strategic value of providing end-to-end connectivity
What is a realistic time frame for launch?
Magnitude of organizational and human resource requirements(1) Assuming LMDS capital and revenue 2 times Fuzhou estimate for cities 11-15; 3 times Fuzhou estimate for cities 5-10
(2) Assumes no local voice revenue through 2004
116. ENTERPRISE SOLUTIONS BUSINESS MODEL MOST COMPLEX WITH HIGH CAPEX AND OPEX REQUIREMENTS...Building metropolitan fiber rings to offer access to medium and large businesses poses significant challenge
Operating expenses required dwarfs long haul network costs on a per city basis
Complexity in obtaining night-of-way varies by districts within each city
Designing fiber route and network configuration requires significant experience
Converting customers to full CNC service may not be as easy as it seems on surface
Initial risk for companies utilizing new entrant
Coverage issues for offering service to all business locations
Experienced sales-force with established relationships a must
118. CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAINCT’s Offering Yields Significant GapsLearnBuyGetUse/supportPayCustomer value chainNeeds identifiedHow datacom services can help their business
Assistance deploying solutionsQuicker and more convenient application channelsRapid and reliable provisioningFaster, reliable repair servicesPrompt, customized billing
Lack customer focus
Solutions virtually non-existent
Mostly one-way product marketingNo customer input for provisioning
CT determines queue without specific timing
No penalties for missed appointmentsNegligent repair service
Slow fulfillment & technical support responsePoor response to customers
Limited bill customizationCT
approachSignificant opportunity for CNC establish position in
customer solutions, ease of use, and responsive serviceAreas highlighted most in customer interviewsSource: Customer interviews; BCG analysis
119. STAGED PRODUCT INTRODUCTION NECESSARY TO MANAGE QUALITYHypothesized Product IntroductionsVoiceData200020012002200320042008Phase I & IIPhase IIIPhase IV Leased Lines
Mobile carriers
Eneterprise
High bandwidth dedicated internet access for businesses and ISPs
Access Ports
VPN
Basic enterprise
Broadband applications
Platforms to enable VOD, etc...
Web Hosting
Dark Fiber
Residential ISP?Advanced VPN
Extranet
Voice, video QoS guarantees
Industry specific offerings
Other emerging services (e.g. e-Commerce)IP-phone voice
Prefix
“Dial-around” solutionsEqual access voice?On-net voice?Focus on quality over quantityMarket as integrated productsStress CNC role as integrated datacom playerPositioning
Issues
120. CNC SHOULD USE CREATIVE WAYS TO GROW THE MARKET, AVOID HEAD TO HEAD COMPETITIONCompetitors all focus on the same demand from the same customers
Savagely compete on price
Reactively wait for customers to identify need, request productsPursue growing customers - data intensive enterprises
Fresh opportunities for sales, instead of competing over existing business
Approach proactively with new products, instead of waiting for customers to initiate sales process
Creatively identify new markets
I.e. market for companies requiring very rapid provisioning or customized products
Become the only choice for these companies
Lobby the government to support more e-commerce and information industries growthCTCNCUnicomJitongCT is likely to be unable to meet growing demand aloneTraditional, narrow viewNew approaches to growing sales
121. TOTAL GDP VS. GDP/CAPITA IS A PRELIMINARY INDICATOR FOR ATTRACTIVE LOCAL ACCESS MARKETSExample: 15 Initial Cities with POPs on CNC NetworkShanghaiBeijingGuangzhouTianjinHangzhouWuhanNanjingJinanShijiazhuangZhenzhouChangshaXuzhouXiamenFuzhouShenzhenExamples of additional cities not in initial 15 designated for CNC POPsHypothetical breakeven curve for building local accessSuzhouWuxiTotal GDP (k RMB)GDP/cap (k RMB)
122. VERY DENSE MARKETS SUCH AS SHANGHAI BEST SERVED BY METRO FIBER RINGSMPOP/rail stationHong Qiao Development AreaPeople’s parkHuai Hai RoadXujiahuiPudong Financial ZoneFiber length:
Along subway:
Along elevated ring road:
Along road:17000m
9000m
8000m# of major business
buildings accessed:~200Fibers alongSubway in construction
Subway
Elevated ring road
Road (dig required)
Dense Business Area served
Metro stationsMMM
123. SHANGHAI ECONOMICS VERY ATTRACTIVE DUE TO HIGH BUILDING AND BUSINESS DENSITY5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~310M RMB5 year IRR:~70%Shanghai presents most attractive enterprise solutions marketSG & AAllocated backboneIDD
Emerging data(3)
DLD
Data servicesSONET/switching equipment
OSS
Allocated backbone(2)(1) Assuming 15% cost of capital
(2) Cost of providing F/R and ATM service on backbone allocated over first 4 cities
(3) Web hosting IP VPNS, etc.
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency interviews; field analysisPower provisioning, etc.Fiber constructionRight of wayPresent value of cash flows
124. MEDIUM SIZED CITIES WITH HIGH GDP/CAPITA SUCH AS FUZHOU BEST SERVED WITH LMDS SOLUTIONFiber length:
Along road:
# LMDS station:
5000M
1Area served(1):
# of major business
buildings covered:~40km2
~40(2)Lake
Fiber along road
Railway
Railway station
Road
LMDS station
Major buildings
Area servedRS(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area
(2) Assume half of the buildings are prime business buildings for economic modelingSR
125. PRELIMINARY FUZHOU ECONOMICS UTILIZING LMDS VERY FAVORABLE5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~20M RMB5 year IRR:~60%LMDS solutions for medium sized cities will play a critical role in developing enterprise solutionsSG & APower, provisioning, etc.IDD
Emerging data services
DLD
Data servicesBase station
CPE(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Bldg equipmentSpectrum fees
Fiber to POPPresent value of cash flows
126. OTHER CITIES OF SIZEABLE POPULATION BUT RELATIVELY LOW GDP/CAPITA MAY NOT WARRANT INVESTMENTExample: ShijiazhuangNo fiber connection
required, assume rail
station is LMDS base
1Area served(1):
# of major business
buildings covered:~40km2
~20(2)Railway
Road
LMDS station
Major buildings
Area servedSS(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area
(2) Assume half of the buildings are prime business buildings for economic modeling
127. OVERALL ECONOMICS APPEAR MARGINAL FOR SHIJIAZHUANG5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~ -3M RMB5 year IRR:~5%Cities without dense business districts may not be attractive enterprise markets regard less of overall sizeSG&APower, provisioning, etc.IDD
Emerging data services
DLD
Data servicesBase station(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Spectrum CPE
Bldg. equipmentPresent value of cash flows
128. OVERALL REVENUE AND MARKET SHARE EXPECTATIONS: ENTERPRISE SOLUTIONSPredominately voice (DLD / ILD) revenue in the first two years; migrating to data and Internet services by 2002CNC revenue
(RMB BN)Internet AccessLeased LinesILDDLDShare assumptionsOther
Emerging ServicesWeb Hosting / CollocationSource: CNC team inputs; foreign benchmarks; BCG analysis1999
3%
80%
1%
3%
80%
1%
0%
0%
0%
0%
0%
0%DLD
Off-net share of total DLD
Geographic coverage of CNC
CNC share within coverage
ILD
Off-net share of total ILD
Geographic coverage of CNC
CNC share within coverage
Leased Lines
Geographic coverage of CNC
CNC share within coverage
Internet Access
Broadband
Narrowband / Dial-Up
Web Hosting / Collocation
Other Emerging Services2000
10%
60%
25%
11%
60%
25%
30%
2%
2%
0%
0%
0%2001
17%
75%
29%
18%
75%
29%
47%
10%
10%
0%
5%
1%2002
23%
90%
33%
26%
90%
33%
63%
14%
14%
0%
8%
2%2003
30%
100%
30%
33%
100%
30%
80%
18%
18%
0%
10%
4%2004
32%
100%
28%
35%
100%
28%
82%
21%
21%
0%
13%
6%
129. OVERALL ECONOMICS ATTRACTIVE FOR PHASE I BUILDOUT IN TOP FOUR CITIES5 year PVs (M RMB)CapExOpExRevenue5 year city NPV5 year IRRShanghai
Beijing
Guangzhou
Shenzhen
Total145
149
157
95
546504
447
400
332
1683960
768
640
480
2848311
172
83
5370%
45%
30%
28%Overall Phase I 5 year NPV: ~620M RMB
5 year IRR: ~44%Source: BCG benchmark database; industry interviews; BCG analysis
130. GOING FORWARD, CITIES WILL NEED TO BE ANALYZED ON A CASE BY CASE BASISDeployment technology will play a critical roleMethodology/criteria for choosing local access marketsInitial prioritization by total GDP vs. GDP/capita
Relevance and proximity to CNC network
Map urban area by biggest buildings and availability of existing conduits
Determine if density falls into one of the three density categories
Estimate costs and revenue associated with buildout1.
2.
3.
4.
5.Go or no go!Cost to deliver enterprise solutionsIncreasing business density and areaIntermediate density best served by LMDSVery dense and large area best served by fiberToo costly to serveFiberLMDS
131. RECAP OF OVERALL PHASE I ECONOMICS AND KEY ISSUESEnterprise Solutions2
1.1 B
3.2 B
(38%)
1.2 B
Businesses/km2
Data growth
IGW/connectivity
Deployment cities
Realistic rollout
Buildout economics for 15 cities vs. connectivity valueWholesale/Carrier
100 M
2.3 B
(27%)
2.1 B
Mobile share
Internet growth
IGW/connectivity
Voice QOS
Regulatory backing
Cost of deployment vs. service flexibilityLong distance voice
3.8 B
3 B
(35%)
--
Settlement charges
Pricing/competition
IGW/connectivity
Managing life cycle
Business solutions
Economics of 60 VOIP cities vs. strategic value of coverage
Economics1
CapEx
2004 Revenue
(% of total)
5 YR NPV3
Key Issues
Sensitivity
Top issues to address
Tradeoffs(1) All values in RMB and based on preliminary inputs to be refined
(2) Includes only Phase I buildout to top 15 cities
(3) Assuming 15% cost of capital
132. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
133. EMERGING OPPORTUNITIES EXIST FOR CONSUMER ISP AND ADVANCED DATA SERVICESResidential ISP
CNC may be in unique position to offer true broadband internet access due to IP network and international gateway
What strategies will capture significant value while minimizing development time and necessity for brand equity?
Web Hosting/Data Centers
Niche competitors such as Exodus in the U.S. aggressively pursuing this business model
Will opportunities develop in the near term for China and could CNC supply resources necessary?
E-commerce solutions
Many telcos in Europe and U.S. offering e-commerce solutions
Will opportunities develop in the near term for China and could CNC supply resources necessary?
134. Datacom services explosion Slowed adoptionStable competition with CT, Unicom, and Jitong; clear regulationsIncreased competition with limited cooperation from CTFragmented, unstable competition; multiple entrants and unclear regulationsBase caseBestWorstDemand sideCompetitive/Regulatory Situation (Supply side)ENVIRONMENTAL UNCERTAINTIES LEAD TO THREE BASIC SCENARIOS TO BE ANALYZEDGrowth in existing data and and emerging datacom services (as expected)
135. MONTE CARLO SIMULATION WILL ALLOW FOR GAUGING THE EFFECTS OF UNCERTAINTIES IMPLIED IN SCENARIOSExample: Effect of Average Building Size, Tier 1 Business Proportion & Spending on Shanghai Metro Access EconomicsEstablish Input Variables25,000.0028,750.0032,500.0036,250.0040,000.00Average building size (m2)MinMost likelyMax7.5%11.3%15.0%18.8%22.5%% Tier 1 businessesMinMost likelyMax300.00350.00400.00450.00500.00Average spending/sq m for Tier 1 (RMB)MinMost likelyMaxProbabilityMonte Carlo simulation of 1000 trials with 5 year NPV as forecast outputFrequency ChartCertainty is 95.00% from $238,500 to $558,816 000 RMBMean = $381,016.000.023.046.068.091022.7545.568.2591$150,000$262,500$375,000$487,500$600,0001,000 Trials 6 OutliersForecast: 5 YR NPVResulting forecast
136. MONTE CARLO SIMULATION PROVIDES VERY USEFUL OUTPUT95% certainty that with the inputs provided, 5 year NPV will be greater than 239M RMB
Statistically impossible for the project to have a negative NPV based on provided inputs
Forecast mean is actually higher than our base case value (381M vs. 318M) due to effects of variable inputs
A sensitivity report generated from the simulation tells us that average building size contributes the most to output variance, therefore it is the most important input to focus on clarifying
137. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
138. NEXT STEPSAgree on business mix assumptions
Develop organization structure
Agree on key principles and objectives
Timeline, key milestones
Develop implementation action plan
High level plan (by quarters) till Jan 2002
Detailed plan (by month) Jan-Jul 2000
Key milestones, process control
Integrate and refine overall CNC financial
Objectives and assumptions for financial model
Scenarios / sensitivities
139. ORGANIZATION DESIGN METHODOLOGYDefine principles & objectivesKey criteriaDesign organization structure
Possibility of combination/hybrid modelsDefine job responsibility/accountability corresponding to organization structure
Example for process flow (how each function interacts)
Example for KPI, principles for KPISelect models to test
140. MAJOR OUTPUTS: ORGANIZATION DESIGNKey principles for KPI
With examplesDivision/accountability
“Internal market” as cross-dept incentiveOrganization chart
Dotted line vs. solid line
Reporting/accountability
Rationale/methodology
141. IMPLEMENTATION PLAN DESIGN METHODOLOGYObjective/target scheduleMajor function/module working backwardDetailed work and cycle time for module/sub-module ® refine timelineDraft implementation timelineKey checklist & mile stones per divisionKey process for rollout (across divisions)
Product rollout
Geographic rolloutRevise target if necessaryIdentify bottleneck, refine scheduleSegmented view of implementation
142. Key cross-functional coordination process flow
ExamplesMAJOR OUTPUTS: IMPLEMENTATION PLANKey rollout plan example
Product
CityMS project time-line/milestones
Overall
By divisionHighlights
Major milestones resource planning
143. WORKPLAN(1)(1) Refer to CNC team schedule for details. TDC off Dec 22-30; TC off Dec 20-24; Rest off Dec 27, 31 for holiday