- 1 -China Netcom - The Boston Consulting Group
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CHINA NETCOM BUSINESS PLAN UPDATE
December 14, 1999 - Beijing
- 2 -China Netcom - The Boston Consulting Group
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TODAY’S OBJECTIVES
Review 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
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CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
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KEY CNC STRATEGIC PRINCIPLES
The 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
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CNC SHAREHOLDERS
Principles:
• 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?
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BACKBONE BUSINESS
Principles:• 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)
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LOCAL ACCESS BUSINESS
Principles:• 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
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INTERNATIONAL GATEWAY BUSINESS
Principles:• 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
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REGULATORY STRATEGY
Principles:
• 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
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COMPETITIVE STRATEGY
Principles:• 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
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MARKETING STRATEGY
Principles:
• 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
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CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
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REGULATORY HIGHLIGHTS
Our 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
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KEY REGULATORY ISSUES AND IMPLICATIONS
Service 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 portability
IGW 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 economicsFuture 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 years
3 full service carrier including CNCMore licenses for value-added service providers (type II)
MII supports CNC IP based license as Full Service LicenseBut lack of clear documentation may cause confusion at local level
Based on cooperation of carriersArbitration/settlement process exist but time consumingMild punishment, law suit as last resort
For current IP-phone trial, fees not settledLikely future settlement: LD carrier pays local PSTN operator RMB0.14/min
Price floor likely specified for incumbent by regulationNo 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 PTAsFrequency not likely to be auctioned
USO for incumbent with contribution from new entrant2-3 years before transparent and equitable approach
Prefix based solution provided by regulation in 1 year
Number as national resources controlled centrallyFee will be collected for occupation of number resource2-3 years before portability regulations
Impact on CNC
Highest/Immediate
High/Medium Term
Key issues Assumption Implication to CNC
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KEY REGULATORY BODIES AND RESPONSIBILITIES
Other depts, e.g
SETC
Various law
making bodies
NPCState
Council
Dept. of Radio Frequency
Administration
Telecom Administration
Bureau
Other depts.
Provincial Telecom Administration Bureau
ChinaTelecomNational
Company
Municipal Level Telecom
Administration Bureau
Telecom Operating Entities:
e.g. CT fixed line
Provincial government
MII
AdministrationOperations
National
Provincial
Municipality
• Drafting, 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
…
PTAs
PTB
Source: Pyramid Research; BCG analysis
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KEY LICENSE ASPECTS AND IMPLICATION TO CNC
Full Service and International
Value added services
ownership
Geographic scope
Duration
license fees
Performance targets
Technology
Key Aspects
• Number 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 technology
Assumptions
• Current 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 influence
Implication to CNC
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NATURE, SCOPE AND NUMBER OF LICENSES
Source: BCG analysis
VSAT transport service International NLD On-net voice
IP backbone
IP-phone (including
international)Wireless Paging
VAS(e.g.ISP,
VPN)
Service nature
• Owning satellite
• Maintain satellite channel
• VSAT base stations
• Ownership & operation of international gateways
• Interconnect with foreign carriers
• Leasing IDD channels and lines
• Building & operating of national switches and trunk lines
• Maintaining POP is nationwide
• Provide basic voice & data national transport
• Ownership & operation of local access networks
• Ownership of last mile
• Provide basic local voice/data transport and access to NLD/IDD
• Building and leasing of broadband IP based backbone transport capacity
• Provide IP based voice service
• No requirement in infrastructure building
• Including international IP based LD
• Building & operation of local BSC network
• Provide wireless voice services
• Interconnect with national transport carrier
• Building & operation of Local Paging Networks
• Interconnect with national transport carrier
• With or without building & operation of local network
• Offer web-hosting, VPN, call center services, etc.
Scope • National coverage
• Cross international point of presence
• Service national transport carriers
• Cross provincial boarders
• Have access to international PO connects
• Service local PSTNs
• Covers local service areas, (e.g. cities municipalities)
• Cross provincial boarders
• Access to international points of connect
• Covers 12-25 trail cities
• Access to international points of connect
• Covers local service areas: cities municipalities
• Majority in local scope
• 4 national coverage
• Primarily in local scope
No. of futurelicenses
Remain 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 years
5-6 possible in the next 1~2 years
Multiple licenses possible in the next 4-5 years
Numerous national scope licensespossible in the next 2 years
Numerous more licenses (with FDI) possible in the next 2 years
License controlled by MII MII MII MII MII MII MII
Primarily by provincial
government
Provincial government
No. of current licenses
1 3 2 23
(CT, Unicom,CNC)
4Trail stage 2
2 national scope;
multiple localUnlimited
Basic telecom services
Remain 1 for the next 6 years
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INTERCONNECTION ISSUES AND IMPLICATION TO CNC
Key Issues Assumptions Implication to CNC
• Obligation 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 POI
Incumbent obligation to interconnect
Interconnect timeframe
Enforcement
Account settlement
Access and collocation
Charges and fees
• If 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 service
Note 1: Point Of Interconnect 2: Telecommunications Administration Bureau
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CLEAR GUIDANCE FOR INTERCONNECT ALREADY PUBLISHED, LOCAL PTA OBLIGED TO FOLLOW
Local 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 provincial PTA 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 bottleneck
BACKUP
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THE PROCESS OF LOCAL INTERCONNECT IS GENERALY SMOOTH But There’s Great Difficulty in Some Cities
Interconnect in major cities is smooth• e.g. BJ, SH, GZ
Great difficulty in some cities • e.g. Wuhan
• Fast 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 agenda
BACKUP
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TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (I)
Current
Likely scenarios for Y2000
End user
• Customer 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 termination
• CNC 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 reducing
• No settlement
• No settlement
• No settlement
CNC CNC End userPTA
Switch
SHPSTN
Switch
CNC backbone(1)
Switch Switch
BJPSTN
PTA
Transmission(paid by CNC)Fees:
1
2
Transmission(paid by CNC)
Note 1: Currently leased from CT. Own backbone by July 2000
ExampleInter-
connection
Backup
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TERMINATION SETTLEMENT MAY REDUCE CNC MARGIN (II)Example: National Long Distance
Backup
0.3 0.3 0.3
0.16
0.06 0.06
0.14
0.14CNC pays PTA
CNC paysPTA
KeepIP-phone price the same
Customerpays PTA(1)
IP-phone price
Customerpays PTA
IP-phone price
New IP-phone price
Current IP-phone Trial Stage scenario: no settlement
CNC Alternative I CNC Alternative IIPossible scenario
for 2000: no settlement
1
RMB/min
Note 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 PTA
Possible scenario
for 2000: RMB0.14/min
settlement rate for both
origination and
termination ends
2
• Increase IP price to cover settlement cost
• Customer doesn’t pay PTA but perceive IP-phone price increase
• CNC maintain current IP-phone revenue
• Keep 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 revenue
0.3
0.44
0.360.36
• CNC retains 100% of IP-phone price as revenue
• CNC retains 100% of IP-phone price as revenue
The 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
The 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
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KEY PRICING REGULATION ISSUES AND IMPLICATION TO CNC
Key Issues Assumptions Implication to CNC
• Regulation 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 levels
General 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.
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LEASED LINE COST HIGHEST AMONG INTERCONNECT COSTSApproximately RMB 134K/month to Link up One City
Item Cost 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 city
9
100-150
109 - 159 134 average
320
454 average
(1) Before CNC backbone construction completes, bandwidth for this segment is leased from China Telecom
Backup
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ROW AND ISSUES RELATED TO BULIDING LOCAL LOOP
Key Issues Assumptions Implication to CNC
• Theoretically, 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
Scheduling
• Theoretical 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
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FREQUENCY FOR WIRELESS BB NEED TO BE ALLOCATEDCurrently Only Narrow Band Wireless Spectrum Assigned
Key Issues Assumptions Implication to CNC
• No 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 owners
Frequency band allocation
Administration of frequencies
License of service
Frequency fees
Roof top access
• Reserved 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 -China Netcom - The Boston Consulting Group
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OTHER REGULATIONS AND OBLIGATIONS
Key Issues Likely scenario Implication to CNC
• Less 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 practices
Universal Service Obligation
Equal Access
Numbering plan
Number portability
• Indirect 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 -China Netcom - The Boston Consulting Group
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KEY CNC BUSINESS OBJECTIVES AND CORRESPONDING REGULATORY IMPERATIVES
The Carrier’s Carrier, Enterprise Solutions and Offnet Voice business models require CNC to achieve the following business objectives, and hence actively lobby for favorable regulations
()
Carrier’s Carrier
Enterprise Solutions
Off-net Voice
Fiber local access solution
Off-net voice interconnect solution
LMDS broadband wireless access solution
Business ObjectiveImportant to realizing business model
- 29 -China Netcom - The Boston Consulting Group
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OBTAIN FREQUENCY SPECTRUM IN 6 MONTHS TIME FRAMETo Ensure LMDS Solution Is Available Before June 2000
Frequency Assignment
Feasibility Trial
Roof Top Access
Service License
Frequency Fee
• Advocate 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 fee
Key Issues For The LMDS Business Objective CNC Imperatives deploying LMDS In 15 major cities
LMDS
CNCPriority
Highest/Immediate
High/Medium Term
Note 1: Unicom will start trial in ChengDu before EOY1999, expected to finish trial around June 2000.
- 30 -China Netcom - The Boston Consulting Group
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OBTAIN REGULATORY SUPPORT FOR UTILITY PREVILEGEAvoid Case-by-case Local Negotiation to Ensure Quick Deployment
Fiber LocalAccess
CNCPriority
Highest/Immediate
High/Medium Term
Utility privilege & ROW
Compensation fees for digging
Building Access
Scheduling for future access and capacity
• Obtain 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 determination
Key Issues For The Fiber Local Access Business Objective CNC Imperatives In Building Fiber Access in 5 Key Cities
- 31 -China Netcom - The Boston Consulting Group
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OBTAIN STRONG ENFORCEMENT AND FAIR SETTLEMENT RATETo Ensure Optimal Economics, Also Obtain Equal Access Provisions
Offnet Voice
CNCPriority
Highest/Immediate
High/Medium Term
Interconnect 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 treatment
Key Issues For The Off-net Voice Business Objective CNC Imperatives In Offering Off-net Voice
- 32 -China Netcom - The Boston Consulting Group
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SUMMARY: KEY REGULATORY RELATED CNC IMPERATIVES
Service 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 procedures
Key issues CNC imperatives, key areas to advocate
CNCPriority
Highest/Immediate
High/Medium Term
- 33 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
- 34 -China Netcom - The Boston Consulting Group
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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
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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 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
• Demand forecast
• Geographic segmentation
• Customer segmentation
Competition overview
Business models
Next steps
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DEMAND MODELING METHODOLOGY
Product AProduct A
CURRENT MARKET SIZE
• By product
Product BProduct B
Product CProduct C
.
.
.
Driver 1Driver 1
Driver 2Driver 2
Driver 3Driver 3
Growth drivers
Forecast using• Historical trend• Foreign benchmark• China-specific adjustment
Forecast using• Historical trend• Foreign benchmark• China-specific adjustment
Product AProduct A
Product BProduct B
Product CProduct C
.
.
.
Driver 1Driver 1
Driver 2Driver 2
Driver 3Driver 3
FUTURE MARKET SIZE
• By product
IterationsIterations
Iterations/ verify modelIterations/
verify model
Share assumptions by product by year• Competitive environment• Foreign benchmark• Geographic coverage
CNC REVENUE by product
Fill in gapsFill in gaps
Breakdown to growth drivers, test formulae/ relationship
Breakdown to growth drivers, test formulae/ relationship
- 38 -China Netcom - The Boston Consulting Group
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2004 TELECOM MARKET PROJECTED TO BE RMB 676 BNData And Internet Services Are The Growth Engine Going Forward
0
100
200
300
400
500
600
700
1998 1999 2000 2001 2002 2003 2004
Data(2)
Internet(3)
Other (4)
(RMB Bn)
99’-04’CAGR (%)
Voice (1)
Data (2)
Internet (3)
Other (4)
55%
10% 0%35%
239
Total
Voice (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 pagingSource: BCG analysis
312
363
441
506
587
676
10%
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 -China Netcom - The Boston Consulting Group
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1998 TELECOM MARKET IS RMB 239 BN
0
50
100
150
200
250
Voice services Data and Internetservices
Other services
Market 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 pagingSource: China Telecom annual reports; CNC team inputs; BCG analysis
(1)
(2) (3)
(4)
38%
23%
20%
Overall - 27%
Backup
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MARKET FORECASTBackup
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(RMB B)
VOICE SERVICESLocal 63.39 74.30 85.62 97.38 109.57 122.16 135.16 148.52 162.19 176.09 190.15 DLD 48.47 55.35 59.83 64.55 68.79 73.95 79.79 85.54 91.53 97.69 103.94
On-Net 48.47 54.81 57.75 60.46 62.84 64.72 68.57 72.55 76.65 80.86 85.17 Off-Net / VoIP - 0.53 2.08 4.09 5.96 9.22 11.22 12.99 14.88 16.83 18.77
ILD 18.30 15.90 14.75 13.44 12.01 11.02 10.30 9.53 8.95 8.40 7.87 On-Net 18.30 15.73 14.14 12.43 10.66 9.41 8.62 7.79 7.18 6.60 6.07 Off-Net / VoIP - 0.17 0.60 1.01 1.35 1.61 1.69 1.74 1.78 1.80 1.80
International Termination - 4.56 4.78 4.80 4.24 4.29 4.12 3.73 3.34 2.94 2.54 Traditional - 4.33 4.24 3.96 3.23 3.01 2.68 2.24 1.84 1.47 1.14 IP - 0.23 0.54 0.84 1.01 1.29 1.44 1.49 1.50 1.47 1.40
Subtotal 130.16 150.10 164.98 180.16 194.61 211.42 229.38 247.32 266.00 285.12 304.51 % of Total 55% 48% 46% 41% 39% 36% 34% 32% 28% 26% 23%
DATA SERVICESLeased Lines 23.26 29.21 32.56 46.12 57.55 71.61 86.41 102.13 112.34 121.58 129.43
Mobile Operators 14.14 16.19 15.35 16.97 17.90 19.19 20.04 20.46 20.89 21.33 21.78 Local 11.31 12.95 12.28 13.58 14.32 15.36 16.03 16.37 16.71 17.07 17.43 Backbone 2.83 3.24 3.07 3.39 3.58 3.84 4.01 4.09 4.18 4.27 4.36
ISPs 0.57 1.18 1.64 2.35 3.49 5.16 6.50 8.12 10.11 12.54 15.50 Broadband - - 0.01 0.08 0.27 0.90 1.98 3.66 6.54 9.97 13.35 Narrowband / Dial-Up 0.57 1.18 1.63 2.27 3.22 4.26 4.52 4.47 3.57 2.56 2.14
Paging 0.61 0.59 0.57 0.57 0.59 0.60 0.61 0.62 0.63 0.64 0.65 Business 7.94 11.26 15.00 26.22 35.57 46.66 59.26 72.92 80.70 87.06 91.50
Access Ports - - - 0.02 0.06 0.13 0.26 0.46 0.77 1.16 1.72 Subtotal 23.26 29.21 32.56 46.13 57.61 71.74 86.67 102.59 113.11 122.74 131.15 % of Total 10% 9% 9% 10% 11% 12% 13% 13% 12% 11% 10%
INTERNET SERVICESInternet Access 1.01 2.53 5.38 8.43 15.34 23.62 35.29 54.16 104.74 156.30 221.97
Business 0.20 0.51 2.04 3.74 9.33 15.30 25.45 42.66 89.80 136.97 197.56 Broadband - - 1.21 2.58 7.88 13.34 23.28 40.40 87.54 134.66 195.34 Narrowband / Dial-Up 0.20 0.51 0.83 1.16 1.45 1.95 2.17 2.25 2.26 2.31 2.21
Residential 0.81 2.02 3.34 4.69 6.01 8.32 9.84 11.50 14.94 19.33 24.41 Broadband - - - 0.04 0.09 0.35 0.75 1.35 3.45 7.99 12.97 Narrowband / Dial-Up 0.81 2.02 3.34 4.65 5.92 7.98 9.09 10.15 11.49 11.34 11.44
Web Hosting / Collocation - 0.07 0.35 0.90 1.92 3.54 5.36 7.72 10.33 13.07 16.24 Other Emerging Services - - 2.33 4.61 8.48 15.25 26.83 49.09 97.18 155.14 223.66
Subtotal 1.01 2.60 8.05 13.95 25.74 42.41 67.49 110.97 212.25 324.51 461.87 % of Total 0.4% 0.8% 2% 3% 5% 7% 10% 14% 23% 29% 35%
MOBILE & PAGINGMobile 69.33 115.90 143.36 186.90 211.93 244.37 274.30 301.17 330.68 363.08 398.64 Paging 15.02 14.19 13.59 13.45 13.90 14.16 14.42 14.69 14.96 15.24 15.52
Subtotal 84.35 130.10 156.95 200.36 225.83 258.53 288.72 315.86 345.64 378.31 414.16 % of Total 35% 42% 43% 45% 45% 44% 43% 41% 37% 34% 32%
OTHER SERVICESDark Fiber / Conduits - - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63
Sale - - - 0.13 0.22 0.37 0.59 0.90 1.32 1.46 1.89 Lease - - - 0.03 0.05 0.08 0.14 0.23 0.35 0.51 0.74
Subtotal - - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63 % of Total 0% 0% 0% 0.04% 0.05% 0.08% 0.11% 0.15% 0.18% 0.18% 0.20%
TOTAL 238.78 312.01 362.54 440.76 504.06 584.56 672.99 777.87 938.66 1,112.66 1,314.32
MARKET SIZE
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BACKUP: DRIVERS AND ASSUMPTIONSProduct Drivers Sub-Drivers Assumptions Rationale
Population 1.3 B by 2004 (CAGR = 0.9%, 1999-2004) EIU forecastTeledensity around 15% by 2004 follow historical growthGDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecastMOU growth in line with GDP growth foreign benchmark
Price Expected trend an average rise of 3% per year foreign benchmark (with no major tariff rebalancing)GDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecast
MOU growthorganic growth in line with GDP;extra ~2% growth due to price elasticity
foreign benchmark
Price Expected trend an average drop of 10% per year foreign benchmarkGDP growth RMB 8,000 B in 1998, up to RMB 11,000 B in 2004 EIU forecast
MOU growthorganic growth in line with GDP;extra ~2% growth due to price elasticity
foreign benchmark
Price Expected trend an average drop of 15% per year foreign benchmark# Internet subscribers 2 M in 1998, up to 45 M in 2004 Yankee Group forecastBroadband penetration 0% in 1999, up to 16% in 2004 Morgan Stanley report for USA; assumed a 5-year lag
Average Usage15 hrs / month in 1998,up to 20 hrs / month in 2004
foreign benchmark, various forecast
Price Expected trend historical (?), foreign benchmarkGrowth of total # lines in line with GDP growthBandwidth upgrade ~10% upgrade to next bandwidth level each year Taiwan benchmark
Price Expected trend98-99: ~30% drop, converge toprice drop of 7% per year
historical, OECD benchmark
# LinesGrowth of # mobile /Internet subcribers
93 M mobile subscribers and45 M Internet subscribers by 2004
various forecasts (Yankee Group, Paul Budde,Warburg Dillon Read, Lehman Brothers)
Price Expected trend98-99: ~30% drop, converge toprice drop of 7% per year
historical, OECD benchmark
Growth of total # ports CNC's numbers foreign benchmark (Williams ?)Bandwidth upgrade CNC's numbers foreign benchmark (Williams ?)
Price Expected trend CNC's numbers foreign benchmark (Williams ?)Growth of total # ports CNC's numbers foreign benchmark (Williams ?)Bandwidth upgrade CNC's numbers foreign benchmark (Williams ?)
Price Expected trend CNC's numbers foreign benchmark (Williams ?)# Total Companies in line with GDP growth
% Active Web Pages0% in 1998, up to 20% (for small companies)and 92% (for large companies) in 2004
Morgan Stanley report for USA; assume a 5-year lag
% Outsourcing0% in 1998, up to 100% (for small companies)and 55% (for large companies) in 2004
Morgan Stanley report for USA; assume a 5-year lag
PriceRMB 370 per month for small companies, up toRMB 90k per month for large companies, in 1998
US benchmark
GDPRMB 8,000 B in 1998, up toRMB 11,000 B in 2004
EIU forecast
Foreign / US B2B Portal Market 2% in 1998, up to 9% in 2004 foreign benchmark; assume a 5-year lagOther Emerging Services % of Data Market foreign benchmark
# Mobile Subscibers 24 M in 1998, up to 93 M in 2004 Paul Budde, Warburg Dillon Read, Lehman Brothers forecast
GDP growthRMB 8,000 B in 1998, up toRMB 11,000 B in 2004
EIU forecast
MOU growth foreign benchmarkPer Minute Charge in line with DDD price trend
MOU Per Subscriber
# Lines
# Ports
Web Hosting
Portal - B2B
Mobile
Leased Lines -Business
# Lines
Leased Lines -Carrier
# Lines
MOU Per Line
MOU
Local
# Customers
Internet Access
# Subscribers
DDD
IDD
MOU
Access Ports
Leased Dark Fiber /Conduits
BackupTo be updated
- 42 -China Netcom - The Boston Consulting Group
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DATA AND INTERNET SERVICES SHOW SUBSTANTIAL POTENTIAL FOR GROWTH: 37% CAGR 1999-2004
0
20
40
60
80
100
120
140
160
1998 1999 2000 2001 2002 2003 2004
Leased Lines - ISP
Leased Lines - Business
Market Size
(RMB Bn)
24
Total
Leased Lines - Mobile
99’-04’CAGR
Access Ports
Internet Access
Web Hosting / Collocation
Other Emerging Services
Leased Lines - Paging3241
60
83
114
154
4%
41%
1%
39%
152%
69%
136%
(1)
(1) 01’-04’ CAGR(2) 00’-04’ CAGRSource: CNC team inputs; foreign benchmarks; BCG analysis
84%(2)
37%
- 43 -China Netcom - The Boston Consulting Group
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EMERGING DATA SERVICES WILL ACCOUNT FOR MORE THAN 20% OF THE TOTAL DATA SERVICES MARKET BY 2004
Existing data services market
Emerging data services market
Total data services market
24 32 3855
7395
122
0
50
100
150
98 99 00 01 02 03 04
RMB Bn
Year
32
1910
63
0.10
10
20
30
40
50
98 99 00 01 02 03 04
RMB Bn
Year
122
95
73
55383224
154
114
83
60
4132
0
40
80
120
160
98 99 00 01 02 03 04
RMB Bn
Year
99’-04’CAGR
Emerging
Existing
99’-04’CAGR
99’-04’CAGR
31%
238%
37%
Source: CNC team inputs; foreign benchmarks; BCG analysis
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THE EMERGING SERVICES MARKET IS EXPERIENCING TREMENDOUS GROWTH
0
50
100
150
200
250
2000 2001 2002 2003 2004 2005 2006 2007 2008
Market size (RMB Bn)
Estimated emerging
data services
Portal
Broadband - contentBroadband - network applicationsIP VPN
Web Hosting /Collocation(1)
(1) Listed separately in CNC market analysisSource: BCG estimates
Examples
Backup
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Emerging services Opportunities 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 opportunities
5
Portal
• B2B 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 CNC
16(B2B: 5
B2C: 11)
Broadband content• Content development not our priority• May form strategic partnerships with content providers; improve
customer retention2
Total emerging services market expected to reach RMB 32B by 2004, or more than 20% of the total data / Internet services market
Total emerging services market expected to reach RMB 32B by 2004, or more than 20% of the total data / Internet services market
IP VPN
• Fit 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 service
1
(1) Listed as “existing’ service in CNC market analysisSource: international benchmarks; Morgan Stanley; BCG analysis
Broadband 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
guarantee1
A NUMBER OF EMERGING SERVICES WILL BECOME ATTRACTIVE OPTIONS OF PRODUCT OFFERINGS FOR CNC
Backup
- 46 -China Netcom - The Boston Consulting Group
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CARRIER: EXPECTED SHARES
Competitor Key strengths / weaknesses2000 2004
Expected share
CNC
• IP/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 communications
• Extensive existing backbone• Existing local access, captive demand• Weakness: legacy system makes it difficult to
cut down costs
80% 65%
• Existing coverage / user base• Weakness: bandwidth constraint
5% 5%
Unicom
• Early mover to market• Nearly complete coverage in 150 cities• Captive mobile demand• Weakness: In-fighting board, acrimonious
relationship with CT
10% 20%
Jitong
• Solution primarily based on VSAT coverage, bandwidth constraint
• Existing bandwidth primarily occupied by own IP phone service
• Questionable excess bandwidth for resale
5% 3%
Rationale / Benchmark
Mobile operatorsA 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)
ISPsExpect 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 operatorsNot CNC priority
Source: CNC team inputs; BCG analysis
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LARGE / MEDIUM BUSINESSES: EXPECTED SHARES
Competitor Key strengths / weaknesses2000 2004
Expected share
CNC
• Multiple 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 quickly
1% 15%
China Telecom• Voice services
• Satellite communications
• Incumbent: 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 services
74% 55%
• Coverage/bandwidth limited• Weakness: bandwidth constraint in later years
5% 5%
Unicom• Early to market, built local access in TJ/CQ/SC• Weakness: continuous management problems
10% 15%
Jitong
• Aggressively going after market from current ISP base
• Weakness: bandwidth constraint (VSAT-based solution)
10% 10%
Rationale / Benchmark
In 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 -China Netcom - The Boston Consulting Group
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OFF-NET VOICE: EXPECTED SHARES
Competitor Key strengths / weaknesses
CNC
• Low 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 services
• Incumbent / early entrant• Existing coverage• No interconnect hassle• Weakness:
- higher cost position based on existing infrastructure
- cannibalize circuit voice services
Unicom
• Early to market• Synergy with mobile business• Weaknesses:
- initial stage unclear management focus- Acrimonious relation with CT
Jitong
• Quick 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)
2000 2004
Expected share
15% 28%
55% 40%
15% 20%
15% 12%
Rationale / Benchmark
In 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% share
Source: CNC team inputs; BCG analysis
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SHARE ASSUMPTIONS
Backup
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
VOICE SERVICESLocal 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Geographic Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Share within Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
DLDOn-Net 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Geographic Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Share within Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Off-Net / VoIP 0% 1% 15% 22% 30% 30% 28% 25% 23% 20% 18%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 1% 25% 29% 33% 30% 28% 25% 23% 20% 18%
ILDOn-Net 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Geographic Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Share within Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Off-Net / VoIP 0% 1% 15% 22% 30% 30% 28% 25% 23% 20% 18%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 1% 25% 29% 33% 30% 28% 25% 23% 20% 18%
International TerminationTraditional 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Geographic Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Share within Coverage 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
IP 0% 0% 12% 19% 27% 30% 31% 31% 32% 32% 33%Geographic Coverage 0% 80% 60% 75% 90% 100% 100% 100% 100% 100% 100%Share within Coverage 0% 0% 20% 25% 30% 30% 31% 31% 32% 32% 33%
DATA SERVICESLeased Lines
Mobile OperatorsLocal 0% 0% 0% 0.1% 0.3% 0.5% 0.8% 1.1% 1.5% 1.9% 2.4%
Addressable % 30% 31% 100% 100% 100% 100% 100% 100% 100% 100% 100%IP % 0% 5% 11% 18% 24% 30% 35% 40% 45% 50% 55%Share within Addressable and IP 0% 0% 0% 1% 1% 2% 2% 3% 3% 4% 4%
Backbone 0% 0% 0.9% 8.0% 15% 21% 26% 27% 28% 28% 27%Addressable % 30% 31% 100% 100% 100% 100% 100% 100% 100% 100% 100%IP % 0% 0% 1% 10% 20% 30% 40% 45% 50% 55% 60%Share within Addressable and IP 0% 0% 90% 80% 75% 70% 65% 60% 55% 50% 45%
SHARE 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
ISPsBroadband 0% 0% 0.6% 5% 9% 12% 13% 14% 15% 15% 16%
Addressable % 30% 30% 38% 46% 53% 61% 69% 77% 84% 92% 100%Share within Addressable 0% 0% 2% 12% 16% 20% 19% 18% 18% 17% 16%
Narrowband / Dial-Up 0% 0% 0.6% 5% 7% 10% 9% 8% 7% 5% 3%Addressable % 30% 30% 38% 46% 53% 61% 69% 77% 84% 92% 100%Share within Addressable 0% 0% 2% 10% 13% 16% 13% 11% 8% 5% 3%
Paging 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Addressable % 70% 70% 100% 100% 100% 100% 100% 100% 100% 100% 100%Share within Addressable 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Business 0% 0% 1% 5% 9% 14% 17% 21% 22% 24% 25%Addressable % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Geographic Coverage 0% 0% 30% 47% 63% 80% 82% 83% 85% 87% 88%Share within Coverage 0% 0% 2% 10% 14% 18% 21% 25% 26% 28% 29%
Access Ports 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%
INTERNET SERVICESInternet Access
BusinessBroadband 0% 0% 2% 10% 14% 18% 21% 25% 26% 28% 29%Narrowband / Dial-Up 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
ResidentialBroadband 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Narrowband / Dial-Up 0% 0% 0% 1% 3% 4% 6% 7% 8% 9% 9%
Web Hosting / Collocation 0% 0% 0% 5% 8% 10% 13% 15% 16% 17% 17%
Other Emerging Services 0% 0% 0% 1% 2% 4% 6% 7% 8% 9% 10%
MOBILE & PAGINGMobile 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Paging 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
OTHER SERVICESDark Fiber / Conduits
Sale 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%Lease 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100%
SHARE
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CNC REVENUE PROJECTIONBackup
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(RMB B)
VOICE SERVICESLocal - - - - - - - - - - DLD 0.004 0.312 0.889 1.769 2.807 3.125 3.284 3.379 3.390 3.298
On-Net - - - - - - - - - - Off-Net / VoIP 0.004 0.312 0.889 1.769 2.807 3.125 3.284 3.379 3.390 3.298
ILD 0.001 0.091 0.219 0.401 0.489 0.470 0.440 0.404 0.362 0.316 On-Net - - - - - - - - - - Off-Net / VoIP 0.001 0.091 0.219 0.401 0.489 0.470 0.440 0.404 0.362 0.316
International Termination - 0.065 0.157 0.272 0.392 0.445 0.467 0.476 0.472 0.456 Traditional - - - - - - - - - - IP - 0.065 0.157 0.272 0.392 0.445 0.467 0.476 0.472 0.456
Subtotal 0.006 0.467 1.265 2.442 3.688 4.040 4.191 4.259 4.225 4.070 % of Total 100% 76% 37% 30% 23% 16% 11% 7% 5% 3%
DATA SERVICESLeased Lines - 0.127 1.616 3.919 7.942 12.127 17.358 20.615 23.914 27.010
Mobile Operators - 0.028 0.285 0.575 0.883 1.167 1.287 1.400 1.505 1.602 Local - - 0.013 0.038 0.077 0.125 0.182 0.251 0.332 0.426 Backbone - 0.028 0.272 0.537 0.806 1.042 1.105 1.149 1.173 1.176
ISPs - 0.009 0.108 0.246 0.526 0.677 0.879 1.208 1.659 2.171 Broadband - 0.000 0.004 0.023 0.110 0.261 0.514 0.967 1.533 2.114 Narrowband / Dial-Up - 0.009 0.103 0.223 0.416 0.415 0.365 0.241 0.126 0.057
Paging - - - - - - - - - - Business - 0.090 1.224 3.098 6.532 10.284 15.192 18.007 20.750 23.236
Access Ports - - 0.017 0.058 0.134 0.263 0.462 0.770 1.165 1.721 Subtotal - 0.127 1.633 3.977 8.076 12.390 17.821 21.385 25.079 28.730 % of Total 0% 21% 47% 48% 51% 50% 46% 35% 29% 24%
INTERNET SERVICESInternet Access - 0.024 0.305 1.231 2.654 5.446 10.811 23.869 37.995 57.219
Business - 0.024 0.258 1.083 2.335 4.946 10.101 22.978 37.031 56.161 Broadband - 0.024 0.258 1.083 2.335 4.946 10.101 22.978 37.031 56.161 Narrowband - - - - - - - - - -
Residential - - 0.047 0.148 0.319 0.500 0.710 0.891 0.964 1.058 Broadband - - - - - - - - - - Narrowband - - 0.047 0.148 0.319 0.500 0.710 0.891 0.964 1.058
Web Hosting / Collocation - - 0.045 0.144 0.354 0.670 1.158 1.628 2.156 2.802 Other Emerging Services - - 0.046 0.170 0.610 1.677 3.436 7.774 13.963 22.366
Subtotal - 0.024 0.396 1.545 3.619 7.793 15.405 33.271 54.114 82.387 % of Total 0% 4% 11% 19% 23% 31% 40% 55% 63% 70%
MOBILE & PAGINGMobile - - - - - - - - - - Paging - - - - - - - - - -
Subtotal - - - - - - - - - - % of Total 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
OTHER SERVICESDark Fiber / Conduits - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63
Sale - - 0.13 0.22 0.37 0.59 0.90 1.32 1.46 1.89 Lease - - 0.03 0.05 0.08 0.14 0.23 0.35 0.51 0.74
Subtotal - - 0.16 0.27 0.46 0.73 1.13 1.66 1.98 2.63 % of Total 0% 0% 4% 3% 3% 3% 3% 3% 2% 2%
TOTAL 0.01 0.62 3.45 8.24 15.84 24.96 38.55 60.58 85.40 117.82
REVENUE
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2000 2004
CNC share CNC share
Market growth
Market growth
Market size RMB 10B
RELATIVE ATTRACTIVENESS OF DIFFERENT PRODUCT CATEGORIES CHANGES IN THE NEXT FEW YEARS
80%
40%
0%
0% 15% 30%0% 15% 30%
3000%
50%
0%
300%
Emerging data
IP voice
Existing datacom
On-net voice
Carrier
On-net voice
Carrier
Emerging data
Existing datacom
IP voice
- 52 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
• Demand forecast
• Geographic segmentation
• Customer segmentation
Competition overview
Business models
Next steps
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CHINA TELECOM MARKET CONCENTRATED IN TOP CITIESTop 60 Cities Account For 64% of the Voice & Data Market
1998 Accumulated Revenue (RMB Bn )
(1) Excluding paging of RMB 14 BNSource: Pyramid Report; China Statistics Yearbook; BCG analysis
BJ
GZ
SZ Next11 cities
Next45 cities
223
SH
China Total(1)
0
50
100
150
200
250
0 10 20 30 40 50 60 70
- 54 -China Netcom - The Boston Consulting Group
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IP / OFF-NET VOICE REPRESENTS SUBSTANTIAL OPPORTUNITY IN NEAR-TO-MEDIUM TERM
0
5
10
15
20
25
99 00 01 02 03 04 05 06 07 08
IP Voice Market Size (RMB Bn)
0
5
10
15
20
25
30
35
99 00 01 02 03 04 05 06 07 08
CNC’s Expected Share (%)
0
1
2
3
4
5
99 00 01 02 03 04 05 06 07 08
Estimated CNC Revenue and Profit (RMB Bn)
Revenue
Likely Profit(1)
YearYearYear
Market Share Revenue / Profit
• CNC’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 benchmarksSource: CNC team inputs; BCG analysis
• Profit margin drops as competition intensifies and price decreases
• IP voice continues to replace traditional circuit voice in DLD & ILD
- 55 -China Netcom - The Boston Consulting Group
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FOR VOICE MARKET: IDD/MOBILE CONSUMPTION MAJOR SOURCE OF REVENUE IN TOP CITIES
Mobile
SH BJ GZ SZ Other 11 cities
45 other cities Rest of China
Source: China Telecom; BCG estimate
36%
1998 voice market size(RMB Bn)
26%11%5%7%7%8%
Local
DLD
IDD
3.1 2.31.6
719.4 30
2.92.4
2.3
0.40.3
4.4
13.823
3.2
19.3
2.7
15.1
1.8
7.8
2.76
7.4
2.4
7.6
2.8
5.4
2.8
6.8
Backup
Total: 199
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21
0
13
16
0
5
10
15
20
25
30
35
0 10 20 30 40 50 60 70 80
GEOGRAPHICALLY EVEN MORE CONCENTRATED FOR DATACOM46% Revenue in Top 4 Cities
1998 Data Communications Revenue (RMB Bn )
Source: Pyramid Report; China Statistics Yearbook; BCG analysis
Backup
Next 11 cities
Next45 cities
Top 4 cities
China Total24
600+
- 57 -China Netcom - The Boston Consulting Group
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GEOGRAPHIC SEGMENTATION
Top 4
Next 11(1)
45 others(2)
Beijing, Shanghai, Guangzhou, Shenzhen
Fuzhou, 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, Wenzhou
Backup
Sample 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 -China Netcom - The Boston Consulting Group
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TOP CITIES BOAST HIGHEST TELECOM SPENDING PER CAPITA1998 Annual Telecom Spending Per Capita
RMB /cap
SH
BJ
GZ
SZ (1)
11 cities
45 cities
Mobile
525
444
1135
6721
117
60
Backup
IDD DLD Local
ROC 22
233
256
397
2351
30
12
4
176
200
348(2)
348(2)
66
55
26
240
187
239(2)
239(2)
105
77
34
(1) Large non-local/business traveler population base(2) GZ, SZ estimated under same assumption
- 59 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
• Demand forecast
• Geographic segmentation
• Customer segmentation
Competition overview
Business models
Next steps
- 60 -China Netcom - The Boston Consulting Group
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BUSINESS CUSTOMERS REPRESENT 54% OF VOICE MARKET, 97% OF DATA MARKET
Local
1998 Telecom revenue (RMB Bn )
Residential
Business
DLD IDD Mobile Paging Leased lines
Internet
Voice Data
35
28
22
27
3
15
32
37
7
8
23
0.8
0.2
63 49 18 69 15 23 1
Source: China Telecom; Pyramid research
Total237
- 61 -China Netcom - The Boston Consulting Group
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4 BUSINESS CUSTOMER TIERS ARE IDENTIFIED ACCORDING TO MONTHLY TELECOM SPENDING
Tier ranking
Typical company profileCompany examples
Typical monthly telecom spending per office (RMB K)
1
• Top high tech firm• Top international trade • Top financial institutes• Top news agency and ministry info center
Ericsson, Motorola, Sinochem, Bank of China, XingHua News Agent
500-1000
2
• Financial 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 Food
100-500
3
• Local 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
10-100
• Small companies4 2-10
- 62 -China Netcom - The Boston Consulting Group
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EACH TIER HAS DISTINCT NEEDS AND EXPECTATIONS
Tier Ranking Most 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 access
Service 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 transmission
1
2
3
4
(1) Product/services CNC might not provide in near term
- 63 -China Netcom - The Boston Consulting Group
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INDUSTRY TYPE AND CONSUMER TIER ARE HIGHLY CORRELATED
Financial Services
General Manufacturing
High Tech
Professional Services
InternationalTrade
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 line
Tier 1Tier 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 below
Industry Types Main Telecom Needs Typical Tier Ranking
- 64 -China Netcom - The Boston Consulting Group
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LARGE AND MEDIUM ENTERPRISES REPRESENT 62% OF TELECOM SPENDING IN BUSINESS SECTOR
Over 95% For Data Services
48
43
16
16
Small(1)
(Tier 4 and below)
Voice (107) Data (23)
1998 Revenue (RMB Bn )
(1) Size definition according to China Statistics YearbookSource: China Telecom, Pyramid Research, China Statistics Consultants Co., China Statistics Yearbook, BCG estimate
6
1
Large(1)
(Tier 1,2,3)
Medium(1)
(Tier 3, Tier 4)
4,600
20
42
# of companies (‘000)
Total: 130
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EXAMPLE: KEY INDUSTRIES AND COMPANY PROFILE
Company name
ABN amro bank
Gangao Security
Pudong development bank
Xi’an Janssen
Nestle
Advance Electrics
Ericsson (SH)
Ericsson (BJ)
Hua Teng
BCG
Horizon
Overseas trade
Company name
SH
BJ
BJ
Sinochem
East Net
Gubei Real Estate
BJ
SH
SH
SH
SH
SH
SH
SH
SH
SH
SH
SH
Tier ranking
2
2
2
2
3
3
2
1
3
2
4
2
1
N.A.
N.A.
Telecom spending RMB per m2/month
147
250
67
56
20
233
25
150
33
67
70
50
N.A.
N.A.
N.A.
Telecom spending RMB per/cap/month
3143
2000
1000
556
40
1750
240
2400
417
2000
538
167
N.A.
N.A.
N.A.Other
Trade
PS
HT
GM
FS
Backup
Info. high way BJ N.A. N.A. N.A.
- 66 -China Netcom - The Boston Consulting Group
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A TYPICAL BUSINESS BUILDING GENERATES ~4.5 MM RMB TELECOM REVENUE PER MONTH
Backup
Typical Business Building# Company
(by type)
1~2 Tier 1
3~5 Tier 2
50-60Tier 3
~30Tier 4
5000m2
15000m2
4000m2
750
250
50
4
Typical Spending Per Month (K RMB)
1,500
3,000
120
=
=
=
(1) Gross Floor SpaceSource: BCG interview, BCG analysis
GFS(1): 30,000m2
Occupancy: 80%
Average in SH:3,000 (RMB K)
Total: 4,620(RMB K)
eitherxorx
x
x
- 67 -China Netcom - The Boston Consulting Group
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INTERVIEWS CONDUCTED TO ASSESS CUSTOMER NEEDS AND TRENDS, TO COMPLEMENT AND VERIFY SECONDARY DATA
Identify 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 -China Netcom - The Boston Consulting Group
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IN DEPTH INTERVIEWS REVEAL SIGNIFICANT OPPORTUNITY FOR NEW ENTRANT TELCOS
Long 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 users
Backup
- 69 -China Netcom - The Boston Consulting Group
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SERVICE QUALITY & SERVICE LEVEL ARE THE KEY SWITCHING FACTORS
Especially for Tier I & 2 Customers
Switching Criteria
Product/Service quality
Service level
Price
Product offering
Relative maturity as telecom customer
Tier 1 Tier 2 Tier 3 Tier 4
Source: BCG interview
Impact on switching decision weak strong
- 70 -China Netcom - The Boston Consulting Group
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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 Bank
Backup
- 71 -China Netcom - The Boston Consulting Group
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CUSTOMERS CAN BE WON OVER BY MEETING GROWTH NEED China Telecom’s Slow Pace and Long Cycle is Major Area of Discontent
ISPs seeking alternatives to CT Business 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 Teng
Backup
- 72 -China Netcom - The Boston Consulting Group
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RESPONSE TIME AND MEASURABLE SERVICE QUALITY ARE DIFFERENTIATION FACTORS
Customers 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, SinoChem
Key customers require specialized care
Backup
- 73 -China Netcom - The Boston Consulting Group
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TELECOM SERVICE QUALITY AND SERVICE LEVELS ARE THE KEY PURCHASING CRITERIA AMONG KEY CUSTOMERS
One-stop, end-to-end solution desired Price 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 Trade
Backup
- 74 -China Netcom - The Boston Consulting Group
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ISP AND MOBILE ARE THE MAJOR CARRIER SEGMENTS
(1) Customers include MOR, CATV and other large volume usersSource: Pyramid research; BCG analysis
Dark Fiber, Conduits & Access Ports(1)
Paging
ISP
Mobile
N/A
0.2%
46%
5%
CAGR (98-05)
Carriers’ market size(RMB Bn )
14
20
8
0.6
0.6
0.6
1.1
0
10
20
30
1998 2005 (projected)
0
- 75 -China Netcom - The Boston Consulting Group
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BOTH CHALLENGES AND OPPORTUNITIES FOR CNC TO ADDRESS CARRIERS’ NEEDS
ISPs looking for alternatives to CT ...• More reliable services (backbone, i
nternational gateway)• Broader bandwidth at a reasonable
price• Less lead time for adjusting info ne
eds (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 competition
ISP
Mobile 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-money
Mobile
- 76 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
- 77 -China Netcom - The Boston Consulting Group
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COMPETITIVE SUMMARY
Regulatory 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 Netcom - The Boston Consulting Group
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China Unicom
COMPETITIVE LANDSCAPE TODAY: 1999 (I)
Residential
Business
Segments Full-service providers Value Added Service Providers
Cellular
Internet access
Broadband applications
On-net voice
Off-net voiceIP phone
On-net voice
Off-net voice
Internet access
Leased line
VPN / other broadband applications
Multiple ISP’s
LocalMSOs
Satellite
CNC
ChinaUnicom
Paging
• China Telecom
SatelliteCommunications
Corp
MobileCommunications
Corp
FormerChina
Telecom
Former CT paging
Hold license/ Deploy ?
Jitong
Jitong
Jitong
CNC
Multiple
ISPs
CNC
- 79 -China Netcom - The Boston Consulting Group
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COMPETITIVE LANDSCAPE TODAY: 1999 (II)Competitors In Telecom Markets
Targeted offerings
Carrier’s Carrier
Switched
Voice
All
DLD
ILD
IP
Large/medium business customers
China TelecomChina Telecom
SatelliteUnicom Jitong
Competitor
()
()
TJ, CQ, Sichuan
CNC
- 80 -China Netcom - The Boston Consulting Group
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2 SCENARIOS WILL EMERGE IN COMPETITIVE LANDSCAPEDepend on Interaction of Pro-competitive regulation and FDI
Pro-competitive Regulation
Implementation
Activeness of FDI• Number of FDI backed players• Intensity of FDI funding
Landscape today• Few basic carriers• Limited number of
type II carriers• Low FDI activity• Funding depend
on internal resources
Landscape today• Few basic carriers• Limited number of
type II carriers• Low FDI activity• Funding depend
on internal resources
Scenario 2: Open Competition
In the VAS area• Controlled number
of basic carriers• Numerous active
FDI backed regional/Type II players
Scenario 2: Open Competition
In the VAS area• Controlled number
of basic carriers• Numerous active
FDI backed regional/Type II players
OpenCompetition
ClosedCompetition
Latent Active
Likely in 2004
Less likely
in 2004
Scenario 1: Open in all fronts
• Multiple CLECs and IXCs
• Numerous regional/Type II players
• up to 50% FDI
Scenario 1: Open in all fronts
• Multiple CLECs and IXCs
• Numerous regional/Type II players
• up to 50% FDI
- 81 -China Netcom - The Boston Consulting Group
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MOST LIKELY COMPETITIVE LANDSCAPE IN 2003/4
Residential
Business
Segments Full-service providers Value Added Service Providers
Cellular
Internet access
Broadband applications
On-net voice
Off-net voiceIP phone
On-net voice
Off-net voice
Internet access
Leased line
VPN / other broadband applications
Multiple ISP’s
ProvincialMSOs
Satellite
CNC
ChinaUnicom
Paging
CT broken into regions
• Six regional operating companies for NLD
• HQ controls international and data
SatelliteCommunications
Corp
MobileCommunications
Corp
FormerChina
Telecom
Former CT paging
Jitong
Jitong
Jitong
Multiple ISR
players Multiple I-
Phone players
Multiple ISR
players
Multiple I-
Phone players
UtilitiesCATVs
MultipleRegionalPlayers
Multiple VANs
Multiple ISP’s
MultiplePlayers
CNC
4-5 morenationalplayers
CATVs
- 82 -China Netcom - The Boston Consulting Group
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LIKELY SCENARIO MEANS MORE OPPORTUNITY THAN THREAT
• 1-2 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 players
New entrant ISPs, MSOs and Wireless Carriers as potential customer
• Local autonomy and separate P&L lead to flexibility in partnership• CT local bandwidth requirement not easily accommodated by national plan due to
separate investment ownership
Paging, Wireless, ISP services separated from incumbent as potential customer
• Becoming 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 flexibility
Opportunity
Threat
- 83 -China Netcom - The Boston Consulting Group
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CHINA TELECOM (I)
99%
Recent split along service lines, national paging service folded into Unicom
But each former China Telecom constituent still holds dominating share in respective market *:
China Mobile Communications
Corp.
China Mobile Communications
Corp.
China Telecom(Voice and Data Services)
China Telecom(Voice and Data Services)
China Satellite Communications
Corp.
China Satellite Communications
Corp.National Long
Distance Services
National Long Distance Services
International Long
Distance Services
International Long
Distance Services
Broad-bandData
Services
Broad-bandData
Services
ISPservice
(163, 169
China-Net)
ISPservice
(163, 169
China-Net)
National / International Level
Regional Level
Municipality/ City Level
ProvincialLevel
Local Voice and Data Services
Local Voice and Data Services
• Likely to further break down into 6 regional companies
• Likely to remain as one national entity
• VSAT based backbones and local base stations
• Likely to remain as one national entity
• Holding local GSM networks and frequencies
• Likely to remain as one national entity
• Likely to further break down into 6 regional companies
~100% ~100% 90% 80%+ 95% 100%
* As of 3Q 1999
- 84 -China Netcom - The Boston Consulting Group
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CHINA TELECOM (II)
The fixed line services of China Telecom will likely to be broken up into 6 regional companies
Generating significant competitive impact to CNC
Potential 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 FDI
China Telecom
West China Telecom
Southwest China Telecom
North China Telecom
East China Telecom
South China Telecom
Central China Telecom
Broken up
• Local 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 Netcom - The Boston Consulting Group
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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 -China Netcom - The Boston Consulting Group
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UNICOM
Entrenched 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 -China Netcom - The Boston Consulting Group
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JITONG
Primarily 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 -China Netcom - The Boston Consulting Group
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HIGH POSSIBILITY FOR COOPERATION AT LOCAL LEVEL
Competitor
China Telecom fixed line Services
China Telecom Wireless
Unicom (include former CT paging services)
Method Probability Method CNC’s shareRationale/comments
Potential partnership Potential as carrier customer
• Interconnect• Leased line for local
access
• 100% for VoIP• 1999-2000: 50% of
targeted cities• 2001-2004: 60% of
targeted cities
Inter-city traffic diverted to CNC backbone
Inter-city traffic through CNC backbone as backup
20% of total CT wireless traffic goes through CNC backbone
At most 5% of inter-city traffic goes through CNC backbone
• Required by government, but expect some delay in implementation
• CT backbone is assumed to be CT wireless’ primary carrier
• CNC IP/DWDM back bone as complementary carrier with lower cost
• CNC only complements areas where Unicom cannot cover
• CNC as low cost backup solution
Jitong CNC backbone provide back-up bandwidth
20% of total Jitong traffic
• Jitong’s primarily VSAT based backbone will not meet expansion need
CATV HFC as local access partner in major cities
Over 50% possibility in CNC target cities, if fiber available
carrier customer and fiber leasing
2000-2002: 5 key cities2003-2004: 15 major provincial capitals
• CNC fiber only complements areas SARFT lacks coverage
ISPs carrier customer 1999-2000 10%2000-2004 40%
• CNC high speed back bone is effective to drive up end user demand
- 89 -China Netcom - The Boston Consulting Group
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CARRIER: EXPECTED SHARES
Competitor Key strengths / weaknesses2000 2004
Expected share
CNC
• IP/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 communications
• Extensive existing backbone• Existing local access, captive demand• Weakness: legacy system makes it difficult to
cut down costs
80% 65%
• Existing coverage / user base• Weakness: bandwidth constraint
5% 5%
Unicom
• Early mover to market• Nearly complete coverage in 150 cities• Captive mobile demand• Weakness: In-fighting board, acrimonious
relationship with CT
10% 20%
Jitong
• Solution primarily based on VSAT coverage, bandwidth constraint
• Existing bandwidth primarily occupied by own IP phone service
• Questionable excess bandwidth for resale
5% 3%
Rationale / Benchmark
Mobile operatorsA 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)
ISPsExpect 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 operatorsNot CNC priority
Source: CNC team inputs; BCG analysis
- 90 -China Netcom - The Boston Consulting Group
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LARGE / MEDIUM BUSINESSES: EXPECTED SHARES
Competitor Key strengths / weaknesses2000 2004
Expected share
CNC
• Multiple 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 quickly
1% 15%
China Telecom• Voice services
• Satellite communications
• Incumbent: 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 services
74% 55%
• Coverage/bandwidth limited• Weakness: bandwidth constraint in later years
5% 5%
Unicom• Early to market, built local access in TJ/CQ/SC• Weakness: continuous management problems
10% 15%
Jitong
• Aggressively going after market from current ISP base
• Weakness: bandwidth constraint (VSAT-based solution)
10% 10%
Rationale / Benchmark
In 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 -China Netcom - The Boston Consulting Group
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OFF-NET VOICE: EXPECTED SHARES
Competitor Key strengths / weaknesses
CNC
• Low 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 services
• Incumbent / early entrant• Existing coverage• No interconnect hassle• Weakness:
- higher cost position based on existing infrastructure
- cannibalize circuit voice services
Unicom
• Early to market• Synergy with mobile business• Weaknesses:
- initial stage unclear management focus- Acrimonious relation with CT
Jitong
• Quick 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)
2000 2004
Expected share
15% 28%
55% 40%
15% 20%
15% 12%
Rationale / Benchmark
In 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% share
Source: CNC team inputs; BCG analysis
- 92 -China Netcom - The Boston Consulting Group
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CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
- 93 -China Netcom - The Boston Consulting Group
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AGENDA
Business Models
• Domestic and international long-distance voice
• Wholesale/carrier
• Enterprise solutions
• Issues going forward
- 94 -China Netcom - The Boston Consulting Group
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Economic modelingEconomic modeling Choice of business modelsto pursue and timing
Choice of business modelsto pursue and timing
Roadmap for pursuing business models and
expected financial performance
Integrated approach to CNC business plan
MajorissuesMajorissues
Expectedoutput
Expectedoutput
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 scenarios
Assessment of market opportunities
Assessment 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 area
Regulatory and competitive analysis
Regulatory 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 assessment
METHODOLOGY BEING USED TO DEVELOP BUSINESS MODELS AND OVERALL STRATEGY
- Current areas of focus
- 95 -China Netcom - The Boston Consulting Group
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CNC AT A CRITICAL STRATEGIC CROSSROADS
Preliminary Conclusions Recommendations/Decisions to be Made
Offnet 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 focus
Overarching question: Can CNC successfully pursue all opportunities outlined in the short/medium term?
Overarching question: Can CNC successfully pursue all opportunities outlined in the short/medium term?
(1) Assuming settlement fees of 10% of revenue
- 96 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
Overall approach
Where
How
BUSINESS MODELS SUMMARY: THREE CORE ELEMENTS
Enterprise Solutions
Capture 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/Carrier
Target 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”
ISP
Long distance voice
Capture 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 -China Netcom - The Boston Consulting Group
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Enterprise solutions
POTENTIAL BUSINESS MODELS COVER WIDE RANGE OF PRODUCT/MARKET ALTERNATIVES
Opportunity for growth
Current market size
Wholesale/carrier
Consumer ISP?
Domestic and International Long Distance Voice
Residential Med/large enterprise customers
Carriers
Potential traffic per consumer
Products
Emerging datacom
Data
Voice
Emerging data niche
- 98 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
AGENDA
Business Models
• Domestic and international long-distance voice
• Wholesale/carrier
• Enterprise solutions
• Issues going forward
- 99 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
APPROACH TO DOMESTIC AND INTERNATIONAL VOICE BUSINESS MODEL
Objectives Hypothesized Approach
Capture 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” image
Fight 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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
DOMESTIC AND INTERNATIONAL VOICE SUMMARY
Preliminary Economics
Phase 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 Addressed
Interconnect 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 -China Netcom - The Boston Consulting Group
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LARGE MARKET WITH POTENTIAL TO GAIN SHARE QUICKLY
New entrants typically gain share quickly
Example: IDD and DLD services
Market sizeable - off-net traffic accounts for ~15% of total DLD/ILD revenue by 2004
Source: China Telecom annual reports; CNC’s team inputs; BCG surveys, analysis & benchmarking
0
10
20
30
40
50
0 1 2 3 4 5 6 7
Year after entry
Optus (DLD)
Tele 2 (DLD)
Mercury(DLD)
Hong Kong (IDD)
Japan (IDD)
US (IDD)
0
20
40
60
80
100
1998 2000 2004
(RMB BN)
DLD On-Net
DLD Off-Net
ILD On-Net
ILD Off-Net
(%)
- 102 -China Netcom - The Boston Consulting Group
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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 -China Netcom - The Boston Consulting Group
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CNC VOIP REVENUE AND MARKET SHARE EXPECTATIONS
Source: CNC’s team inputs; various benchmarks; BCG analysis
Voice revenue Share assumptions
0
1
2
3
4
1999 2000 2001 2002 2003 2004
CNC Revenue(RMB BN)
Off-Net DLD
% of total CNC revenue
100% 76% 37% 30% 23% 16%
Off-Net ILD
International Termination
1999
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 coverage
2000
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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL (PHASE I BUILDOUT)
VOIP Revenue Alone Justifies Building Backbone
-2300-1400
3700
-700
740
-500
570
-100
-490
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
5 year PV(1) (M RMB)
CapEX OpEx
Revenue
5 year NPV@15%:5 year NPV@15%:~ -500M RMB
5 year IRR:5 year IRR: ~12%
Essentially breakeven economics for operating backbone for VOIP only
VOIP(2)Backbone construction
Backbone
International termination
IDD
DLD
IP
POP/Access platformOSS
Present 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 economicsSource: BCG benchmark database; industry interviews; BCG analysis
- 105 -China Netcom - The Boston Consulting Group
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AGENDA
Business Models
• Domestic and international long-distance voice
• Wholesale/carrier
• Enterprise solutions
• Issues going forward
- 106 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
APPROACH TO WHOLESALE/CARRIER BUSINESS MODEL
Objectives Hypothesized Approach
Develop 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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
WHOLESALE/CARRIER SUMMARY
Preliminary Economics
Phase 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 Addressed
Backbone 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 -China Netcom - The Boston Consulting Group
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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 -China Netcom - The Boston Consulting Group
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OVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATE
Anticipated Price Decrease in Leased Lines Limits Overall Revenue Growth
0
5
10
15
20
25
30
1998 1999 2000 2001 2002 2003 2004
Leased Lines - ISP
Market Size (RMB B)
15
Total
Leased Lines - Mobile
99’-04’CAGR
Access Ports
Leased Lines - Paging
18 18
20
22
2628
4%
41%
1%
152%(1)
9%
(1) 01’-04’ CAGRSource: CNC team inputs; foreign benchmarks; BCG analysis
Dark Fiber 68% (1)
- 110 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
CARRIERS SEEKING ALTERNATIVES...
ISPs definitely seeking alternatives to CT Mobile 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, Infohighway
Mobile 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 -China Netcom - The Boston Consulting Group
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…BUT TECHNOLOGICAL LIMITATIONS AND COMPETITIVE CHALLENGE ARE IMPORTANT FACETS TO MANAGE
Competitive ChallengeTechnological Limitations
Mobile 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 target
Build presence by offering low-costtrials and backup capacity
Lobby for clear regulation from MII on freedom of choice for carriers
- 112 -China Netcom - The Boston Consulting Group
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PREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODEL
Additional CapEx and OpEx Minimal
1670
-160
660
730
5010
-1890
-3600
-46
-400
-52
200
5 year PV(1) (M RMB)
CapEX OpEx
Revenue
5 year NPV@15%:5 year NPV@15%: ~2.1B RMB
5 year IRR:5 year IRR: ~ 40%
Wholesale critical to enhancing profitability of backbone
VOIP
Backbone allocation
Dark FiberAccess ports
ISPs
Mobile operators
VOIP
VOIP
ISP accessOSS
(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis
OSS/provisioning
Present value of cash flows8,000
7,000
5,000
1,000
6,000
-3,000
-4,000
- 113 -China Netcom - The Boston Consulting Group
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AGENDA
Business Models
• Domestic and international long-distance voice
• Wholesale/carrier
• Enterprise solutions
• Issues going forward
- 114 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
APPROACH TO ENTERPRISE SOLUTIONS BUSINESS MODEL
Objectives Hypothesized Approach
Capture 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 -China Netcom - The Boston Consulting Group
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ENTERPRISE SOLUTIONS SUMMARY
Preliminary Economics
Phase 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 Addressed
Right 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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
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
- 117 -China Netcom - The Boston Consulting Group
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…BUT COMPRISES TREMENDOUS UPSIDE POTENTIAL
0
20
40
60
80
100
120
140
160
180
200
1998 2000 2004
Internet Access
Leased Lines
ILD
DLD
Local
0
5
10
15
20
25
30
35
2000 2004
Other
Portal
Broadband Content
Web Hosting/ Collocation
Existing Services Emerging Services98-04CAGR
124%
40%
-10%
7%
11% IP VPN
Broadband Network Applications
71%
83%
186%
98%
111%
286%
00-04CAGRMarket size
(RMB BN)Market size (RMB BN)
78
96
187Overall 16% Overall 86%
3
32
Source: CNC team inputs; foreign benchmarks; BCG analysis
- 118 -China Netcom - The Boston Consulting Group
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CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAINCT’s Offering Yields Significant Gaps
Learn Buy Get Use/support PayCustomer value chain
Needs identified
• How datacom services can help their business
• Assistance deploying solutions
• Quicker and more convenient application channels
• Rapid and reliable provisioning
• Faster, reliable repair services
• Prompt, customized billing
• Lack customer focus
• Solutions virtually non-existent
• Mostly one-way product marketing
• No customer input for provisioning
• CT determines queue without specific timing
• No penalties for missed appointments
• Negligent repair service
• Slow fulfillment & technical support response
• Poor response to customers
• Limited bill customization
CTapproach
Significant opportunity for CNC establish position in customer solutions, ease of use, and responsive service
Significant opportunity for CNC establish position in customer solutions, ease of use, and responsive service
Areas highlighted most in customer interviews
Source: Customer interviews; BCG analysis
- 119 -China Netcom - The Boston Consulting Group
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STAGED PRODUCT INTRODUCTION NECESSARY TO MANAGE QUALITY
Hypothesized Product Introductions
Voice
Data
2000 2001 2002 2003 2004 2008
Phase I & II Phase III Phase 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 HostingDark FiberResidential ISP?
Advanced VPN• Extranet• Voice, video QoS guarantees• Industry specific offerings
Other emerging services (e.g. e-Commerce)
IP-phone voice• Prefix • “Dial-around” solutions
Equal access voice? On-net voice?
Focus on quality over quantity
Market as integrated products
Stress CNC role as integrated datacom player
PositioningIssues
- 120 -China Netcom - The Boston Consulting Group
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CNC SHOULD USE CREATIVE WAYS TO GROW THE MARKET, AVOID HEAD TO HEAD COMPETITION
Competitors all focus on the same demand from the same customers
Savagely compete on price
Reactively wait for customers to identify need, request products
Pursue 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 growth
CT
CNC
Unicom
Jitong
CT is likely to be unable to meet growing demand aloneCT is likely to be unable to meet growing demand alone
Traditional, narrow view New approaches to growing sales
- 121 -China Netcom - The Boston Consulting Group
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TOTAL GDP VS. GDP/CAPITA IS A PRELIMINARY INDICATOR FOR ATTRACTIVE LOCAL ACCESS MARKETS
Example: 15 Initial Cities with POPs on CNC Network
1,000,000
6,000,000
11,000,000
16,000,000
21,000,000
26,000,000
31,000,000
36,000,000
0 20 40 60 80 100 120
Shanghai
Beijing
Guangzhou
Tianjin
Hangzhou
Wuhan
NanjingJinan
Shijiazhuang
Zhenzhou
ChangshaXuzhou
Xiamen
Fuzhou
Shenzhen
Examples of additional cities not in initial 15 designated for CNC POPs
Hypothetical breakeven curve for building local access
SuzhouWuxi
Total GDP (k RMB)
GDP/cap (k RMB)
- 122 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
VERY DENSE MARKETS SUCH AS SHANGHAI BEST SERVED BY METRO FIBER RINGS
M
POP/rail station
Hong Qiao Development
Area
People’s park
Huai Hai Road
Xujiahui
Pudong Financial
Zone
Fiber length:Along subway:Along elevated ring road:Along road:
Fiber length:Along subway:Along elevated ring road:Along road:
17000m9000m8000m
# of major businessbuildings accessed:# of major businessbuildings accessed: ~200
Fibers alongFibers along
Subway in construction
Subway
Elevated ring road
Road (dig required)
Dense Business Area served
Metro stations
M
M
M
- 123 -China Netcom - The Boston Consulting Group
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SHANGHAI ECONOMICS VERY ATTRACTIVE DUE TO HIGH BUILDING AND BUSINESS DENSITY
-248
705
133
-106
78
-9
-54
-142
-46-14
45
-31
-600-500-400-300-200-100
01002003004005006007008009001000
5 year PV(1) (M RMB)
CapEX OpEx
Revenue
5 year NPV@15%:5 year NPV@15%: ~310M RMB
5 year IRR:5 year IRR: ~70%
Shanghai presents most attractive enterprise solutions
market
SG & A
Allocated backbone
IDDEmerging data(3)
DLD
Data services
SONET/switching equipment
OSSAllocated 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 analysis
Power provisioning, etc.
Fiber construction
Right of way
Present value of cash flows
- 124 -China Netcom - The Boston Consulting Group
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MEDIUM SIZED CITIES WITH HIGH GDP/CAPITA SUCH AS FUZHOU BEST SERVED WITH LMDS SOLUTION
Fiber length:Along road:# LMDS station:
Fiber length:Along road:# LMDS station:
5000M1
Area served(1):# of major businessbuildings covered:
Area served(1):# of major businessbuildings covered:
~40km2
~40(2)
LakeFiber along roadRailwayRailway stationRoadLMDS stationMajor buildingsArea served
R
S
(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
S
R
- 125 -China Netcom - The Boston Consulting Group
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PRELIMINARY FUZHOU ECONOMICS UTILIZING LMDS VERY FAVORABLE
-7
31
6
3.5
-4.1-3.7
-3.1-1. 2-2. 5
2
-2.1-15-10-505101520253035404550
5 year PV(1) (M RMB)
CapEX OpEx
Revenue
5 year NPV@15%:5 year NPV@15%: ~20M RMB
5 year IRR:5 year IRR: ~60%
LMDS solutions for medium sized cities will play a critical role in
developing enterprise solutions
SG & A
Power, provisioning, etc.
IDDEmerging data services
DLD
Data services
Base station
CPE
(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Bldg equipment
Spectrum feesFiber to POP
Present value of cash flows
- 126 -China Netcom - The Boston Consulting Group
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OTHER CITIES OF SIZEABLE POPULATION BUT RELATIVELY LOW GDP/CAPITA MAY NOT WARRANT INVESTMENT
Example: Shijiazhuang
No fiber connectionrequired, assume rail station is LMDS base
No fiber connectionrequired, assume rail station is LMDS base
1
Area served(1):# of major businessbuildings covered:
Area served(1):# of major businessbuildings covered:
~40km2
~20(2)
RailwayRoadLMDS stationMajor buildingsArea served
S
S
(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 -China Netcom - The Boston Consulting Group
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OVERALL ECONOMICS APPEAR MARGINAL FOR SHIJIAZHUANG
-4
9.7
-4. 1
-2. 9-2. 5
1.8
-1. 9
1.10.6
-0. 6
-20
-15
-10
-5
0
5
10
15
5 year PV(1) (M RMB)
CapEX OpEx
Revenue
5 year NPV@15%:5 year NPV@15%: ~ -3M RMB
5 year IRR:5 year IRR: ~5%
Cities without dense business districts may not be attractive enterprise markets
regard less of overall size
SG&A
Power, provisioning, etc.
IDDEmerging data servicesDLD
Data services
Base station
(1) Assuming 15% cost of capitalSource: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Spectrum
CPEBldg. equipment
Present value of cash flows
- 128 -China Netcom - The Boston Consulting Group
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OVERALL REVENUE AND MARKET SHARE EXPECTATIONS: ENTERPRISE SOLUTIONS
Predominately voice (DLD / ILD) revenue in the first two years; migrating to data and Internet services by 2002
0
5
10
15
20
25
2000 2001 2002 2003 2004
CNC revenue(RMB BN)
Internet Access
Leased Lines
ILD
DLD
Share assumptions
OtherEmerging Services
Web Hosting / Collocation
Source: CNC team inputs; foreign benchmarks; BCG analysis
1999
3%80%1%
3%80%1%
0%0%
0%0%
0%
0%
DLDOff-net share of total DLDGeographic coverage of CNCCNC share within coverage
ILDOff-net share of total ILDGeographic coverage of CNCCNC share within coverage
Leased LinesGeographic coverage of CNCCNC share within coverage
Internet AccessBroadbandNarrowband / Dial-Up
Web Hosting / Collocation
Other Emerging Services
2000
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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
OVERALL ECONOMICS ATTRACTIVE FOR PHASE I BUILDOUT IN TOP FOUR CITIES
5 year PVs (M RMB)
CapEx OpEx Revenue 5 year city NPV 5 year IRR
Shanghai
Beijing
Guangzhou
Shenzhen
Total
145
149
157
95
546
504
447
400
332
1683
960
768
640
480
2848
311
172
83
53
70%
45%
30%
28%
Overall Phase I 5 year NPV: ~620M RMB
5 year IRR: ~44%
Overall Phase I 5 year NPV: ~620M RMB
5 year IRR: ~44%
Source: BCG benchmark database; industry interviews; BCG analysis
- 130 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
GOING FORWARD, CITIES WILL NEED TO BE ANALYZED ON A CASE BY CASE BASIS
Deployment technology will play a critical roleMethodology/criteria for
choosing local access markets
Initial 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 buildout
1.
2.
3.
4.
5.
Go or no go!
Cost to deliver
enterprise solutions
Increasing business density and area
Intermediate density best served
by LMDS
Very dense and large area best served by fiber
Too costly to serve
Fiber
LMDS
- 131 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
RECAP OF OVERALL PHASE I ECONOMICS AND KEY ISSUES
Enterprise 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 value
Wholesale/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 flexibility
Long 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 -China Netcom - The Boston Consulting Group
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AGENDA
Business Models
• Domestic and international long-distance voice
• Wholesale/carrier
• Enterprise solutions
• Issues going forward
- 133 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
EMERGING OPPORTUNITIES EXIST FOR CONSUMER ISP AND ADVANCED DATA SERVICES
Residential 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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
Datacom services explosion
Slowed adoption
Stable competition with CT, Unicom, and Jitong; clear regulations
Increased competition with limited cooperation from CT
Fragmented, unstable competition; multiple entrants and unclear regulations
Base case
Best
Worst
Demand side
Competitive/Regulatory Situation (Supply side)
ENVIRONMENTAL UNCERTAINTIES LEAD TO THREE BASIC SCENARIOS TO BE ANALYZED
Growth in existing data and and emerging datacom services (as expected)
- 135 -China Netcom - The Boston Consulting Group
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MONTE CARLO SIMULATION WILL ALLOW FOR GAUGING THE EFFECTS OF UNCERTAINTIES IMPLIED IN SCENARIOS
Example: Effect of Average Building Size, Tier 1 Business Proportion & Spending on Shanghai Metro Access Economics
Establish Input VariablesEstablish Input Variables
25,000.00 28,750.00 32,500.00 36,250.00 40,000.00
Average building size (m2)
Min
Most likely
Max
7.5% 11.3% 15.0% 18.8% 22.5%
% Tier 1 businesses
Min
Most likely
Max
300.00 350.00 400.00 450.00 500.00
Average spending/sq m for Tier 1 (RMB)
Min
Most likely
Max
Pro
ba
bil
ity
Monte Carlo simulation of
1000 trials with 5 year
NPV as forecast output
Monte Carlo simulation of
1000 trials with 5 year
NPV as forecast output
Frequency Chart
Certainty is 95.00% from $238,500 to $558,816 000 RMB
Mean = $381,016.000
.023
.046
.068
.091
0
22.75
45.5
68.25
91
$150,000 $262,500 $375,000 $487,500 $600,000
1,000 Trials 6 Outliers
Forecast: 5 YR NPV
Resulting forecast
- 136 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
MONTE CARLO SIMULATION PROVIDES VERY USEFUL OUTPUT
95% 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 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
CONTENT
Key strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
- 138 -China Netcom - The Boston Consulting Group
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NEXT STEPS
Agree 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 -China Netcom - The Boston Consulting Group
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ORGANIZATION DESIGN METHODOLOGY
Define principles & objectivesDefine principles & objectives
Key criteriaKey criteria
Design organization structure• Possibility of combination/hybrid models
Design organization structure• Possibility of combination/hybrid models
Define job responsibility/accountability corresponding to organization structure
• Example for process flow (how each function interacts)
• Example for KPI, principles for KPI
Define job responsibility/accountability corresponding to organization structure
• Example for process flow (how each function interacts)
• Example for KPI, principles for KPI
Select models to test
Select models to test
- 140 -China Netcom - The Boston Consulting Group
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MAJOR OUTPUTS: ORGANIZATION DESIGN
Key principles for KPI
• With examples
Key principles for KPI
• With examples
Division/accountability
• “Internal market” as cross-dept incentive
Division/accountability
• “Internal market” as cross-dept incentive
Organization chart
• Dotted line vs. solid line
• Reporting/accountability
• Rationale/methodology
Organization chart
• Dotted line vs. solid line
• Reporting/accountability
• Rationale/methodology
- 141 -China Netcom - The Boston Consulting Group
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IMPLEMENTATION PLAN DESIGN METHODOLOGY
Objective/target scheduleObjective/target schedule
Major function/module working backwardMajor function/module working backward
Detailed work and cycle time for module/sub-module refine timeline
Detailed work and cycle time for module/sub-module refine timeline
Draft implementation timelineDraft implementation timeline
Key checklist & mile stones per division
Key checklist & mile stones per division
Key process for rollout (across divisions)
• Product rollout• Geographic rollout
Key process for rollout (across divisions)
• Product rollout• Geographic rollout
Revise target if necessary
Identify bottleneck, refine schedule
Segmented view of implementation
- 142 -China Netcom - The Boston Consulting Group
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Key cross-functional coordination process flow
• Examples
Key cross-functional coordination process flow
• Examples
MAJOR OUTPUTS: IMPLEMENTATION PLAN
Key rollout plan example• Product • City
Key rollout plan example• Product • City
MS project time-line/milestones• Overall• By division
MS project time-line/milestones• Overall• By division
Highlights• Major milestones
resource planning
Highlights• Major milestones
resource planning
- 143 -China Netcom - The Boston Consulting Group
--Confidential--Destroy by Shredding--45034-05-Interim-14Dec99-TZD-gx-SHI
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
Week 4 Responsibility key milestonesstrarting
Phase IReview/presentation Dec 14
Phase II JSFinancial modeling JS
Model construction JS Jan 3 integratedFinancial assumption JS Dec 15 finalizedTechnical assumptions JS Dec 15 finalizedOther cost assumptions TC Dec 16 first cutIterations JSScenario definition JS Dec 13 first cutScenario run JS
24 months master plan NLRegulatory/lobbying NL Dec 13 first cutMarketing/product LC Dec 20 first cutSales LC Jan 3 first cutTechnical deployment/vendor plan JS Jan 7 first cutProcess development NL Jan 7 first cutOSS NL Jan 7 first cut
Organizational development NL/TCKPI and accountability NL Jan 7 first cut
Knowledge sharing, BCG USA (RC) DM/RCSynthesis/production teamReview/presentation Jan 14 team
X'mas/New Year Break 7 86-Dec
527-Dec 3-Jan 10-Jan13-Dec 20-Dec