the policy and prospects of china’s fixed broadband market liberalization

The policy and prospecTs of china’s fixed broadband Market liberalization

perspective JANUARY 2015

Jane Hou, taylor Lam, Adam Meng

the policy and prospects

of china’s fixed broadband

Market liberalization

Published by

Value Partners Management Consulting

A-1111, the Spaces International Center, No.8

Dongdaqiao Road, Chaoyang District

Beijing, China 100020

January 2015

Written and edited by:

Jane Hou, Taylor Lam, Adam Meng

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perspective The policY ANd pRospecTs of chiNA’s fixed bRoAdbANd MARkeT libeRAlizATioN

OVERVIEW

in deceMber 2014, the Ministry of industry

and inforMation technology of china

(hereinafter referred to as “Miit” or “the Ministry”)

introduced “policy on the pilot of fixed broadband

Market liberalization”, encouraging civil capital

to enter fixed broadband Market in various

Models, which is considered as another Milestone

of state Monopolized industries’ opening up.

There’re various Types of parTicipanTs in

fixed broadband markeT worldwide.

several disTinguished business models have

been ouTlined.

4 – 5

Exhibit 1Global Fixed Broadband Value Chain Analysis (FBB Value Chain)

sources: Media, Value partners Analysis 2015

BACkBONE NETWORk

(PARTIALLy OWN)

NETWORk PROVIDER / ISP




INTRA-CITy

NETWORk

TIER 2 OPERATOR

LIGHT TIER 2 OPERATOR

CPNBRAND /

MARkETING

OFFERING /

TARIFF

DISTRIBuTION /

RETAIL

CuSTOMER

SERVICE /

CARING

TIER 3 OPERATOR / TyPICAL VISP

LIGHT VISP

RESELLER


DISTINGuISHED BuSINESS MODELS

from a global perspective, major fbb

players – besides typical isps and

network providers – can be divided into

4-5 groups: tier 2 broadband operators,

light tier 2 broadband operators, tier 3

broadband operators/visps, light visps

and broadband resellers. due to the

high liberalization level of the market,

tier 2 broadband operators are com-

monly participating in the construction

and operation of the backbone network.

across the oversea markets, there’re

many non-telecom background com-

panies which operate fixed broadband

business, like internet, media, energy,

financial services and even ngo.

1) the entrance of fttx, 2) capability

of high capex investment, 3) source-

ful ott contents to bundle formed the

key success basis for the fbb business.

there’re non-telecom background com-

panies (like internet companies google,

facebook and virgin Media), typical

visp (like british media company sky),

light visp (like american ip telephone

services provider vonage) and some

resellers in the market.

internet giant google invested radically

in network infrustratures, including

google fiber project, unity consortium

project, titan aerospace project, o3b

networks project, project loon and

tv whitespace project. google fiber

– google’s fttx initiative launched in

2012 - is highly comparable to china’s

potential piloting players. thus, its

underlyding business logics could be

inspirations to china’s incoming partici-

pants, especially to internet companies.

google fiber project is a high-speed

fttx project which was launched

in 2012 by google, now is rolling out

in 12 cities in the us as planned (by

december 2014, 3 cities had actually

launched). by possessing ample band-

width through contract with network

providers, relying on high-quality

optical fiber under the support of pon

technology, google fiber could provide

unprecedent high speed internet con-

nection – nearly as much as 1000 times

of market average in the us – to the

end users. both the uplink and downlink

transmission speed are up to 1gbps.

google has bundled pay tv, cloud

drive, mobile phone business into its

high speed internet service package.

due to the maturity of america’s pay

tv market, google fiber has a very

high arpu reaching 107 usd / month in

kansas city. in the mean time, google

fiber utilized the model of “booking

first, building afterward” to devest

unnecessary investments. and the

ultimate cost allocation of fttx is 1100

usd per household. therefore, google

fiber would be able to achieve the paid-

back in about 1 year.

6 – 7

Exhibit 2Google Fiber service offers

sources: Google fiber webpage, Value partners Analysis 2015

GiGABit + tv

$ 120 / mo

$300 waived construction fee

GiGABit iNterNet

$ 70 / mo

$300 waived construction fee

Free iNterNet

$ 0 / mo

$300 construction fee (one time or $ 25 / mo for 12 mo)

Google Drive(1TB storage)

Network Box

HDTV(TV Set Not Included)

Optional Add-On:Chromebook

Nexus 7 tabletTV BoxStorage Box


value partners believes google’s posse-

sion of network infrastructure is highly

consistent with company’s strategic

demands.

• the wholesale cost control.

by investing in network assets,

google can significantly downsize

the bandwidth wholesale cost

from telecommunication operators,

also increase the bargaining chip

in the game.

• to improve the user experiences.

poor internet speed will degrade

the user experience of youtube

and other ott services from google.

• driving family market product/service.

high-quality network can greatly

promote google’s products/services

targeting on family and establish

stronger loyalty.

• to hatch things like iot with high-

quality network. support projects

of high data consumption such as

google driverless car.

• to raise competition threshold.

the investment in telecom network

will set a high threshold for future

competitors.

in addition, fbb business model of icp,

vas providers such as virgin Media

(uk), sky (uk) and vonage (usa) are

similar to google. facebook invested

heavily in the construction of the sub-

marine cable connecting the us west

coast and for private use, in order to

support the real-time data synchroniza-

tion of different idcs across continents.

the intention of google’s 300 million

dollars submarine cable project unity

consortium is close to facebook’s.

Exhibit 32012-2018 China fixed broadband market size(unit: million, household)

sources: oVUM, MiiT, Value partners Analysis

8 – 9

housEhold pEnEtration ratE

YEar to YEar growth ratE

2012 2013 2014 e 2015 e 2016 e 2017 e 2018 e

32% 35%

12%

39%

11%

42%

9%

45%

8%

48%

6%

50%

5%

165

185

205224

241256

269


in recent years, chinese fixed broadband

user base has been expanding. by the end

of 2013, there were more than 185 million

residentials or business users nationwide.

and this figure would exceed 200 million

in 2014 even by conservative estimates.

institutions believe that chinese broad-

band user amount will increase steadily

with not less than 5% of an amplitude in

the next 5 years.

on the other hand, chinese broadband

household penetration rate is still less

than 40%, especially in the vast under-

developed areas where the broadband

households penetration is only 18%.

china’s fixed broadband market potential

is still very huge.

CHINESE FIxED BROADBAND MARkET OVERVIEW

in addition, the proportion of china

fttx among all connectivity technolo-

gies is still very low, most broadband

users are still on cable modem, dsl

and other traditional technology rather

than optic fiber.

therefore, the broadband speed is far

behind the developed markets.

according to akamai report, china’s

average broadband speed is merely

about 1.7Mbps, whereas korea’s average

is at 14.2Mbps. clear opportunities on

optic fiber broadband are set to seize.

The saturation of chinese fixed broadband market is deficient, but its future growth is stable, and fibre optic broadband has significant market potential.

dsl

10 – 11

sources: oVUM, MiiT, Value partners Analysis

Exhibit 4China’s FBB user bases by connectivity technologies(unit: million, household)

20120%

100%

2013 2014 e 2015 e 2016 e 2017 e 2018 e

4% 4%

71% 56%

13%

16%

12%

22%

224241

CablE modEm

othEr

Ftth / b

5% 5% 5% 5% 5%

46% 39% 33% 28% 24%

19%

21%

23%

24%

25%

30%

35%

39%

43%46%


based on the depth of involvement

along the fbb value chain, china’s

fixed broadband market players can be

categorized into four segments: tier 1

broadband operators (basic telecom

operators), tier 2 broadband operators,

tier 3/residential broadband operators

and broadband resellers/distributors.

• tier 1 / broadband operators.

owners of national, provincial and

metro backbone networks, also

involved in the construction of metro

network and cpn. they are eligible to

provide self-branded wire communi-

cations broadband service and value

added services to the end users.

commonly they tend to collaborate

with tier 3 or residential broadband

operators in the construction and

operations of cpn. exemplary

enterprises include china Mobile,

china unicom, china telecom, as well

as non-telecom enterprises such as

the branch of state administration

of press, publication, radio, film and

television, and citic.

• tier 2 / broadband operators.

through renting the bandwidth from

tier 1 broadband operators, these

operators construct metro broad-

band network and as well provide

additional services, such as idc and

enterprise dedicated lines. the main

advantage of these operators is main-

ly high quality-price and enterprise-

level after sales service. exemplary

companies include the great wall

broadband, gohoo broadband, aipu

broadband.

• tier 3 / residential broadband

operators. usually these enterprises

are involved in the operation of cpn,

and provide resale service from the

upper-tier broadband operators.

these enterprises’ main advantage

are its in-depth involvement into

communities, residential areas and

commercial buildings, as well as

strong social networks. they can also

provide timely and direct response

along with lower and more flexible

pricing to their network services,

so as to capture a major non-

mainstream market share. Most of

these enterprises are real estate and

property management companies.

• broadband resellers / distributors.

through cooperating with primary

and secondary broadband opera-

tors, distributors act as sales agents

to resell the broadband services.

these enterprises include 3c/home

appliance retailers such as gome and

suning.

12 – 13

Exhibit 5Policy Decoding(FBB Value Chain)

sources: MiiT, expert interview, Value partners Analysis

BACkBONE NETWORk

LIBERALIzED

INTRA-CITy

NETWORkCPN

BRAND /

MARkETING

OFFERING /

TARIFF

DISTRIBuTION /

RETAIL

CuSTOMER

SERVICE /

CARING

1

2

3

modEl 1

CErtiFiCatE oF nEtwork ConstruCtion

CErtiFiCatE oF isp

modEl 2

modEl 3


value partners believes the liberalization

of broadband market is driven by three

main levers. predominantly, Miit is aiming

to better regulating the fixed broadband

market, tier 2 and tier 3 fbb operators,

in order to eliminate the ‘gray broad-

band’ services commonly available in the

chinese market. also, the accumulated

capex on backbone network (core

network) by basic telecom operators has

been considerable, whereas the acces-

sible residential area and commercial

buildings are limited to them, largely

restricting the service expansion.

therefore, integrating civil enterprises’

resources and service capacities can ef-

fectively promote the fttx deployment,

and hence retrieve the return from state-

owned investment into the core networks.

additionally, such policies are aligned

with the central government’s essential

statement on liberalization to civil capitals

among nationally monopolistic industries,

and to optimize the flexibility and innova-

tive advantages of civil enterprises.

Miit encourages three service models

amongst civil capital investment to par-

ticipate in the broadband service provi-

sion, including two types of qualifications

(see exhibit 5).

MIIT POLICy DECODING

primarily, Miit allows civil enterprises

to construct fully or partially

the infrastructures and network equip-

ment necessary for household users’

wire communications, and the scale

shall be from user end to the network

access server, i.e. fttx (fiber to the x).

enterprises are also eligible to rent and

resale relevant network elements.

enterprises acquiring the isp qualification

are also eligible to provide self-branded

services to the end users for their broad-

band internet usage.

currently Miit has only opened the ‘last-

mile network’ – fttx – resources for civil

enterprises, namely the construction and

operation of non-core / non-backbone

broadband infrustratures. after the pilot

period, Miit may also liberalize the back-

bone network to civil enterprises.

14 – 15

immediately after the introduction

of this policy, multiple enterprises started

to pay close attention to the license;

we expect that enterprises from various

industries will participate in license ap-

plications.

since the introduction of the policy,

a number of enterprises from different

industries have been closely following

the detailed instruction and progression

from Miit, with some clearly stating

to apply for the license. value partners

believes the qualification to fbb license

application shall be much stricter than

the Mvno license issued by Miit in 2013.

from our benchmarking with the overall

industrial data, the capital expenditure

(capex) is around 1,000 rMb if investing

only the cpn to reach each household in

the residential area. if the network con-

struction is extended to metro network

scale, the capex would be hard to esti-

mate considering the complexity of con-

struction conditions. the post-sale service

of broadband, moreover, requires staffing

to enter each household for network

maintenance and debugging, the service

cost (part of the operation expenditure)

would therefore be also substantial.

we presume enterprises intending to

obtain the license are most likely from

the following industries/backgrounds:

• secondary broadband operators.

undeniably the most competitive and

pertinent players in obtaining the li-

cense, given their business operation

advantage and the key focus of Miit.

• real estate / property management

companies (third-level broadband

operator). real estate and property

enterprises are intrinsically advan-

tageous in undertaking the fixed-

broadband service to households,

provided the ownership and manage-

ment of the residences and com-

mercial buildings, complimentary to

basic telecom operators’ resources.

the collaboration between telecom

operators and these companies

would be therefore highly prioritized.

• internet and digital media

enterprises. internet companies

including baidu, alibaba and ten-

cent can promptly try obtaining

the license, and achieving different

objectives, such as promoting more

value added internet-based service,

assisting idcs’ fiber connection cross

regions, and further enriching big

data accumulation.

• cloud service / telecom value

added service provider (especially

for business clients). the fixed

broadband service can be naturally

bundled with information system ser-

vices and cloud services, considering

the strong coupling nature of the two

businesses.


• smart home products / smart tv

manufacturers. the target market of

smart tv and smart home appliances

manufacturers is highly overlapping

with that of fixed broadband market.

smart home appliances companies

can integrate the broadband business

with their core business and upgrade

the service experiences through

enhanced network service, hence

augment associated user values and

user stickiness.

• Mobile virtual network operators

(3c and home appliance retailers).

similar to the Mvno qualification

issued by Miit in 2013, this is another

opportune business for most chinese

3c / electronic appliance retailers on

their ongoing strategic transforma-

tion. fixed broadband service can

enhance the users’ relationship by

diversifying the service/product

portfolio. the physical stores of these

companies are, in fact, already critical

distribution channels for primary and

secondary broadband operators.

• additionally, private network opera-

tors (such as financial service institu-

tions, and airline companies) and

network equipment provider (such

as huawei and zte) may also extend

their service realm to commercial

broadband.

given the initiation of this pilot and the

limited resources liberalized to civil

capital, apart from secondary broad-

band operators, real estate enterprises

and other enterprises with real property

resources would become the most

prioritized partners for the telecom

operators. these enterprises are also

presumably more capable of accumu-

lating large user base within the 3-year

timeframe of pilot period.

16 – 17

currently china’s fixed broadband pen-

etration rate is still at a comparatively low

level, with low broadband access speed

and hence large profitability opportunity

to be filled. the overall development of

chinese high-speed broadband network

has been slow, consequent to the insuf-

ficient investment in infrastructures and

basic equipment. according to the ‘china

broadband strategic plan’, the number

of fixed broadband users in china is

expected to reach 0.4bn in 2020, and

the growth of households of high-speed

broadband access must be supported by

large capital investment.

on the other hand, companies in the

capital-intensive industries, such as

energy & utility and telecommunications

industry, are gradually transforming from

the long-existing monopolistic / oligopo-

listic status to more mixed ownership with

capital injections from civil enterprises.

further, despite large investment into

the backbone network by the telecom

operators, these enterprises suffer

limited business diversity and scalability,

especially when the market demand is in-

creasingly diverse. in sum, the Miit policy

on the introduction of civil capital into

fixed broadband service market is highly

aligned with the overall chinese macro-

and micro-economic scenario.

VALuE PARTNERS PERSPECTIVES

although only the peripheral resources

related to fbb is open to civil capital at

the pilot stage, we expect Miit to deepen

the market liberalization further in the

future. considering the complexity in

construction and difficulty in operation

of the fbb service, Miit would strictly

ensure the qualification of licensed enter-

prises and control the number of license

issued. therefore, we highly recommend

enterprises with particular economic and

operational strength, such as internet

companies, media, and real estate com-

panies, to proactively obtain this valuable

license.

in the meantime, from the perspective

of market opportunity and basic tel-

ecom operators’ current obstacles, civil

enterprises applying for the license shall

be particularly focusing on integrating

residential or office buildings. we believe

sufficient acess to fttx entrances would

be the key success factor for the license

applicants.


such policies are aligned with the central Government’s essential statement on liberalization to civil capitals among nationally monopolistic industries, and to optimize the flexibility and innovative advantages of civil enterprises.

18 – 19

AuTHORS

JANE HOuprincipal, beijing office

[email protected]

ADAM MENGassociate, beijing office

[email protected]

TAyLOR LAMassociate, hong kong office

[email protected]


currently MiiT has only opened the ‘last-mile network’ – fTTx – resources for civil enterprises, namely the construction and operation of non-core / non-backbone broadband infrustratures. after the pilot period, MiiT may also liberalize the backbone network to civil enterprises.

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