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CONTENT Key strategic principles Regulatory overview Market overview Competition overview Business models Next stepsAGENDA Business ModelsDomestic and international long-distance voiceWholesale/carrierEnterprise solutionsIssues going forwardEconomic modelingChoice of business modelsto pursue and timingRoadmap for pursuing business models and expected financial performanceIntegrated approach to CNC business planMajorissuesExpectedoutputHow do the market sizing and share assumptions translate into overall top line revenue for CNC?What capital investments will be necessary to build out metro and long haul fiber networks?Predicted cash flow profile by business model and selected scenariosAssessment of market opportunitiesHow will China datacom market develop?How large is the overall opportunity for a new entrant?Overall market sizing and revenue forecast by product areaRegulatory and competitive analysisWhat 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 scenariosStrategic implications and capabilities assessmentMETHODOLOGY BEING USED TO DEVELOP BUSINESS MODELS AND OVERALL STRATEGY-Current areas of focusCNC AT A CRITICAL STRATEGIC CROSSROADSPreliminary ConclusionsRecommendations/Decisions to be MadeOffnet VOIP predicted to generate to provide breakeven economics for building backbone1 Wholesale revenue provides significant upside potential Majority of wholesale revenue relies on access to mobile carriersEnterprise solutions economics very attractive,but substantial complexity and resources involvedHigh-bandwidth international gateway critical to success in both wholesale and enterprise Economic predictions highly sensitive to a set of key assumptionsAccelerate vendor selection and backbone construction;time to market criticalCommitment to utilizing IP/DWDM invlolves risk to mobile carrier business RFP to vendors should be based on product requirements vs.technologyStaging of investments and service launch must consider tradeoff between quality of service and coveragePreliminary talks with international carriers should begin ASAPScenario modeling will help us decide where to focusOverarching question:Can CNC successfully pursue all opportunities outlined in the short/medium term?(1)Assuming settlement fees of 10%of revenue Overall approach Where HowBUSINESS 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 areasSuperior service and bandwidth Target CTs 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“Chinas first datacom carrier”Do not overextend resources in VOIP as it does not fit CNCs long term strategy Create“dial-around”solutions for business and interconnect terms-17930-Enterprise solutionsPOTENTIAL BUSINESS MODELS COVER WIDE RANGE OF PRODUCT/MARKET ALTERNATIVESOpportunity for growthCurrent market sizeWholesale/carrierConsumer ISP?Domestic and International Long Distance VoiceResidentialMed/large enterprise customersCarriersPotential traffic per consumerProductsEmerging datacomDataVoiceEmerging data nicheAGENDA Business ModelsDomestic and international long-distance voiceWholesale/carrierEnterprise solutionsIssues going forwardAPPROACH TO DOMESTIC AND INTERNATIONAL VOICE BUSINESS MODELObjectivesHypothesized ApproachCapture early revenue from launch of prepaid IP calling cards“Cash cow”for funding other business model developmentPursue prefix and equal access long distance for business customers as soon as possible to begin establishing relationshipsManage pricing and product life cycle effectively to maximize total margin and avoid investing in declining productsDo not overextend ourselves nor blur our“datacom”imageFight the regulatory battle to ensure favorable approaches to equal access and interconnectMarket calling cards to business customers in the short term for travelling personnelEmphasize quality image/brand to distinguish from CT and Unicom-position calling card as first step in becoming a next generation full services providerEstablish mechanisms to link marketing expenditures with revenue and margin growth by product to ensure effective investmentEmphasize low cost targeted marketing and loyalty programsDo not overextendAlways emphasize advanced technology and evolution to full services provisionDOMESTIC AND INTERNATIONAL VOICE SUMMARYPreliminary EconomicsPhase I CapEx(2000,2001):3.8 B RMB Fiber/construction:2.4 B RMB IP/DWDM equipment:720 M RMB POP/VOIP:530 M RMB OSS/Network management system:100 M RMBOpEx expected to be 30%of revenue by 2002Market 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 alone1Key Issues to be AddressedInterconnect agreements with local PTAs;attempt to obtain blanket policy from MII International gateway license and connectivitySettlement charges commensurate with VOIP pricingDevelopment of business offnet strategy Scalable“dial-around”solutions in short term Equal access longer termQuality of service for voice,must approach switched quality rapidlyPoint of diminishing returns for adding VOIP gateways vs.strategic value of providing coverage(1)Highly sensitive to settlement feesLARGE MARKET WITH POTENTIAL TO GAIN SHARE QUICKLYNew entrants typically gain share quicklyExample:IDD and DLD servicesMarket sizeable-off-net traffic accounts for 15%of total DLD/ILD revenue by 2004Source:China Telecom annual reports;CNCs team inputs;BCG surveys,analysis&benchmarking0102030405001234567Year after entryOptus(DLD)Tele 2(DLD)Mercury(DLD)Hong Kong(IDD)Japan(IDD)US(IDD)020406080100199820002004(RMB BN)DLD On-NetDLD Off-NetILD On-NetILD Off-Net(%)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 modelsFocus on consumers will not complement long term vision of providing enterprise solutionsMass 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 businessAttempt to position cards in marketing messages as the first product from a company that is building the most advanced network in PRCConsider selling cards to businesses for their traveling personnel to begin establishing enterprise relationshipsCarefully manage product life cycle to begin pulling back marketing investment as wholesale and enterprise business models growCNC VOIP REVENUE AND MARKET SHARE EXPECTATIONSSource:CNCs team inputs;various benchmarks;BCG analysisVoice revenueShare assumptions01234199920002001200220032004CNC Revenue(RMB BN)Off-Net DLD%of total CNC revenue100%76%37%30%23%16%Off-Net ILDInternational Termination19993%80%1%3%80%1%5%80%0%Off-Net DLDOff-net share of total DLDGeographic coverage of CNCCNC share within coverageOff-Net ILDOff-net share of total ILDGeographic coverage of CNCCNC share within coverageInternational TerminationIP share of totalGeographic coverage of CNCCNC share within coverage200010%60%25%11%60%25%11%60%20%200117%75%29%18%75%29%18%75%25%200223%90%33%26%90%33%24%90%30%200330%100%30%33%100%30%30%100%30%PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL(PHASE I BUILDOUT)VOIP Revenue Alone Justifies Building Backbone-2300-14003700-700740-500570-100-490-5000-4000-3000-2000-10000100020003000400050005 year PV(1)(M RMB)CapEXOpExRevenue5 year NPV15%:-500M RMB5 year IRR:12%Essentially breakeven economics for operating backbone for VOIP onlyVOIP(2)Backbone constructionBackboneInternational terminationIDDDLDIPPOP/Access platformOSSPresent 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 analysisAGENDA Business ModelsDomestic and international long-distance voiceWholesale/carrierEnterprise solutionsIssues going forwardAPPROACH TO WHOLESALE/CARRIER BUSINESS MODELObjectivesHypothesized ApproachDevelop wholesale business as traffic generator to improve economics of backbone through higher utilizationBecome the wholesale carrier of choice with technologically superior service offerings including high bandwidth international gateway connectivityConsider wholesaling access to CT,Unicom,and Jitong depending on competitive implicationsSuperior 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 offeringDevelop interconnection capabilities in all major POPs and mobile basestations in key geographical locationsWholesale 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 serviceInternet connectivityMobile interconnectAccess ports to backboneWHOLESALE/CARRIER SUMMARYPreliminary EconomicsPhase I CapEx(2000,2001):100 M RMB ISP access platform:50 M RMB OSS/Provisioning systems:50 M RMBOpEx expected to be 10%of revenue by 20021Market share and revenue estimates-2002 Mobile(backbone):15%ISPs:9%1.1 B RMB Access ports:100%2 Dark fiber:100%25 year NPV:$2.1 B RMBAssumes launch date of 3Q 2000 for leased lines and relatively aggressive mobile shares Potentially too optimisticKey Issues to be AddressedBackbone technology platform-QOS for voice vs.lower cost deployment?High-bandwidth international gateway paramount to differentiating ISP accessFavorable regulatory backing for courting regional CT mobile carriersEnsuring existing VOIP gateways can serve wholesale needsRevenue opportunity of wholesaling dark fiber vs.enabling competitionOrganizational challenges(1)Including allocation of backbone OpEx(2)Market estimates based on revenue generation by CNC alonePOTENTIAL WHOLESALE CUSTOMERS INCLUDE ISPs,MOBILE OPERATORS,AND FIXED LINE CARRIERS ISPs offer significant potential if CNC can provide superior bandwidth access and to international gatewayCurrent satisfaction among regional ISPs very lowInternational 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 CNCs new high capacity VoIP network and international gateway likely to yield lower costs Fixed line carriers potentially looking for alternativesExisting long-haul transport infrastructure limitedChina Telecom could even be a possible customer given current focus on increasing residential teledensityOVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATEAnticipated Price Decrease in Leased Lines Limits Overall Revenue Growth0510152025301998199920002001200220032004 Leased Lines-ISP Market Size(RMB B)15 Total Leased Lines-Mobile99-04CAGR Access Ports Leased Lines-Paging1818202226284%41%1%152%9%(1)01-04 CAGRSource:CNC team inputs;foreign benchmarks;BCG analysis Dark Fiber68%CARRIERS SEEKING ALTERNATIVES.ISPs definitely seeking alternatives to CTMobile carriers likely to follow“We need a telecom service provider that is not our competitor.”-Founder,Eastnet“China Telecom,with their own network development plans,tends to starve us on capacity or to force us to pay in advance for excess capacity.”-Manager,Infohighway“The fact that it takes China Telecom two months every time we need an extra line makes it very difficult to have our own customers.We want another operator who can get us leased lines fast.”-Manager,InfohighwayMobile carriers might consider diverting part of their traffic to alternative service providers with:more attractive pricing higher quality service higher bandwidthInterviews with regional mobile carriers and Unicom need to be conducted to verify potentialBUT TECHNOLOGICAL LIMITATIONS AND COMPETITIVE CHALLENGE ARE IMPORTANT FACETS TO MANAGECompetitive ChallengeTechnological LimitationsMobile carriers may be hesitant to use VOIP technology for primary applications Carriers currently addressing sound quality as a major improvement initiative VOIP has yet to deliver toll-quality voice transmission,even on landline Mobile carriers may take view that VOIP could further degrade voice qualityChina Telecom likely to have advantage in competing share of CT Mobiles business Strong former intra-CT connection even after split Extensive backbone coverage and large TDM based capacityUnicom Mobile Services business as tough targetBuild presence by offering low-costtrials and backup capacityLobby for clear regulation from MII on freedom of choice for carriersPREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODELAdditional CapEx and OpEx Minimal1670-1606607305010-1890-3600-46-400-522005 year PV(1)(M RMB)CapEXOpExRevenue5 year NPV15%:2.1B RMB5 year IRR:40%Wholesale critical to enhancing profitability of backboneVOIPBackbone allocationDark FiberAccess portsISPsMobile operatorsVOIPVOIPISP accessOSS(1)Assuming 15%cost of capitalSource:BCG benchmark database;industry interviews;BCG analysisOSS/provisioningPresent value of cash flows8,0007,0005,0001,0006,000-3,000-4,000AGENDA Business ModelsDomestic and international long-distance voiceWholesale/carrierEnterprise solutionsIssues going forwardAPPROACH TO ENTERPRISE SOLUTIONS BUSINESS MODELObjectivesHypothesized ApproachCapture strong share among medium/large business by offering enhanced datacom solutionsGoal to establish clear position as best service/quality provider in major marketsUtilize most cost effective deployment technologies to cover major metro areasMinimize head-to-head competition by offering differentiated,data-centric products-attempt to drive datacom marketDevelop image as fast,responsive solutions providerEnable competitive advantage for business customers through datacomFor building managers:make their buildings more attractive to tenantsDeployment to target key buildings in major metropolitan areasFour cities by year 2000/01Top 15 cities by 2001Fiber in most dense urban hi-rise areas and LMDS to complement and serve less dense areasInitial lead products will be low cost voice over IP and high bandwidth internet accessMigration to full datacom solutions as customer base and capabilities growQuality customer service more important short term than full product offeringEmphasis on ease of use and fast provisioning versus competitors-exploit CTs weaknessesEducation of customers on use of datacom products as competitive weaponsMarketing partner with key building managers ENTERPRISE SOLUTIONS SUMMARYPreliminary EconomicsPhase I Capital Investment(2000,2001):1.1 B RMB First four cities(assuming fiber):650 M RMB Additional 11 cities1:400 M RMBOpEx expected to be 40%of revenue by 2002Market 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 RMBAssumes launch date of 3Q 2000 for data services Likely too optimisticKey Issues to be AddressedRight of way for existing ducts and diggingPartnership strategy for high bandwidth IGW Rights to LMDS frequency spectrumAre 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 connectivityWhat 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 2004ENTERPRISE 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 challengeOperating expenses required dwarfs long haul network costs on a per city basisComplexity in obtaining night-of-way varies by districts within each cityDesigning fiber route and network configuration requires significant experience Converting customers to full CNC service may not be as easy as it seems on surfaceInitial risk for companies utilizing new entrant Coverage issues for offering service to all business locationsExperienced sales-force with established relationships a mustBUT COMPRISES TREMENDOUS UPSIDE POTENTIAL020406080100120140160180200199820002004Internet AccessLeased LinesILDDLDLocal0510152025303520002004OtherPortalBroadband ContentWeb Hosting/CollocationExisting ServicesEmerging Services98-04CAGR124%40%-10%7%11%IP VPNBroadband Network Applications186%111%286%00-04CAGRMarket size(RMB BN)Market size(RMB BN)7896187Overall16%Overall332Source:CNC team inputs;foreign benchmarks;BCG analysisCUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAINCTs Offering Yields Significant GapsLearnBuyGetUse/supportPayCustomer value chainNeeds 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 customizationCTapproachSignificant opportunity for CNC establish position in customer solutions,ease of use,and responsive serviceAreas highlighted most in customer interviewsSource:Customer interviews;BCG analysisSTAGED PRODUCT INTRODUCTION NECESSARY TO MANAGE QUALITYHypothesized Product IntroductionsVoiceData20002001200220032004Phase I&IIPhase IIIPhase IV Leased Lines Mobile carriers EneterpriseHigh bandwidth dedicated internet access for businesses and ISPsAccess Ports VPN Basic enterprise Broadband applications Platforms to enable VOD,etc.Web HostingDark FiberResidential ISP?Advanced VPN Extranet Voice,video QoS guarantees Industry specific offeringsOther emerging services(e.g.e-Commerce)IP-phone voice Prefix “Dial-around”solutionsEqual access voice?On-net voice?Focus on quality over quantityMarket as integrated productsStress CNC role as integrated datacom playerPositioningIssuesCNC SHOULD USE CREATIVE WAYS TO GROW THE MARKET,AVOID HEAD TO HEAD COMPETITIONCompetitors all focus on the same demand from the same customersSavagely compete on priceReactively wait for customers to identify need,request productsPursue growing customers-data intensive enterprisesFresh opportunities for sales,instead of competing over existing businessApproach proactively with new products,instead
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