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-1-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHICHINA NETCOM BUSINESS PLAN UPDATE-2-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHITODAYS OBJECTIVES Review the overall analysis of regulation,competition,and market developmentDiscuss the specific implications for CNC strategy Review the specific draft business models for CNC How we might attack the business,carrier,and IDD/DLD marketsWhat key trade-offs we need to makeWhat 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 modelHow to move forward with the refined financials,organization design,and the plan for implementation-3-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHICONTENT Key strategic principles Regulatory overview Market overview Competition overview Business models Next steps-4-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIKEY 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 progressesOur development of business models will seek to be aligned with the principles Strategic principles and key assumptions will be considered in the following aspectsCNC shareholdersBackbone businessLocal access businessInternational gateway businessRegulatory strategyCompetitive strategyMarketing strategy-5-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHICNC SHAREHOLDERS Principles:Leverage shareholders concerted vision in creating a new generation IP broadband communication infrastructure and a profitable,successful companyLeverage shareholders existing backbone assets,local access assets,research capabilities and local government relationships to secure time-to-market and create competitive advantageSet 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&DMOR 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 backboneLeverage CATVs city backbone-MOR will continue to favor CNC over Unicom,provided CNC meets the expectation as a profit center for MORShanghai Municipal Govt:Eager to make Shanghai as Chinas test ground for building high-tech infrastructure(e.g.the integration of telecom,CATV,Internet)-in particular,testing HFC to deliver broadband internet-one issue:SPT and ATT JV;how to handle?-6-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIBACKBONE BUSINESS Principles:Target advanced backbone among 15 key cities in Eastern China;start with 2 cores from shareholders but quickly build own networkUse backbone for a variety of wholesale and retail voice and data servicesMaintain the leading edge IP/packet network,both for technological superiority and to fulfill shareholder missionMaintain the best cost position,using ROWs,purchasing clout,right technologyBuild 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 wayNetwork will be IP or packet in natureDeployment plan will keep costs low,build out quickly,and create good position-lay large number of conduits in one time-later fill,light up,and color fiber strands-lease out conduit/fiber/bandwidth to maximize return(utilization)-7-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHILOCAL ACCESS BUSINESS Principles:Be very focused in local deployment,targeting priority business areas onlyEmphasize broadband to the customer,using FTTB and LMDS where logicalSeek strong local market share,especially in new data services growth areasDifferentiate 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 deploymentAssume that CNC will have access to key city ROW,such as subway systemsWill need specific assumptions about the ease and cost of hooking up buildingsAssume that primary emphasis will be on FTTB,but that LMDS can play an important role,especially in initial deployment and in secondary citiesWill need specific assumptions about timing of adding secondary cities-8-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIINTERNATIONAL GATEWAY BUSINESS Principles:CNC will be one of few players with a full international licenseVital to enable CNC to provide end-to-end services,global data services,and higher margin IDD serviceHK gateway link may be strategically important Assumptions:HK as one of the key location for international connection-a major traffic destination-a major relay locationInternational voice remains highly profitable segment in medium term futureExpect high growth together with steep price drop in international servicesActively plan ahead for joining international sub-oceanic cable consortium-9-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIREGULATORY 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 issuesBe careful about committing investment if regulatory issues too uncertainEnsure CNC strategy addresses national economic development prioritiesPay careful attention to managing relations with China TelecomExpected 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 levelMany key regulations remain in grey areas,where CNC can play a role in shaping the policyWill need to make specific assumptions on a number of regulatory issues,and develop several scenariosAssume that CT and Unicom are the only full service competitors,but several niche playersWTO will introduce FDI into Chinas telecom market by 2002,but infrastructure play remain tightly controlled(still limited competition)until 2004/5-may be opportunity for some form of partnership with foreign telcos-10-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHICOMPETITIVE STRATEGY Principles:Focus on the best service quality,supply what customers need,avoid competing on priceBuild both“highways”and“tollbooths”Prepare for rapidly changing industry structureBe careful in positioning toward China Telecom:-complementary and addressing unmet needs-growing the whole marketThe only viable alternative to China Telecom for carriersThe only true“end to end”network across China,with clear central management Assumptions:Technology leads to continual change in industry structureThe decentralized nature and business oriented behaviors of China Telecom enables CNC to partner at the local levelHigh opportunity for CNC to fill China Telecom product/service backlog Unicom will be a threat to start a“price war”Various niche players emerge in later years,more threat than(carrier)opportunity for CNC-11-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIMARKETING STRATEGY Principles:For local access,will target medium and large businesses in targeted buildingsFor 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 industriesAssume a growing demand for business telecom services-will need both high and low growth scenariosNeed to validate the willingness of key customers to switch,and their anticipated areas of future demand growthIP phone still the source of revenue in the near futureDial-up ISP(171)may conflict with ISP carrier interests,but could also serve as strategic inroad for future 3G(1)(1)Not in scope of this project-12-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHICONTENT Key strategic principles Regulatory overview Market overview Competition overview Business models Next steps-13-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIREGULATORY HIGHLIGHTS Our key assumptions:MII regards CNCs 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 2000CNC 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 2004/2005Account 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 basisEqual access by prefix/pre-select in 1 year;number portability may take another 1-2 years at leastCNC will have LMDS spectrum CNC anticipates a well-intentioned regulator,with varied degrees of control over local incumbent practice None of these assumptions are“guaranteed;”CNC must fight aggressively for them-14-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIKEY REGULATORY ISSUES AND IMPLICATIONSService licensesFull Service license interpretationInterconnect enforcementAccount settlementPricing and rebalancingROW and access Frequency spectrum allocation and feesUniversal Service ObligationEqual AccessNumbering and portabilityIGW license important to competitiveness,size of customer base and#of partnersMII notification on each instance adds delay to CNC local interconnectionTime to market in each city affected,detract CNC resourcesFuture Interconnect economicsFuture price competitiveness vs.other players(e.g.CT)economics;price competitiveness vs.CTCase-by-case local coordination and negotiation delay local access build-out;may also be expensive to obtainTime to market for local access build-out by LMDS access solutionsSubsidizing incumbent for USO affect cost structure of new entrantsUnable to reach CT local line customerMedium term implication:on-net voice not targeted for the near 4-5 years3 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 levelBased on cooperation of carriersArbitration/settlement process exist but time consumingMild punishment,law suit as last resortFor current IP-phone trial,fees not settledLikely future settlement:LD carrier pays local PSTN operator RMB0.14/minPrice floor likely specified for incumbent by regulationNo imminent initiative for rebalancingLegally feasible for public telecom carrier(e.g.CNC)Practice will have to coordinate with municipalities and infrastructure buildingControlled by MII in co-ordination with PTAsFrequency not likely to be auctionedUSO for incumbent with contribution from new entrant2-3 years before transparent and equitable approachPrefix based solution provided by regulation in 1 yearNumber as national resources controlled centrallyFee will be collected for occupation of number resource2-3 years before portability regulationsImpact on CNCHighest/ImmediateHigh/Medium TermKey issuesAssumptionImplication to CNC-15-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIKEY REGULATORY BODIES AND RESPONSIBILITIESOther depts,e.g SETCVarious law making bodiesNPCState CouncilDept.of Radio Frequency AdministrationTelecom Administration BureauOther depts.Provincial Telecom Administration BureauChinaTelecomNationalCompanyMunicipal Level Telecom Administration BureauTelecom Operating Entities:e.g.CT fixed lineProvincial governmentMIIAdministrationOperationsNationalProvincialMunicipalityDrafting,passing of telecom laws and statues,e.g.China Telecoms LawInternational,National and Inter-Provincial scope license grantingHighest level of regulatory enforcement/arbitrationInternational Gateway administrationNational level telecom resources control(e.g.numbers,frequency spectrums)Provincial level telecom administrationProvincial level license grantingProvincial level regulatory enforcement focus on coordinationIn the process of splitting operation and administrationA number of Municipal Level TABs are yet to be createdLimited enforcement powerOperation and administration not separateSettle interconnect and other disputesWhen not settled by provincial&municipal coordination,propagate up to provincial level and MIIPTAsPTBSource:Pyramid Research;BCG analysis-16-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIKEY LICENSE ASPECTS AND IMPLICATION TO CNCFull Service and InternationalValue added servicesownershipGeographic scopeDurationlicense feesPerformance targetsTechnologyKey AspectsNumber of licenses tightly controlled:at most 3 in 2003,including CNCCNC full service license expected 1Q 2000International licenses tightly controlled:at most 4 in 2003,including CNCCNC IGW license expected by EOY1999More than 4 value-added service licenses possibleControl-share foreign ownership not allowed in basic telecom and public data transport servicesUp to 50%of FDI in value added service providersIntra provincial services under control of provincial TABsNo limitRegulation will require license feesRegulation will specify clear service buildout targetsRegulations will be technology neutralBut will give preference to new technologyAssumptionsCurrent regulation only cover interconnection between 7 types of licensed basic telecom carriers(e.g.NLD,local,wireless,international)With IP-phone license,CNC needs to negotiate with CT local branches city by cityCNC IP based bandwidth wholesale service not covered in published regulation,adds delay in local negotiationNumber of potential customers for carriers carrier servicesSpeed of establishment and coverage of targeted customer for carriers carrier serviceFinancial strength of new entrant customersIntra-provincial LMDS service require application in each targeted areaCompetitors ability to lockout key service areasLimited degree of impact on economicsAdds planning and local coordination pressure to CNC local access solutionsCNC IP/DWDM backbone receive positive influenceImplication to CNC-17-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHINATURE,SCOPE AND NUMBER OF LICENSESSource:BCG analysisVSAT transport serviceInternationalNLDOn-net voiceIP backboneIP-phone(including international)WirelessPagingVAS(e.g.ISP,VPN)Service natureOwning satelliteMaintain satellite channelVSAT base stationsOwnership&operation of international gatewaysInterconnect with foreign carriersLeasing IDD channels and linesBuilding&operating of national switches and trunk linesMaintaining POP is nationwideProvide basic voice&data national transportOwnership&operation of local access networksOwnership of last mileProvide basic local voice/data transport and access to NLD/IDDBuilding and leasing of broadband IP based backbone transport capacityProvide IP based voice serviceNo requirement in infrastructure buildingIncluding international IP based LDBuilding&operation of local BSC networkProvide wireless voice services Interconnect with national transport carrierBuilding&operation of Local Paging Networks Interconnect with national transport carrierWith or without building&operation of local networkOffer web-hosting,VPN,call center services,etc.ScopeNational coverageCross international point of presenceService national transport carriersCross provincial boardersHave access to international PO connectsService local PSTNsCovers local service areas,(e.g.cities municipalities)Cross provincial boardersAccess to international points of connectCovers 12-25 trail cities Access to international points of connect Covers local service areas:cities municipalitiesMajority in local scope 4 national coveragePrimarily in local scopeNo.of futurelicensesRemain 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)45 in 1-2 years5-6 possible in the next 12 yearsMultiple licenses possible in the next 4-5 yearsNumerous national scope licensespossible in the next 2 yearsNumerous more licenses(with FDI)possible in the next 2 yearsLicense controlled byMIIMIIMIIMIIMIIMIIMIIPrimarily by provincial governmentProvincial governmentNo.of current licenses13223(CT,Unicom,CNC)4Trail stage22 national scope;multiple localUnlimitedBasic telecom servicesRemain 1 for the next 6 years-18-China Netcom-The Boston Consulting Group-Confidential-Destroy by Shredding-45034-05-Interim-14Dec99-TZD-gx-SHIINTERCONNECTION ISSUES AND IMPLICATION TO CNCKey IssuesAssumptionsImplication to CNCObligation clearly specified by regulation for interconnection between 7 types of telecom network licensed operatorsCNCs IP broadband network receive equivalent protectionMII sets technical specification of interconnect solutionsClear provision on cost and ownership of technical assetFrom time of written request,interconnect complete within:2 months if only CO data modification is involved4 months if capacity expansion needed7 months if new POI(1)neededTime frame not strictly adhered to,varies from 4-6 monthsDispute settled primary via coordinationArbitrated by MII and local governmentViolation 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 pathSettlement for IP based will follow scheme when trial finishesIncumbents provide cabinet room and conduit accessIn case theres no excess conduit capacity,incumbent has to provide feasible expansion planLocal practice will varyIncumbent charges rental fee for conduit accessIncumbent charges for leased line needed for interconnectInfrastructure and network investment related to interconnect are responsibility of both parties,separated from POIIncumbent obligation to interconnectInterconnect timeframeEnforcementAccount settlementAccess and collocationCharges and feesIf CNC network is not covered by regulation,local negotiation will leave loophole for incumbent and add delayIncumbent l
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