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Main point,Bullet point,dash point,period point,Quote reference,MASTER SLIDE TITLE,-,52,-,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,AGENDA,BusinessModels,Domesticandinternationallong-distance voice,Wholesale/carrier,Enterprise solutions,Issuesgoingforward,Economicmodeling,Choiceofbusinessmodels,topursueand timing,Roadmap forpursuingbusinessmodelsand expected financialperformance,Integrated approach to CNCbusinessplan,Majorissues,Expectedoutput,Howdothe marketsizingand share assumptions translateinto overalltop linerevenueforCNC?,What capitalinvestmentswillbenecessarytobuildout metro andlong haulfibernetworks?,Predictedcashflow profilebybusinessmodeland selected scenarios,Assessment of,marketopportunities,HowwillChinadatacom marketdevelop?,Howlargeisthe overallopportunityfor anew entrant?,Overall marketsizingand revenueforecastbyproductarea,Regulatory andcompetitive,analysis,What typeofregulatoryenvironmentwill evolveinChina?,Will equal accessforvoiceand databegrantedandwhen?,What effectwill WTOhave?,Regulatory mappingand CNCsharepredictionsacrossscenarios,Strategicimplications andcapabilitiesassessment,METHODOLOGYBEINGUSED TO DEVELOPBUSINESSMODELS ANDOVERALL STRATEGY,-,Current areas of focus,CNCATACRITICALSTRATEGICCROSSROADS,PreliminaryConclusions,Recommendations/Decisions to be Made,OffnetVOIPpredictedtogeneratetoprovidebreakeveneconomics forbuildingbackbone,1,Wholesalerevenueprovidessignificantupsidepotential,Majorityofwholesalerevenuereliesonaccesstomobilecarriers,Enterprisesolutionseconomicsveryattractive,butsubstantialcomplexityandresourcesinvolved,High-bandwidthinternationalgatewaycriticaltosuccessinbothwholesaleandenterprise,Economicpredictionshighlysensitivetoasetofkeyassumptions,Acceleratevendorselectionandbackboneconstruction;timetomarketcritical,CommitmenttoutilizingIP/DWDMinvlolvesrisktomobilecarrierbusiness,RFPtovendorsshouldbebasedonproductrequirementsvs.technology,Stagingofinvestmentsandservicelaunchmustconsidertradeoffbetweenqualityofserviceandcoverage,Preliminary talks with international carriersshould begin ASAP,Scenario modeling will help usdecide where to focus,Overarching question: CanCNCsuccessfully pursueall,opportunities outlined intheshort/medium term?,(1),Assuming settlementfeesof 10% ofrevenue,Overall approach,Where,How,BUSINESS MODELSSUMMARY:THREECOREELEMENTS,EnterpriseSolutions,Capture datacomgrowth inkeybusiness centers with leading-edgeproducts and superior customerservice,Top business districts inmajor urban areas;onlythe most denseareasin shortterm,Focused Deployment,Leverage existing conduits tolayin major urbanareas,Superior service andbandwidth,Target CTs weaknessin service andbandwidth,Utilize LMDS inintermediate citiesandareaswhere time tomarket iscritical,Wholesale/Carrier,Target mobile carriers and ISPs with backbonetransport; considersupplyingfixed-line incumbents,CoverPOPsin all major calling zones; develop local leasedlinesnetwork in keylocations,Aggressivedeployment ofbackbone infrastructure to provideunparalleled bandwidth,Establishhighbandwidthinternational gateway todifferentiate internet access,Superior service with clear positioning,“Theclearalternative toCT”,ISP,Longdistance voice,Capture early revenue from tofunddevelopment ofsubsequentbusinessmodels,Top 60 POPs byend of year 2000 utilizing mixof leasedlines from CTand CNC network,Position offnetvoice asfirstproduct from “China,s first datacom carrier”,Do not overextend resources inVOIPas it does notfitCNCslongtermstrategy,Create “dial-around”solutionsforbusiness and interconnectterms,- 17930 -,Enterprisesolutions,POTENTIALBUSINESS MODELSCOVER WIDE RANGE OFPRODUCT/MARKETALTERNATIVES,Opportunity forgrowth,Current marketsize,Wholesale/,carrier,Consumer ISP?,Domestic and International Long DistanceVoice,Residential,Med/largeenterprisecustomers,Carriers,Potentialtraffic per consumer,Products,Emerging datacom,Data,Voice,Emerging data,niche,AGENDA,Business Models,Domestic and international long-distancevoice,Wholesale/carrier,Enterprisesolutions,Issues going forward,APPROACH TO DOMESTICANDINTERNATIONAL VOICEBUSINESS MODEL,Objectives,Hypothesized Approach,Capture early revenue from launch of prepaidIP callingcards,“Cashcow”forfunding other business model development,Pursue prefix and equal accesslongdistancefor business customers assoonas possible tobegin establishingrelationships,Manage pricingand product life cycle effectivelyto maximize total marginand avoidinvestingin declining products,Do not overextend ourselves nor blur our,“,“datacom”image,Fighttheregulatorybattle toensure favorable approaches to equal accessand interconnect,Market callingcardsto business customers intheshorttermfortravellingpersonnel,Emphasizequality image/brandto distinguishfromCT and Unicom-position calling card asfirststepin becoming anextgenerationfullservicesprovider,Establishmechanismsto link marketing expenditures with revenueand margingrowth byproduct to ensure effective investment,Emphasizelow cost targeted marketing and loyaltyprograms,Do not overextend,Always emphasize advancedtechnology andevolutionto full services provision,DOMESTIC AND INTERNATIONAL VOICE SUMMARY,Preliminary Economics,PhaseI CapEx (2000,2001): 3.8 B RMB,Fiber/construction:2.4B RMB,IP/DWDM equipment: 720 MRMB,POP/VOIP:530M RMB,OSS/Network management system:100M RMB,OpExexpected to be30%of revenueby 2002,Market share and revenueestimates- 2002,Offnet DLD: 30%,Offnet ILD: 30% $2B RMB,IP Intl. termination: 27%,5 year NPV:,Essentially breakeven considering offnetvoice alone,1,Key Issuesto be Addressed,Interconnect agreements with localPTAs; attemptto obtainblanket policyfromMII,International gateway licenseand connectivity,Settlementcharges commensurate with VOIP pricing,Development ofbusiness offnetstrategy,Scalable “dial-around” solutions inshort term,Equalaccess longerterm,Quality ofservice for voice,mustapproach switched qualityrapidly,Pointof diminishingreturns for addingVOIPgateways vs. strategic value of providing coverage,(1),Highly sensitive tosettlementfees,LARGEMARKET WITH POTENTIAL TOGAINSHARE QUICKLY,New entrants typically gain share quickly,Example: IDD and DLDservices,Market sizeable- off-nettraffic accounts for 15% oftotalDLD/ILD revenue by2004,Source: China Telecom annual reports; CNCs team inputs; BCGsurveys,analysis &benchmarking,Yearafterentry,Optus(DLD),Tele2 (DLD),Mercury,(DLD),HongKong(IDD),Japan(IDD),US (IDD),(RMBBN),DLD On-Net,DLD Off-Net,ILD On-Net,ILD Off-Net,(%),CAREFUL MANAGEMENT OF PRE-PAIDCALLING CARD BUSINESS NECESSARY TOALIGN WITH LONG TERM STRATEGY,Prepaid callingcards call fordifferentcapability setandtarget customers than longer term business models,Focuson consumers will not complement long term visionof providing enterprisesolutions,Massadvertising andmarketingaround alow-cost position may notfitimagerequiredfor futureneeds,Threefactors important to considerin managing prepaidcalling card business,Attempt topositioncardsin marketing messages asthefirstproduct from acompany that is buildingthemostadvanced network inPRC,Consider selling cards tobusinesses fortheir traveling personnel tobeginestablishing enterpriserelationships,Carefullymanage productlifecycleto beginpulling back marketing investment as wholesale andenterprise businessmodels grow,CNC VOIP REVENUE ANDMARKET SHARE EXPECTATIONS,Source: CNCs team inputs; variousbenchmarks; BCGanalysis,Voicerevenue,Shareassumptions,CNC Revenue,(RMBBN),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,Geographiccoverageof CNC,CNC sharewithin coverage,Off-Net ILD,Off-net share of total ILD,Geographic coverage of CNC,CNCsharewithin coverage,International Termination,IPshareoftotal,Geographic coverage of CNC,CNCsharewithin 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%,PRELIMINARYECONOMICSFOR LONGDISTANCEVOICEMODEL(PHASE IBUILDOUT),VOIP RevenueAloneJustifies Building Backbone,5,year PV,(1),(MRMB),CapEX,OpEx,Revenue,5,year NPV15%:, -500,M RMB,5,year IRR:,12%,Essentiallybreakeveneconomics foroperatingbackbonefor VOIPonly,VOIP,(2),Backboneconstruction,Backbone,International termination,IDD,DLD,IP,POP/Access platform,OSS,Present value of cashflows,(1),Assuming15%costofcapital,(2)Includingsettlement chargesestimated at 10%ofVOIP revenue, andmarketing/salesat10% of revenue,(3)Backbone OpExchargesallocated1/3 eachtoVOIP,wholesale,andenterprisebusinessmodeleconomics,Source:BCGbenchmark database;industryinterviews;BCGanalysis,AGENDA,BusinessModels,Domesticandinternationallong-distance voice,Wholesale/carrier,Enterprise solutions,Issuesgoingforward,APPROACHTOWHOLESALE/CARRIERBUSINESSMODEL,Objectives,HypothesizedApproach,Develop wholesalebusinessastraffic generatortoimprove economicsofbackbonethrough higherutilization,Becomethe wholesalecarrier of choicewith technologicallysuperiorservice offeringsincludinghighbandwidthinternationalgateway connectivity,ConsiderwholesalingaccesstoCT, Unicom,and Jitongdependingoncompetitiveimplications,Superiorcustomerservice withclearpositioning,“The clear alternative to CT”,Aggressive deploymentofbackboneinfrastructure,Connecting top15citiesbyend of 2000and expandingtotop50cities by 2002,Seek partnershipstoestablishhighbandwidthinternationalgateway connectivity-absolutelyessentialfor differentiatingCNCoffering,Develop interconnectioncapabilitiesinall major POPsand mobilebasestationsinkey geographicallocations,Wholesaleaccess to incumbentproviderswherefeasible, butdonotwholesale sourcesofcompetitiveadvantage (e.g.,enhanceddata services suchasIPVPNs),Rollout productofferinginstaged mannertoensurequalityofservice,Internetconnectivity,Mobileinterconnect,Accessportstobackbone,WHOLESALE/CARRIERSUMMARY,PreliminaryEconomics,PhaseI CapEx (2000,2001):100 MRMB,ISPaccess platform:50MRMB,OSS/Provisioning systems: 50M RMB,OpEx expected to be 10% of revenueby2002,1,Marketshareand revenueestimates -2002,Mobile(backbone):15%,ISPs:9%1.1 BRMB,Accessports: 100%,2,Dark fiber:100%,2,5 yearNPV: $2.1BRMB,Assumes launchdate of 3Q 2000for leasedlinesandrelativelyaggressive mobileshares,Potentiallytoooptimistic,KeyIssues to be Addressed,Backbonetechnology platform -QOS forvoicevs.lowercostdeployment?,High-bandwidthinternational gatewayparamount to differentiatingISPaccess,Favorableregulatorybacking forcourtingregionalCTmobilecarriers,EnsuringexistingVOIP gateways canservewholesaleneeds,Revenue opportunity of wholesaling darkfibervs. enabling competition,Organizationalchallenges,(1),IncludingallocationofbackboneOpEx,(2)Market estimatesbasedonrevenue generationbyCNC alone,POTENTIALWHOLESALE CUSTOMERSINCLUDE ISPs, MOBILEOPERATORS, ANDFIXEDLINE CARRIERS,ISPs offer significant potentialifCNCcan providesuperiorbandwidth accessandtointernationalgateway,Current satisfactionamongregionalISPs verylow,International gatewaylicenseinconjunctionwith highbandwidth trans-oceaniccarrieralliancecouldprovide vastlysuperiorservice,Mobilecarrierswillbesearchingfor lower costalternatives to carry longdistancetrafficduetointensifying competition,CNCsnewhighcapacityVoIPnetworkandinternationalgatewaylikelytoyieldlowercosts,Fixedlinecarrierspotentiallylookingforalternatives,Existinglong-haultransportinfrastructurelimited,ChinaTelecomcouldevenbeapossiblecustomergivencurrentfocusonincreasingresidentialteledensity,OVERALLWHOLESALEMARKETSIZEISSUBSTANTIALANDGROWINGATAMODESTRATE,AnticipatedPriceDecreaseinLeasedLinesLimitsOverallRevenueGrowth,LeasedLines-ISP,MarketSize(RMB,B),15,Total,LeasedLines-Mobile,99,-04,CAGR,AccessPorts,LeasedLines-Paging,18,18,20,22,26,28,4%,41%,1%,152%,(1),9%,(1)01,-04,CAGR,Source:CNCteaminputs;foreignbenchmarks;BCGanalysis,DarkFiber,68%,(1),CARRIERSSEEKINGALTERNATIVES.,ISPsdefinitelyseekingalternativestoCT,Mobilecarrierslikelytofollow,“,Weneedatelecomserviceproviderthatisnotourcompetitor.,”,”,-Founder,Eastnet,“,ChinaTelecom,withtheirownnetworkdevelopmentplans,tendstostarveusoncapacityortoforceustopayinadvanceforexcesscapacity.”,-Manager,Infohighway,“,ThefactthatittakesChinaTelecomtwomonthseverytimeweneedanextralinemakesitverydifficulttohaveourowncustomers.Wewantanotheroperatorwhocangetusleasedlinesfast.,”,-Manager,Infohighway,Mobilecarriersmightconsiderdivertingpartoftheirtraffictoalternativeserviceproviderswith:,moreattractivepricing,higherqualityservice,higherbandwidth,InterviewswithregionalmobilecarriersandUnicomneedtobeconductedtoverifypotential,BUTTECHNOLOGICALLIMITATIONSANDCOMPETITIVECHALLENGEAREIMPORTANTFACETSTOMANAGE,CompetitiveChallenge,TechnologicalLimitations,MobilecarriersmaybehesitanttouseVOIPtechnologyforprimaryapplications,Carrierscurrentlyaddressingsoundqualityasamajorimprovementinitiative,VOIPhasyettodelivertoll-qualityvoicetransmission,evenonlandline,MobilecarriersmaytakeviewthatVOIPcouldfurtherdegradevoicequality,ChinaTelecomlikelytohaveadvantageincompetingshareofCTMobile,sbusiness,Strongformerintra-CTconnectionevenaftersplit,ExtensivebackbonecoverageandlargeTDMbasedcapacity,UnicomMobileServices,businessastoughtarget,Buildpresencebyofferinglow-cost,trialsandbackupcapacity,LobbyforclearregulationfromMIIon,freedomofchoiceforcarriers,PREDICTEDWHOLESALEECONOMICSADDSIGNIFICANTVALUETOVOIPBUSINESSMODEL,AdditionalCapExandOpExMinimal,5,yearPV,(1),(MRMB),CapEX,OpEx,Revenue,5,yearNPV15%:,2.1,BRMB,5,yearIRR:,40%,Wholesalecriticaltoenhancingprofitabilityofbackbone,VOIP,Backboneallocation,DarkFiber,Accessports,ISPs,Mobileoperators,VOIP,VOIP,ISPaccess,OSS,(1),Assuming15%costofcapital,Source:BCGbenchmarkdatabase;industryinterviews;BCGanalysis,OSS/provisioning,Presentvalueofcashflows,8,000,7,000,5,000,1,000,6,000,-3,000,-4,000,AGENDA,Business Models,Domestic and international long-distance voice,Wholesale/carrier,Enterprise solutions,Issuesgoing forward,APPROACH TO ENTERPRISE SOLUTIONS BUSINESSMODEL,Objectives,Hypothesized Approach,Capturestrongshareamong medium/large businessby offering enhanceddatacomsolutions,Goal toestablish clear position asbest service/qualityprovider in major markets,Utilizemost cost effectivedeployment technologies to cover major metro areas,Minimize head-to-headcompetition by offering differentiated, data-centric products-attempt to drive datacom market,Developimageas fast, responsive solutions provider,Enablecompetitive advantagefor businesscustomers through datacom,For building managers: maketheirbuildings moreattractive totenants,Deployment totargetkey buildingsin major metropolitanareas,Four cities byyear 2000/01,Top 15citiesby 2001,Fiber in mostdense urban hi-rise areas and LMDSto complementand serve lessdenseareas,Initiallead productswill be low cost voice overIP andhigh bandwidth internet access,Migration to full datacom solutionsas customer base andcapabilitiesgrow,Qualitycustomer service more important short term thanfull product offering,Emphasis on ease of use andfast provisioning versus competitors-exploit CTs weaknesses,Education of customers on use of datacom productsas competitive weapons,Marketing partner with key buildingmanagers,ENTERPRISE SOLUTIONSSUMMARY,Preliminary Economics,Phase ICapital Investment (2000,2001): 1.1 B RMB,First four cities (assumingfiber):650 MRMB,Additional 11cities,1,: 400M RMB,OpEx expectedto be 40% ofrevenue by 2002,Marketshare and revenue estimates- 2002,OffnetVoice,2,: 20%,Existing data:10% 1.1 B RMB,Emerging data: 5%,5 yearNPV: Roughly 1.2 B RMB,Assumeslaunchdate of 3Q 2000 fordata services,Likelytoo optimistic,Key Issues tobe Addressed,Right of way for existing ducts anddigging,Partnership strategyfor high bandwidth IGW,Rightsto LMDSfrequency spectrum,Are the15 cities designatedfor Phase I buildoutthe right 15citiesfor local access?,Tradeoff between pureeconomics bycity vs. strategic value ofproviding end-to-endconnectivity,What isa realistic time frame forlaunch?,Magnitude of organizationaland human resource requirements,(1),Assuming LMDScapitaland revenue 2timesFuzhouestimate for cities 11-15; 3timesFuzhouestimate for cities 5-10,(2) Assumes nolocalvoice revenuethrough2004,ENTERPRISE SOLUTIONSBUSINESS MODELMOST COMPLEXWITH HIGH CAPEX AND OPEX REQUIREMENTS.,Building metropolitanfiberrings to offeraccessto medium andlargebusinesses poses significantchallenge,Operating expenses requireddwarfslong haul network costs on aper city basis,Complexity inobtaining night-of-way varies by districtswithineach city,Designing fiber routeand network configuration requiressignificant experience,Converting customersto fullCNC service may notbe as easy asit seems on surface,Initialrisk for companies utilizing new entrant,Coverage issues for offeringservice to all business locations,Experienced sales-force withestablished relationships amust,BUT COMPRISESTREMENDOUS UPSIDE POTENTIAL,Internet Access,LeasedLines,ILD,DLD,Local,Other,Portal,Broadband Content,Web Hosting/ Collocation,Existing Services,Emerging Services,98-04,CAGR,124%,40%,-10%,7%,11%,IP VPN,Broadband Network Applications,71%,83%,186%,98%,111%,286%,00-04,CAGR,Marketsize (RMB BN),Marketsize (RMB BN),78,96,187,Overall,16%,Overall,86%,3,32,Source:CNC team inputs; foreign benchmarks; BCGanalysis,CUSTOMER NEEDSEXISTTHRUGHOUT THEVALUE CHAIN,CTs OfferingYieldsSignificant Gaps,Learn,Buy,Get,Use/support,Pay,Customer valuechain,Needs identified,How datacom servicescan help theirbusiness,Assistance deployingsolutions,Quickerand more convenientapplication channels,Rapid and reliable provisioning,Faster,reliable repair services,Prompt,customized billing,Lack customerfocus,Solutions virtually non-existent,Mostlyone-wayproduct marketing,No customer input forprovisioning,CT determinesqueue withoutspecific timing,No penalties for missed appointments,Negligent repair service,Slow fulfillment & technicalsupport response,Poor responseto customers,Limitedbill customization,CT,approach,Significant opportunity forCNC establishposition in,customer solutions, ease ofuse, and responsive service,Areas highlighted most in customer interviews,Source:Customer interviews; BCG analysis,STAGEDPRODUCTINTRODUCTIONNECESSARY TO MANAGE QUALITY,Hypothesized ProductIntroductions,Voice,Data,2000,2001,2002,2003,2004,2008,Phase I& II,Phase III,Phase IV,LeasedLines,Mobilecarriers,Eneterprise,High bandwidthdedicated internet access for businessesand ISPs,AccessPorts,VPN,Basic enterprise,Broadband applications,Platforms to enable VOD, etc.,Web Hosting,Dark Fiber,Residential ISP?,Advanced VPN,Extranet,Voice,video QoS guarantees,Industry specific offerings,Other emergingservices (e.g. e-Commerce),IP-phone voice,Prefix,“Dial-around”solutions,Equal access voice?,On-netvoice?,Focus on quality overquantity,Marketas integratedproducts,StressCNC role as integrated datacom player,Positioning,Issues,CNC SHOULD USECREATIVE WAYSTO GROW THE MARKET,AVOID HEAD TOHEAD COMPETITION,Competitors all focuson thesame demand from thesame customers,Savagely compete on price,Reactively wait for customers to identifyneed, requestproducts,Pursuegrowingcustomers - data intensiveenterprises,Fresh opportunities for sales, instead ofcompeting overexisting business,Approach proactivelywith new products, instead of waiting forcustomers to initiatesalesprocess,Creatively identify new markets,I.e. market for companies requiringvery rapid provisioning orcustomized products,Becomethe only choice for these companies,Lobby the government
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