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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,*,Main point,Bullet point,dash point,period point,Quote reference,MASTER SLIDE TITLE,-,51,-,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,Business Models,Domestic and international long-distance voice,Wholesale/carrier,Enterprise solutions,Issues going forward,Economic modeling,Choice of business models,to pursue and timing,Roadmap for pursuing business models and expected financial performance,Integrated approach to CNC business plan,Majorissues,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,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,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,CNC AT A CRITICAL STRATEGIC CROSSROADS,Preliminary Conclusions,Recommendations/Decisions to be Made,Offnet VOIP predicted to generate to provide breakeven economics for building backbone,1,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?,(1),Assuming settlement fees of 10% of revenue,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 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 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,AGENDA,Business Models,Domestic and international long-distance voice,Wholesale/carrier,Enterprise solutions,Issues going forward,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,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 alone,1,Key Issues to be Addressed,Interconnect agreements with local PTAs; 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,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; CNCs team inputs; BCG surveys, analysis & benchmarking,Year after entry,Optus (DLD),Tele 2 (DLD),Mercury,(DLD),Hong Kong (IDD),Japan (IDD),US (IDD),(RMB BN),DLD On-Net,DLD Off-Net,ILD On-Net,ILD 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 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,CNC VOIP REVENUE AND MARKET SHARE EXPECTATIONS,Source: CNCs team inputs; various benchmarks; BCG analysis,Voice revenue,Share assumptions,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%,PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL (PHASE I BUILDOUT),VOIP Revenue Alone Justifies Building Backbone,5,year PV,(1),(M RMB),CapEX,OpEx,Revenue,5,year NPV15%:, -500,M RMB,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 platform,OSS,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 economics,Source: BCG benchmark database; industry interviews; BCG analysis,AGENDA,Business Models,Domestic and international long-distance voice,Wholesale/carrier,Enterprise solutions,Issues going forward,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,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 2002,1,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,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,CNCs 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,OVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATE,Anticipated Price Decrease in Leased Lines Limits Overall Revenue Growth,Leased Lines - ISP,Market Size (RMB,B),15,Total,Leased Lines - Mobile,99-04,CAGR,Access Ports,Leased Lines - Paging,18,18,20,22,26,28,4%,41%,1%,152%,(1),9%,(1) 01-04,CAGR,Source: CNC team inputs; foreign benchmarks; BCG analysis,Dark Fiber,68%,(1),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,BUT TECHNOLOGICAL LIMITATIONS AND COMPETITIVE CHALLENGE ARE IMPORTANT FACETS TO MANAGE,Competitive Challenge,Technological 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 Mobiles 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-cost,trials and backup capacity,Lobby for clear regulation from MII on,freedom of choice for carriers,PREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODEL,Additional CapEx and OpEx Minimal,5,year PV,(1),(M RMB),CapEX,OpEx,Revenue,5,year NPV15%:,2.1,B RMB,5,year IRR:, 40%,Wholesale critical to enhancing profitability of backbone,VOIP,Backbone allocation,Dark Fiber,Access ports,ISPs,Mobile operators,VOIP,VOIP,ISP access,OSS,(1),Assuming 15% cost of capital,Source: BCG benchmark database; industry interviews; BCG analysis,OSS/provisioning,Present value of cash flows,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,Issues going forward,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 CTs weaknesses,Education of customers on use of datacom products as competitive weapons,Marketing partner with key building managers,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 cities,1,: 400 M RMB,OpEx expected to be 40% of revenue by 2002,Market share and revenue estimates - 2002,Offnet Voice,2,: 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,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,BUT COMPRISES TREMENDOUS UPSIDE POTENTIAL,Internet Access,Leased Lines,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,Market size (RMB BN),Market size (RMB BN),78,96,187,Overall,16%,Overall,86%,3,32,Source: CNC team inputs; foreign benchmarks; BCG analysis,CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAIN,CTs Offering Yields Significant Gaps,Learn,Buy,Get,Use/support,Pay,Customer 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,CT,approach,Significant opportunity for CNC establish position in,customer sol
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