1. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
2. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
3. Economic modelingChoice of business models
to pursue and timingRoadmap for pursuing business models and expected financial performance
Integrated approach to CNC business planMajorissuesExpectedoutput
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 scenariosAssessment 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 areaRegulatory 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 assessmentMETHODOLOGY BEING USED TO DEVELOP BUSINESS MODELS AND OVERALL STRATEGY- Current areas of focus
4. CNC 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 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 focusOverarching question: Can CNC successfully pursue all
opportunities outlined in the short/medium term? (1) Assuming settlement fees of 10% of revenue
5. Overall approach
Where
How
BUSINESS MODELS SUMMARY: THREE CORE ELEMENTSEnterprise SolutionsCapture 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 CT’s weakness in service and bandwidth
Utilize LMDS in intermediate cities and areas where time to market is critical Wholesale/CarrierTarget 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”
ISPLong distance voiceCapture 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 “China’s first datacom carrier”
Do not overextend resources in VOIP as it does not fit CNC’s long term strategy
Create “dial-around” solutions for business and interconnect terms- 17930 -
6. Enterprise solutions
POTENTIAL 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
niche
7. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
8. APPROACH TO DOMESTIC AND INTERNATIONAL VOICE BUSINESS MODELObjectivesHypothesized ApproachCapture 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” imageFight 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
9. DOMESTIC 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 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 alone1
Key Issues to be AddressedInterconnect agreements with local PTA’s; 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
10. LARGE 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; CNC’s team inputs; BCG surveys, analysis & benchmarkingYear after entryOptus (DLD)Tele 2 (DLD)Mercury
(DLD)Hong Kong (IDD)Japan (IDD)US (IDD)(RMB BN)DLD On-NetDLD Off-NetILD On-NetILD Off-Net(%)
11. 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
12. CNC VOIP REVENUE AND MARKET SHARE EXPECTATIONS
Source: CNC’s team inputs; various benchmarks; BCG analysisVoice revenueShare assumptionsCNC Revenue
(RMB BN)Off-Net DLD% of total CNC revenue100%76%37%30%23%16%Off-Net ILDInternational Termination1999
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 coverage2000
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%
13. PRELIMINARY ECONOMICS FOR LONG DISTANCE VOICE MODEL (PHASE I BUILDOUT)VOIP Revenue Alone Justifies Building Backbone5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~ -500M RMB5 year IRR:~12%Essentially breakeven economics for operating backbone for VOIP onlyVOIP(2)Backbone constructionBackboneInternational termination
IDD
DLDIP
POP/Access platform
OSSPresent 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
14. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
15. APPROACH TO WHOLESALE/CARRIER BUSINESS MODELObjectivesHypothesized ApproachDevelop 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
16. WHOLESALE/CARRIER SUMMARYPreliminary EconomicsPhase 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 20021
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 AddressedBackbone 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
17. 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
CNC’s 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
18. OVERALL WHOLESALE MARKET SIZE IS SUBSTANTIAL AND GROWING AT A MODEST RATEAnticipated Price Decrease in Leased Lines Limits Overall Revenue GrowthLeased Lines - ISPMarket Size (RMB B)15TotalLeased Lines - Mobile99’-04’
CAGRAccess PortsLeased Lines - Paging1818202226284%41%1%152%(1)9%(1) 01’-04’ CAGR
Source: CNC team inputs; foreign benchmarks; BCG analysisDark Fiber68%(1)
19. 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 bandwidth
Interviews with regional mobile carriers and Unicom need to be conducted to verify potential
20. …BUT 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 quality
China Telecom likely to have advantage in competing share of CT Mobile’s business
Strong former intra-CT connection even after split
Extensive backbone coverage and large TDM based capacity
Unicom Mobile Services’ business as tough targetBuild presence by offering low-cost
trials and backup capacityLobby for clear regulation from MII on
freedom of choice for carriers
21. PREDICTED WHOLESALE ECONOMICS ADD SIGNIFICANT VALUE TO VOIP BUSINESS MODELAdditional CapEx and OpEx Minimal5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~2.1B RMB5 year IRR:~ 40%Wholesale critical to enhancing profitability of backboneVOIPBackbone allocationDark Fiber
Access ports
ISPs
Mobile operators
VOIPVOIP
ISP access
OSS(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysisOSS/provisioningPresent value of cash flows8,0007,0005,0001,0006,000-3,000-4,000
22. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
23. APPROACH TO ENTERPRISE SOLUTIONS BUSINESS MODELObjectivesHypothesized ApproachCapture 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 CT’s weaknesses
Education of customers on use of datacom products as competitive weapons
Marketing partner with key building managers
24. 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 RMB
OpEx expected to be ~ 40% of revenue by 2002
Market 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 RMB
Assumes launch date of 3Q 2000 for data services
Likely too optimistic
Key Issues to be AddressedRight 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
25. 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
27. CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAINCT’s Offering Yields Significant GapsLearnBuyGetUse/supportPayCustomer value chainNeeds identifiedHow datacom services can help their business
Assistance deploying solutionsQuicker and more convenient application channelsRapid and reliable provisioningFaster, reliable repair servicesPrompt, customized billing
Lack customer focus
Solutions virtually non-existent
Mostly one-way product marketingNo customer input for provisioning
CT determines queue without specific timing
No penalties for missed appointmentsNegligent repair service
Slow fulfillment & technical support responsePoor response to customers
Limited bill customizationCT
approachSignificant opportunity for CNC establish position in
customer solutions, ease of use, and responsive serviceAreas highlighted most in customer interviewsSource: Customer interviews; BCG analysis
28. STAGED PRODUCT INTRODUCTION NECESSARY TO MANAGE QUALITYHypothesized Product IntroductionsVoiceData200020012002200320042008Phase I & IIPhase IIIPhase IV Leased Lines
Mobile carriers
Eneterprise
High bandwidth dedicated internet access for businesses and ISPs
Access Ports
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 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 playerPositioning
Issues
29. CNC SHOULD USE CREATIVE WAYS TO GROW THE MARKET, AVOID HEAD TO HEAD COMPETITIONCompetitors all focus on the same demand from the same customers
Savagely compete on price
Reactively wait for customers to identify need, request productsPursue growing customers - data intensive enterprises
Fresh opportunities for sales, instead of competing over existing business
Approach proactively with new products, instead of waiting for customers to initiate sales process
Creatively identify new markets
I.e. market for companies requiring very rapid provisioning or customized products
Become the only choice for these companies
Lobby the government to support more e-commerce and information industries growthCTCNCUnicomJitongCT is likely to be unable to meet growing demand aloneTraditional, narrow viewNew approaches to growing sales
30. TOTAL GDP VS. GDP/CAPITA IS A PRELIMINARY INDICATOR FOR ATTRACTIVE LOCAL ACCESS MARKETSExample: 15 Initial Cities with POPs on CNC NetworkShanghaiBeijingGuangzhouTianjinHangzhouWuhanNanjingJinanShijiazhuangZhenzhouChangshaXuzhouXiamenFuzhouShenzhenExamples of additional cities not in initial 15 designated for CNC POPsHypothetical breakeven curve for building local accessSuzhouWuxiTotal GDP (k RMB)GDP/cap (k RMB)
31. VERY DENSE MARKETS SUCH AS SHANGHAI BEST SERVED BY METRO FIBER RINGSMPOP/rail stationHong Qiao Development AreaPeople’s parkHuai Hai RoadXujiahuiPudong Financial ZoneFiber length:
Along subway:
Along elevated ring road:
Along road:17000m
9000m
8000m# of major business
buildings accessed:~200Fibers alongSubway in construction
Subway
Elevated ring road
Road (dig required)
Dense Business Area served
Metro stationsMMM
32. SHANGHAI ECONOMICS VERY ATTRACTIVE DUE TO HIGH BUILDING AND BUSINESS DENSITY5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~310M RMB5 year IRR:~70%Shanghai presents most attractive enterprise solutions marketSG & AAllocated backboneIDD
Emerging data(3)
DLD
Data servicesSONET/switching equipment
OSS
Allocated backbone(2)(1) Assuming 15% cost of capital
(2) Cost of providing F/R and ATM service on backbone allocated over first 4 cities
(3) Web hosting IP VPNS, etc.
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency interviews; field analysisPower provisioning, etc.Fiber constructionRight of wayPresent value of cash flows
33. MEDIUM SIZED CITIES WITH HIGH GDP/CAPITA SUCH AS FUZHOU BEST SERVED WITH LMDS SOLUTIONFiber length:
Along road:
# LMDS station:
5000M
1Area served(1):
# of major business
buildings covered:~40km2
~40(2)Lake
Fiber along road
Railway
Railway station
Road
LMDS station
Major buildings
Area servedRS(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area
(2) Assume half of the buildings are prime business buildings for economic modelingSR
34. PRELIMINARY FUZHOU ECONOMICS UTILIZING LMDS VERY FAVORABLE5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~20M RMB5 year IRR:~60%LMDS solutions for medium sized cities will play a critical role in developing enterprise solutionsSG & APower, provisioning, etc.IDD
Emerging data services
DLD
Data servicesBase station
CPE(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Bldg equipmentSpectrum fees
Fiber to POPPresent value of cash flows
35. OTHER CITIES OF SIZEABLE POPULATION BUT RELATIVELY LOW GDP/CAPITA MAY NOT WARRANT INVESTMENTExample: ShijiazhuangNo fiber connection
required, assume rail
station is LMDS base
1Area served(1):
# of major business
buildings covered:~40km2
~20(2)Railway
Road
LMDS station
Major buildings
Area servedSS(1) More detailed field analysis required to map buildings and most effective LMDS positioning; assumes 3.5 km radius for LMDS area
(2) Assume half of the buildings are prime business buildings for economic modeling
36. OVERALL ECONOMICS APPEAR MARGINAL FOR SHIJIAZHUANG5 year PV(1) (M RMB)CapEXOpExRevenue5 year NPV@15%:~ -3M RMB5 year IRR:~5%Cities without dense business districts may not be attractive enterprise markets regard less of overall sizeSG&APower, provisioning, etc.IDD
Emerging data services
DLD
Data servicesBase station(1) Assuming 15% cost of capital
Source: BCG benchmark database; industry interviews; BCG analysis; real estate agency provided data
Spectrum CPE
Bldg. equipmentPresent value of cash flows
37. OVERALL REVENUE AND MARKET SHARE EXPECTATIONS: ENTERPRISE SOLUTIONSPredominately voice (DLD / ILD) revenue in the first two years; migrating to data and Internet services by 2002CNC revenue
(RMB BN)Internet AccessLeased LinesILDDLDShare assumptionsOther
Emerging ServicesWeb Hosting / CollocationSource: CNC team inputs; foreign benchmarks; BCG analysis1999
3%
80%
1%
3%
80%
1%
0%
0%
0%
0%
0%
0%DLD
Off-net share of total DLD
Geographic coverage of CNC
CNC share within coverage
ILD
Off-net share of total ILD
Geographic coverage of CNC
CNC share within coverage
Leased Lines
Geographic coverage of CNC
CNC share within coverage
Internet Access
Broadband
Narrowband / Dial-Up
Web Hosting / Collocation
Other Emerging Services2000
10%
60%
25%
11%
60%
25%
30%
2%
2%
0%
0%
0%2001
17%
75%
29%
18%
75%
29%
47%
10%
10%
0%
5%
1%2002
23%
90%
33%
26%
90%
33%
63%
14%
14%
0%
8%
2%2003
30%
100%
30%
33%
100%
30%
80%
18%
18%
0%
10%
4%2004
32%
100%
28%
35%
100%
28%
82%
21%
21%
0%
13%
6%
38. OVERALL ECONOMICS ATTRACTIVE FOR PHASE I BUILDOUT IN TOP FOUR CITIES5 year PVs (M RMB)CapExOpExRevenue5 year city NPV5 year IRRShanghai
Beijing
Guangzhou
Shenzhen
Total145
149
157
95
546504
447
400
332
1683960
768
640
480
2848311
172
83
5370%
45%
30%
28%Overall Phase I 5 year NPV: ~620M RMB
5 year IRR: ~44%Source: BCG benchmark database; industry interviews; BCG analysis
39. GOING FORWARD, CITIES WILL NEED TO BE ANALYZED ON A CASE BY CASE BASISDeployment technology will play a critical roleMethodology/criteria for choosing local access marketsInitial prioritization by total GDP vs. GDP/capita
Relevance and proximity to CNC network
Map urban area by biggest buildings and availability of existing conduits
Determine if density falls into one of the three density categories
Estimate costs and revenue associated with buildout1.
2.
3.
4.
5.Go or no go!Cost to deliver enterprise solutionsIncreasing business density and areaIntermediate density best served by LMDSVery dense and large area best served by fiberToo costly to serveFiberLMDS
40. RECAP OF OVERALL PHASE I ECONOMICS AND KEY ISSUESEnterprise Solutions2
1.1 B
3.2 B
(38%)
1.2 B
Businesses/km2
Data growth
IGW/connectivity
Deployment cities
Realistic rollout
Buildout economics for 15 cities vs. connectivity valueWholesale/Carrier
100 M
2.3 B
(27%)
2.1 B
Mobile share
Internet growth
IGW/connectivity
Voice QOS
Regulatory backing
Cost of deployment vs. service flexibilityLong distance voice
3.8 B
3 B
(35%)
--
Settlement charges
Pricing/competition
IGW/connectivity
Managing life cycle
Business solutions
Economics of 60 VOIP cities vs. strategic value of coverage
Economics1
CapEx
2004 Revenue
(% of total)
5 YR NPV3
Key Issues
Sensitivity
Top issues to address
Tradeoffs(1) All values in RMB and based on preliminary inputs to be refined
(2) Includes only Phase I buildout to top 15 cities
(3) Assuming 15% cost of capital
41. AGENDABusiness Models
Domestic and international long-distance voice
Wholesale/carrier
Enterprise solutions
Issues going forward
42. EMERGING OPPORTUNITIES EXIST FOR CONSUMER ISP AND ADVANCED DATA SERVICESResidential ISP
CNC may be in unique position to offer true broadband internet access due to IP network and international gateway
What strategies will capture significant value while minimizing development time and necessity for brand equity?
Web Hosting/Data Centers
Niche competitors such as Exodus in the U.S. aggressively pursuing this business model
Will opportunities develop in the near term for China and could CNC supply resources necessary?
E-commerce solutions
Many telcos in Europe and U.S. offering e-commerce solutions
Will opportunities develop in the near term for China and could CNC supply resources necessary?
43. Datacom services explosion Slowed adoptionStable competition with CT, Unicom, and Jitong; clear regulationsIncreased competition with limited cooperation from CTFragmented, unstable competition; multiple entrants and unclear regulationsBase caseBestWorstDemand sideCompetitive/Regulatory Situation (Supply side)ENVIRONMENTAL UNCERTAINTIES LEAD TO THREE BASIC SCENARIOS TO BE ANALYZEDGrowth in existing data and and emerging datacom services (as expected)
44. MONTE CARLO SIMULATION WILL ALLOW FOR GAUGING THE EFFECTS OF UNCERTAINTIES IMPLIED IN SCENARIOSExample: Effect of Average Building Size, Tier 1 Business Proportion & Spending on Shanghai Metro Access EconomicsEstablish Input Variables25,000.0028,750.0032,500.0036,250.0040,000.00Average building size (m2)MinMost likelyMax7.5%11.3%15.0%18.8%22.5%% Tier 1 businessesMinMost likelyMax300.00350.00400.00450.00500.00Average spending/sq m for Tier 1 (RMB)MinMost likelyMaxProbabilityMonte Carlo simulation of 1000 trials with 5 year NPV as forecast outputFrequency ChartCertainty is 95.00% from $238,500 to $558,816 000 RMBMean = $381,016.000.023.046.068.091022.7545.568.2591$150,000$262,500$375,000$487,500$600,0001,000 Trials 6 OutliersForecast: 5 YR NPVResulting forecast
45. MONTE CARLO SIMULATION PROVIDES VERY USEFUL OUTPUT95% certainty that with the inputs provided, 5 year NPV will be greater than 239M RMB
Statistically impossible for the project to have a negative NPV based on provided inputs
Forecast mean is actually higher than our base case value (381M vs. 318M) due to effects of variable inputs
A sensitivity report generated from the simulation tells us that average building size contributes the most to output variance, therefore it is the most important input to focus on clarifying
46. CONTENTKey strategic principles
Regulatory overview
Market overview
Competition overview
Business models
Next steps
47. NEXT STEPSAgree on business mix assumptions
Develop organization structure
Agree on key principles and objectives
Timeline, key milestones
Develop implementation action plan
High level plan (by quarters) till Jan 2002
Detailed plan (by month) Jan-Jul 2000
Key milestones, process control
Integrate and refine overall CNC financial
Objectives and assumptions for financial model
Scenarios / sensitivities
48. ORGANIZATION DESIGN METHODOLOGYDefine principles & objectivesKey criteriaDesign organization structure
Possibility of combination/hybrid modelsDefine job responsibility/accountability corresponding to organization structure
Example for process flow (how each function interacts)
Example for KPI, principles for KPISelect models to test
49. MAJOR OUTPUTS: ORGANIZATION DESIGNKey principles for KPI
With examplesDivision/accountability
“Internal market” as cross-dept incentiveOrganization chart
Dotted line vs. solid line
Reporting/accountability
Rationale/methodology
50. IMPLEMENTATION PLAN DESIGN METHODOLOGYObjective/target scheduleMajor function/module working backwardDetailed work and cycle time for module/sub-module ® refine timelineDraft implementation timelineKey checklist & mile stones per divisionKey process for rollout (across divisions)
Product rollout
Geographic rolloutRevise target if necessaryIdentify bottleneck, refine scheduleSegmented view of implementation
51. Key cross-functional coordination process flow
ExamplesMAJOR OUTPUTS: IMPLEMENTATION PLANKey rollout plan example
Product
CityMS project time-line/milestones
Overall
By divisionHighlights
Major milestones resource planning
52. WORKPLAN(1)(1) Refer to CNC team schedule for details. TDC off Dec 22-30; TC off Dec 20-24; Rest off Dec 27, 31 for holiday