BCG中国网通战略咨询报告完整版英文版3

CHINANETCOMBUSINESSPLANUPDATEDecember14,1999-BeijingTODAY’SOBJECTIVESReviewtheoverallanalysisofregulation,competition,andmarketdevelopmentDiscussthespecificimplicationsforCNCstrategyReviewthespecificdraftbusinessmodelsforCNCHowwemightattackthebusiness,carrier,andIDD/DLDmarketsWhatkeytrade-offsweneedtomakeWhatarethekeysuccessfactorsandassumptions?Discusstheinitialeconomicsofthesebusinessmodels,andofCNCoverallDiscussthespecificnextstepsintwokeyareas:HowtofinalizeandendorsetheoverallCNCbusinessmodelHowtomoveforwardwiththerefinedfinancials,organizationdesign,andtheplanforimplementationCONTENTKeystrategicprinciplesRegulatoryoverviewMarketoverviewCompetitionoverviewBusinessmodelsNextstepsKEYCNCSTRATEGICPRINCIPLESTheobjectiveoftheseprinciplesistoprovidefurtherclarityinthedevelopmentandevaluationoftheCNCbusinessmodelThesewillberevisitedandrefinedastheprojectprogressesOurdevelopmentofbusinessmodelswillseektobealignedwiththeprinciplesStrategicprinciplesandkeyassumptionswillbeconsideredinthefollowingaspectsCNCshareholdersBackbonebusinessLocalaccessbusinessInternationalgatewaybusinessRegulatorystrategyCompetitivestrategyMarketingstrategyCNCSHAREHOLDERSPrinciples:Leverageshareholders’concertedvisionincreatinganewgenerationIPbroadbandcommunicationinfrastructureandaprofitable,successfulcompanyLeverageshareholders’existingbackboneassets,localaccessassets,researchcapabilitiesandlocalgovernmentrelationshipstosecuretime-to-marketandcreatecompetitiveadvantageSetamodelofanewtypeof“SOE”,asefficientasthebestoftheFIE/privatecompanies;beatshareholders’expectationsbydeliveringhighreturnAssumptions:CAS:stronginterestinseeingCNCsuccessfulandprofitablequickly,standsreadyforfavorableregulatoryinfluenceandresearchsupport;wantsopportunitiesfornetworkingR&DMORandSARFT:extensivebackboneandaccessassetsandROWmainfocusonusingMORforrightofway,helpingthemparticipateintelecomwillnotuseSARFTlocalCATVinthenearterm,buttheyareakeyuserofthebackboneLeverageCATV’scitybackboneMORwillcontinuetofavorCNCoverUnicom,providedCNCmeetstheexpectationasaprofitcenterforMORShanghaiMunicipalGov't:EagertomakeShanghaiasChina’stestgroundforbuildinghigh-techinfrastructure(e.g.theintegrationoftelecom,CATV,Internet)inparticular,testingHFCtodeliverbroadbandinternetoneissue:SPTandATTJV;howtohandle?BACKBONEBUSINESSPrinciples:Targetadvancedbackboneamong15keycitiesinEasternChina;startwith2coresfromshareholdersbutquicklybuildownnetworkUsebackboneforavarietyofwholesaleandretailvoiceanddataservicesMaintaintheleadingedgeIP/packetnetwork,bothfortechnologicalsuperiorityandtofulfillshareholdermissionMaintainthebestcostposition,usingROWs,purchasingclout,righttechnologyBuildreservecapacity/conduittodeterothersAssumptions:ThecostsofconstructionandROWwillbethemajorityofnewnetworkcostsvirtuallyallofthenetworkwilluseMORorSARFTrightofwayNetworkwillbeIPorpacketinnatureDeploymentplanwillkeepcostslow,buildoutquickly,andcreategoodpositionlaylargenumberofconduitsinonetimelaterfill,lightup,andcolorfiberstrandsleaseoutconduit/fiber/bandwidthtomaximizereturn(utilization)LOCALACCESSBUSINESSPrinciples:Beveryfocusedinlocaldeployment,targetingprioritybusinessareasonlyEmphasizebroadbandtothecustomer,usingFTTBandLMDSwherelogicalSeekstronglocalmarketshare,especiallyinnewdataservicesgrowthareasDifferentiatefromChinaTelecombysuperiorservices,quality,responsivenessBuildstronglocalteamtoenablefastserviceresponseEmphasize“endtoend”networkownershipandmanagementAssumptions:SH,BJ,GZ,andSZbusinessdistrictsastargetsfortheneartermTheseaccountforthevastmajorityofbusinesstelecomdemandNeedtosetspecificestimatesfortimingandsequenceofdeploymentAssumethatCNCwillhaveaccesstokeycityROW,suchassubwaysystemsWillneedspecificassumptionsabouttheeaseandcostofhookingupbuildingsAssumethatprimaryemphasiswillbeonFTTB,butthatLMDScanplayanimportantrole,especiallyininitialdeploymentandinsecondarycitiesWillneedspecificassumptionsabouttimingofaddingsecondarycitiesINTERNATIONALGATEWAYBUSINESSPrinciples:CNCwillbeoneoffewplayerswithafullinternationallicenseVitaltoenableCNCtoprovideend-to-endservices,globaldataservices,andhighermarginIDDserviceHKgatewaylinkmaybestrategicallyimportantAssumptions:HKasoneofthekeylocationforinternationalconnectionamajortrafficdestinationamajorrelaylocationInternationalvoiceremainshighlyprofitablesegmentinmediumtermfutureExpecthighgrowthtogetherwithsteeppricedropininternationalservicesActivelyplanaheadforjoininginternationalsub-oceaniccableconsortiumREGULATORYSTRATEGYPrinciples:Mustactivelylobbyforfavorableregulatorydecisions,togetherwithshareholdersprovideregulatorswithinternationalbenchmarkingforbestpracticesalignCNCobjectiveswithfaircompetition,andpublicinterestshaveeffectiveseniormanagementfocusonlobbyingissuesBecarefulaboutcommittinginvestmentifregulatoryissuestoouncertainEnsureCNCstrategyaddressesnationaleconomicdevelopmentprioritiesPaycarefulattentiontomanagingrelationswithChinaTelecomExpectedWTOin2000willimplygreateropeningofthemarketinthefutureAssumptions:Atleasta2-3yearwindowwhenCNCcancontinuetoenjoyfavorablepolicytreatment,whilealsoworkingtostraightenoutregulatoryissuesatlocallevelManykeyregulationsremainingreyareas,whereCNCcanplayaroleinshapingthepolicyWillneedtomakespecificassumptionsonanumberofregulatoryissues,anddevelopseveralscenariosAssumethatCTandUnicomaretheonlyfullservicecompetitors,butseveralnicheplayersWTOwillintroduceFDIintoChina’stelecommarketby2002,butinfrastructureplayremaintightlycontrolled(stilllimitedcompetition)until2004/5maybeopportunityforsomeformofpartnershipwithforeigntelcosCOMPETITIVESTRATEGYPrinciples:Focusonthebestservicequality,supplywhatcustomers’need,avoidcompetingonpriceBuildboth“highways”and“tollbooths”PrepareforrapidlychangingindustrystructureBecarefulinpositioningtowardChinaTelecom:complementaryandaddressingunmetneedsgrowingthewholemarketTheonlyviablealternativetoChinaTelecomforcarriersTheonlytrue“endtoend”networkacrossChina,withclearcentralmanagementAssumptions:TechnologyleadstocontinualchangeinindustrystructureThedecentralizednatureandbusinessorientedbehaviorsofChinaTelecomenablesCNCtopartneratthelocallevelHighopportunityforCNCtofillChinaTelecomproduct/servicebacklogUnicomwillbeathreattostarta“pricewar”Variousnicheplayersemergeinlateryears,morethreatthan(carrier)opportunityforCNCMARKETINGSTRATEGYPrinciples:Forlocalaccess,willtargetmediumandlargebusinessesintargetedbuildingsForbackbone,providecarrierservicesForinternational,supportotherbusinessesandalsoofferIDDandrefiling,etc.Inallareas,emphasizequality,service,endtoend,etc.Getafewkeycustomersearly;proveourselvesandthenbuildfurtherAssumptions:Carrierandlargeandmediumsizedcorporationsarethekeyfocusespeciallythoseintelecom-intensiveindustriesAssumeagrowingdemandforbusinesstelecomserviceswillneedbothhighandlowgrowthscenariosNeedtovalidatethewillingnessofkeycustomerstoswitch,andtheiranticipatedareasoffuturedemandgrowthIPphonestillthesourceofrevenueinthenearfutureDial-upISP(171)mayconflictwithISPcarrierinterests,butcouldalsoserveasstrategicinroadforfuture3G(1)(1)NotinscopeofthisprojectCONTENTKeystrategicprinciplesRegulatoryoverviewMarketoverviewCompetitionoverviewBusinessmodelsNextstepsREGULATORYHIGHLIGHTSOurkeyassumptions:MIIregardsCNC’sIP-basedlicenseasFullServicelicense,butlacksclearregulatorydocumentation.Incaseoflocalinterpretationdifference,MIIiswillingtoclarifyonbehalfofCNCe.g.ambiguityonlocalfixedline(CNCnumber)CNCwillbegrantedInternationalGatewaylicenseby1Q2000CNCIPnetworkprotectedbythecurrentfixed/mobileinterconnectregulationCNCnotrequiredtomeetspecificcoveragetargetsforthenearfuture(2-3years)Themarketwillbeopenedupgradually,withFDIincreasing:morevalueaddedserviceprovidersby2003moreI-Phoneprovidersby2001nonewFullServiceproviderstill2004/2005AccountsettlementspecificforI-Phonewillberegulatedafterthetrialstageends.ItwillbelowerthantheRMB0.14/minrateforbasictelecomnetworksonapercallbasisEqualaccessbyprefix/pre-selectin1year;numberportabilitymaytakeanother1-2yearsatleastCNCwillhaveLMDSspectrumCNCanticipatesawell-intentionedregulator,withvarieddegreesofcontroloverlocalincumbentpracticeNoneoftheseassumptionsare““guaranteed;””CNCmustfightaggressivelyforthemKEYREGULATORYISSUESANDIMPLICATIONSServicelicensesFullServicelicenseinterpretationInterconnectenforcementAccountsettlementPricingandrebalancingROWandaccessFrequencyspectrumallocationandfeesUniversalServiceObligationEqualAccessNumberingandportabilityIGWlicenseimportanttocompetitiveness,sizeofcustomerbaseand#ofpartnersMIInotificationoneachinstanceaddsdelaytoCNClocalinterconnectionTimetomarketineachcityaffected,detractCNCresourcesFutureInterconnecteconomicsFuturepricecompetitivenessvs.otherplayers(e.g.CT)economics;pricecompetitivenessvs.CTCase-by-caselocalcoordinationandnegotiationdelaylocalaccessbuild-out;mayalsobeexpensivetoobtainTimetomarketforlocalaccessbuild-outbyLMDSaccesssolutionsSubsidizingincumbentforUSOaffectcoststructureofnewentrantsUnabletoreachCTlocallinecustomerMediumtermimplication:on-netvoicenottargetedforthenear4-5years3fullservicecarrierincludingCNCMorelicensesforvalue-addedserviceproviders(typeII)MIIsupportsCNCIPbasedlicenseasFullServiceLicenseButlackofcleardocumentationmaycauseconfusionatlocallevelBasedoncooperationofcarriersArbitration/settlementprocessexistbuttimeconsumingMildpunishment,lawsuitaslastresortForcurrentIP-phonetrial,feesnotsettledLikelyfuturesettlement:LDcarrierpayslocalPSTNoperatorRMB0.14/minPricefloorlikelyspecifiedforincumbentbyregulationNoimminentinitiativeforrebalancingLegallyfeasibleforpublictelecomcarrier(e.g.CNC)PracticewillhavetocoordinatewithmunicipalitiesandinfrastructurebuildingControlledbyMIIinco-ordinationwithPTAsFrequencynotlikelytobeauctionedUSOforincumbentwithcontributionfromnewentrant2-3yearsbeforetransparentandequitableapproachPrefixbasedsolutionprovidedbyregulationin1yearNumberasnationalresourcescontrolledcentrallyFeewillbecollectedforoccupationofnumberresource2-3yearsbeforeportabilityregulationsImpactonCNCHighest/ImmediateHigh/MediumTermKeyissuesAssumptionImplicationtoCNCKEYREGULATORYBODIESANDRESPONSIBILITIESOtherdepts,e.gSETCVariouslawmakingbodiesNPCStateCouncilDept.ofRadioFrequencyAdministrationTelecomAdministrationBureauOtherdepts.ProvincialTelecomAdministrationBureauChinaTelecomNationalCompanyMunicipalLevelTelecomAdministrationBureauTelecomOperatingEntities:e.g.CTfixedlineProvincialgovernmentMIIAdministrationOperationsNationalProvincialMunicipalityDrafting,passingoftelecomlawsandstatues,e.g.ChinaTelecomsLawInternational,NationalandInter-ProvincialscopelicensegrantingHighestlevelofregulatoryenforcement/arbitrationInternationalGatewayadministrationNationalleveltelecomresourcescontrol(e.g.numbers,frequencyspectrums)ProvincialleveltelecomadministrationProvinciallevellicensegrantingProvinciallevelregulatoryenforcementfocusoncoordinationIntheprocessofsplittingoperationandadministrationAnumberofMunicipalLevelTABsareyettobecreatedLimitedenforcementpowerOperationandadministrationnotseparateSettleinterconnectandotherdisputesWhennotsettledbyprovincial&municipalcoordination,propagateuptoprovinciallevelandMII…PTAsPTBSource:PyramidResearch;BCGanalysisKEYLICENSEASPECTSANDIMPLICATIONTOCNCFullServiceandInternationalValueaddedservicesownershipGeographicscopeDurationlicensefeesPerformancetargetsTechnologyKeyAspectsNumberoflicensestightlycontrolled:atmost3in2003,includingCNCCNCfullservicelicenseexpected1Q2000Internationallicensestightlycontrolled:atmost4in2003,includingCNCCNCIGWlicenseexpectedbyEOY1999Morethan4value-addedservicelicensespossibleControl-shareforeignownershipnotallowedinbasictelecomandpublicdatatransportservicesUpto50%ofFDIinvalueaddedserviceprovidersIntraprovincialservicesundercontrolofprovincialTABsNolimitRegulationwillrequirelicensefeesRegulationwillspecifyclearservicebuildouttargetsRegulationswillbetechnologyneutralButwillgivepreferencetonewtechnologyAssumptionsCurrentregulationonlycoverinterconnectionbetween7typesoflicensedbasictelecomcarriers(e.g.NLD,local,wireless,international)WithIP-phonelicense,CNCneedstonegotiatewithCTlocalbranchescitybycityCNCIPbasedbandwidthwholesaleservicenotcoveredinpublishedregulation,addsdelayinlocalnegotiationNumberofpotentialcustomersforcarrier’scarrierservicesSpeedofestablishmentandcoverageoftargetedcustomerforcarrier’scarrierserviceFinancialstrengthofnewentrantcustomersIntra-provincialLMDSservicerequireapplicationineachtargetedareaCompetitor’sabilitytolockoutkeyserviceareasLimiteddegreeofimpactoneconomicsAddsplanningandlocalcoordinationpressuretoCNClocalaccesssolutionsCNCIP/DWDMbackbonereceivepositiveinfluenceImplicationtoCNCNATURE,SCOPEANDNUMBEROFLICENSESSource:BCGanalysisVSATtransportserviceInternationalNLDOn-netvoiceIPbackboneIP-phone(includinginternational)WirelessPagingVAS(e.g.ISP,VPN)ServicenatureOwningsatelliteMaintainsatellitechannelVSATbasestationsOwnership&operationofinternationalgatewaysInterconnectwithforeigncarriersLeasingIDDchannelsandlinesBuilding&operatingofnationalswitchesandtrunklinesMaintainingPOPisnationwideProvidebasicvoice&datanationaltransportOwnership&operationoflocalaccessnetworksOwnershipoflastmileProvidebasiclocalvoice/datatransportandaccesstoNLD/IDDBuildingandleasingofbroadbandIPbasedbackbonetransportcapacityProvideIPbasedvoiceserviceNorequirementininfrastructurebuildingIncludinginternationalIPbasedLDBuilding&operationoflocalBSCnetworkProvidewirelessvoiceservicesInterconnectwithnationaltransportcarrierBuilding&operationofLocalPagingNetworksInterconnectwithnationaltransportcarrierWithorwithoutbuilding&operationoflocalnetworkOfferweb-hosting,VPN,callcenterservices,etc.ScopeNationalcoverageCrossinternationalpointofpresenceServicenationaltransportcarriersCrossprovincialboardersHaveaccesstointernationalPOconnectsServicelocalPSTNsCoverslocalserviceareas,(e.g.citiesmunicipalities)CrossprovincialboardersAccesstointernationalpointsofconnectCovers12-25trailcitiesAccesstointernationalpointsofconnectCoverslocalserviceareas:citiesmunicipalitiesMajorityinlocalscope4nationalcoveragePrimarilyinlocalscopeNo.offuturelicensesRemain3forthenext6years(CT,Unicom,andCNC)3Inthenext6years(CT,Unicom,CNC)3Inthenext6years(CT,Unicom,CNC)4~5in1-2years5-6possibleinthenext1~2yearsMultiplelicensespossibleinthenext4-5yearsNumerousnationalscopelicensespossibleinthenext2yearsNumerousmorelicenses(withFDI)possibleinthenext2yearsLicensecontrolledbyMIIMIIMIIMIIMIIMIIMIIPrimarilybyprovincialgovernmentProvincialgovernmentNo.ofcurrentlicenses13223(CT,Unicom,CNC)4Trailstage22nationalscope;multiplelocalUnlimitedBasictelecomservicesRemain1forthenext6yearsINTERCONNECTIONISSUESANDIMPLICATIONTOCNCKeyIssuesAssumptionsImplicationtoCNCObligationclearlyspecifiedbyregulationforinterconnectionbetween7typesoftelecomnetworklicensedoperatorsCNC’sIPbroadbandnetworkreceiveequivalentprotectionMIIsetstechnicalspecificationofinterconnectsolutionsClearprovisiononcostandownershipoftechnicalassetFromtimeofwrittenrequest,interconnectcompletewithin:2monthsifonlyCOdatamodificationisinvolved4monthsifcapacityexpansionneeded7monthsifnewPOI(1)neededTimeframenotstrictlyadheredto,variesfrom4-6monthsDisputesettledprimaryviacoordinationArbitratedbyMIIandlocalgovernmentViolationfineisverylow(30,000RMBmaxperoffense)Possibletoclaimforcompensationduetonon-cooperationofincumbents(thelastresort)RMB0.07/minforPSTNaccessofeachendofcallpathSettlementforIPbasedwillfollowschemewhentrialfinishesIncumbentsprovidecabinetroomandconduitaccessIncasethere’snoexcessconduitcapacity,incumbenthastoprovidefeasibleexpansionplanLocalpracticewillvaryIncumbentchargesrentalfeeforconduitaccessIncumbentchargesforleasedlineneededforinterconnectInfrastructureandnetworkinvestmentrelatedtointerconnectareresponsibilityofbothparties,separatedfromPOIIncumbentobligationtointerconnectInterconnecttimeframeEnforcementAccountsettlementAccessandcollocationChargesandfeesIfCNCnetworkisnotcoveredbyregulation,localnegotiationwillleaveloopholeforincumbentandadddelayIncumbentlocalpracticevaries,addcomplexityanddelaytoprojectIncumbentcantakeadvantageoftimeframeloopholes,adddelaysatlocallevelCentralcontroloverlocalTAB(2)variesduetovarieddegreeofseparation,leadtodifferentdegreeofjustandresolutiontimeframeUpwardpropagationtoMIItimeconsuming,addingdelaystoresolutionFutureeconomics:upto30%ofrevenuepaidtoPSTNbasedon0.30/minIPrateIncumbentcantakeadvantageofcapacityconstraintstodelayinterconnectatlocallevelSomeincumbentlocalbranchesrequireCNCtopayforinvestment,ownershipgoestoincumbent,addscosttoCNCserviceNote1:PointOfInterconnect2:TelecommunicationsAdministrationBureauCLEARGUIDANCEFORINTERCONNECTALREADYPUBLISHED,LOCALPTAOBLIGEDTOFOLLOWLocalPTAcanberesistant,alsoitsorganizationnotsuitableforquickexecutionThepolicydecisionrequestinglocalPTAstocorporatewithinterconnectiontricklesfromtopdown:thecentralÞprovincialPTAÞcityPTACityPTAbeforeimplementationwillgenerallyaskforleadtimeforverificationwithupperlevels.E.g.insomecasesnewentranthastowaitforextendedtimeperiodforthisprocessUndertheMarketDepartment’’scoordination,thereareupto18independentdepartmentswithineachcityPTAtocooperatefortheexecutionandresourceplanningofinterconnectEachofthesedepartmentcanadddelaytotheprocess,leadtimesaddupIncaseofinsufficientresource,therequestingandapprovalprocessforexpansion/upgradeisevenlongerLocalPTAcaneasilyuseresourceconstraintasanexcusefordelayininterconnection…ButinterconnectionisfeasibleCNChassofarbeenabletoreachinterconnectcontractatprovinciallevelsMostPTAsinCNC’stargetcitiesdisplayedtimelycooperationInordertoensurequickexecution,CNCshouldUnderstandandincorporateintoplanningprocessthestatusofincumbentnetworkresourcesGiveleadtimeinplanningandcommunicatingintentiontointerconnectwiththeincumbentBuildstrongcommunicationchannelwithalllevelsofPTAsCo-ordinateforgoodtimingacrossalllevels;parallelprocessingtominimizetimeneededandclearbottleneckBACKUPTHEPROCESSOFLOCALINTERCONNECTISGENERALYSMOOTHButThere’’sGreatDifficultyinSomeCitiesInterconnectinmajorcitiesissmoothe.g.BJ,SH,GZGreatdifficultyinsomecitiese.g.WuhanFastagreementreachedFromnegotiationtoimplementationusuallytakes2-3weeksTakes4-6monthtocompletenegotiationIssues:- localCTbranchattemptedtocurtailCNCbyforbiddingconnectionsofmultiplelinesatCNClevelResolution:- resorttoregulatoryprovisiontoreachIPphoneinterconnectagreement- pushoffmultiplelineissueasfuturenegotiationagendaBACKUPTERMINATIONSETTLEMENTMAYREDUCECNCMARGIN(I)CurrentLikelyscenariosforY2000EnduserCustomerpayslocalPTAforPSTNusagee.g.RMB0.1every3mintoPTANosettlementpaidbyCNCtoPTACustomerpayslocalPTAforPSTNusagee.g.RMB0.1every3mintoPTANosettlementpaidbyCNCtoPTACNCpaysRMB0.14/mintoPTAforbothoriginationandterminationCNCchargescustomerIP-phonecarrierratee.g.RMB0.3/minpaidtoCNC(debitfromprepaidIPphonecard)CNCchargescustomerIP-phonecarrierratee.g.RMB0.3/minPerminuteIPrate¥0.44/minpaidtoCNCotherwiseCNCseemarginreducingNosettlementNosettlementNosettlementCNCCNCEnduserPTASwitchSHPSTNSwitchCNCbackbone(1)SwitchSwitchBJPSTNPTATransmission(paidbyCNC)Fees:12Transmission(paidbyCNC)Note1:CurrentlyleasedfromCT.OwnbackbonebyJuly2000ExampleInter-connectionBackupTERMINATIONSETTLEMENTMAYREDUCECNCMARGIN(II)Example:NationalLongDistanceBackupCNCpaysPTACNCpaysPTAKeepIP-phonepricethesameCustomerpaysPTA(1)IP-phonepriceCustomerpaysPTAIP-phonepriceNewIP-phonepriceCurrentIP-phoneTrialStagescenario:nosettlementCNCAlternativeICNCAlternativeIIPossiblescenariofor2000:nosettlement1RMB/minNote1:PTAchargescustomeron3minuteunits,RMB0.18per3min.CalculationforthisexampleusesaverageperminuterateofRMB0.06,assumingcustomercallslongenoughduration.Source:BJPTAPossiblescenariofor2000:RMB0.14/minsettlementrateforbothoriginationandterminationends2IncreaseIPpricetocoversettlementcostCustomerdoesn’’tpayPTAbutperceiveIP-phonepriceincreaseCNCmaintaincurrentIP-phonerevenueKeepIPpricesameCustomerdoesn’’tpayPTAnorperceiveIP-phonepriceincreaseCNCpaysPTAoutofIP-phoneincomeCNCrevenue=54%ofcurrentIP-phonerevenue0.30.440.360.36CNCretains100%ofIP-phonepriceasrevenueCNCretains100%ofIP-phonepriceasrevenueTheRMB0.14/minsettlementratespecifiedbycurrentregulationisbasedontraditionalfixedlineeconomics.CNCwouldlobbyfornewsettlementratespecifictoIP-phoneeconomicsKEYPRICINGREGULATIONISSUESANDIMPLICATIONTOCNCKeyIssuesAssumptionsImplicationtoCNCRegulationfollowscost-basedpricingguidelineCarriersobligedtopublishaccountingdataassistingpricingregulationPricefloorspecifiedforincumbentNewentranthasflexiblepricerangearoundincumbentrateLocal,NLD,IDD,wireless,satelliteNationalleasedlinesPriceBureauwithineachprovincialgovernmentsetspricesaccordingtolocalstandardoflivingandinflationratesLocalPTAswillhaveautonomySincelocalnetworkshavebeenbuiltbylocalPTAinvestments,localPTAhasstronginfluenceonlocalpricelevelsGeneralpricingrulesDifferentialTreatmentCentralcontrolLocalcontrol/GeographicpracticeUsuallyhighinitialCNCcostpositionduetoleasingaccessandsettlementShorttermuncertaintyinpricebasedcompetitivenessSomeflexibilityinpricingofCNCproductofferingAdvantageouslongtermcompetitioncapabilityoverincumbentClarityinpricingisfavorabletoCNCButlimitsCNCpricingflexibilityDisadvantageouslocalpricebasedcompetitivepositioninsomegeographiesVariedcoststructureacrossgeographiescomplicatesproductmanagementprocess,difficultforCNCtohaveconsistentpricing,andhence,image.LEASEDLINECOSTHIGHESTAMONGINTERCONNECTCOSTSApproximatelyRMB134K/monthtoLinkupOneCityItemCostpermonth(inRMB1,000)LeasedlinetolocalPTACapacity:2MbpsNumberofchannels:30DomesticLDtransport(1)TotalforconnectinguponecityLeasedlinetointernationalgatewayE1capacityTotalforIDDfromonecity9100-150109-159Þ134average320454average(1)BeforeCNCbackboneconstructioncompletes,bandwidthforthissegmentisleasedfromChinaTelecomBackupROWANDISSUESRELATEDTOBULIDINGLOCALLOOPKeyIssuesAssumptionsImplicationtoCNCTheoretically,CNCcanassumeprivilegedaccesstopublicresources,e.g.bridgesandroadsThereisnospecificdefinitionofROWinmostlocalitiesInpractice,there’’snofreeaccessOntimefeechargedfordiggingashighasRMB20KperkmreimbursementtolocalmunicipalitiesLaboraccountfor5-10%oftotalcostConduitsinbridgesandcommercialbuildingsownedbymunicipalgovernmentsConduitsinresidentialarealargelyownedbyCTConduitaccessauctionedbylocalgovernmentwhenbuildingcompletesOnceauctioned,additionalconduitscannotbeeasilyaddedfor4-5yearsUtilityprivilegeAccessfeesandcostOwnership&controlSchedulingTheoreticalutilityprivilegedoesnotguaranteelocalcooperationLocalaccesstoconduitinmostcitiesprimarilyrelyonrentingfromresourceholderse.g.CT,utilitiesetc.Negotiationofrentallargelyonacase-by-casebasisCase-by-casenegotiationwilldelaylocalloopbuildoutConduitaccessrightshavetobepurchasedbackfromexitingholdersPlanningandcoordinationneededtofitscheduleFREQUENCYFORWIRELESSBBNEEDTOBEALLOCATEDCurrentlyOnlyNarrowBandWirelessSpectrumAssignedKeyIssuesAssumptionsImplicationtoCNCNoclearregulationavailableandfiercecompetitionexpectedinfrequencybandsforLMDS(25-38GHz)1890-1900MHzand1960-1980MHzreservedforFDDModeWLL1900-1920reservedforcordlessstandardse.g.DECTWirelessdatacomin821-825and866-870MHzrange,NOvoicetrafficispermittedinthisrangeFrequencymanagementpoliciesimplementedbylocalDTAs,inconjunctionwithPTAsandPTBsLocalfrequencyallocationisissuedafterPTAtestandMIIexamination,aprocessof6-12monthsAllocationremainsfixedfor3-5yearsonaverageFrequencypolicieshandledbylocalDTAs,problemsresolvedlocallyandappealedtoMII1975-1980MHzbandoccupiedbyDGT’swirelessaccessnetworkinSH,BJ,GZ,SZ,FZandXiamen1890-1895and1970-1975MHzoccupiedbyUnicominCD,TJandCQLocalwirelessaccesslicensesneedtobeobtainedfromlocalPTAsPrimarilytobecontrolledinsteadoffrequencyauctionsNooverallregulationbackingonetimesolutionRooftopaccessandbuildingaccessdependoncase-by-casenegotiationswithpropertyownersFrequencybandallocationAdministrationoffrequenciesLicenseofserviceFrequencyfeesRooftopaccessReservedfrequencyandavailableLMDSmodulationaffectsviabilityandqualityofCNCaccesssolutionsLongcircleoffrequencyallocationprocesswillimpacttime-to-marketforCNCsolutionsOccupiedfrequencyspectrumsinkeytargetcitiesexpecttotakelongcycleofnegotiationandmigrationCostoflocalwirelessaccesssolutionslocallicenseapplicationcycledelayandvariationWillintroducedelaysinkeycitiese.g.BJ,SHandGZTimetomarkettokeytargetcustomersOTHERREGULATIONSANDOBLIGATIONSKeyIssuesLikelyscenarioImplicationtoCNCLesstransparentpracticeslikelytoremainfor4-5yearsbeforeequitablepoliciesaremadeDuringtheinterim,incumbentissubsidizedforUSObyothercarriers,reflectedinaccountsettlementprices:RMB0.07/mininsteadofRMB0.044/minNewentrantnotexpectedtobeobligated…InsteadindirectlyparticipateinpayingincumbentsubsidyviahigherpricesExpecttobethoroughlyaddressedover1-2yearstimeRegulationprovidesgeneralenduserrighttochooseLDcarrier,accessprovidertoassigndefaultLDcarrierEnforcementisresponsibilityoflo