1、CHINA NETCOM BUSINESS PLAN UPDATE,December 14, 1999 - Beijing,TODAYS OBJECTIVES,Review the overall analysis of regulation, competition, and market developmentDiscuss the specific implications for CNC strategyReview the specific draft business models for CNC How we might attack the business, carrier,
2、 and IDD/DLD marketsWhat key trade-offs we need to makeWhat are the key success factors and assumptions?Discuss the initial economics of these business models, and of CNC overallDiscuss the specific next steps in two key areas:How to finalize and endorse the overall CNC business modelHow to move for
3、ward with the refined financials, organization design, and the plan for implementation,CONTENT,Key strategic principlesRegulatory overviewMarket overviewCompetition overviewBusiness modelsNext steps,KEY CNC STRATEGIC PRINCIPLES,The objective of these principles is to provide further clarity in the d
4、evelopment and evaluation of the CNC business modelThese will be revisited and refined as the project progressesOur development of business models will seek to be aligned with the principlesStrategic principles and key assumptions will be considered in the following aspectsCNC shareholdersBackbone b
5、usinessLocal access businessInternational gateway businessRegulatory strategyCompetitive strategyMarketing strategy,CNC SHAREHOLDERS,Principles:Leverage shareholders concerted vision in creating a new generation IP broadband communication infrastructure and a profitable, successful companyLeverage s
6、hareholders existing backbone assets, local access assets, research capabilities and local government relationships to secure time-to-market and create competitive advantageSet a model of a new type of “SOE”, as efficient as the best of the FIE/private companies; beat shareholders expectations by de
7、livering high returnAssumptions:CAS: strong interest in seeing CNC successful and profitable quickly, stands ready for favorable regulatory influence and research support; wants opportunities for networking R how to handle?,BACKBONE BUSINESS,Principles:Target advanced backbone among 15 key cities in
8、 Eastern China; start with 2 cores from shareholders but quickly build own networkUse backbone for a variety of wholesale and retail voice and data servicesMaintain the leading edge IP/packet network, both for technological superiority and to fulfill shareholder missionMaintain the best cost positio
9、n, using ROWs, purchasing clout, right technologyBuild reserve capacity/conduit to deter othersAssumptions:The costs of construction and ROW will be the majority of new network costsvirtually all of the network will use MOR or SARFT right of wayNetwork will be IP or packet in natureDeployment plan w
10、ill keep costs low, build out quickly, and create good positionlay large number of conduits in one timelater fill, light up, and color fiber strandslease out conduit/fiber/bandwidth to maximize return (utilization),LOCAL ACCESS BUSINESS,Principles:Be very focused in local deployment, targeting prior
11、ity business areas onlyEmphasize broadband to the customer, using FTTB and LMDS where logicalSeek strong local market share, especially in new data services growth areasDifferentiate from China Telecom by superior services, quality, responsiveness Build strong local team to enable fast service respo
12、nseEmphasize “end to end” network ownership and managementAssumptions:SH, BJ, GZ, and SZ business districts as targets for the near termThese account for the vast majority of business telecom demandNeed to set specific estimates for timing and sequence of deploymentAssume that CNC will have access t
13、o key city ROW, such as subway systemsWill need specific assumptions about the ease and cost of hooking up buildingsAssume that primary emphasis will be on FTTB, but that LMDS can play an important role, especially in initial deployment and in secondary citiesWill need specific assumptions about tim
14、ing of adding secondary cities,INTERNATIONAL GATEWAY BUSINESS,Principles:CNC will be one of few players with a full international licenseVital to enable CNC to provide end-to-end services, global data services, and higher margin IDD serviceHK gateway link may be strategically importantAssumptions:HK
15、 as one of the key location for international connectiona major traffic destinationa major relay locationInternational voice remains highly profitable segment in medium term futureExpect high growth together with steep price drop in international servicesActively plan ahead for joining international
16、 sub-oceanic cable consortium,REGULATORY STRATEGY,Principles:Must actively lobby for favorable regulatory decisions, together with shareholdersprovide regulators with international benchmarking for best practicesalign CNC objectives with fair competition, and public interestshave effective senior ma
17、nagement focus on lobbying issuesBe careful about committing investment if regulatory issues too uncertainEnsure CNC strategy addresses national economic development prioritiesPay careful attention to managing relations with China TelecomExpected WTO in 2000 will imply greater opening of the market
18、in the futureAssumptions:At least a 2-3 year window when CNC can continue to enjoy favorable policy treatment, while also working to straighten out regulatory issues at local levelMany key regulations remain in grey areas, where CNC can play a role in shaping the policyWill need to make specific ass
19、umptions on a number of regulatory issues, and develop several scenariosAssume that CT and Unicom are the only full service competitors, but several niche playersWTO will introduce FDI into Chinas telecom market by 2002, but infrastructure play remain tightly controlled (still limited competition) u
20、ntil 2004/5may be opportunity for some form of partnership with foreign telcos,COMPETITIVE STRATEGY,Principles:Focus on the best service quality, supply what customers need, avoid competing on priceBuild both “highways” and “tollbooths”Prepare for rapidly changing industry structureBe careful in pos
21、itioning toward China Telecom: complementary and addressing unmet needsgrowing the whole marketThe only viable alternative to China Telecom for carriersThe only true “end to end” network across China, with clear central managementAssumptions:Technology leads to continual change in industry structure
22、The decentralized nature and business oriented behaviors of China Telecom enables CNC to partner at the local levelHigh opportunity for CNC to fill China Telecom product/service backlog Unicom will be a threat to start a “price war”Various niche players emerge in later years, more threat than (carri
23、er) opportunity for CNC,MARKETING STRATEGY,Principles:For local access, will target medium and large businesses in targeted buildingsFor backbone, provide carrier services For international, support other businesses and also offer IDD and refiling, etc.In all areas, emphasize quality, service, end t
24、o end, etc.Get a few key customers early; prove ourselves and then build furtherAssumptions:Carrier and large and medium sized corporations are the key focusespecially those in telecom-intensive industriesAssume a growing demand for business telecom serviceswill need both high and low growth scenari
25、osNeed to validate the willingness of key customers to switch, and their anticipated areas of future demand growthIP phone still the source of revenue in the near futureDial-up ISP (171) may conflict with ISP carrier interests, but could also serve as strategic inroad for future 3G(1),(1) Not in sco
26、pe of this project,CONTENT,Key strategic principlesRegulatory overviewMarket overviewCompetition overviewBusiness modelsNext steps,REGULATORY HIGHLIGHTS,Our key assumptions:MII regards CNCs IP-based license as Full Service license, but lacks clear regulatory documentation. In case of local interpret
27、ation difference, MII is willing to clarify on behalf of CNCe.g. ambiguity on local fixed line (CNC number)CNC will be granted International Gateway license by 1Q 2000CNC IP network protected by the current fixed/mobile interconnect regulation CNC not required to meet specific coverage targets for t
28、he near future (2-3 years)The market will be opened up gradually, with FDI increasing:more value added service providers by 2003more I-Phone providers by 2001no new Full Service providers till 2004/2005Account settlement specific for I-Phone will be regulated after the trial stage ends. It will be l
29、ower than the RMB0.14/min rate for basic telecom networks on a per call basisEqual access by prefix/pre-select in 1 year; number portability may take another 1-2 years at leastCNC will have LMDS spectrumCNC anticipates a well-intentioned regulator, with varied degrees of control over local incumbent
30、 practice None of these assumptions are “guaranteed;” CNC must fight aggressively for them,KEY REGULATORY ISSUES AND IMPLICATIONS,Service licensesFull Service license interpretationInterconnect enforcementAccount settlementPricing and rebalancingROW and access Frequency spectrum allocation and feesU
31、niversal Service ObligationEqual AccessNumbering and portability,IGW license important to competitiveness,size of customer base and # of partnersMII notification on each instance adds delay to CNC local interconnectionTime to market in each city affected, detract CNC resourcesFuture Interconnect eco
32、nomicsFuture price competitiveness vs. other players (e.g. CT)economics; price competitiveness vs. CTCase-by-case local coordination and negotiation delay local access build-out; may also be expensive to obtainTime to market for local access build-out by LMDS access solutionsSubsidizing incumbent fo
33、r USO affect cost structure of new entrantsUnable to reach CT local line customerMedium term implication: on-net voice not targeted for the near 4-5 years,3 full service carrier including CNCMore licenses for value-added service providers (type II)MII supports CNC IP based license as Full Service Li
34、censeBut lack of clear documentation may cause confusion at local levelBased on cooperation of carriersArbitration/settlement process exist but time consumingMild punishment, law suit as last resortFor current IP-phone trial, fees not settledLikely future settlement: LD carrier pays local PSTN opera
35、tor RMB0.14/minPrice floor likely specified for incumbent by regulationNo imminent initiative for rebalancingLegally feasible for public telecom carrier (e.g. CNC)Practice will have to coordinate with municipalities and infrastructure buildingControlled by MII in co-ordination with PTAsFrequency not
36、 likely to be auctionedUSO for incumbent with contribution from new entrant2-3 years before transparent and equitable approachPrefix based solution provided by regulation in 1 yearNumber as national resources controlled centrallyFee will be collected for occupation of number resource2-3 years before
37、 portability regulations,Impact on CNC,Highest/Immediate,High/Medium Term,Key issues,Assumption,Implication to CNC,KEY REGULATORY BODIES AND RESPONSIBILITIES,Other depts, e.g SETC,Various law making bodies,NPC,State Council,Dept. of Radio Frequency Administration,Telecom Administration Bureau,Other
38、depts.,Provincial Telecom Administration Bureau,ChinaTelecomNationalCompany,Municipal Level Telecom Administration Bureau,Telecom Operating Entities: e.g. CT fixed line,Provincial government,MII,Administration,Operations,National,Provincial,Municipality,Drafting, passing of telecom laws and statues,
39、 e.g. China Telecoms LawInternational, National and Inter-Provincial scope license grantingHighest level of regulatory enforcement/ arbitrationInternational Gateway administrationNational level telecom resources control (e.g. numbers, frequency spectrums)Provincial level telecom administrationProvin
40、cial level license grantingProvincial level regulatory enforcement focus on coordinationIn the process of splitting operation and administrationA number of Municipal Level TABs are yet to be createdLimited enforcement powerOperation and administration not separateSettle interconnect and other disput
41、esWhen not settled by provincial & municipal coordination, propagate up to provincial level and MII,PTAs,PTB,Source: Pyramid Research; BCG analysis,KEY LICENSE ASPECTS AND IMPLICATION TO CNC,Full Service and InternationalValue added servicesownershipGeographic scopeDurationlicense feesPerformance ta
42、rgetsTechnology,Key Aspects,Number of licenses tightly controlled: at most 3 in 2003, including CNCCNC full service license expected 1Q 2000International licenses tightly controlled: at most 4 in 2003, including CNCCNC IGW license expected by EOY1999More than 4 value-added service licenses possibleC
43、ontrol-share foreign ownership not allowed in basic telecom and public data transport servicesUp to 50% of FDI in value added service providersIntra provincial services under control of provincial TABsNo limitRegulation will require license feesRegulation will specify clear service buildout targetsR
44、egulations will be technology neutralBut will give preference to new technology,Assumptions,Current regulation only cover interconnection between 7 types of licensed basic telecom carriers (e.g. NLD, local, wireless, international)With IP-phone license, CNC needs to negotiate with CT local branches
45、city by cityCNC IP based bandwidth wholesale service not covered in published regulation, adds delay in local negotiationNumber of potential customers for carriers carrier servicesSpeed of establishment and coverage of targeted customer for carriers carrier serviceFinancial strength of new entrant c
46、ustomersIntra-provincial LMDS service require application in each targeted areaCompetitors ability to lockout key service areasLimited degree of impact on economicsAdds planning and local coordination pressure to CNC local access solutionsCNC IP/DWDM backbone receive positive influence,Implication t
47、o CNC,NATURE, SCOPE AND NUMBER OF LICENSES,Source: BCG analysis,VSAT transport service,International,NLD,On-net voice,IP backbone,IP-phone (including international),Wireless,Paging,VAS(e.g.ISP,VPN),Service nature,Owning satelliteMaintain satellite channelVSAT base stations,Ownership & operation of i
48、nternational gatewaysInterconnect with foreign carriersLeasing IDD channels and lines,Building & operating of national switches and trunk linesMaintaining POP is nationwideProvide basic voice & data national transport,Ownership & operation of local access networksOwnership of last mileProvide basic
49、local voice/data transport and access to NLD/IDD,Building and leasing of broadband IP based backbone transport capacity,Provide IP based voice serviceNo requirement in infrastructure buildingIncluding international IP based LD,Building & operation of local BSC networkProvide wireless voice services Interconnect with national transport carrier,
