波士顿为某电信企业制作：战略咨询报告完整版report2--p52
- 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 planMajor issuesExpected output 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 RATE Anticipated 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 MODEL Additional 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
- 26. …BUT COMPRISES TREMENDOUS UPSIDE POTENTIALInternet AccessLeased LinesILDDLDLocalOtherPortalBroadband ContentWeb Hosting/ CollocationExisting ServicesEmerging Services98-04 CAGR124%40%-10%7%11%IP VPNBroadband Network Applications71%83%186%98%111%286%00-04 CAGRMarket size (RMB BN)Market size (RMB BN)7896187Overall16%Overall86%332Source: CNC team inputs; foreign benchmarks; BCG analysis
- 27. CUSTOMER NEEDS EXIST THRUGHOUT THE VALUE CHAIN CT’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 QUALITY Hypothesized 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 MARKETS Example: 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 INVESTMENT Example: 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 SCENARIOS Example: 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
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