Broadband China? - What and Why

iBIT, Inc

BROADBAND CHINA?

WHAT & WHY?

November, 2004

Xiaolin Lu

What is this all about?What is this all about?

China cable and telecom industries are

migrating from state-owned to market-driven

industries….

But what to do and why….

Learn from US experience after the bubble,

with so different regulatory environment?

Maybe….

KEY ISSUESKEY ISSUES

Cost Structure ( technology platform)

Regulatory

Environment O

pera

tio

ns

Reali

ty

Business

Opportunities

Wall Street

Perception

AN INTERDEPENDENT WORLDAN INTERDEPENDENT WORLD

Technology Service &

Operation Regulation

HFC HBO, Cost-

reduction FCC Cable ruling

DWDM High-capacity,

lower-cost Broke up of Ma Bell

CM/DSL HSD Title 1

Micro Processor Excel

CHALLENGES TO THE CHALLENGES TO THE

TOP LINETOP LINE

THE RESIDENTIAL PIE: USTHE RESIDENTIAL PIE: US

Cable ILECs Other

Video Voice Data

Source: Paul Kagan Associates

Cable Dominates

Video Market

ILECs Dominates

Voice Market

Cable Leads

High-Speed Data

Market

TELEPHONY USAGE: CHINATELEPHONY USAGE: CHINA

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fixed Line Mobile

mn

su

b

Local

32%

LD

19%

Mobile

43%

Data

6%

Sat

0%

Paging

0%

Telecom System Revenue: 1Q 2004

50.0

60.0

70.0

80.0

90.0

100.0

1Q/02 1Q/03 1Q/04

Fixed

Mobile Competition further

drives down the ARPU

OPPORTUNITIES: OPPORTUNITIES: TRIPLE PLAYTRIPLE PLAY

Create a customer destination Reduce churn

Create differentiation

Build a common platform for innovation and

gain economy of scale

Increase ARPU (Average Revenue Per Unit)

Offensively and defensively change the nature

of services and products

TOP THREE US CABLE COMPANIESTOP THREE US CABLE COMPANIES

54%

36%

15% 14%

0.9

58%

40%

17%

0

0.83

61%

34%

20% 20%

1.1

0%

20%

40%

60%

80%

100%

120%

Basic/HHP DTV % HSD % Voice % RGU/HHP

Comcast Time Warner Cox

Source: Company Data

THE IMPORTANCE OF THE IMPORTANCE OF

THE BOTTOM LINE:THE BOTTOM LINE:

After the bubble, it is not just After the bubble, it is not just

revenue…revenue…

HSD SERVICE REALITYHSD SERVICE REALITY

300

350

400

450

500

550

1Q02 2Q02 3Q02 4Q02 1Q03

56% network cost reduction

77% customer service call reduction

40% marketing cost reduction

70% cable modem cost reduction

58% growth

$M

Source: Comcast

US CABLE INDUSTRY EXPENDITUREUS CABLE INDUSTRY EXPENDITURE

0

2

4

6

8

10

12

14

16

18

1996 1997 1998 1999 2000 2001 2002 2003

In B

illi

on

s

• Total $84 Billion capital expenditure, equates to $1,200 per customer

• With $52/month ARPU that is increasing, the 10 year ROI is huge

Source: Kagan World Media

WALL STREET PERCEPTIONWALL STREET PERCEPTION

US

ARPU/month 72.00

EBITDA Margin 35%

EBITDA 25.2

Capex 10.0

FCF 15.2

Multiple 7

Value/Sub ($) 1,276.8

TECHNOLOGY OR TECHNOLOGY OR

SOMETHING ELSE IS SOMETHING ELSE IS

CHANGING THE USER CHANGING THE USER

BEHAVIORSBEHAVIORS

The cost for 128 kilobytes of memory will fall

below $100 in the near future.

- Creative Computing Magazine

December 1981

HOW TO PREDICT THE FUTURE…HOW TO PREDICT THE FUTURE…

At $100 for 128 KB, 256 MB

would cost $200K

Hard Disk Storage Moore’s Law

Cost per MB Smoore’s Law!

$0

$2,000

$4,000

$6,000

$8,000

$10,000

1956 to 1985

$10,000……….…...………………………………1/10 Cent

$0

$10

$20

$30

$40

$50

$60

1986 to 1993

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

1994 to 2004

Source: Seagate

VIDEO COMPRESSIONVIDEO COMPRESSION

MPEG and ITU are working

jointly on a new standard:

MPEG AVC (Advanced

Video Coding).

AVC is also known as:

H.264, H.26L, JVT, and

MPEG-4 Part 10

Best of breed compression

– very good for HD and SD;

interlaced and film content;

variety of content;

wide range of bit rates.

Commercial

Availability

MPEG-2

MPEG-4

H.264

Media Player

etc.

wavelets

1X 1.66X 3.00X 4.00+X

Now

2004

2005

2006

2007

2008

Encoding Gain Factor

0.001

0.010

0.100

1.000

10.000

100.000

1000.000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

year

do

wn

str

eam

ra

te [

Mb

/s]

V.26 V.27

V.29 V.33 V.34 V.34

V.90

ADSL2+/DOCSIS

VDSL/DOCSIS 2.0

VDSL2/DOCSIS 3.0

ISDN

voicevoice--band modemsband modems

EVOLUTION OF BROADBAND ACCESSEVOLUTION OF BROADBAND ACCESS

PROLIFIC VIDEOPROLIFIC VIDEO

IP+Storage+Portability+….IP+Storage+Portability+….

REAL-TIME VIEWERSHIP IS ERODING

2003/2004 2005 and beyond

Real-time viewing 94.3%

Real-time viewing 81.5%

Real-time viewing 59.9%

VCR/DVD

MSO’s DVR and SVOD

VOD movies

Viewer’s DVR

2.9%

0.6%

0.2%

1.9%

2.3%

6.5%

0.8%

8.9%

VCR/DVD

MSO’s DVR and SVOD

VOD movies

Viewer’s DVR

1.7%

29.4%

1.1%

7.8%

VCR/DVD

MSO’s DVR and SVOD

VOD movies

Viewer’s DVR

2001/2002

Source: Forrester

SOMEHOW, THE SOMEHOW, THE

POLICEMAN DOES HAVE POLICEMAN DOES HAVE

SOME POWERS…..SOME POWERS…..

REGULATION AND BUSINESS: USREGULATION AND BUSINESS: US

Communication

Services

Title 2

Regulation

Requirement

VOICE DATA VIDEO

Open Pipe Franchising

Business Selling Minutes Flat rate

+ Usage

Information

Services

Title 1

Content

Service

Title 6

None

All you can

eat buffet

THE “DRIVERS” FOR FTTHTHE “DRIVERS” FOR FTTH

Competition to Cable MSOs has 63% share of HSD vs 37% for the carriers

Favorable regulatory climate No unbundle requirement on FTTH

Reduced churn on voice Bell have lost 10% of their residential line to UNE-P competition

But…..

DBS earned 18% market share of total TV HH in 5-6 years

At $1,200/HHP cost for aerial construction, and heavy underground buildup mix, can the RBOC afford it, in time?

Verizon SBC BellSouth Qwest

Aerial 45% 28% 32% 13%

Underground 55% 72% 68% 87%

OPTIONSOPTIONS

LEC

Narrowband

Switched DLC

Rebuild

Network Upgrade

Cable modem

Deep Fiber Deep Fiber

PenetrationPenetration

Wireless

Mobility

Broadband

Cable

Broadband

Broadcast

FTTH

CHALLENGESCHALLENGES

Cable ILEC OverBuilder

Embedded

Base HFC Twist Pair None

Upgrade Fiber deep

DOCSIS

xDSL

FTTH

Fiber/metallic

Overlay

Business Triple Play Triple Play Niche market

Challenge BALANCE

• Migrate from one service monopoly to multi-service duopoly • Or perhaps migrate from facility-based monopoly to

facility-independent multi-service duopoly

Source : RHK Inc. (www.rhk.com)

( Thousands )

WORLDWIDE PENETRATIONWORLDWIDE PENETRATION

0

50

100

150

200

250

300

350

400

450

500

Mil

lio

ns

of

Pa

yin

g C

ust

om

ers

2004 2007 2010

DSL

Cable

WiMax

Fiber

LOOKING FORWARD….LOOKING FORWARD….

Source : John Cioffi

CITYCITY--WIDE WIWIDE WI--FI IN CHASKA, MNFI IN CHASKA, MN

City operated, 16 square mile coverage area

Public safety, low-cost residential broadband service

7500 homes passed, 1100 pre-registered

200 cells, <$500,000 CapEx

KEY ISSUESKEY ISSUES

User Behavior

Wall Street Regulation

Bottom Line

Technology