• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
China Broadband Telecommunications 2007 GIGA
 

China Broadband Telecommunications 2007 GIGA

on

  • 1,702 views

GIGA Broadband Telecommunications in China 2007

GIGA Broadband Telecommunications in China 2007

Statistics

Views

Total Views
1,702
Views on SlideShare
1,702
Embed Views
0

Actions

Likes
0
Downloads
46
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    China Broadband Telecommunications 2007 GIGA China Broadband Telecommunications 2007 GIGA Document Transcript

    • BroadbandTelecommunications in China 2007
    • Mobile Broadband Market Outlook in China - Final Report Sep tem ber 2 0 0 7 P ro du ce d f or T ek es b y : BD A C h ina Lim ite d
    • Mobile Broadband Market Outlook in China Table of Content1 TELECOM MARKET OVERVIEW ................................................................................ 1 1.1 CHINA’S TELECOM MARKET KEY TRENDS.............................................................................1 1.1.1 Telecom Service Revenue Growth Has Slowed .........................................................1 1.1.2 Capital Expenditures Remains Flat ..........................................................................1 1.1.3 IP Cannibalization and Fixed-to-Mobile Substitution Are Key Threats .........................2 1.1.4 Uptake of Wireless VAS and Internet Applications Are Key Growth Drivers ................2 1.2 TELECOM SERVICES AND TECHNOLOGIES ............................................................................4 1.2.1 China’s Telecom Market at a Glance ........................................................................4 1.2.2 Forecasts of Key Telecom Services ..........................................................................4 1.3 CARRIERS ...................................................................................................................6 1.3.1 Services and Market Position ..................................................................................62 REGULATORY ENVIRONMENT FOR TELECOM AND MOBILE BROADBAND .............. 8 2.1 INTRODUCTION TO REGULATORY STRUCTURES .....................................................................8 2.1.1 The Lack of Converged Regulatory Body .................................................................8 2.1.2 Telecom and Media Convergence ............................................................................9 2.2 PROMOTION OF INDIGENOUS STANDARDS AND IMPACT ON FOREIGN COMPANIES ......................... 10 2.3 REGULATORY ENVIRONMENT FOR MOBILE BROADBAND ......................................................... 11 2.3.1 Prospects for 3G Licensing ................................................................................... 11 2.3.2 Prospects for Mobile WiMax.................................................................................. 11 2.3.3 Entry Barriers for Basic Telecom Services .............................................................. 123 BROADBAND MARKET OVERVIEW AND OUTLOOK ................................................13 3.1 CHINA BROADBAND MARKET OVERVIEW ........................................................................... 13 3.1.1 Broadband Has Become the Major Form of Internet Access Technology .................. 13 3.1.2 Low Price Is a Key Success Factor ........................................................................ 13 3.1.3 Broadband Applications over the Internet Are Going Popular .................................. 14 3.2 FIXED BROADBAND TECHNOLOGIES WILL MAINTAIN STRONG GROWTH .................................... 15 3.2.1 ADSL to Dominate Broadband Market in the Near Future ....................................... 15 3.2.2 FTTx+LAN Growth Is Modest; Cable Modem Growth Accelerating ........................... 16 3.2.3 WiFi Is Gaining Popularity with End Users ............................................................. 17 3.3 3G MARKET WILL TAKE OFF AFTER LICENSES ISSUED IN 2009 ................................................. 17 3.3.1 3G Is a Must Have ............................................................................................... 17 3.3.2 3G Licensing in 2008 or 2009 ............................................................................... 18 3.3.3 3G Licensing Scenario .......................................................................................... 19 3.3.4 3G User Forecast ................................................................................................. 19 3.3.5 3G Evolution Forecasts ......................................................................................... 21 3.4 FIXED WIMAX HAS LIMITED OPPORTUNITIES..................................................................... 22 3.5 MOBILE WIMAX OVERSHADOWED BY 3G .......................................................................... 24 3.6 MARKET OUTLOOK ...................................................................................................... 264 BROADBAND SERVICE PROVIDER ANALYSIS ....................................................... 27 4.1 FIXED-LINE CARRIERS DOMINATE BROADBAND MARKET ....................................................... 27
    • Mobile Broadband Market Outlook in China 4.1.1 Broadband Market Competitive Landscape ............................................................ 27 4.1.2 Challenges for Broadband Business ...................................................................... 28 4.1.3 Strategies of Fixed-line Carriers for Broadband Service .......................................... 28 4.2 MOBILE CARRIERS’ STRATEGY TOWARD BROADBAND BUSINESS............................................... 30 4.2.1 China Unicom has actively Trialed Ethernet LAN and WiMax ................................... 30 4.2.2 China Mobile is highly Interested in WiMax............................................................ 30 4.3 CABLE OPERATORS AND OTHER CPN OPERATORS’ OPPORTUNITIES ......................................... 31 4.3.1 Cable Operators Are Increasing Investment in Broadband Service .......................... 31 4.3.2 Broadband CPN Operators Face Uncertain Future .................................................. 32 4.4 OUTLOOK FOR FUTURE MOBILE BROADBAND OPERATORS ...................................................... 325 EQUIPMENT SUPPLIERS’ OPPORTUNITIES ........................................................... 34 5.1 OVERALL MARKET POSITION IN TELECOM MARKET .............................................................. 34 5.1.1 Domestic Vendors Dominate Wireline Market and Gain Share in Wireless Market ..... 34 5.1.2 Key Success Factors for Domestic Vendors ............................................................ 35 5.2 SUPPLIERS’ PROJECTED 3G MARKET POSITION................................................................... 36 5.3 COMPETITIVE POSITIONING OF KEY WIMAX SUPPLIERS ........................................................ 376 CONSUMER DEMAND ANALYSIS............................................................................40 6.1 BROADBAND APPLICATIONS OVER THE INTERNET ARE GETTING POPULAR .................................. 40 6.2 WIRELESS INTERNET IS GAINING TRACTION ...................................................................... 40 6.3 MOBILE BROADBAND WILL STIMULATE USER DEMAND .......................................................... 437 EMERGING BUSINESS MODELS FOR MOBILE BROADBAND ..................................45 7.1 VOIP MARKET ANALYSIS .............................................................................................. 45 7.1.1 Broadband VoIP Has Become Popular ................................................................... 45 7.1.2 IM Is Now a Key Communication Tool over Internet ............................................... 45 7.1.3 Market Outlook for VoIP with Availability of Mobile Broadband ................................ 46 7.2 MOBILE MUSIC MARKET ANALYSIS .................................................................................. 47 7.2.1 CRBT has Grown Quickly as the Major Mobile Music Service ................................... 47 7.2.2 Mobile Music Is Facing Challenges as Well as Momentum from Mobile Carriers ........ 48 7.2.3 Market Outlook for Mobile Music with Availability of Mobile Broadband.................... 49 7.3 MOBILE TV MARKET ANALYSIS ....................................................................................... 49 7.3.1 Introduction to Mobile TV..................................................................................... 49 7.3.2 Mobile Operators are Providing Mobile TV Service with SPs .................................... 50 7.3.3 Mobile TV Faces Challenges from Broadcasters ...................................................... 50 7.3.4 Market Outlook for Mobile TV with Availability of Mobile Broadband ........................ 51 7.3.5 Lessons from China IPTV market .......................................................................... 51 7.4 GAMING MARKET ANALYSIS ........................................................................................... 54 7.4.1 China’s Online Gaming Market Comes out Flighting ................................................ 54 7.4.2 Mobile Gaming Market Analysis ............................................................................ 56 7.4.3 Market Outlook for Mobile Gaming with Availability of Mobile Broadband................. 58 7.5 LOCATION BASED SERVICE MARKET ANALYSIS .................................................................... 58 7.5.1 LBS Have a Small User Base in China .................................................................... 58 7.5.2 LBS Face Challenges ............................................................................................ 59
    • Mobile Broadband Market Outlook in China 7.5.3 Market Outlook for LBS with Availability of Mobile Broadband ................................. 60 7.6 MOBILE SOCIAL NETWORKING SERVICE MARKET ANALYSIS .................................................... 60 7.6.1 Mobile SNS Have Accumulated a Great Number of Users........................................ 60 7.6.2 Mobile SNS See Obstacles from Mobile Operators .................................................. 62 7.6.3 Market Outlook for Mobile SNS with Availability of Mobile Broadband ...................... 628 OPPORTUNITIES FOR FINNISH COMPANIES - PRELIMINARYRECOMMENDATIONS ...................................................................................................63 8.1 OPPORTUNITIES FOR MOBILE BROADBAND IN CHINA............................................................ 63 8.2 TECHNOLOGY ADOPTION IN CHINA .................................................................................. 63 8.3 OPPORTUNITIES FOR FINNISH COMPANIES ........................................................................ 63 8.4 PRELIMINARY RECOMMENDATIONS ................................................................................... 65
    • Mobile Broadband Market Outlook in China ExhibitsExhibit 1.1.1: Total Telecom Service Revenue and Annual Growth Rate.......................................1Exhibit 1.1.2: Telecom Revenue Growth and Capex Growth .......................................................2Exhibit 1.1.3: WVAS as % of Mobile Carriers’ Total Revenue ......................................................3Exhibit 1.2.1: Mobile, Fixed, Internet and Broadband Subscribers ..............................................4Exhibit 1.2.2: Forecasts of Telecom Service Subscribers .............................................................5Exhibit 1.3.1: Comparison of Telecom Operators’ Revenue .........................................................7Exhibit 1.3.2: Service Subscribers.............................................................................................7Exhibit 2.1.1: Regulatory Bodies and Their Responsibilities ........................................................8Exhibit 3.1.1: Survey of Internet Users’ Access Technology ...................................................... 13Exhibit 3.1.2: Broadband ARPU Decline .................................................................................. 14Exhibit 3.1.3: Most Frequently Used Internet Services ............................................................. 15Exhibit 3.2.1: Fixed Broadband Forecast Breakdown By Technology ......................................... 16Exhibit 3.3.1: 3G Licensing Scenario and Revenue Share Before and After Restructuring ........... 19Exhibit 3.3.2: 3G User Forecasts ............................................................................................ 20Exhibit 3.3.3: Projection of 3G Evolution Roadmap in China ..................................................... 22Exhibit 3.5.1: Spectrum Map in China ..................................................................................... 24Exhibit 3.5.2: Comparison of Mobile WiMax and 3G ................................................................. 25Exhibit 3.5.3: Global Mobile WiMax Roadmap .......................................................................... 26Exhibit 4.1.1: Broadband Market Breakdown by Service Provider ............................................. 27Exhibit 4.1.2: Number of Cities where Companies Won 3.5 Ghz Spectrum in 2001-2004 ............ 29Exhibit 4.4.1: Opportunities in Mobile WiMax for Different Companies ...................................... 33Exhibit 5.1.1: Share of China’s Telecom Equipment Sales to Carriers in 2006 ............................ 34Exhibit 5.1.2: Vendors’ Share in Key Wireline Sectors in China ................................................. 34Exhibit 5.1.3: Market Share in China Mobile’s GSM RAN ........................................................... 35Exhibit 5.1.4: Accumulated Share in China Unicom’s CDMA RAN .............................................. 35Exhibit 5.2.1: Shares in China’s 2G and 3G Markets ................................................................. 36Exhibit 5.2.2: Share of TD-SCDMA RAN Contracts in 1H 2007 .................................................. 37Exhibit 5.3.1: Market Share of Fixed WiMAX Suppliers ............................................................. 37Exhibit 5.3.2: R&D Spending in 2006 in Absolute Terms and as a Percentage of Revenue ......... 38Exhibit 5.3.3: Market Position or Investment in Mobile Broadband Technologies ....................... 39Exhibit 6.1.1: Most Frequently Used Internet Services ............................................................. 40Exhibit 6.2.1: Key Reasons for Using WAP Service ................................................................... 41Exhibit 6.2.2: Most Popular WAP Services and Applications ...................................................... 41Exhibit 6.2.3: Main Complaints about WAP Services ................................................................ 42Exhibit 6.2.4: Comparison of China Mobile and China Unicom WAP Services ............................. 42Exhibit 6.3.1: 3G Services That Users Are Willing To Pay For .................................................... 43Exhibit 6.3.2: Prices WAP Users Would Accept for 3G Wireless Internet Services ....................... 44Exhibit 7.1.1: Broadband VoIP User Growth ............................................................................ 45Exhibit 7.1.2: Comparison of Wireless / Wireline Accounts and IM Active Accounts by YE 2006 .. 46Exhibit 7.2.1: China Mobile and China Unicom CRBT Penetration .............................................. 47Exhibit 7.2.2: Mobile Music Market Size Forecast ..................................................................... 48Exhibit 7.3.1: Forecasts of Broadband, Cable DTV and IPTV User ............................................. 52Exhibit 7.3.2: Cities Approved for IPTV Services ...................................................................... 52
    • Mobile Broadband Market Outlook in ChinaExhibit 7.3.3: Price and Service Comparison of TV Services ...................................................... 53Exhibit 7.4.1: Online Gaming Market Size and Forecast ............................................................ 54Exhibit 7.4.2: Online Gamers Forecast .................................................................................... 55Exhibit 7.4.3: Age Distribution of Online Gamers ..................................................................... 55Exhibit 7.4.4: Mobile Gaming Market Size and Forecast ............................................................ 57Exhibit 7.5.1: Mobile and LBS Subscribers ............................................................................... 59Exhibit 7.6.1: Mobile SNS Market Size and Forecast................................................................. 61
    • Mobile Broadband Market Outlook in China1 Telecom Market Overview1.1 China’s Telecom Market Key Trends1.1.1 Telecom Service Revenue Growth Has SlowedChina’s telecom service revenue increased by 11% in 2006, the lowest annual growthrecorded since 2001, as a result of flat voice growth, caused by IP (Internet Protocol)cannibalization and price cuts. Internet/broadband and wireless value added services(WVAS) continued to be key growth drivers for telecom operators, reporting 24% and42% YoY growth. WVAS contributed 21.6% of mobile carrier revenues in 2006, up from17.9% a year earlier.Exhibit 1.1.1: Total Telecom Service Revenue and Annual Growth Rate (RMBbillion) 700 16% 15% 18% 600 13% 13% 11% 12% 648 15% 500 584 12% 400 519 461 9% 300 412 357 6% 200 100 3% 0 0% 2001 2002 2003 2004 2005 2006 Telecom Revenue Annual Growth RateSource: MII1.1.2 Capital Expenditures Remains FlatIn 2006, total capital expenditures in the Chinese telecom industry rebounded by 7.9% toRMB 219 billion (EUR 21.9 billion) from previous levels, driven by investment in GSM andbroadband. However, overall capex remained sluggish compared with RMB 255 billion(EUR 34.4 billion) in 2001. o Fixed-line carriers are cautious about further investment because their traditional PSTN business is declining and they are accumulating funds for investments in their anticipated future 3G business. o Mobile carriers are relatively aggressive in expanding coverage and increasing mobile networks’ capacity in order to sustain the strong user growth.Overall, Chinese carriers spent more than global peers at the same revenue level, with acapex-to-revenue ratio of 33.8% in 2006, compared with 10-20% for most tier-1 carriersworldwide. Without 3G, BDA believes the ratio will continue to decline as a result ofreduced capex. Page 1 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 1.1.2: Telecom Revenue Growth and Capex Growth (RMB billion) 700 648 80% 584 70% 600 69% 528 460 60% 500 422 372 49% 48% 50% 400 42% 40% 300 255 35% 34% 207 222 220 203 219 30% 200 20% 100 10% 0 0% 2001 2002 2003 2004 2005 2006 Revenue Capex Ratio of Capex to RevenueSource: MII1.1.3 IP Cannibalization and Fixed-to-Mobile Substitution Are Key ThreatsEmerging companies that provide broadband VoIP over internet, such as Skype, are takingoff in China. This is mainly due to a mix of plans that offer free computer-to-computerVoIP as well as much cheaper computer-to-phone and phone-to-computer VoIP. Over100 unlicensed small companies in China provide broadband VoIP to individuals orenterprises through cooperation with carriers.Due to VoIP’s much lower price, fixed-line carriers have been reporting decreasingrevenue from long distance voice service since 2005. Compared with 2004, ChinaTelecom and China Netcom’s long distance revenue declined by a two-year CAGR of 2%and 5% respectively in 2006.Fixed-to-Mobile substitution has accelerated over the past few years. Due to the growingnumber of mobile subscribers and falling cellular tariffs, PSTN subscribers have started toswitch to mobile service. According to China Netcom, the company’s POTS subscribersdropped for the first time in Q3 2006 by 0.18 million. Furthermore, both fixed-line carriershave begun to suffer local voice revenue declines, 4% for China Telecom and 9% for ChinaNetcom in 2006. BDA believes the loss will accelerate in the future.1.1.4 Uptake of Wireless VAS and Internet Applications Are Key Growth DriversFixed VASTo compensate for deteriorating fixed-line voice businesses, fixed-line carriers arepromoting broadband and VAS (value added services), including caller ID, telephoneinformation services, PHS SMS, integrated information service and CRBT (Color Ring BackTone, the substitution of music or jokes instead of the traditional rings heard by callers). Page 2 of 66
    • Mobile Broadband Market Outlook in ChinaVAS was China Telecom’s fastest-growing business in 2006, accounting for 8.3% of totalrevenues in 2006, up from 6.1% in 2005. China Netcom also significantly increased itsVAS revenue contribution from 4.9% in 2005 to 6.4% in 2006.Caller ID, telephone information service and SMS from PHS (Personal Handphone System,the Japanese-originated extended ranged cordless service adopted in 2000 by China’sfixed line carrier to compensate for their lack of a mobile license) comprise 68% of totalrevenue for China Telecom, but integrated information service and CRBT are growingmuch faster and are the company’s key growth drivers. Broadband applications includingIPTV and internet-related and IT services for SMEs (Small and Medium Sized Enterprises)are bundled as an ‘integrated information service’, a key focus for both China Telecom andChina Netcom.Wireless VAS (WVAS)WVAS has become a key weapon for mobile operators to combat declining ARPU,contributing 24% to China Mobile’s revenue and 20% to China Unicom’s GSM and CDMAbusinesses in 2006, up from single-digit results in 2002, as shown in Exhibit 1.1.3.SMS remains the killer application, generating 49% of WVAS revenue for China Mobile and62% for China Unicom in 2006. However, CRBT, MMS and WAP soared in 2006 with agrowth rate of over 100%. Mobile carriers are also promoting full track music download,streaming video and wireless internet services as future killer applications in anticipationof 3G rollout. Service Providers (SP) and Content Providers (CP) are also activelydeveloping online gaming, and LBS (Location Based Service), which are proving successfulin Japan and South Korea. These applications will see strong growth as 3G and otheralternative mobile broadband technologies are introduced in China. (See detailed analysison applications in Chapter 6)Exhibit 1.1.3: WVAS as % of Mobile Carriers’ Total Revenue 24% 21% 20% 20% 16% 15% China Mobile 15% 10% 10% 10% Unicom CDMA 6% 5% 4% 5% 2% Unicom GSM 2002 2003 2004 2005 2006Source: Company Reports, BDA Page 3 of 66
    • Mobile Broadband Market Outlook in China1.2 Telecom Services and Technologies1.2.1 China’s Telecom Market at a GlanceChina is currently the world’s largest single market in terms of main telephone and mobilesubscribers. It accounted for 29% of total main telephone lines (including PSTN and PHSservice) and 17% of mobile subscribers worldwide in 2006.Mobile subscribers surpassed main telephone lines in 2003, thanks to strong growth inrecent years, with a 5-year Compound Annual Growth Rate (CAGR) of 26% from 2001 to2006. For main telephone lines, Public Switched Telephone Network (PSTN) has beenlacklustre with a 5-year CAGR of 10% while Personal Handphone Systems (PHS) surgedwith 78% CAGR in the past 5 years since its introduction in 2000.Both internet users and broadband subscribers have taken off in China thanks to falling PCprices and access fees. Broadband service in particular has doubled annually in the past5 years, with the biggest jump in 2003 when Severe Acute Respiratory Syndrome (SARS)hit China and drove residents to work from home through broadband access.Exhibit 1.2.1: Mobile, Fixed, Internet and Broadband Subscribers (million) 2001 2002 2003 2004 2005 2006 5-year CAGR Mobile 145.0 206.6 268.7 334.8 393.0 461.0 26% Main Telephone Line 180.1 214.2 262.4 312.4 350.3 368.1 15% - PSTN 175.0 201.1 225.3 247.2 265.0 277.0 10% - PHS 5.1 13.1 37.1 65.2 85.3 91.1 78% Internet 33.7 59.1 79.5 94.0 111.0 137 32% Broadband 1.9 4.4 12.7 26.8 40.2 54.6 96%Source: MII, CNNIC, BDA1.2.2 Forecasts of Key Telecom ServicesMobile, internet and broadband services will continue to see strong growth in China due tohuge unmet demand. China’s mobile market penetration rocketed to 35% in 2006 from30% in 2005 but remains significantly lower than the global market penetration at 41%,the average of all countries according to ITU’s statistics, indicating there is room forcontinued investment in the Chinese mobile market. The same is true of the internet,which has reached 10% market penetration in China, compared with 17% penetration inthe global market, according to ITU. Fueled by surging internet demand, broadbandservices will also see huge potential uptake, starting from a household penetration rate of13% in 2006.Meanwhile, main telephone services including PSTN and PHS have reached saturation inChina, with a penetration rate of 28%, compared with 19% worldwide, according to ITU. Page 4 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 1.2.2: Forecasts of Telecom Service Subscribers (million) 5-year 2006 2007F 2008F 2009F 2010F 2011F CAGR Mobile 461 543 615 685 750 811 12% Main Telephone Line 368 366 354 334 307 279 -5% - PSTN 277 283 287 287 284 276 0% - PHS 91 83 67 47 23 3 -49% Internet 137 73 214 251 291 332 19% Broadband 55 69 85 101 116 133 19%Source: MII, CNNIC, BDAMobile: Continuous Strong GrowthMobile subscriptions continued to display robust growth in 2006 with 68 million newsubscribers. Driven by increasing competition and expansion to rural markets, themobile market is expected to maintain 12% CAGR over the next five years, to reach 811million by 2011, taking penetration to 60% of China’s total population.Competition will intensify with more players in the mobile market. Industry restructuringis expected to take place in 2008, and will likely see the four major carriers trimmed tothree, all with mobile licenses. Mobile service tariffs are expected to continue decliningfrom the current RMB 0.18 (EUR 0.02) per minute.Rural areas still have strong potential demand for mobile services due to low penetrationof 15% in 2006, compared with 35% nationwide. Rural markets have become keygrowth regions in China, contributing over 50% of total user additions since 2006. BDAforecasts 72% of new subscribers will come from rural areas by 2011, thanks to improvingnetwork coverage, growing supply of Ultra Low Cost Handset (ULCH) costing below RMB300 (EUR 29) and falling service prices.PSTN and PHS: User DeclineWith increasing fixed-to-mobile substitution, PSTN and PHS users will decline in the nextfive years, down to 279 million by 2011 from 368 million in 2006. Due to mobile voice tariffreduction, consumers are opting for mobile phones over PSTN, leading to fewer PSTNphone installations and a rise in the number of current PSTN users abandoning the servicein favor of mobile technology.As a local cellular service with limited mobility within a city, PHS has lost price advantagesin 2006 compared with GSM or CDMA services, especially with the introduction of CallingParty Pays (CPP) to mobile services, removing a key advantage of PHS. PHS service costsRMB 0.1 (EUR 0.01) per minute, compared with RMB 0.1-0.2 (EUR 0.01-0.02) per minutefor GSM and CDMA service. Page 5 of 66
    • Mobile Broadband Market Outlook in ChinaFixed-line operators are also reducing PHS capital investment and promotions, inanticipation of industry restructuring and 3G licensing in 2008, driving PHS users to switchto mobile.Internet and Broadband: Sustained GrowthChina’s internet users totaled 162 million in June 2007, the second largest marketworldwide just behind the US. China’s low internet penetration means user growth willcontinue to be strong in the future. In June 2007, China’s internet penetration rateamong individuals reached 12.3%, compared to about 70% or 210 million users in the US.BDA forecasts internet users will reach 332 million by 2011 with a 5-year CAGR of 19.4%. o As personal computer prices continued to drop, desktop and laptop sales in China remained strong at 14.9 million in 2006. At the same time, more desktops and laptops are connecting to the internet. o Of all new PCs purchased between 2003 and 2005, BDA estimates that 75% are connected to the internet and expects this number to increase to 94% by 2011.Internet user growth continues to be a major driver of broadband uptake. BDA forecastsChina’s broadband market, spurred by internet growth and competition among carriers,will maintain stable growth with 14-15 million additions every year, reaching 133 million by2011. In 2007, China will surpass the US and become the largest broadband market interms of user numbers. China had 55 million broadband users in 2006, compared with58 million in the US.1.3 Carriers1.3.1 Services and Market PositionChina’s mobile market is a duopoly of two mobile carriers: China Mobile and China Unicom.Net subscriber additions remain robust with 5 to 6 million per month. China Mobile has316.1 million mobile subscriptions by March 2007, accounting for 68% of the total market.China Unicom operates both a GSM and a CDMA network with 109.2 million GSMsubscriptions and 37.7 million CDMA subscriptions. China Unicom is likely to spin off itsCDMA assets to China Telecom in the long-expected industry restructuring, likely tohappen in 2008.Benefiting from the delay in 3G, China Mobile continues to gain share from Unicomaccounting for 80% of the incremental market in Q1 2007. China Mobile has aggressivelyimplemented Calling-party-pays (CPP) and cut roaming charges to land-grab subscribersahead of 3G licensing, which will create more competition in the wireless market with theentrance of more players. China Unicom has tried to increase its market share this yearby offering lower end handsets but growth remains weak compared with China Mobile.Benefiting from the lack of competition, China Mobile’s revenues grew 21% year-on-year Page 6 of 66
    • Mobile Broadband Market Outlook in Chinain 2006. The other three operators – China Unicom, China Telecom, and China Netcom –all recorded slightly slower, single-digit growth compared with 2005. As a result, ChinaMobile has strengthened its dominant position in the market, accounting for 45% of totaltelecom service revenue in China (See Exhibit 1.3.1 below).Exhibit 1.3.1: Comparison of Telecom Operators’ Revenue (RMB billion) 700 0.3 16 China Satcom 600 0.5 0.9 14 82 0.5 11 78 92 China Tietong 500 73 7 92 400 67 88 China Unicom 75 173 300 165 China Netcom 158 145 200 285 China Telecom 100 172 198 231 China Mobile 0 2003 2004 2005 2006Source: MIIExhibit 1.3.2: Service Subscribers (million) China China China China China Mobile Unicom Telecom Netcom TietongMobile 301 142 -- -- --Fixed-line -- 0.5 228.0 121.4 17.9Broadband 0.001 1.3 31.0 16.4 3.2Source: Company Information, BDAThe two fixed-line carriers China Telecom and China Netcom have been increasinglysuffering from IP and fixed-to-mobile substitution in recent years, slowing down revenuegrowth to below 5% in 2006, compared with overall telecom service revenue growth of11% in the same year. Broadband has become the last resort for fixed-line carriers,contributing over 13% revenue in 2006 with more than 30% annual growth.Fixed-line carriers are eager to acquire mobile licenses but have to wait for therestructuring and 3G licensing policy from the government, which could be released in2008 or 2009.Due to restructuring in 2002, China Telecom and China Netcom operate in differentregions of China as dominant fixed-line carriers. China Tietong, devolved from the Ministryof Railway, runs fixed-line networks mainly along railway lines. China Telecom and ChinaNetcom together dominate PSTN and broadband market in China, with China Tietong a farthird. Page 7 of 66
    • Mobile Broadband Market Outlook in China2 Regulatory Environment for Telecom and Mobile Broadband2.1 Introduction to Regulatory Structures2.1.1 The Lack of Converged Regulatory BodyChina’s telecommunication industry has been developing at a much faster pace than theregulatory framework can handle. State regulation of the telecom sector thereforeremains a largely reactive process. Furthermore, there is a lack of overall regulatoryconvergence both in terms of structures and overall goals. Because there is no unifiedregulatory body, oversight is fragmented across different organizations, with each onetending to push its own priorities.For example, SASAC (State-owned Assets Supervision and Administration Commission)and NDRC (National Development and Reform Commission) have been pushing differentagendas, leading to conflicts over decision making on 3G licensing. NDRC, responsiblefor state economic security, has taken the lead in supporting the home-grown 3G standardTD-SCDMA. Slow progress on TD-SCDMA has seemingly delayed the issuing of 3G licenses,preventing China’s fixed-line carriers, China Telecom and China Netcom, from entering themobile business. From NDRC’s perspective, it makes sense to support China Mobile byallowing it improve TD-SCDMA whilst blocking other carriers from getting 3G licenses inorder to reduce the competition facing China Mobile. However, NDRC’s priorities insupporting China Mobile/TD-SCDMA conflict with SASAC’s priorities as a shareholder in allfour major state carriers. It wants to give fixed-line carriers access to mobile to increasethe value of state assets.The upshot is that many important decisions, such as 3G licensing, industry restructuringand telecom media convergence, ultimately have to be made by the State Council (China’scabinet). Yet decision makers within the State Council face many other priorities, includingpressing social and economic issues. Telecom issues are rarely considered a high priority,leading to constant delays in the decision-making process.The detailed roles and responsibilities of all major carriers are listed in Exhibit 2.1.1 below.Exhibit 2.1.1: Regulatory Bodies and Their Responsibilities Regulating Body Function/Objectives Leader  All other regulatory bodies report to the State Council State Council Wen Jiabao  All decisions are ultimately made at the State Council level SASAC  Oversees the state’s holdings in state-owned (State-owned Assets enterprises, estimated at USD 1.3 trillion (EUR 973 Li Rongrong Supervision and billion) Administration  Shareholder in all state-owned carriers Page 8 of 66
    • Mobile Broadband Market Outlook in China Commission)  Focused on how to maintain/increase the value of state-owned assets  Takes the leading role in driving the industry restructuring process  Wants to consolidate state-owned enterprises to reduce competition; plans to reduce SASAC-managed enterprises from 161 to 80-100 by 2010  Responsible for macroeconomic policy and state economic security NDRC  Promotes domestic standards, such as TD-SCDMA, (National and provides funding for research and development Ma Kai Development and of key state projects Reform Commission)  Issues manufacturing licenses, including those for handset vendors  Promotes telecom and media convergence MII  Issues licenses for all telecom services (Ministry of Wang Xudong  In charge of telecom industry policies and drafting Information Industry) the telecom law SARFT  Promotes cable, radio, film, and TV industries (State Administration  Censors content Wang Taihua of Radio, Film, and  Issues licenses for all audio and video services over Television) all networks, such as IPTV and Mobile TV licensesSource: BDA Analysis2.1.2 Telecom and Media ConvergenceWhen it comes to media and telecom convergence, SARFT (State Administration of Radio,Film and Television) and MII (Ministry of Information Industry) have been fighting forauthority over the oversight of converged services. This power-play has hampered thedevelopment of telecom and media convergence and adoption of converged services,such as mobile TV and IPTV, in China.At present, SARFT as the primary broadcasting regulator, still plays the major role inissuing mobile TV and IPTV licenses, as well as content censorship. To date, only threeIPTV licenses and four mobile TV licenses have been issued. These licenses have beenissued primarily to broadcasters rather than the telecom carriers, forcing the telecomcarriers to partner with license-holders when they need to offer mobile TV and IPTVservices, and share revenues with them. Many conflicts and frictions have emerged fromthese partnerships, forcing telecom operators to slow down their investment aspartnerships have not proved the most effective approach to tapping the market. Untiltelecom media convergence has been truly achieved at the regulatory level, telecomoperators are not likely to receive licenses. Page 9 of 66
    • Mobile Broadband Market Outlook in ChinaThere is little hope of resolution of this situation in the short term, given the lack ofcoordination between the two departments. Content censorship has further complicatedthe story as SARFT also plays an invisible role in censoring content and guiding mediacoverage in China. In addition to reporting to the State Council or cabinet, SARFT alsoreports to the Propaganda Bureau of the Communist Party, and needs to ensure the mediacontinues to act as the “mouthpiece” for the Party. Therefore, in the regulation of media,the Party also retains a central role and has exerted an invisible influence on this sector.2.2 Promotion of Indigenous Standards and Impact on Foreign CompaniesOver the past few years, China has been aggressively promoting its home-grown protocolsover international standards. Regulatory policies to support domestic standards werefurther highlighted in China’s 11th Five Year Plan (from 2006 to 2010) and labeled as“Indigenous Innovation”. Furthermore, President Hu Jintao called for innovation to be akey plank of the 11th Five Year Plan in a major policy address last year.The push for “Indigenous Innovation” has been carried out in the development ofhome-grown standards such as TD-SCMDA in 3G, CMMB in mobile TV, WAPI in WiFi andAVS as an audio video coding standard. We believe the regulatory authority will not backoff, but will instead continue to leverage TD-SCDMA in order to gain a foothold in future4G standards.This relentless promotion of domestic standards has caused concern among foreignparticipants in China’s telecommunications sector. Many industry participants believe thepush for “Indigenous Innovation” has hampered the development of innovative servicesand applications in the convergence world, such as 3G, mobile TV and IPTV.A growing consensus is emerging among foreign equipment vendors selling in China thata push for “Indigenous Innovation” has led to escalating research and manufacturingcosts, and raised barriers for foreign participants wishing to enter the market. Foreignmanufacturers have to develop technologies in compliance with the Chinese standards,which leads to incremental R&D expenditure and diverts existing R&D budgets fromdeveloping global technologies.The government has realized it needs to strike a balance between promoting the foreigninvestment necessary to sustain economic growth in China and protecting domestic firmsvia indigenous standards. For instance, while China has been pushing TD-SCDMA as apreferred 3G standard, MII (Ministry of Information Industry) has also accepted the othertwo international standards WCDMA and CDMA 2000 EV-DO as industry standards. Thegovernment has also assured foreign participants that 3G licenses will be issued in anindependent and technologically neutral manner by the managements of China’s carriers,although this does not inspire much confidence given that management teams areappointed by the government and Communist Party. Page 10 of 66
    • Mobile Broadband Market Outlook in China2.3 Regulatory Environment for Mobile Broadband2.3.1 Prospects for 3G LicensingBefore each new technology is introduced into China, it must to go through three majorsteps: spectrum allocation, industry standardization and issuance of commercialoperational licenses.In respect to 3G, China issued spectrum for the TDD-based technology TD-SCDMA, andfor the FDD-based technologies WCDMA and CDMA 2000 EV-DO, as far back as 2002.Finally, in May 2007, both standards were accepted as 3G industry standards by MII.BDA believes that the delays in getting the domestic 3G standard TD-SCDMA ready forprime time will continue to push back the issuance of 3G licenses for all three kinds of 3Gtechnologies. BDA believes 3G licensing will now be delayed until late 2008 or early 2009.Major political events could also contribute to the delay as an upcoming leadershipreshuffle may slow down decision-making on industry restructuring and 3G licensing. TheCommunist Party of China (CPC) will hold its 17th National Congress (NCCPC, an eventwhich takes place only every 5 years) in September or October 2007. This will be followedsix months later by another acronym-laden event, the National People’s Congress (NPC),in March 2008. Any changes in the top echelon of the party leadership at the NCCPCmust be ratified by the NPC in March, and then reflected by a corresponding reshuffle inthe Cabinet. Regardless of the scope of any eventual changes, uncertainty andspeculation ahead of the NCCPC is bound to generate caution and have a slowing effect onthe workings of government.2.3.2 Prospects for Mobile WiMaxChina has yet to consider spectrum allocations for mobile WiMax, which indicates there isstill a long way to go before mobile WiMax can be introduced into China. The industrystandardization process, as well as the issuance of commercial operational licenses, areeven further off.Given the government’s push for indigenous standards, we think foreign companies needto be more flexible in the way they push new technologies and standards into the Chinamarket.We believe there is an opportunity for mobile WiMax to play a role if it can be more flexiblein complementing TD-SCDMA, supporting its long-term evolution in exchange for an entryticket to the China market. Page 11 of 66
    • Mobile Broadband Market Outlook in China2.3.3 Entry Barriers for Basic Telecom ServicesThe basic service provider sector of the telecoms industry faces tougher entry barriersthan any other part of the industry. Under Chinese law, foreign companies are notpermitted to directly hold telecom service licenses. Foreign companies seeking to offertelecom services must either enter into a joint venture with a licensed Chinese telecomprovider or enter into a partnership with a licensed provider. These regulations aim toprotect China Mobile and China Telecom from foreign competition.Confusing regulations remain a barrier to service providers. For instance, the MIIinterprets WTO obligations as limited to those services specifically listed in the WTOschedule of commitments, and consequently ignores new technological developments andexcludes foreign investors from participating fully in new offerings. These offerings arelikely to include new value-added services which are commercially viable, as opposed toolder offerings which are open to foreign investors but now commercially less attractive. Page 12 of 66
    • Mobile Broadband Market Outlook in China3 Broadband Market Overview and Outlook3.1 China Broadband Market Overview3.1.1 Broadband Has Become the Major Form of Internet Access TechnologyChina’s internet access market has been in a migration from narrowband to broadbandsince 2002. According to a survey by quasi-governmental industry body CNNIC,broadband including DSL and cable modem, has become the major type of internet accesstechnology for users in China, taking over from dial-up and dedicated line. o CNNIC found 91 million out of a total of 137 million internet users were accessing the internet through broadband in 2006. o Furthermore, there were 17 million internet users accessing the internet through cellular services.Exhibit 3.1.1: Survey of Internet Users’ Access Technology (million) 17 Handset 43 64 91 Broadband 17 7 27 31 29 20 27 Dedicated Line 12 54 59 45 51 39 27 Dial up 2001 2002 2003 2004 2005 2006Note: 1) Broadband refers to xDSL and cable modem.2) Respondents gave multiple answers so total numbers exceed internet users. For example, totalinternet users were 137 million by 2006, compared with 174 million responses in the chart.Source: CNNICFalling prices of broadband access coupled with growing popularity of value addedinternet applications have been the key drivers for accelerating broadband adoption inChina.3.1.2 Low Price Is a Key Success FactorBroadband access fees are highly competitive compared with fees for dial-up anddedicated line. o The typical broadband access fee declined from RMB 3 (EUR 0.39) per hour in 2002 to RMB 1.1 (EUR 0.11) per hour in 2006, compared with a price of RMB 1.5 (EUR 0.15) per hour for dial-up in recent years. Furthermore, ADSL provides users with the choice of 512 kbps, 1 Mbps or 2 Mbps speeds compared with 56 kbps for dial-up. o Compared with dedicated line, ADSL is also a much cheaper option for businesses Page 13 of 66
    • Mobile Broadband Market Outlook in China as it costs them RMB 600 (EUR 60) per month, in contrast to RMB 1,000 (EUR 100) for dedicated line, while both methods provide a speed of 1 Mbps. o The most competitive broadband package is unlimited access, priced at RMB 100 (EUR 10) to RMB 130 (EUR 13) per month with 1-2 Mbps speed; this enables subscribers to enjoy unlimited usage for high speed applications including gaming, streaming media and downloading.Meanwhile, broadband ARPU (Average Revenue Per User) per month is also declining dueto a mixture of price falls, and an increase in the number of lower end users. In centralChina, ARPU in some regions can be as low as RMB 20-30 (EUR 2-3) per month. Telecomcarriers therefore have to look to value added services, including IPTV, in order to drivehigh bandwidth consumption and revenue growth.Exhibit 3.1.2: Broadband ARPU Decline (RMB per month) 136.0 102.0 81.0 77.0 100.0 73.2 65.2 66.3 2003 2004 2005 2006 China Telecom China NetcomSource: Company information3.1.3 Broadband Applications over the Internet Are Going PopularInternet users have been switching to high speed applications. According to thebi-annual survey by CNNIC, internet users have significantly increased their usage ofsocial networking and community sites (including blogs and video sharing), video andmusic downloads, and online gaming in the past two years. Meanwhile, they are spendingless time on regular internet services like email, news sites and search engines. Page 14 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 3.1.3: Most Frequently Used Internet Services Email 85.6% 56.1% News Reading 62.0% 53.5% Search Engine 65.0% 51.5% Acquiring Information 49.9% 41.0% BBS, Online Community 20.8% 36.9% Watch/Download Video 5.1% 36.3% Listen/Download Music 8.0% 34.4% Software Downloading 37.4% Dec-04 32.9% Dec-06 Online Gaming 15.9% 26.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%Note: Respondents gave multiple answersSource: CNNICMeanwhile, telecom carriers are promoting IPTV to drive broadband usage, and ARPUgrowth. Through cooperation with content providers, telecom carriers can share 50% ofIPTV subscription fees, which are set at about RMB 20-60 (EUR 2-6) per month excludingthe connection fee. Furthermore, IPTV will drive demand for high bandwidth, up to 20-30Mbps if HDTV (High Definition TV), SDTV (Standard Definition TV), VoIP, internet andgaming can be offered simultaneously.3.2 Fixed Broadband Technologies Will Maintain Strong Growth3.2.1 ADSL to Dominate Broadband Market in the Near FutureADSL is the dominant broadband technology, followed by FTTx+LAN (Fiber to the x point,including curb, building or node) and cable access. ADSL has strengthened its position inthe broadband market, accounting for 68% of the total broadband market in 2006, upfrom 64% in 2004. We believe ADSL will continue to be the mainstream broadbandaccess service during the next five years as operators install optical fiber closer to endusers and upgrade ADSL to ADSL 2/2+ and VDSL 2, giving data rates of up to 20-30 Mbps.So FTTH (Fiber to the home) will see only a slow take-up in China as telecom carriers focuson ADSL. Page 15 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 3.2.1: Fixed Broadband Forecast Breakdown By Technology (million) 3.2 2.6 36.9 2.2 32.6 1.8 28.3 Others 1.4 24.4 1.1 20.1 Cable modem 16.3 86.3 68.8 78.3 FTTx+LAN 47.8 58.9 37.2 xDSL 2006 2007F 2008F 2009F 2010F 2011FSource: BDA, MIIADSL is most attractive to users because of its ease of installation, low price andguaranteed bandwidth. Users can get on line within 1-3 days of applying to local telecomcarriers. The price of ADSL is highly competitive set against cable modem or EthernetLAN, given its guaranteed bandwidth for 512kbps, 1 Mbps or 2Mbps over a proprietarypipeline, while FTTx+LAN users have to share 10 Mbps within a premise network. Telecomcarriers are aggressively promoting ADSL services in order to take the edge away fromother players. They plan to focus on FTTH in the longer future when demand for highbandwidth takes up.3.2.2 FTTx+LAN Growth Is Modest; Cable Modem Growth AcceleratingFTTx+LAN is also mainly provided by telecom carriers but is less popular due to highercosts, and because it is more difficult to manage compared with ADSL. FTTx+LANservice costs about RMB 700-800 (EUR 70-80) per line, compared with RMB 500 (EUR 50)for ADSL (including the ADSL modem). With FTTx+LAN, it is impossible for telecomcarriers to charge users based on bandwidth.Ethernet LAN services offered by the emerging Customer Premise Network (CPN)operators are losing share due to limited bandwidth and poor service quality resultingfrom interconnection issues. CPN operators’ Ethernet LAN services cost similarly aboutRMB 70-100 (EUR 7-10) per month. However, bandwidth drops significantly during peakhours such as 8:00–11:00 PM and weekends, as a large number of users must sharelimited backhaul transmission bandwidth of 10 Mbps. Furthermore, users often find itdifficult to access websites hosted at the telecom carriers’ IDC (Internet Data Center) dueto interconnection problems.Cable modem access may see stronger growth in the next five years, driven by the cableoperators’ increasing investment in IP infrastructure and promotions. Since 2006, SARFThas been pressing cable operators to build IP network and increase internet accessservices, including cable modem and Ethernet LAN, to compete with telecom carriers’IPTV services with interactive applications. SARFT will also promote the cable operators’broadband business through financial support and guiding their technology choices. Page 16 of 66
    • Mobile Broadband Market Outlook in China3.2.3 WiFi Is Gaining Popularity with End UsersWiFi is increasingly deployed by both enterprises and households, due to the stronggrowth in broadband connections, high volume of shipments and the low price of WiFiembedded laptop and Access Points (AP). o Sales of WiFi products reached USD 62 million (EUR 49.4 million) in first three quarters of 2006, up by 79% YoY, according to IDC. Enterprises and households accounted for 64% of purchases in this period. o WiFi-embedded laptops are the major type of terminal for WiFi services, accounting for over 50% of terminals in China. Laptop shipments will increase from 3 million in 2005 to 8 million in 2009, 90% of which will be WiFi-embedded. o WiFi-ready mobile handsets are not officially permitted to be sold in China (to the point that vendors such as Nokia have had to disable the WiFi components in converged ‘Cell-Fi’ devices) due to the potential impact on carriers of cheap VoIP, but BDA has seen their growing popularity in the market with 1-2 million WiFi handsets bought locally in the black market or brought by users from overseas. o Most APs (integrated with router) cost RMB 200-300 (EUR 20-30) each.WiFi Mesh is still at an early stage, and will be limited to small scale private networks forenterprises, manufacturers or government offices. There are a couple of cases of WiFiMesh deployment in Beijing for government and the police. Opportunities for WiFi Meshmay increase with the rollout of Safe City and Wireless City projects by government, toprovide wireless access and video surveillance. However, growth will remain slow duringthe next 5-10 years due to lack of investment in most cities.Telecom carriers are cautious about deploying WiFi in public areas due to the limitedvalue-added to broadband services, and complicated deployment in the premise network.There were only 25,000 WiFi subscribers served by telecom carriers by 2006. However,BDA believes opportunities will emerge in the next five years because carriers plan toprovide connections among home alliance through WiFi and home gateway.3.3 3G market will take off after licenses issued in 20093.3.1 3G Is a Must HaveThe government has given a high priority to the first domestically-developed telecomstandard, TD-SCDMA. Since 2005, the government has made domestic innovation a focusfor economic growth. TD-SCDMA is reported as being among the top five most importantdomestic innovations the government is supporting, on a par with the manned spacecraft,Shenzhou VI. Furthermore, the central government continues to push domestic standardsfor 4G and wireless broadband technology based on TD-SCDMA.Secondly, the government will give 3G licenses to all telecom carriers in order to balancethe competitive landscape of the major four state-controlled carriers. Restructuring will Page 17 of 66
    • Mobile Broadband Market Outlook in Chinaoccur along with 3G licensing.Finally, 3G is a mature and cost-effective technology for voice and WVAS that can driverevenue growth. o WCDMA has proved more cost efficient than GSM for voice service in European markets. o WVAS has contributed 24% of China Mobile’s revenue and 205% of China Unicom’s. The percentage is set to increase to 25% by 2007, in line with the experience of Japan and South Korea, if 3G networks are built to support more advanced WVAS.3.3.2 3G Licensing in 2008 or 2009BDA believes that 3G licensing may be still further delayed to 2008 or 2009 to providemore time for carrier restructuring, and improvements to TD-SCDMA via expandedpre-commercial trials. o China Mobile is building TD-SCDMA networks in eight cities, while China Telecom and China Netcom are also building TD-SCDMA networks in one city each. The capital investment and handset subsidy totaled RMB 26.7 billion (EUR 2.6 billion) in 2007. A target exists of between 2 to 3 million users by Q1 2008, after the pre-commercial service starts in October 2007. o Restructuring seems to be further delayed to late 2008 because of two upcoming political events, the 17th National Congress of the Communist Party of China (NCCPC) in October 2007 and National People’s Congress (NPC) in March 2008, which will slow down the decision making process. The Olympic Games in August 2008 will also make the restructuring less likely to take place till afterwards.TD-SCDMA licenses may be issued as early as March 2008 if the pre-commercial trialsperform well. Licenses for WCDMA and CDMA 2000 are likely to be issued aroundyear-end 2008, or early 2009, after the industry restructuring has been announced. o The Chinese Government has promised to the International Olympic Committee (IOC) to provide 3G services during the Olympic Games in August 2008, although IOC is reportedly upset that China’s choice of TD-SCDMA means that visitors from overseas will not be able to enjoy 3G roaming services (being forced instead to rely on 2G based networks such as EDGE or CDMA 2000-1X). o Delays to the introduction of the other two 3G licenses will give TD-SCDMA a head start of 6 to 12 months.TD-SCDMA may see commercial trials delayed from October 2007 to early 2008 due tocontinued problems with handsets and the complexity of acquiring and deployingTD-SCDMA base stations (with some 3,000 reportedly required in Beijing for example). o China Mobile has new requirements for handset vendors before the Olympic Games in August 2008. These include having HSDPA ready, as well as TD/GSM Page 18 of 66
    • Mobile Broadband Market Outlook in China auto-roaming, EDGE/TD/GSM tri-mode and MBMS. However, HSDPA and TD/EDGE/GSM tri-mode may not be available until 2H 2008. o In Beijing, cell sites are difficult to acquire for TD-SCDMA, which will delay the network rollout to early 2008. Only up to 62% of TD BS can share cell sites with GSM. For the remaining 38% of TD BS, there are extra difficulties due to limited space and the need for extra power supply and transmission. Complicated and ponderous antennae makes construction difficult in densely built up areas, including sport centers.3.3.3 3G Licensing ScenarioThe most likely 3G licensing scenario is TD-SCDMA to China Mobile, CDMA2000 1xEV-DOto China Telecom, and WCDMA to the merged China Netcom and China Unicom, as shownin Exhibit 3.3.1. This licensing and restructuring will yield a lot of benefits. Specifically: o First, the spin-off of CDMA networks will address Unicom’s dilemma in operating two competing 2G networks, which has led to many internal conflicts in customer service, network investment, and marketing expenses. o Secondly, fixed-line carriers such as China Telecom and China Netcom will gain access to mobile business through acquisition of the CDMA network and a merger with Unicom, respectively. o Thirdly, the restructuring would create three carriers of relatively equal size, facilitating more effective competition in the telecom market. o Lastly, as the strongest carrier, China Mobile can better promote TD-SCDMA, leveraging its leading position (70% mobile market share), abundant cash flow and experience in mobile business.Exhibit 3.3.1: 3G Licensing Scenario and Revenue Share Before and AfterRestructuring Revenue Share Before and After Restructuring* TD-SCDMA CNC, 13% CNC+CU, 23% CDMA 20001X EV-DO CM, 46% CM, 46% CT, 26% WCDMA CT, 31% CU, 15%Note: Based on 2006 revenueSource: Company Information, BDA3.3.4 3G User ForecastBDA believes TD-SCDMA will lead China’s 3G market by 2011, thanks to its head start, andheavy investment from China Mobile. CDMA2000 1xEV-DO will soon exceed TD-SCDMA interms of network coverage, but WCDMA may lag behind in network rollout. Page 19 of 66
    • Mobile Broadband Market Outlook in China o TD-SCDMA networks will expand to 50-100 cities nationwide from 2009 with additional capex of RMB 30-40 billion (EUR 3-4 billion). China Mobile, the wholly state-owned company that holds a majority stake in Hong Kong-listed China Mobile, will operate the TD-SCDMA network, and invest further in TD-SCDMA network rollout. o WCDMA and CDMA2000 1xEV-DO may start network rollout from 2009. EV-DO will be ready in most areas nationwide within one year due to its ease of upgrades through software and hardware based on existing networks. WCDMA networks may be ready in coastal areas at first, and gradually extended to inland and western China within two to three years.BDA forecasts TD-SCDMA will be the primary 3G service in China until 2010. Then it willsee its market share overtaken by CDMA 2000 1x EV-DO and WCDMA, due to their rich,mature and cost effective terminals. o China Mobile will spend RMB 4 billion (EUR 0.39 billion) or more to subsidize 2-3 million handsets in 2007 and 2008 in the eight cities. o More subscribers can be expected to be attracted to TD-SCDMA from 2010 when handset prices fall and services improve. The TD-SCDMA handsets cost about RMB 2,000 (EUR 195) on average in 2007, but this is expected to fall by half by 2011. Available handset models will also increase to more than 100 models in two to three years, compared to roughly 20 at present. o However, TD-SCDMA may not compete with WCDMA and CDMA2000 1xEV-DO on the terminal side once the latter two services are available in 2009 and 2010. Already,1,011 WCDMA devices have been launched, including over 300 HSDPA devices launched by 2006, and there are 466 EV-DO devices available, including from 20 to 30 for EV-DO Rev. A. The cheapest WCDMA handsets may cost as little as USD 100 by the end of 2007. o As a result, CDMA2000 1xEV-DO will see strong take-up in 2009 and 2010, due to fast network rollout and China Telecom’s promotion through fixed and mobile bundled packages. Furthermore, WCDMA will report fastest growth from 2011 thanks to its rich and cost effective terminals.Exhibit 3.3.2: 3G User Forecasts (million) 2007F 2008F 2009F 2010F 2011F Share in 3G (2011) CDMA2000 1xEV-DO - - 1.2 6.1 15.3 38% WCDMA - - 0.3 1.6 14.7 36% TD-SCDMA 0.3 2.3 4.0 6.5 10.4 26% Total 3G Users 0.3 2.3 5.5 14.2 40.4 100% % in Total Mobile Users 0.1% 0.4% 0.8% 1.9% 5.0% -Source: BDA Page 20 of 66
    • Mobile Broadband Market Outlook in China3.3.5 3G Evolution ForecastsTD-SCDMA and WCDMA will have HSDPA in place when they start network rollout afterlicensing. Competition and potential demand for advanced applications are the key driversfor HSDPA deployments. o The number of mobile carriers will increase to three from two in 2009, and there will be fiercer competition once fixed-line carriers join the market through restructuring. o Furthermore, China Mobile needs to accelerate trials of HSDPA over the TD-SCDMA network in order to compete with the more mature WCDMA and CDMA2000 1xEV-DO standards. It has requested HSDPA-enabled terminals be available in the market from May 2008, in time for the Olympic Games. o Demand for mobile TV, gaming, music and LBS has risen up in China, and can be better met with HSDPA. China Mobile has the lead in WVAS offerings, and will be interested in testing the new applications over TD-SCDMA networks. o Similar to HSDPA, TD-SCDMA-based MBMS is supposed to be available by the Olympic Games in August 2008, though it will be hard to meet this goal. Meanwhile, WCDMA-based MBMS may be provided in 2010 or 2011, when handsets are more mature. o HSDPA has become a mainstream UMTS solution in the global market, which makes it easy and cheap to build out in China as well. Over 71% of commercial WCDMA networks have launched HSDPA and 291 HSDPA devices were available by July 2007, according to a Global mobile Suppliers Association (GSA) survey.HSUPA might be in place in the rather more distant future. Under vendors’ current plans,TD-SCDMA will not have HSUPA products ready until 2008 or 2009. WCDMA has seen thebeginning of HSUPA deployment in global markets, but its Chinese carrier, the newcompany that comes after China Netcom merged with China Unicom, may be slow to gofor HSUPA rollout, preferring to wait for the maturity of terminals and applications. o Both government and China Mobile will urge early introduction and deployment of HSUPA in order to catch up with the global pace of 3G evolution, regardless of market demand or product maturity. o UMTS HSUPA has seen a couple of commercial deployments since 2007 in Europe and Asia. The terminals and applications can be attractive and mature in two to three years, after which Chinese carriers may start to provide the service. The industry consolidation is also likely to take one or two years, during which time the new carrier will not be able to wholly focus on business. Page 21 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 3.3.3: Projection of 3G Evolution Roadmap in ChinaSource: BDACDMA2000 1xEV-DO Rev. A may be deployed one to two years after China Telecom’s rollout of the CDMA2000 1xEV-DO Rev.0 network in 2009. o China Telecom recently released a press statement saying EV-DO Rev. A would be needed for higher data rates and WVAS support, including Push-to-Talk, VoIP and video telephony. o EV-DO Rev. A has just reported on commercial deployment starting late 2006, mainly in South Korea, Japan and US. US carriers will build out EV-DO Rev. A in most US areas by year-end 2007.3.4 Fixed WiMax Has Limited OpportunitiesWiMAX has gained widespread attention in recent months as operators worldwide haveannounced trials and commercial deployment. China’s four operators are also expressingstrong interest in the technology, and all are reportedly conducting trials in differentprovinces, mainly on fixed WiMax. o China Netcom is the most aggressive, carrying out the country’s first commercial fixed WiMAX deployment in Guangdong and Hunan provinces. China Netcom spent RMB 30 million (EUR 3 million) on fixed WiMax by 2006 to serve SMEs and high-end residential areas in key cities in Guangdong province, as competitive operators in its greenfield market. o China Telecom is also trialing fixed WiMax in eight provinces and two municipalities in northern China for SMEs. o China Unicom has tested fixed WiMAX in many cities and provinces. China Unicom is reportedly planning to invest RMB 70 million (EUR 6.8 million) to build a WiMAX trial network covering 21 provinces in 2007. o As the wireless telecom service provider for the Olympic Games, China Mobile is planning to provide wireless broadband access through fixed WiMax and WiFi. There will be 150 fixed WiMax base stations and 9,000 APs in Beijing, covering 90% of the urban area. o A local branch of China Mobile in Zhejiang province is building fixed WiMax to provide broadband access service for local residents and SMEs. It aims to serve Page 22 of 66
    • Mobile Broadband Market Outlook in China 1,000 users by year-end 2007.A few emerging companies are trialing fixed WiMax services to target the broadbandmarket using their existing 3.5GHz spectrum. Some local governments are also trialingfixed WiMax for wireless communication infrastructure. o The Chinese government offered 2X30 MHz at 3.5 GHz in some 300 cities in 2001-2004. Chinacomm won 30 cities with about 2X10 MHz bandwidth at 3.5 GHz as the biggest non-carrier spectrum holder. In 2006, Chinacomm announced plans to deploy fixed WiMax in Beijing, Shenzhen, Guangzhou and Shanghai in the near term and further build networks in other 25 cities within 18 months. o Governments in Beijing, Tianjin and Wuhan have started to deploy fixed WiMax on a small scale to provide broadband services for government communication, video surveillance and data transmission.Cable operators are also considering fixed WiMax as a technology to provide broadbandservices and VoIP. However, lack of capital and experience in offering telecom serviceswill be the major obstacles to volume deployment in the next three to five years. o Cable operators hold 700 MHz spectrum for terrestrial TV broadcasting, over which they are planning to provide digital TV services. o Cable operators lack capital and are preoccupied with cable DTV rollout. They are taking on huge loans to fund migration from analog TV to DTV. o Furthermore, they have limited experience in managing wireless networks or providing broadband, VoIP and other communication services.Vertical industry enterprises are also interested in fixed WiMax as they need wirelessbroadband technology to transmit data, voice and video for internal communication.They are planning to replace existing Multichannel, Multipoint Distribution System (MMDS)or other old technologies at 3.5GHz or 5.8GHz with fixed WiMax.Despite the growing interest in the technology, BDA sees limited opportunities for fixedWiMax. BDA forecasts a total market size of only 200,000 to 300,000 terminals by 2011,up from 10,000 in 2006. However, prospects remain weak beyond 2011 when mobileWiMax is mature and cost effective. o Fixed WiMax costs much more than DSL, which limits its prospects in the mainstream household market. With the same 2Mbps data rate, fixed WiMax receivers cost about RMB 1,000 (EUR 100) each, compared with RMB 200-300 (EUR 20-30) for a DSL modem. Fixed WiMax base stations cost RMB 50,000 (EUR 5,000) each. The cost is unlikely to fall significantly, due to lack of interoperability. o Carriers will deploy the technology for backhaul or complementary broadband access when wireline access is difficult. o The private communication market for enterprises or governments is also small. o The market size of private networks is also small due to the fragmented market and slow speed of payment. Vendors complain enterprises or governments are always slow in budget planning, negotiation and payment, with time-frames of Page 23 of 66
    • Mobile Broadband Market Outlook in China between two and three years, compared with 12-18 months for telecom carriers. This hinders overall market growth.3.5 Mobile WiMax Overshadowed by 3GMobile WiMax will see some trials and commercial deployments thanks to China Mobile’sinitiatives to provide mobile WiMax for the Olympic Games, and some limited governmentdeployments. o China Mobile has announced plans to deploy mobile WiMax in the eight cities that will host the Olympic Games in August 2008. The spectrum has been assigned by local government at 2.5 GHz. o Wuhan city government also provides mobile WiMax deployment at 1.8 GHz for shipping surveillance on the Yangtze river around the city of Wuhan. o Both China Mobile and the Wuhan government’s mobile WiMax services may continue for a few years, but are unlikely to expand to more cities.However, the potential competition with 3G has made government cautious aboutlicensing and spectrum allocation, since China’s government is investing heavily inTD-SCDMA and potential local 4G standards, as well as protecting state-owned telecomcarriers. BDA believes the barriers may not be removed until 2010 or even further intothe future, when TD-SCDMA matures and government permits more competition to enterthe market. o No proper spectrum is available in China for mobile WiMax, as shown in Exhibit 3.5.1. Fragmented deployments supported by local governments will be difficult to turn into nationwide services because it is difficult to obtain spectrum from central government.Exhibit 3.5.1: Spectrum Map in ChinaSource: MIIMobile WiMax’s positioning in China is more of a competitive technology to 3G than acomplementary solution, because the mobile internet applications over mobile WiMax willsignificantly erode the telecom carriers’ 3G business. o VoIP over fixed internet has caused fixed-line carriers’ long distance voice revenue to drop. P2P also puts pressure on carriers’ infrastructure investment, while contributing no revenue to the carriers. o Mobile internet over mobile WiMax will produce more pressure on mobile carriers because IP cannibalization will be more serious given the high cost of mobile voice and WVAS. Page 24 of 66
    • Mobile Broadband Market Outlook in China o Average mobile voice price is RMB 0.18 (EUR 0.02) per minute, compared with RMB 0.1 (EUR 0.01) per minute for fixed-line voice. Voice revenue also accounts for the majority of mobile carriers’ revenue; in 2006, voice revenue made up 76.4% of China Mobile’s revenue and 80.5% of China Unicom’s. o WVAS business may also be hurt by mobile internet due to widely available free content. Mobile TV and mobile music, considered killer applications for 3G, will also be impacted by free content over mobile internet that users can access easily with mobile WiMax.The introduction of mobile WiMax will be difficult because it runs counter to thegovernment’s initiatives to protect telecom carriers’ interests. The situation may notimprove until 2010 when restructuring is complete and a new competition structureemerges. o China’s government is increasingly protecting telecom carriers’ benefits by controlling licenses, reducing competition through restructuring and restraining foreign investment. SASAC released a policy in late 2006 to issue licenses to state-owned enterprises solely in order to ensure economic security. For private companies and foreign companies, it is hard to obtain licenses for mobile communication services. o Cable operators and railway communication service providers may have a chance to obtain a mobile WiMax license as state-owned enterprises. However, it may take a few years from 2010 for them to lobby government and build the networks.Furthermore, the introduction of mobile WiMax will not only impair telecom carriers’interests, but will put pressure on TD-SCDMA, which is currently the major focus ofChinese government concern. TD-SCDMA will take time to mature, to compete with other3G technologies, and to evolve to LTE or 4G. o Our interviews with companies found that the government is encouraging deployment of fixed WiMax at 3.5 GHz, but has shown no sign of opening up spectrum for mobile WiMax.Exhibit 3.5.2: Comparison of Mobile WiMax and 3GSource: KT Page 25 of 66
    • Mobile Broadband Market Outlook in ChinaFinally, mobile WiMax is not mature enough for commercial deployment in the near future.In the global market, mobile WiMax may see increasing deployments in other markets asearly as 2009, as shown in Exhibit 3.5.3. In China, however, it may take another two tothree years for the government to test, standardize and license it. Furthermore, Chinesecarriers are also relatively cautious about introducing new technology which is not costeffective. o Most user-affordable handsets will be available as early as 2010 worldwide. o Mobile subscribers in China are more price sensitive than subscribers in many other markets because they have to pay for the handset without subsidy. The ASP (Average Sales Price) of GSM handsets was RMB 1,063 (EUR 104) in June 2007, which can act as a benchmark for mobile WiMax handsets.Exhibit 3.5.3: Global Mobile WiMax RoadmapSource: BDA interviews3.6 Market outlookBDA believes the market for 3G in China will take off from 2009, after the industryrestructuring and licensing is completed. User growth will accelerate, stimulated byintensified competition and network rollout, combined with WVAS promotions.Fixed WiMax deployments will grow, driven by enterprises, backhaul transmission andbroadband access. However, the overall market will remain small, and may shrink with theintroduction of mobile WiMax.Mobile WiMax is attracting interest in China, but is waiting on the government’s decisionsabout the evolution of TD-SCDMA and telecom market restructuring. Concreteopportunities will not emerge until 2010 or even further ahead, when these issues areresolved. o Mobile WiMax vendors are trying to integrate it with the evolution of TD-SCDMA so they can gain government support for it as a local standard. o China’s government is also making plans to develop its own wireless broadband standard, which may be based on mobile WiMax. But the standardization is still at an early stage. o Since Datang Mobile is working on LTE and IMT-Advanced TDD standards as evolution for TD-SCDMA, the chances of mobile WiMax being integrated with TD-SCDMA seem slim. Datang Mobile is wholly-owned by SASAC, and has just received subsidized government loans worth RMB 4.6 billion (EUR 448) in 1H 2007. Page 26 of 66
    • Mobile Broadband Market Outlook in China4 Broadband Service Provider Analysis4.1 Fixed-Line Carriers Dominate Broadband Market4.1.1 Broadband Market Competitive LandscapeChina’s broadband market is very much a duopoly of two carriers, China Telecom andChina Netcom, thanks to their widely deployed copper line infrastructure. By the end of2006, China Telecom held 57% share of the broadband market, while China Netcomoccupied 30%. China Tietong is a distant third with 6% market share. The remaining7% is held by China Unicom and a large number of small broadband players. o China boasted the world’s largest PSTN user base with 277 million users by 2006, which is still growing and will peak at 287 million in 2009. This large PSTN user base serves as a huge addressable for broadband in China. o Most PSTN users can enjoy up to 2-4 Mbps DSL service, which promises a large potential opportunity for DSL as a cost-effective broadband access technology. According to China Telecom’s survey in the 20 southern provinces where it operates, 77% of PSTN users can enjoy up to 2 Mbps data rate within a 3-kilometer distance from the central office. With ADSL2+, 65% of PSTN users can have up to 4 Mbps data rate.Exhibit 4.1.1: Broadband Market Breakdown by Service Provider (2006) China Netcom 30% China Tietong 6% China Unicom 2% Others 5% China Telecom 57%Source: BDAAlthough the government issued a policy mandating equal access to last-mileinfrastructure for all service providers in January 2007, cable and independent CPN(Customer Premise Network) operators have faced increasing pressure from telecomcarriers, in the form of chronic interconnection problems as well as poor service. By theend of 2006, there were only 1.1 million cable modem users and 1.6 million LAN usersserved by CPN operators, which in total accounted for 5% of the market. Page 27 of 66
    • Mobile Broadband Market Outlook in China4.1.2 Challenges for Broadband BusinessWhile the overall broadband market continues to grow rapidly, broadband operators arefacing three major challenges when running their broadband businesses. These threechallenges are declining ARPU, increasing VoIP cannibalization, and growth in traffic onthe backbone network without new revenues to fund increased investment. o With falling prices due to competition and an increasing number of new low-end users, China Telecom’s ARPU has declined by 43% to RMB 77 (EUR 7.7) from 2003 to 2006, while China Netcom’s ARPU fell by 37% to RMB 66 (EUR 6.6) during the same period. o VoIP has become more popular with higher bandwidth internet access. About 11.2% of total internet users used VoIP (PC to PC, PC to phone) frequently in 2006, up from 1.0% in 2004. VoIP has attracted users to by-pass traditional voice service, which has put mounting pressure on the fixed line carriers. o P2P applications including content sharing and streaming video have accounted for 40-50% of traffic over the national backbone network and 60-70% of that over MAN (Metropolitan Area Network), according to China Telecom. The unmanageable, swiftly-growing P2P usage, which thrives on free internet content, has pressured operators to constantly invest in additional bandwidth. However, the incremental investment in broadband does not generate incremental revenue from subscribers who are already paying for a broadband connection.Broadband service providers, especially the telecom carriers, are seeking to overcomethese challenges by controlling costs and promoting VAS to increase ARPU and profit andretain users.4.1.3 Strategies of Fixed-line Carriers for Broadband ServiceFocusing on ADSL as the Key Access TechnologyFixed carriers will continue to focus on ADSL as the most cost-effective broadband accessservice. Optical fiber will be built closer to end users in order to provide higher data rateswith DSL service. o Since its introduction, ADSL has gained share in fixed-line carriers’ broadband offering from other alternative technologies, such as Ethernet LAN. ADSL’s share among different access technologies has grown from 64% in 2003 to 68% in 2006. o Fixed-line carriers control the cost of ADSL through centralized procurement. Despite ADSL’s upgrade to ADSL 2/2+ and the tripled data rate to a maximum 25 Mbps from 8 Mbps, the cost remains at RMB 500-600 (EUR 50-60) per line. o DSL has only penetrated 13% of PSTN users, leaving a large addressable market still to address in the next five years. o The investment return period of ADSL service is usually around 10 months, or 25 months if MAN cost is incorporated in the calculation. Page 28 of 66
    • Mobile Broadband Market Outlook in ChinaOther broadband service providers, therefore, will face continuous pressure to competewith DSL services.Wimax for Greenfield MarketChina Netcom and China Telecom are also conducting trials for fixed WiMax at 3.5 Ghz toprovide broadband service for households and SMEs in greenfield markets. However, theinvestment is limited and has been impacted by changes in competition policy. o In the bidding for 3.5 Ghz for fixed wireless access from 2001 to 2004, China Netcom won 2x10.5 Mhz bandwidth at 3.5Ghz each in 172 cities in the southern provinces, while China Telecom garnered similar spectrum resources in 150 northern cities. o China Netcom suspended its RMB 280 million (EUR 27 million) investment in Guangdong in fixed WiMax in Q1 2007, honoring an agreement it signed with China Telecom in February 2007 to cease competition in the fixed-line market from March 2007 to year-end.Exhibit 4.1.2: Number of Cities where Companies Won 3.5 Ghz Spectrum in2001-2004 172 150 150 143 142 30 4 4 China China China China China Mobile Chinacomm China Satcom Others Netcom Telecom Railcom UnicomNote: Telecom carriers shown in orange, and non-carrier companies shown in green.Source: BDAInitiatives to Drive VAS to Increase ARPUChina Telecom and China Netcom are seeking to provide value-added services viabroadband portals and IPTV to increase revenue. Both businesses are growing slowly dueto widely available pirated content and regulatory barriers.Broadband portals help telecom carriers build their brands, but user and revenue growth isslow, due to user preference for pirated internet content rather than licensed contentprovided by the carriers. o China Telecom’s national portal Vnet, which was launched in 2003, provides gaming, VOD and music downloading for broadband users. In 2006, 21 million Vnet users contributed revenue of more than RMB 500 million (EUR 50 million) or Page 29 of 66
    • Mobile Broadband Market Outlook in China 2% of broadband revenue. o China Netcom has different provincial portals. SPs provide content for portals and share revenue with carriers.IPTV take up is also lackluster due to regulatory barriers. The competition betweentelecom and media industries has forced China Telecom and China Netcom to limit theareas where they are holding IPTV trials. Furthermore, strict content censorship in Chinaprevents carriers from providing content different from traditional TV programs. IPTVusers totaled 0.6 million in 2006, and BDA believes the number will climb to 9.7 million by2011.4.2 Mobile Carriers’ Strategy toward Broadband Business4.2.1 China Unicom has actively Trialed Ethernet LAN and WiMaxAs a competitive carrier for both fixed and mobile services, China Unicom is interested inboth Ethernet LAN and WiMax for broadband services. As a full telecom license holder,China Unicom had some PSTN users in Tianjin, Chongqing and Sichuan, but the user baseis very small with 0.5 million users, limiting the scope of its broadband business. o By the end of 2006, China Unicom had 38,000 dedicated line users and 1.25 million broadband subscribers. o China Unicom built an optical transmission network with adequate nationwide coverage, which enables it to provide FTTx+LAN service to both SMEs and households. o China Unicom has launched WiMAX trials in 5 cities in 2006. The company planned to invest RMB 70 million (EUR 7 million) to deploy fixed WiMax in 21 provinces to offer broadband services to the enterprises or government segments. Unicom is leveraging the 3.5 Ghz spectrum it holds in 143 cities, but it is uncertain if it follow through on this strategy after the trials.4.2.2 China Mobile is highly Interested in WiMaxChina Mobile trails others in broadband due to its lack of a fixed-line license. It is notallowed to provide fixed-line voice service, nor does it have an existing wire lineinfrastructure. At present, it has no other option but to deploy FTTx+LAN, which isexpensive compared with DSL in order to develop its broadband business. By the end of2006, China Mobile had 10,000 broadband users nationwide.However, as a pure play mobile operator, China Mobile has realized it is key to develop abroadband business in order to better compete with fixed-line carriers after they acquiremobile licenses and launch services in 2009. We believe China Mobile would exlporemobile WiMax in order to develop broadband services as well as a complementary solutionto TD-SCDMA. o Fixed-line carriers will provide fixed-mobile convergence applications once they Page 30 of 66
    • Mobile Broadband Market Outlook in China acquire mobile business, which could put pressure on China Mobile’s pure mobile service.In the near future, BDA believes China Mobile will increasingly deploy fixed WiMax toleverage its 3.5 Ghz spectrum resources and licenses. In the meantime, China Mobilecan also leverage its special role as an official sponsor and partner for the Olympic Gamesin 2008. o China Mobile has won 2X10 Mhz spectrum at 3.5 Ghz in 142 cities in 2004, over which China Mobile can deploy fixed WiMax. Previously China Mobile used 3.5 Ghz as backhaul transmission for cellular service. China Mobile has started fixed WiMax commercial operations in a town in Zhejiang province and targeted 1,000 users by 2007. o China Mobile has also started to deploy fixed and mobile WiMax in 8 cities which will host the Olympic Games. China Mobile may expand the services to more cities after the Olympic Games if the service proves popular.4.3 Cable Operators and Other CPN Operators’ Opportunities4.3.1 Cable Operators Are Increasing Investment in Broadband ServiceCable modem and Ethernet LAN services offered by cable operators are losing share dueto limited bandwidth and poor service quality resulting from interconnection issues withincumbent carriers. o Cable modem and Ethernet LAN services can also provide bandwidth up to 1-2 Mbps at relatively low monthly fees of approximately RMB 70-100 (EUR 7-10). o However, access speed slows down significantly during peak hours such as 8:00–11:00 PM, when a large number of users must share limited backhaul transmission bandwidth of 10 Mbps, for example. Backhaul bandwidth is primarily leased at expensive rates by CPN operators from telecom operators, which may provide poor interconnection service as a way to deter CPN operators from competing for users.However, since 2006, cable operators are increasing investment in IP networkinfrastructure and broadband access in order to provide interactive services to competewith telecom carriers’ IPTV service. o Since 2006, cable operators have adopted optical fiber to the building to expand their network capacity and provide IP infrastructure. BDA believes high-speed IP networks will be available in most key cities in China in the near term, driven by SARFT’s promotion. o About 18% of cable operators have already completed a network upgrade in China, with another 54% of cable networks currently undergoing upgrades, according to a survey conducted by the website HC360 in October 2006. Furthermore, 44% of the remaining cable networks will begin upgrades within the next two years. Page 31 of 66
    • Mobile Broadband Market Outlook in China o Over the high-speed IP networks, VOD, broadband access and paid TV services are the top three value-added services preferred by users, which are also the main offering of cable operators.Cable operators are also interested in WiMax to provide broadband services over 700 Mhzspectrum which is allocated for terrestrial TV service. Hangzhou Cable started fixedWiMax trials in June 2007. However, BDA does not believe cable operators will adopt anddeploy WiMax aggressively over the next few years due to limited access to capital andlack of experience running telecom networks.4.3.2 Broadband CPN Operators Face Uncertain FutureCPN operators are promoting their services in Beijing and coastal cities like Shanghai andGuangzhou, where broadband demand is strong. However, they are facing interconnectionand cost problems similar to those encountered by cable operators with FTTx+LANservices.There are a couple of emerging companies deploying fixed WiMax for government orenterprises, of which Chinacomm is the most aggressive. In 2006, MII approvedChinacomm’s deployment of fixed WiMax in 29 cities, a move which leverages its 3.5 GHzlicense. However, BDA believes it will face challenges similar to those it encountered whenit launched fixed wireless access services in 2003. o In 2006, Chinacomm announced plans to deploy fixed WiMax in Beijing, Shenzhen, Guangzhou and Shanghai in the near term and to expand coverage to another 25 cities within 18 months. o Chinacomm won 3.5 Ghz spectrum in 30 cities and deployed fixed-wireless access technology in five cities in 2003. But it failed to compete with fixed-line carriers due to high costs. In 2003, the cost of 2 Mbps provided by fixed wireless was RMB 8,000-10,000 (EUR 857 - 1,071) per month compared with RMB 1,000 (EUR 107) per month for 512 kbps of DSL. o Chinacomm has started deploying fixed WiMax for the government in one district of Beijing with five base stations. o Chinacomm plans to provide broadband services that are competitive with DSL by offering fixed WiMax+WiFi at a lower price and similar speed (Uplink: 512Kps, downlink: 1-2Mbps). However, high costs and interconnection problems with fixed WiMax remain problematic issues.Looking to the future, CPN operators will find it difficult to apply for spectrum for mobileWiMax. At this stage, there is no sign that the government will relinquish its tight controlof the telecom market or promote competition by licensing new players.4.4 Outlook for Future Mobile Broadband OperatorsBDA believes China Mobile will be the most promising player if there is a viable business Page 32 of 66
    • Mobile Broadband Market Outlook in Chinamodel for mobile broadband. China Mobile needs mobile broadband business to transformitself from a mobile pure play into an integrated information service provider. o China Mobile drew up its transformation strategy in 2006. As part of this strategy, China Mobile started to invest in internet businesses from March 2007. It began offering an Instant Messaging service, called Fetion, in June 2007, which China Mobile sees a platform to provide new, innovative applications. o China Mobile will leverage mobile WiMax to offer broadband access services as well as value-added internet applications to mobile broadband users. Furthermore, early internet business experience can help China Mobile develop a strategy to face the competition, and ensure the complementary relationship between mobile WiMax and 3G in future.As shown in the Exhibit below, China Mobile is the best positioned in the future mobilebroadband market because it has ample access to capital, rich mobile network operatingexperience, a strong brand, and a large user base as the dominant mobile operator. It isvery difficult for any other carriers, the cable operators or the independent CPNs tocompete with China Mobile effectively.Exhibit 4.4.1: Opportunities in Mobile WiMax for Different CompaniesSource: BDA Page 33 of 66
    • Mobile Broadband Market Outlook in China5 Equipment Suppliers’ Opportunities5.1 Overall Market Position in Telecom MarketChinese domestic suppliers are well-positioned within the market. The leading supplier,Chinese firm Huawei, claims the highest share of telecom equipment sales to carriers with22% of market share in 2006. Foreign supplier Ericsson ranks second in overall marketshare with 14% and Nokia Siemens Networks (NSN) ranks third also with 14%. Domesticfirm ZTE commands a market share of 11%, and the third-ranked Chinese supplier,Fiberhome, ties for eighth place overall with 2% market share.Exhibit 5.1.1: Share of China’s Telecom Equipment Sales to Carriers in 2006 Others Fiberhome Huawei 15% 2% 22% Cisco 2% Nortel 5% Ericsson Motorola 14% 5% Alcatel Lucent 10% NSN ZTE 14% 11%Note: NSN means Nokia Siemens NetworksSource: BDA and Company Information5.1.1 Domestic Vendors Dominate Wireline Market and Gain Share in Wireless MarketChinese domestic suppliers led by Huawei and ZTE dominate the wireline market. BDAestimates 75% of sales in the wireline market go to domestic vendors.Exhibit 5.1.2: Vendors’ Share in Key Wireline Sectors in China Sectors Huawei ZTE Fiberhome ASB OthersDigital Switching and 50% 30% - 20% - NGNOptical transmission 44% 12% 9% 15% 20% DSLAM 50% 30% - 20% -Note: ASB refers to Alcatel Shanghai Bell, a JV between Alcatel and the Shanghai government.Source: BDADespite being latecomers to the market, Huawei and ZTE are gaining share from leadingforeign suppliers in the wireless market. In China Mobile’s recent procurement for GSMRadio Access Network (RAN), Huawei emerged as the second largest supplier after Page 34 of 66
    • Mobile Broadband Market Outlook in ChinaEricsson, increasing its share to 23%, up from 5% in 2006. ZTE also raised its share to5%, up from 1% in 2006. Huawei and ZTE’s success in China Mobile’s GSM procurement isa sign of their overall strength since China Mobile accounts for 80% of total investment.Exhibit 5.1.3: Market Share in China Mobile’s GSM RAN 3% 12% Nortel 8% 16% 13% ASB 20% Motorola 25% NSN 27% Ericsson 42% 5% ZTE 23% Huawei 1% 5% 2006 1H 2007Source: Company Information, BDA AnalysisIn CDMA, ZTE has become a top tier supplier. According to China Unicom’s analysis, ZTEhas become the third largest vendor in terms of accumulated network capacity with 21%CDMA RAN share in 2006. (See Exhibit 5.1.4)Exhibit 5.1.4: Accumulated Share in China Unicom’s CDMA RAN Samsung Huawei 1% Motorola Ericsson5% 23% 11% Nortel 17% Lucent 22% ZTE 21%Source: China Unicom5.1.2 Key Success Factors for Domestic VendorsSeveral factors account for the recent success of domestic telecom suppliers.Unquestionably, domestic vendors offer much lower price than foreign competitors,thanks to their lower-cost structure and margins. In the past few years, domesticvendors have offered prices 30-50% lower than foreign competitors, especially forwireline products including digital switching, DSLAM and optical transmission. Domesticcompanies’ R&D personnel costs are 60-80% cheaper than foreign peers’, according toHuawei’s estimate. At present, price competition is still the key strategy for domestic Page 35 of 66
    • Mobile Broadband Market Outlook in Chinavendors.But low cost is not the only reason for domestic vendors’ gains. They also provide bettertechnical support and customization for Chinese carriers. With large sales and supportteams nationwide, domestic vendors can respond much more quickly than foreigncompetitors in the event of network problems. Furthermore, domestic vendors’ localR&D teams are willing to revise equipment specifications and offer heavy customizationaccording to carriers’ needs. In contrast, most foreign vendors with products geared to aglobal market are not able to match domestic vendors in terms of customization.Finally, domestic vendors are improving their product quality by investing heavily in R&D.In particular, Huawei and ZTE have spent 10% and 12% of their sales respectively on R&Din 2006, developing 3G, WiMax, IMS and other new technologies. Ericsson and NSN spend15% of sales on R&D by comparison.5.2 Suppliers’ Projected 3G Market PositionBDA believes Huawei and ZTE will grab 39% of China’s 3G market in the next two to threeyears, up from their 11% share of the current 2G market. o Huawei and ZTE’s recent gains in GSM will help them compete in the future WCDMA market. Huawei‘s significant presence in previous WCDMA trials will also help it gain share in future WCDMA deployments. o In the TD-SCDMA market, ZTE won nearly 50% of China Mobile’s base station contracts in 1H 2007. BDA believes ZTE will maintain its share in future expansion contracts. o ZTE has also achieved approximately 20% share in the existing CDMA network capacity and should hold this position in a future CDMA2000 1xEV-DO rollout.Exhibit 5.2.1: Shares in China’s 2G and 3G Markets 11% 12% Other domestic 39% vendors Huawei + ZTE 89% Foreign vendors 49% 2G 3GSource: BDA estimatesBDA believes ZTE will become more competitive to Huawei in the 3G market due to itsstrong foothold in the TD-SCDMA market and established position in CDMA. o Huawei will be a strong competitor to Ericsson and Nokia Siemens Networks in WCDMA. However, it will not take as big a share of this market as ZTE has in TD-SCDMA due to the intensity of competition in WCDMA. Page 36 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 5.2.2: Share of TD-SCDMA RAN Contracts in 1H 2007 46% 28% 14% 12% 1% ZTE Datang-ASB TD Tech Ericsson OthersSource: BDA5.3 Competitive Positioning of Key WiMax SuppliersThe fixed WiMax market is dominated by foreign companies due to their strong presencein the wireless broadband market. The primary suppliers of fixed WiMAX equipment inChina include Alvarion Network, Airspan, Redline Communication, Axxcelera BroadbandWireless, and Siemens SPA. o These vendors are actively trialing WiMAX in China, building out networks with different carriers. In contrast, most of the major vendors are entering the market cautiously, typically only through OEM deals such as those between Alcatel Lucent and primary supplier Alvarion, or that between Ericsson and Airspan. o In terms of trials and commercial deployments in China, Alvarion has the largest market share at approximately 50%.Exhibit 5.3.1: Market Share of Fixed WiMAX Suppliers others Siemens 5% 5% Axxcelera 10% Redline Alvarion 10% 50% Airspan 20%Source: BDA interviewsIn the mobile WiMax market, telecom equipment giants are the major players, includingMotorola, Nortel, Samsung, Alcatel-Lucent and the domestic vendors Huawei and ZTE.Early entrants like Samsung and Nortel are well-positioned in the trials at present, butcompetition from domestic vendors will be intense in the future. o Samsung has supplied products for the first commercial deployment of mobile WiMax, taking place in Wuhan. Page 37 of 66
    • Mobile Broadband Market Outlook in ChinaHuawei and ZTE have proved successful in taking share from foreign competitors aslatecomers, for instance in the markets for digital switching, DSLAM, optical transmission,data communication and 2G cellular networks. BDA believes they will very likely repeatthe story in China’s mobile WiMax market, thanks to their heavy investment, aggressiveprice cuts, good service and government support. o Huawei and ZTE have spent more than 10% of sales revenue on R&D in recent years, comparable with their foreign peers. o ZTE increased its R&D spending to 12.3% of its revenues in 2006, up from 9.0% in 2005, due to growing investment in TD-SCDMA and mobile WiMax.As indicated in Exhibit 5.3.2 below, Huawei and ZTE have closed the gap with leadingglobal vendors in terms of R&D investment as a percentage of revenue. However, inabsolute terms, Huawei and ZTE’s R&D spending still trails far behind global competitors.Huawei’s R&D spending is 22% of Ericsson’s outlay, while ZTE’s is just 9%.Exhibit 5.3.2: R&D Spending in 2006 in Absolute Terms and as a Percentage ofRevenue (USD million) 4,500 20% 3,842 18% 4,000 3,609 3,500 16% 16% 16% 3,000 14% 12% 12% 2,500 10% 10% 2,000 8% 1,500 6% 850 1,000 4% 363 500 2% 0 0% Ericsson NSN Huawei ZTE R&D spending in 2006 R&D as % of revenueSource: Company informationNote: For Ericsson, R&D spending as percentage of revenue refers only to their system product line;data for the other three is company-wide.Furthermore, Huawei and ZTE have pursued a “practical” R&D strategy that focuses ontechnologies with potential demand in the next two to three years. BDA believes Huaweiand ZTE’s current active involvement in mobile WiMax means they will be well-positionedin the future China market. o Huawei started to focus on mobile WiMax in 2006, and the company has been trialing mobile WiMax with China Mobile in Qingdao, along with Samsung. o ZTE is a board member of the WiMax Forum. It has successfully supplied mobile WiMax data cards to Sprint Nextel for construction of the world’s largest commercial mobile WiMax network so far. Page 38 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 5.3.3: Market Position or Investment in Mobile BroadbandTechnologiesSource: BDA Page 39 of 66
    • Mobile Broadband Market Outlook in China6 Consumer Demand Analysis6.1 Broadband Applications Over the Internet are Getting PopularInternet users have been switching to high speed internet so they can use moreinteractive community services and applications. According to the bi-annual survey byCNNIC, internet users have significantly increased their usage of social networking andcommunity sites (including blogs and video sharing), video and music downloads, andonline gaming in the past two years, as shown in the Exhibit below. Meanwhile, they arespending less time on regular internet services like email, news sites and search engines.Exhibit 6.1.1: Most Frequently Used Internet Services Email 85.6% 56.1% News Reading 62.0% 53.5% Search Engine 65.0% 51.5% Acquiring Information 49.9% 41.0% BBS, Online Community 20.8% 36.9% Watch/Download Video 5.1% 36.3% Listen/Download Music 8.0% 34.4% Software Downloading 37.4% Dec. 2004 32.9% Dec. 2006 Online Gaming 15.9% 26.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%Note: Respondents gave multiple answersSource: CNNIC6.2 Wireless Internet is Gaining TractionInternet users have increasingly embraced wireless internet services and are leapfrogginginto mobility. According to the CNNIC survey, the number of users accessing internet viahandset has more than doubled within the last six months, from 17 million in December2006 to 44.3 million in June 2007, representing 27.3% of total internet users. By June2007, another 11.3 million wireless internet users had access via laptop data cards overWiFi or GSM/CDMA networks.WAP (Wireless Application Protocol) over GPRS/EDGE or CDMA 1X networks has emergedas the major platform to deliver wireless internet service. Most WAP users view theservices as a way of killing time when they are on the move, or simply feeling bored,indicating that there is genuine demand for entertainment over mobile internet. 26.1% Page 40 of 66
    • Mobile Broadband Market Outlook in Chinausers chose WAP for internet access as there was no alternative in case of emergency, andanother 13.6% use the handset as their only internet access terminal.Exhibit 6.2.1: Key Reasons for Using WAP Service (Apr. 2007) On the move 53.7% Killing time 37.2% No alternative in case of emergency 26.1% Convenient and Cheap 18.5% Curiosity for new service 17.0% Only handset available for internet 13.6% 0% 10% 20% 30% 40% 50% 60%Source: CNNICMobile operators together with content and service providers are offering WAP users agrowing range of services and applications. According to CNNIC’s survey, downloads ofimages or ringtones are the most popular services with WAP users, as 63% of respondentshave used these services in the past 6 months. More than 40% of WAP respondentsaccessed search engines, games and music via WAP. However, video has yet to becomepopular; CNNIC found only 11.7% of WAP users had tried the service within the past sixmonths.Exhibit 6.2.2: Most Popular WAP Services and Applications (Apr. 2007) Picture or Ringtone Downloading 63.0% Search Engine 48.0% Gaming 40.4% Music 40.2% E-book 34.9% Video 11.7% 0% 10% 20% 30% 40% 50% 60% 70% Source: CNNICAmong wireless internet users, the top two complaints were low data transmission ratesand high prices, followed by limited content or applications. Mobile broadband availabilitywill therefore drive up the usage of wireless services and applications in China. Page 41 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 6.2.3: Main Complaints about WAP Services (Apr. 2007) Low data rate 44.4% High price 29.6% Lack of price transparency 18.3% Limited content 16.6% Poor stability of connection 14.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%Source: CNNIC o At present, WAP services are using GPRS and CDMA 2000 1x as the primary network infrastructure. The low data rate makes for a poor user experience and is a barrier to certain services requiring high speed transmission, such as streaming mobile TV. Low data rates are therefore the biggest obstacle to wireless internet development at present. o The comparison in Exhibit 6.2.4 indicates the current data rate is too low to support more advanced applications. China Mobile has started to upgrade networks to EDGE nationwide, starting in 2007, while China Unicom has been upgrading its GSM to GPRS networks since 2007. Both moves will improve user experience of WAP services significantly until 3G is widely available.Exhibit 6.2.4: Comparison of China Mobile and China Unicom WAP Services(Mar. 2007) % in Mobile Average Data Network Infrastructure WAP User Availability Users Rate China Mobile GPRS Nationwide 10-20 kbps 40 million 13% Mainly in coastal China Mobile EDGE 100 kbps provinces China Unicom CDMA 1x 4 million 12% Nationwide 100 kbpsSource: Company information o The price of WAP services is expensive given their limited capacity and data rate. WAP costs RMB 0.03 (EUR 0.003) per KB or RMB 100 (EUR 10) for 800 MB, compared with RMB 3 (EUR 0.3) per hour for DSL. China Mobile also offers a flat fee package of RMB 500 (EUR 50) per month for unlimited GRPS access, compared to the average flat fee for GPRS of less than RMB 100 (EUR 10) per month. o The variety of service and content are not as rich as on the internet. The top four most popular services for WAP users are picture/ring tone downloads, search, gaming and music listening/downloading. Page 42 of 66
    • Mobile Broadband Market Outlook in China6.3 Mobile Broadband will Stimulate User DemandBDA believes wireless internet user numbers will soar to 211 million by 2011, representing26% penetration among mobile subscribers. The introduction of 3G, especially thedeployment of high speed HSDPA and HSUPA, will significantly remove the existingbarriers facing wireless internet users (as listed in Exhibit 6.2.3.). At the same time, ChinaMobile’s EDGE upgrades will also attract more mid-to-low end users to try out simplewireless internet applications. o Tests for WCDMA and HSDPA show that when a user downloads a picture or large-size file, WCDMA can achieve this up to two thirds faster than EDGE, while HSDPA is up to 80%-90% faster. o EV-DO may provide similar improvements in data rates for CDMA2000 1x.CNNIC’s survey in April 2007 shows that mobile subscribers are willing to pay forapplications over mobile broadband. About one quarter of respondents were willing to payfor information services, such as weather forecasts and stock market information. MobileTV/video, however, jumped to the No. 2 slot, with 34.5% users willing to pay to view,suggesting it has potential as a key driver of 3G data service demand. Other personalizedentertainment services, including mobile music, gaming and social networking were, andseem set to remain, the 3G services that subscribers are most willing to pay for in thefuture.Exhibit 6.3.1: 3G Services That Users Are Willing To Pay For (Apr. 2007) Service Information 39.9% Mobile TV or Video 34.5% News 33.9% Music 30.0% Mobile E-mail 27.8% E-book 25.0% Gaming 24.0% Social Networking 17.4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%Source: CNNICIn terms of pricing for 3G applications, CNNIC’s survey indicates most WAP users arewilling to pay less than RMB 50 (EUR 5) per month for wireless internet services, verysimilar to the money they are spending on the current 2G WAP services now. 6.6% ofthem said they would only accept free wireless internet services. However, given the muchbetter user experience with 3G services, consumers’ willingness to pay may increase fornew applications. Page 43 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 6.3.2: Prices WAP Users Would Accept for 3G Wireless InternetServices (RMB, Apr. 2007) Do Not Care The >100, Price, Free, 4.8% 3.0% 6.6% 51-100, 10.2% 1-10, 21.8% 21-50, 24.8% 11-20, 28.7%Source: CNNIC Page 44 of 66
    • Mobile Broadband Market Outlook in China7 Emerging Business Models for Mobile Broadband7.1 VoIP Market Analysis7.1.1 Broadband VoIP Has Become PopularBroadband VoIP provided by internet companies has become a popular voice service inChina with 11.2% of total internet users having adopted the service by year-end 2006, upfrom 6.5% in 2005. Total broadband VoIP users reached 15.3 million by 2006 up from0.9 million in 2004.Driven by growth in broadband usage and improved quality of VoIP, VoIP users will reach132.9 million by 2011, representing 35% of the total 332 million Internet users.Exhibit 7.1.1: Broadband VoIP User Growth (million) 200 35.0% 40% 29.0% 150 24.0% 30% 116.3 19.0% 100 15.0% 84.3 20% 11.2% 60.2 50 6.5% 40.7 10% 26.0 1.0% 7.2 15.3 0.9 0 0% 2004 2005 2006 2007F 2008F 2009F 2010F 2011F Internet VoIP user VoIP user as % of internet userSource: CNNIC7.1.2 IM Is Now a Key Communication Tool over InternetInstant Messaging (IM) service has become the major communication tool for internetusers. According to the CNNIC survey in June 2007, 113 million internet users or 70% ofthe total have tried IM service, much higher than the 39% in the US (Mar. 2007,www.pewinternet.com) and the 48% in South Korea (Feb. 2007, NIDA). In contrast, thesame surveys showed that only 55% of China’s internet users have tried email service,compared with 91% in the US and 93% in South Korea.IM is also starting to replace traditional means of communication, according to anotherCNNIC survey in November 2006. In five tier-1 cities (Beijing, Shanghai, Guangzhou,Chengdu and Xi’an), over 40% of active IM users (those who have loged-in to IM servicewithin the last 30 days or about 60% of total IM users) considered IM service as theirprimary communication tool, while over 60% of IM users reduced email usage and asimilar percentage reduced telephone service usage. CNNIC’s survey in December 2005showed that 60-70% of IM users tapped voice and video phone services to communicate Page 45 of 66
    • Mobile Broadband Market Outlook in Chinawith other IM users.The IM user base has become comparable to wireless and wireline accounts in China. Byyear-end 2006, Tencent’s (service brand QQ) IM accounts totaled 230 million, surpassingsubscription accounts of China Telecom, China Unicom and China Netcom. Meanwhile,IM users are still growing strongly while China Telecom and China Netcom have started tosee slowing subscriber increase due to fixed-to-mobile substitution.Exhibit 7.1.2: Comparison of Wireless / Wireline Accounts and IM ActiveAccounts by YE 2006 (million) 301 223 230 142 119 113 47 25 24 China China China China Tencent MSN Sina Frequent IM users Mobile Telecom Unicom Netcom IM users* 113 million IM users are for June 2007Note: 1) Active accounts refer to those that have logged in within the last 30 days; 2) Most usershave multiple accounts so active accounts outnumber users.Source: company information, CNNIC7.1.3 Market Outlook for VoIP with Availability of Mobile BroadbandIM has been widely adopted by mobile users. According to CNNIC’s December 2006survey, 15.5% of mobile internet users had adopted online chat, making it the fourth mostpopular service, after email, browsing and downloading files, despite the high price andslow data rate.With the introduction of 3G or mobile WiMax, mobile VoIP will become much easier andprevalent as the primary voice service. This is especially likely after 2011, when HSUPA isexpected to enter the China market. IM services such as QQ and Skype will becomemainstream voice services, thanks to their large user base and attractive andcomprehensive applications, including community, gaming, and video sharing.Consequently mobile carriers will see serious IP cannibalization in both local and longdistance voice services. Mobile carriers have started to fight back against the potentialcompetition by offering their own IM services. China Mobile launched its own IM service,Fetion, commercially in June 2007. Fetion had attracted 8 million active users by May 2007.We believe China Mobile’s IM will continue to do well, given its huge mobile subscriberbase. China Unicom has also launched its own IM service, ‘UM’, but the user base is much Page 46 of 66
    • Mobile Broadband Market Outlook in Chinasmaller. Mobile carriers aim to retain users through their IM platform, which they can then useto offer integrated applications.7.2 Mobile Music Market Analysis7.2.1 CRBT has Grown Quickly as the Major Mobile Music ServiceThe most popular mobile music service by far is CRBT,the customized ring tone thatcallers hear before getting connected to a subscriber. CRBT is heavily promoted by mobileoperators, and consequently claims a user base of over 206 million as of 2006 and a totalpenetration rate of 46.5%. China Mobile’s CRBT subscribers exceeded 200 million inMarch 2007, with 62.5% penetration.Exhibit 7.2.1: China Mobile and China Unicom CRBT Penetration 60% 56.6% 46.9% 40% 36.5% 25.9% 23.7% 25.2% 20% 13.3% 17.2% 9.4% 0.3% 0% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 China Mobile China UnicomSource: China Mobile, China UnicomRingtones are offered on carriers’ own wireless music platforms and free WAP portals, andaccount for approximately 40% of mobile operators’ total WAP revenues. Full-track orentire song downloads are currently hampered by slow network speed in China, but areexpected to take off once 3G is launched commercially.BDA forecasts the market will reach RMB 16.9 billion (EUR 1.6 billion) in 2007 and RMB37.1 billion (EUR 3.6 billion) in 2011, translating into a five-year CAGR of 24.3%. Mobileoperators have realized mobile music’s tremendous growth potential and have heavilypromoted these applications, most recently teaming up with music labels to generate awider variety of content and improve the user’s experience. Page 47 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 7.2.2: Mobile Music Market Size Forecast (RMB billion) 36% 37.1 40 40% 30.4 30 26% 25.1 22% 21.3 21% 20 16.9 18% 20% 12.5 10 0 0% 2006 2007F 2008F 2009F 2010F 2011F Market Size Annual GrowthSource: BDAThe success of full track music downloading in Japan indicates there is huge potential inChina, and that mobile phones will become a major platform for the distribution of mobilemusic. In Japan, the mobile full track music download market has topped USD 180 million(EUR 145 million), far outstripping USD 50 million (EUR 40 million) for internet full trackmusic downloads in 2004. A total of 55 million songs have been downloaded to mobilephones compared with 23 million songs over the internet.BDA believes CRBT and ringtone download will continue to take the lion’s share of mobilemusic market, but full track music download will be the fastest growing music applicationin China.7.2.2 Mobile Music Is Facing Challenges as Well as Momentum from Mobile CarriersCRBT growth may plateau in the short term mainly because of a weak business model.CRBT revenues only come from the monthly subscription fee of RMB 5 (EUR 0.5), whichallows a subscriber to choose a CRBT. Users need to pay to change their CRBT, butunfortunately, they do not do so frequently. Using SK Telecom’s CRBT as a benchmark,its CRBT penetration has reached saturation with penetration of 70%, Chinese mobilecarriers may also see flatter penetration and growth ceiling within two years.Many users download free music from the Internet directly to their mobile phone via datatransmission lines. The availability of free online music has become a seriousimpediment to paid mobile music downloads.Chinese mobile operators have recognized that mobile music will remain a key revenuesource, and as a result they are heavily promoting it as their primary WVAS. ChinaMobile and China Unicom have even worked with music labels to build up their own mobilemusic platforms. They also started creative mobile music services to further cultivate themarket. For example, China Unicom announced the commercial launch of its “Super Page 48 of 66
    • Mobile Broadband Market Outlook in ChinaCRBT” service, allowing subscribers to add a short piece of personalized content beforeplaying the traditional CRBT. China Mobile launched M.Music Club in July 2006, allmembers of which receive music related information via weekly SMS and MMS. VIPmembers, who pay RMB 5 (EUR 0.5) per month for membership, are able to receive a30% discount when changing a CRBT or downloading a ringtone.7.2.3 Market Outlook for Mobile Music with Availability of Mobile BroadbandFull track music downloading is the next big application for mobile operators. ChinaUnicom began testing its full track downloading service on both GSM and CDMA 1xnetworks in July 2007. However, because download speeds currently only reach up to 15kbps, full track music downloading will not achieve its full potential until the arrival of 3G,when faster networks will make the service more accessible and more popular. Full trackmusic downloading will take on a pay-per-download model similar to the business modelof Apples iTunes, a monthly or annual subscription model, or a free download model.Customers are more willing to pay for personalized, customized mobile music services andto enjoy portable music in mobility. According to CNNIC’s report in May 2007, 30.0% ofsurveyed people said they are willing to pay for mobile music download services if 3Gcomes, indicating the great user demand for China’s future mobile music market. CRBT’sshare of the total market will decline with the rise of music downloading service.7.3 Mobile TV Market Analysis7.3.1 Introduction to Mobile TVIn this report we will focus on mobile broadband, and mobile TV services provided overcellular networks, including streaming or cached video content services. Other broadcastservices for mobile terminals using technologies such as DVB-H, S-DMB, T-DMB andMediaFLO will not be discussed since they are offered via broadcasting networks.Mobile StreamingMost mobile TV services use mobile streaming technology which transfers digital data ontelecom networks in real-time, in such a way that the recipient can play the contentcontinuously while the entire content does not have to be downloaded or stored on themobile device.MBMSMultimedia Broadcast/Multicast Service (MBMS) can support 3G networks to providemobile TV service in multicast and broadcast modes. The infrastructure offers an optionto use an uplink channel for interaction between the service and the user. Page 49 of 66
    • Mobile Broadband Market Outlook in China7.3.2 Mobile Operators are Providing Mobile TV Service with SPsMobile TV market growth will be driven by the mobile carrier’s strategies on video-relatedWVAS and increasing demand for portable video service. China Mobile has commerciallystarted its mobile TV service named “Dreamo” on its GPRS and EDGE networks withShanghai Media Group (SMG), China Central Television (CCTV) and China RadioInternational (CRI) in 2006. China Unicom has also launched its own mobile TV serviceas a new WVAS based on CDMA 1x network. Subscribers can enjoy the same live TVprograms broadcast by TV stations, movie or video clips for VOD content and mobile videodownload services by paying a service fee of RMB 10 (EUR 1) per month or RMB 2 (EUR0.2) per view plus traffic fee.We estimate China’s mobile TV users reached 5 million by the end of 2006, most of whichonly watch free TV channels or content. In March 2007, Shanghai Dragon New Media(Dragon), a wholly-owned subsidiary of Shang Media Group (SMG) and the leading mobileTV SP cooperating with China Mobile and China Unicom, gained 2 million mobile TV users,0.5 million out of which are paying subscribers.7.3.3 Mobile TV Faces Challenges from BroadcastersRegulatory barriers to telecom-media convergence are the key issue for mobile TV servicein China. Mobile operators are required to hold a license for mobile TV services issued bythe State Administration of Radio Film and Television (SARFT) before they can providemobile TV services legally. Unfortunately, SARFT has only issued a limited number oflicenses to its TV and radio station subsidiaries, such as SMG, CCTV, Southern MediaCorporation (SMC) and CRI. China Mobile and China Unicom have no choice but to workwith these licensed broadcasters who are also competitors in this potential market. Bothsides want to take control of the value chain to demand a larger share of revenue, andthey may form uneasy partnerships.Telecom-based mobile TV services face challenges from similar broadcaster’s service.SARFT is committed to Digital Audio Broadcasting (DAB) and the domestic standard ChinaMobile Multimedia Broadcasting (CMMB) to enable broadcasters to provide mobile TVservices to mobile devices directly without telecom networks. Thus, other foreignstandards such as DVB-H, MediaFLO, the Korean S-DMB and T-DMB will struggle to land inChina. DAB-based mobile TV service is already available in Beijing, Shanghai andGuangzhou. Although no DAB-featured mobile phones are allowed to be sold in themarket, people can receive programs using other mobile devices, such as MP4 players,PDP and in-vehicle terminals. SARFT expects to offer commercial CMMB service beforethe 2008 Olympics.Streaming mobile TV service requires a relatively high data rate, but the current 2.5Gnetwork provides an unsatisfactory user experience. Network capacity is another bigproblem for streaming. When the density of simultaneous mobile TV users becomes high, Page 50 of 66
    • Mobile Broadband Market Outlook in Chinathe picture quality will typically drop significantly. Mobile operators are also concernedthat streaming mobile TV at peak time takes up too much network capacity, reducing basicvoice or other data service capacity.7.3.4 Market Outlook for Mobile TV with Availability of Mobile BroadbandMobile TV is an attractive wireless application for consumers because wireless subscribersalways have their mobile phone with them and are likely to utilize mobile videoentertainment services during free moments. According to CNNIC’s report in May 2007,34.5% of surveyed people said they are willing to pay for mobile video services if they canenjoy wireless broadband through their mobile phones on a 3G network.Mobile operators will be the key players for mobile TV services as they control billing andhave strong marketing capabilities. Utilizing telecom networks, mobile operators are alsoable to provide more interactivity for mobile TV services. TV content will be delivered tomobile subscribers in different modes to satisfy various user demands. Unicast mode canbe supported by mobile streaming technology and will be popularly used for personalizedor customized VOD services. In the meantime, MBMS will enable mobile carriers totransmit TV programs with broadcast and multicast modes to many subscribers at onetime.We believe the streaming mobile TV market will not take off until operators upgrade theirnetwork to 3G and mobile streaming technology improves. A satisfactory mobile videoservice requires 3G architecture, over which significantly-enhanced data rates will helpimprove mobile TV service quality with higher frame rate.MBMS, which has been standardized in various groups of 3GPP (Third GenerationPartnership Project), can serve telecom operators as a competitive tool against the mobileTV services offered over broadcast networks. However, MBMS will not rise within in thenext three years in China due to a lack of terminals. The first functional mobile terminalsupporting MBMS is estimated to be available by early 2008.7.3.5 Lessons from China IPTV marketChina IPTV Market Overview and OutlookChina’s Internet Protocol TV (IPTV) users trebled in 2006, achieving a total of 0.6 millionsubscribers by year-end 2006, and a penetration rate of 1% among China’s 54.6 millionbroadband users. However, BDA believes IPTV user growth will remain at a moderatepace in 2007 due to regulatory barriers and carriers’ concerns over technology standardsand business models, as well as growing competition from Digital TV services (DTV).BDA forecasts users will increase to 1.3 million by 2007 and 9.7 million by 2011,translating into 2% and 8% of broadband users in those years. Meanwhile, cable DTVusers will maintain strong growth to 92.6 million households by 2011, far ahead of IPTV Page 51 of 66
    • Mobile Broadband Market Outlook in Chinamarket.Exhibit 7.3.1: Forecasts of Broadband, Cable DTV and IPTV User (million) 116.4 132.6 100.9 Broadband user 92.6 85.5 69.4 74.6 54.6 57.6 Cable DTV user 40.2 41.6 25.6 12.6 7.2 9.7 4.1 0.6 2.8 5.0 IPTV user 0.2 1.3 2005 2006 2007F 2008F 2009F 2010F 2011FSource: BDARegulatory RestrictionsSARFT continues to limit telecom carriers’ IPTV rollout, prohibiting telecom carriers fromoffering IPTV services directly to consumers and instead forcing them to partner with thelimited number of companies licensed by SARFT. SARFT has also put the brakes on thenumber of licenses granted to IPTV content providers, and SARFT together with its localsubsidiaries have been equally slow to allow new cities beyond the original 12 to offerIPTV services. BDA believes the situation will not improve in the near term becauseSARFT wants to protect cable TV operators and promote cable DTV services. o IPTV licenses were issued to only three companies in 2006, up from only one in 2005. With the exaction of SMG, which is actively promoting IPTV services nationwide, CCTV and SMC are relatively cautious in their cooperation with telecom operators. o Only 12 cities have been approved to offer IPTV services, out of a total of more than 300 cities in China.Exhibit 7.3.2: Cities Approved for IPTV Services China Telecom’s Home Territory China Netcom’s Home Territory Page 52 of 66
    • Mobile Broadband Market Outlook in ChinaNote: China Netcom’s IPTV trials are being held in six cities: Harbin, Heihe, Mudanjiang (all inHeilongjiang province), Shenyang, Dalian, Panjin (all in Liaoning province). China Telecom isholding trials in Shanghai, Taizhou (Zhejiang province), Fuzhou, Xiamen (both in Fujian province),Xi’an and Hanzhong (both in Shaanxi province).Source: China Telecom, China NetcomBusiness Model DilemmaResidents in China are not willing to pay for IPTV service at present, due to widelyavailable free TV programs and other pirated video content. Consumers can typicallyenjoy 100+ free DTV channels for RMB 15-30 (EUR 1.5-3.0) per month. The slow take-upof paid DTV service is a good example. Only 1.73 million households subscribed to paidDTV channels by year-end 2006 despite the fact that 20-30 paid DTV channels areavailable in most cities. The total revenue nationwide for paid DTV service was only RMB523 million (EUR 52.3 million).IPTV so far can not effectively differentiate itself from traditional TV or DTV servicesexcept for time-shift that allows users to play back programs within 24 hours and limitedVAS including offerings such as voting in contests. Users have to pay an additional RMB10-50 (EUR 1-5) in order to enjoy the time-shift or VAS for IPTV. Worse, IPTV lacks localTV programs in most cities due to competition with local cable operators’ DTV services,causing the IPTV audience to be relatively small. o Local TV channels attract a mainstream audience in most cities. According to a survey conducted by AC Nielsen in more than 20 tier-one cities in 2005, local channels attracted about 60% of the audience between 18:00-24:00.Exhibit 7.3.3: Price and Service Comparison of TV Services TV Service Monthly Fee Services/Features RMB 12 – 18 Analog TV 50-60 channels with many local channels (EUR 1.2-1.8) 50-120 channels, with many local channels, information RMB 20 – 35 DTV broadcasting, Video On Demand (VOD), potential time (EUR 2-3.5) shifting in future RMB 30-70 50-60 channels, without local content in most cases, IPTV (EUR 3-7) information broadcasting, VOD, time shiftingSource: BDA interviewsDuring the next two to three years, carriers will be reluctant to invest large amounts inIPTV because of the financial risks and the lack of a feasible business model. Carriersalso face high initial spending on network upgrades and terminal subsidies for IPTVservice. However, they have to save capital for 3G rollouts starting from 2009. o Carriers must upgrade metro networks and increase bandwidth for broadband access to 2-3 Mbps, costing about RMB 1,000 (EUR 100) per end user, in addition Page 53 of 66
    • Mobile Broadband Market Outlook in China to RMB 800-1,000 (EUR 80-100) for DSL, an IPTV platform and Set-Top Box (STB). o Telecom carriers usually share 55% of IPTV revenue, leading to an ARPU of RMB 15-35 (EUR 1.5-3.5), coming from charges of RMB 30-70.Indications for Mobile Broadband MarketLessons can be learned from the IPTV market for mobile TV services. The competitionbetween SARFT and MII will continue, while the business model remains a dilemma formobile carriers. Cellular network-based broadcast, multicast or unicast mobile TV servicesare attractive with interactivity, but face content shortages and poor video quality. Itremains unclear how mobile carriers will surmount these problems or the regulatorybarriers they face.7.4 Gaming Market Analysis7.4.1 China’s Online Gaming Market Comes out FlightingMarket OverviewChina’s online gaming market has been growing at an astonishing pace. Its total marketsize jumped 78.3% in 2006, to RMB 6.54 billion (EUR 654 million), according to data fromthe China Game Publishers Association (CGPA). More than 100 game operators competein this crowded arena, with top players including NASDAQ-listed Shanda, Netease, The9and Perfect World. The two main categories of games in China are massive multiplayeronline role playing games (MMORPG) and casual games.BDA forecasts that online gaming market revenues will increase to RMB 24.4 billion (EUR2.4 billion) by 2011 with a 5-year CAGR of 30.2%. Growth will be driven by the risingnumber of internet users, especially broadband users, and increasing demand for onlineentertainment. According to CNNIC’s July 2007 report, user demand for games remainsstrong. Of those surveyed, 47% have tried playing online games at least once.Exhibit 7.4.1: Online Gaming Market Size and Forecast (RMB billion) 51% 30 60% 24.4 35% 21.0 20 17.6 40% 13.3 9.9 32% 10 6.5 20% 19% 16% 0 0% 2006 2007F 2008F 2009F 2010F 2011F Market Size Annual GrowthSource: CGPA, BDA Page 54 of 66
    • Mobile Broadband Market Outlook in ChinaAccording to data from CGPA, the country had 32.6 million online gamers by the end of2006, up 24% from 26.3 million in 2005. The number of paying gamers has risen to 19.3million at the end of 2006, up from 13.5 million a year earlier. Clearly, more and morepeople are willing to pay to play, although the item-based free-to-play now generates agreater share of industry revenues.Exhibit 7.4.2: Online Gamers Forecast (million) 27.5% 27.8% 100 27.0% 28% 26.0% 83.8 80 73.2 25.0% 22.6 26% 62.4 60 23.7% 20.5 51.7 42.0 18.7 24% 40 32.5 16.5 14.7 13.2 52.7 61.2 43.7 22% 20 35.1 27.3 19.3 0 20% 2006 2007F 2008F 2009F 2010F 2011F Paying Gamer Non-paying Gamer PenetrationSource: CGPA, BDAThe overwhelming majority of gamers, 81%, are aged between 19 and 30. Furthermore,CGPA found that students make up the largest single category of online gamers, at 27.6%of the total. Non-adults under 18 account for a further 7.9%. For these reasons, thegaming industry has attracted criticism for the social problems posed by game-addictedyouth.Exhibit 7.4.3: Age Distribution of Online Gamers (2006) 36-40 >40 2.0% 0.7% ≤18 31-35 7.9% 8.5% 26-30 19-22 21.6% 30.7% 23-25 28.6%Source: CGPANew Business ModelsOnline game operators are continuing to test new business models. The traditional Page 55 of 66
    • Mobile Broadband Market Outlook in China“pay-to-play” model, based on an annual, monthly or hourly subscription fee, used to bethe dominant business model in China. However, the free-to-play model has been on therise since 2006, enabling users to download and play games without paying a subscriptionor per-minute fees.Value-added offerings such as virtual equipment, special features, additional game levels,or avatars (player personalities within a game) all attract fees. This model has beenadopted by 80% of online games. It contributed approximately 60% of total marketrevenues in 2006, according to CGPA.In-game advertising is a new business model for monetizing the online-game user base.Advertisements are placed within a game, displayed as a banner on the outlines of a gamescreen, or loosely camouflaged within the game itself. The advertiser pays fees to thegame developer or operator for this service. Another twist on this model is the inclusion ofactual product names in the game, similar to product placements in movies.Government PoliciesThe government has recognized the gaming industry as an emerging industry and isincreasingly trying to improve the regulation of this market. The Ministry of Culture(MOC) has categorized the gaming industry as an important part of the cultural industriesand of the digital industry.Last year, the government began to draft regulations aimed at limiting the amount of timethat Chinese youth spend playing online games in an effort to curb game-addiction,neglected studies and other harmful impacts on young gamers. Central to thesemeasures is the game-embedded “anti-obsession” system. This program seeks to limitonline gaming time to 5 hours per day. Game points acquired in the fourth and fifth hoursof play are halved if they are won by minors. The system has been mandatory in all onlinegames since July 2007. The General Administration of Press and Publication (GAPP) hasalso sought to require all gamers to register under their real names.7.4.2 Mobile Gaming Market AnalysisMarket OverviewChinas mobile gaming industry is also in the rapid growth stage, reaching a market size ofRMB 1.49 billion (EUR 145 million) in 2006. BDA forecasts the market will be worth RMB5.51 billion (EUR 537 million) in 2011, with a 5-year CAGR of 29.9%. The growth will bedriven by the user demand, increasing penetration of JAVA-enabled handsets and smartphones, and faster data rate. Page 56 of 66
    • Mobile Broadband Market Outlook in ChinaExhibit 7.4.4: Mobile Gaming Market Size and Forecast (RMB billion) 6.00 38% 39% 40% 34% 5.00 5.51 30% 4.00 22% 18% 3.95 3.00 20% 2.00 2.87 2.14 10% 1.00 1.49 1.76 0.00 0% 2006 2007F 2008F 2009F 2010F 2011F Market Size Annual Growth RateSource: CGPAThere are over 10,000 mobile console games available in the China market. By contrast,there are only about 30 mobile online games. This segment has been developing for twoyears, since 2005. Working with a great number of service providers (SPs) and contentproviders (CPs), Chinese mobile carriers have built up their own official platforms, such asChina Mobile’s Treasure Box and China Unicom’s Uni-BREW, to deliver these mobile games,which are mostly designed for K-JAVA or BREW. Service fees for downloading consolegames make up the majority of revenues. Mobile online games pull in revenues mainly bycharging by the hour, or through a monthly flat fee.Mobile Gaming Needs MaturationThe maturation of Chinas mobile gaming industry depends on many factors such asmobile phone terminals, distribution channels, the tariff and the wireless network.Currently, JAVA-featured handsets make up less than 50% of total handset sales. The lowterminal penetration is one reason for the slow increase in the number of mobile gamers.Subscribers also have to activate GPRS features when downloading a game or playingmobile online games, which further constrains usage.Although mobile games could be distributed through free WAP portals or online, the valuechain is under the tight control of mobile operators. However, their distribution platformslack an efficient rating system to help users select the best games out of the vast gamepool.Mobile subscribers usually have to pay traffic fees and services fees from RMB 2-15 (EUR0.2-1.5) to download a game. These tariffs are relatively high for consumers, compared toother popular wireless value-added services (WVAS) such as short message services (SMS)and color ring back tones (CRBT). Tariffs for mobile games also lack a price benchmark, asa wide variety of games is provided by different companies which charge different –sometimes, vastly different – rates. Page 57 of 66
    • Mobile Broadband Market Outlook in ChinaMobile gaming services provided on GPRS and CDMA 1x networks in China suffer fromslow network data rates, which makes downloading them time-consuming and produces apoor customer experience.However, mobile operators see mobile gaming as one of most promising WVAS, and areputting a great deal of effort into developing it. Their faith in its potential stems from therapid growth of online gaming. China Unicom held a mobile online game designcompetition in 2006 to drive the industry value chain and gain more content. China Mobileis planning a new mobile game platform, with a more reasonable rating system to attracta greater number of users and mobile game suppliers. For example, a game will be ratednot only by game users but by game developers, and other factors will be considered, likepicture quality and the number of times a game is downloaded. The platform is due tostart operating in late 2007.7.4.3 Market Outlook for Mobile Gaming with Availability of Mobile BroadbandMobile gaming market should see faster growth from 2009 when multiple 3G networkslaunched in China and HSUPA or EV-DO Rev. A are introduced in the following few years.The significantly faster data rates of 3G can greatly improve users experiencedownloading games as well as support more attractive games including three dimensional(3D) and massive multi-player online (MMO) games. Furthermore, cost will fall to attract alarger number of users. Fixed Mobile Convergence between mobile games and existingPC based games will shift the already large online gamer user base to mobile. Instead ofsimply charging for each download, telecom operators or SPs will be able to adoptbusiness models that have already proven successful in PC online gaming and apply themto mobile games.Despite China’s large mobile user base and mature gaming ecosystem, BDA believes themobile gaming market is unlikely to duplicate the success of online gaming in Chinabecause of the limitations of playing games on handsets.7.5 Location Based Service Market Analysis7.5.1 LBS Have a Small User Base in ChinaLocation-based services (LBS) provide directory information and navigation services basedon a user’s current position, which can be accessed via WAP, SMS, or real-time datatransfer on cellular networks. LBS first calculate the user’s position, usually by analyzingstandard network metrics from three or more base stations. Except for navigation, themost popular services provide information on nearby points of interest (POI) in responseto user queries for the location of restaurants, hotels, hospitals, gas stations, etc. Page 58 of 66
    • Mobile Broadband Market Outlook in ChinaIn China, despite five years of development, operators are seeing very little user growthwith only 8 million LBS subscribers in 2006. LBS have contributed only 1% of ChinaUnicom’s total WVAS revenues in 2006, and the percentage is even smaller for ChinaMobile.Exhibit 7.5.1: Mobile and LBS Subscribers (million) 350 301 300 247 250 200 142 150 128 100 50 5 8 0 2005 2006 China Mobile China Unicom LBSSource: company information, BDAChina Mobile’s SMS-based LBS “12585” started in selected cities in 2003 using pure cell IDpositioning. A mobile user is able to receive a SMS telling his or her current position.China Mobile also launched “Handset Map”, WAP-based LBS, in four cities in 2005. ChinaUnicom has offered similar LBS, including “Care Star” for tracking elderly people andchildren as well as “Positioning Star” which aids users to find their current position as wellas travel routes.7.5.2 LBS Face ChallengesThe LBS market remains immature as low service quality, operator ambivalence andregulatory issues remain as barriers to LBS uptake.LBS, using radiolocation and triangulation based on the signal-strength of the closest basestations, yields a location estimate that is accurate up to 100 - 200 meters. Such lowaccuracy practically renders the service useless for many applications, and users may findit unacceptable to pay subscription fees of RMB 5 to 30 (EUR 0.5-3.0) per month, pluscostly data traffic fees. In addition to inaccuracy, users are often frustrated by slow GPRSor CDMA 1x network data rate and limited POI information, such as details of hospitals,schools, restaurants, and theaters.Mobile operators’ lack of willingness to invest in or promote services will continue tosuppress the real growth potential in the near term. Chinese mobile carriers still enjoyrobust revenues from traditional WVAS services and are not urgently pursuinginvestments in more complicated LBS. They are unwilling to promote LBS in anymeaningful way because service quality is perceived as too poor to be profitable. Page 59 of 66
    • Mobile Broadband Market Outlook in ChinaA high quality E-map is essential to LBS. However, there are regulatory risks and qualityproblems associated with E-maps in China. As surveying and mapping are related tonational security, the Chinese government strictly controls the licensing of E-map makers.The State Bureau of Surveying and Mapping (SBSM) licenses less than 10 vendors to makeE-maps for navigation. Map providers must also obtain the map authorization code andpublishing license for publishing e-maps. As China’s cities are changing rapidly, LBSgrapples with high expense and inefficiencies in map-making and data collection.7.5.3 Market Outlook for LBS with Availability of Mobile BroadbandAlthough obstacles restrain market growth, we believe LBS growth could accelerate drivenby potential user demand, improved services and mobile broadband technology.According to a BDA survey in April 2006, 55% of surveyed Chinese mobile phone users areinterested in LBS. The characteristics of LBS naturally fit the portability of the mobilephone, and address the particular needs of mobile subscribers when they are on the go.In addition, as handsets are becoming more powerful in terms of storage capacity, processspeed and display, more mobile subscribers are able to try LBS on their handsets.In addition to POI and navigation, operators and SP are introducing services they hope willdrive the market in new directions. Community-oriented services are more likely tocontribute to the LBS market, as they integrate positioning technologies withentertainment and making friends. Facilitating meetings between old friends andencounters between users with similar interests, these recreational services are gainingpopularity and bringing broader recognition to the range of LBS applications. Forexample, car enthusiast communities are becoming popular, which can fuel the demandfor LBS.Mobile broadband or 3G technologies may also spur LBS growth. Currently, due to thelow data rate, most LBS subscribers have to pre-install map data into mobile phones inorder to reduce downloading traffic and waiting time for navigation results. However,this leads to the difficulty of updating installed map information and the high requirementfor mobile storage capacity. Over 3G networks in the future, up-to-date map or POI datawill be sent in real time to end user’s handset.7.6 Mobile Social Networking Service Market Analysis7.6.1 Mobile SNS Have Accumulated a Great Number of UsersAs online social networking services (SNS) have been exploding among internet users inChina, more and more people are familiar with services provided by MySpace and similarsites. Inspired by the increasing popularity of online SNS, some players have followedsuit by introducing similar services, or mobile SNS, into the wireless realm. Page 60 of 66
    • Mobile Broadband Market Outlook in ChinaSimilar to its online ancestor, mobile SNS usually provide mobile subscribers withfriend-making, personal blog, photo sharing and instant messaging (IM) services via SMS,MMS, WAP and/or a client software on the mobile phone. A few SPs have been workingwith Chinese mobile operators in this sector, and many independent WAP portals havetapped into this emerging market as well.BDA forecasts China’s mobile SNS market will reach RMB 834 million (EUR 81 million) in2007, of which mobile SNS by operators and SPs are expected to contribute the largestshare of total revenues. Independent WAP portals have yet to develop effective businessmodels. Mobile SNS market is projected to hit RMB 1.91 billion (EUR 186 million) in2011.Exhibit 7.6.1: Mobile SNS Market Size (RMB million) 2,000 26% 30% 24% 22% 1,910 1,500 18% 1,584 20% 1,000 1,298 21% 1,049 834 10% 500 707 0 0% 2006 2007F 2008F 2009F 2010F 2011FSource: BDAMobile SNS users, including mobile IM users, are expected to reach 29.9 million byyear-end 2007, and will see rapid growth, mainly driven by services provided byindependent WAP portals. The growing penetration of high-end handsets andcommercial launch of 3G will also drive the user growth of mobile SNS services.Exhibit 7.6.2: China’s Mobile SNS Users (million) 120 104.1 100 77.7 80 57.2 60 41.9 40 29.9 18.1 20 0 2006 2007F 2008F 2009F 2010F 2011FSource: BDASPs provide mobile SNS on mobile operators’ WVAS platforms such as China Mobile’sMonternet, charging a monthly subscription fee of less than RMB 10 (EUR 1).Independent mobile SNS providers can share revenues with SPs by helping them cross sell Page 61 of 66
    • Mobile Broadband Market Outlook in ChinaWVAS such as SMS, mobile music, and mobile games. For some top mobile SNS sites,mobile advertising can be the main revenue source through text and banner ads on WAPsites, or ads built into IM. Virtual item purchase is also expected to be a promisingrevenue generator.7.6.2 Mobile SNS See Obstacles from Mobile OperatorsMobile operator’s dominant position in the mobile SNS value chain restrains thedevelopment of the sector. Working as operator’s partners on WVAS, mobile SNS SPsare heavily reliant on operators for service provision and billing, leading to limited productinnovation and poor user experience. In contrast, independent mobile SNS providersusually offer better service, because they are addressing end users directly and havelaunched commercial services supported by non-operator billing channels. However,mobile operators still exert strong control over independent WAP portals by settingregulations on wireless internet services.Risks from unpredictable mobile operator’s regulations are another obstacle for thedevelopment of mobile SNS. China Mobile and China Unicom’s new strict regulations onSPs starting in 2006 will continue to have a strong negative impact on the overall marketgrowth in 2007.In addition, the high traffic cost and low data rate over current 2G or 2.5G networkscurrently suppresses user’s demand and experience of mobile SNS.7.6.3 Market Outlook for Mobile SNS with Availability of Mobile BroadbandWe believe the coming 3G or other mobile broadband technologies will spur the mobileSNS market. More attractive and innovative mobile SNS, for example, mobile music andvideo sharing, will be available and become more popular. The future deployment ofHSUPA technology, which enables mobile subscribers to upload content at a much fasterspeed, will greatly stimulate mobile SNS usage and spur user generated content (UGC).The increasing number of wireless internet players will heat up the competition. Thoseproviding low quality services are gradually fading out. Additionally, the industry will seemore creative business models, such as revenue sharing with the mobile UGC’s authors,and paid interactive activities (e.g. chat with movie stars). Page 62 of 66
    • Mobile Broadband Market Outlook in China8 Opportunities for Finnish Companies - Preliminary Recommendations8.1 Opportunities for Mobile Broadband in ChinaBased on its sheer size and strong pent-up demand, China has an immense appeal toproviders of mobile broadband solutions providers and equipment and terminal providers.BDA believes China will become the world’s largest mobile broadband market in the nextfive to ten years, having already established its position in the existing 2G, internet andbroadband markets. o China by last year had become the world’s largest mobile market with 461 million users, and is expected to add another 60-80 million new users annually in the next five years, driven by growth in rural areas. o BDA forecasts internet user numbers will reach 332 million by 2011, up from 137 million by 2006, and China will surpass the US as the largest internet market in 2008 or 2009. o Broadband user growth will be maintained at 14-15 million additions annually, and China will overtake the US as the largest market in 2007. It will reach 133 million broadband users by 2011, up from 55 million in 2006.WVAS and internet applications have reached an advanced level in China compared tomost other regions, duplicating the success stories of Japan and South Korea. TheseWVAS users are eager to adopt more innovative applications, which will drive demand formobile broadband over the next five years. The survey by CNNIC in April 2007 indicatedusers’ strong interest in video, music, games and other applications over 3G, and theirwillingness to pay for these services. o The emergence of entrepreneurial Internet Service Providers (ISP) and Internet Content Providers (ICP) has been driving innovations in search, IM, gaming, portal and web 2.0 applications, and constantly changing the business models in these fields. In return, these independent ISPs and ICPs have attracted ample capital investment, which has enabled them to invest in the development of innovative services and applications. o For mobile carriers, growth in WVAS has been effective in fighting the decline in voice ARPU, as WVAS contributed about 20% revenue in 2006, and this is expected to rise to 25% in 2007.8.2 Technology Adoption in ChinaWhile the opportunity for mobile broadband in China is self-evident, the ability for Finnishcompanies to access this market will be driven by how China goes about adopting futuremobile broadband standards. China’s relentless push for “Indigenous Innovation” in theform of promoting domestic standards may impact on how it adopts future technologystandards, including mobile WiMax, LTE and IMT-Advanced. Page 63 of 66
    • Mobile Broadband Market Outlook in ChinaBDA believes China will not back off from its push for domestic standards in the near term.Simply put the government has invested too much in their policy to be able to conduct a ‘Uturn’ anytime soon. Possibly such a climb-down must wait until a change ofadministration in 2012. This intransigence though will cause growing trade tensions forChina, and prove costly to domestic consumers who will be unable to benefit from theeconomies of scale and richer applications associated with global standards.Irrespective of the longer term costs, this administration appears determined to pursueTD-SCDMA to reduce foreign ‘domination’ of 3G, and to gain a better foothold in 4G. Thedelays in 3G associated with TD-SCDMA adoption have also exacted a cost in terms of askewed mobile market, with China Mobile’s increasing dominance leading to a challengingmarket for WVAS providers and a decline in innovation and investment by third parties.As a result, BDA advises overseas companies seeking to do business in China to becautious about how they promote new technologies and standards in China. Wherepossible, companies should seek to align their interests with domestic interests (withoutcompromising their fundamental Intellectual Property). Even if China is attempting topromote domestic standards in various areas of the technology landscape, experience todate shows that this effort is often poorly organized, with rival domestic standardsclamouring for government support.We also advise companies to balance their strategies in China against other high growthmarkets such as India or Vietnam which are also characterized by strong market demand,but without the overt protectionist/nationalistic tendencies now so evident in China.We believe there is an opportunity for mobile WiMax to play a role if it can be more flexiblein complementing TD-SCDMA, supporting its long-term evolution in exchange for an entryticket to the China market. It remains to be seen whether TD-SCDMA will migrate to LTEor Mobile WiMax 802.16M, and the final result may well hinge upon whoever is ready to bemore flexible in compromising with this domestic standard.In addition to TD-SCDMA, China has initiated its own 4G program called FuTURE (alsocalled Future Technology for Universal Radio Environment) which was acknowledged in2001 as part of the State “863”Science Project. A trial network has been put up inShanghai and has reportedly achieved speeds of up to 80Mbps uplink speed, and up to90Mbps downlink speed when moving at 50 km/hour. China plans to take this standard toITU and push for it be accepted as an international 4G standard.8.3 Opportunities for Finnish CompaniesBDA believes opportunities will emerge initially in the 3G market, then in mobile WiMaxand 4G in the longer term. Finnish companies, therefore, need to focus on the more Page 64 of 66
    • Mobile Broadband Market Outlook in Chinaimminent 3G market in order to pave their way towards future openings in mobilebroadband.In the 3G market, WCDMA will ultimately take the largest share because of its prevalencein the global 3G market and the attractions this offers to consumers and mobile operators.This market is dominated by the established infrastructure suppliers, and these leadingplayers are likely to duplicate their success in China. Among emerging companies, BDAbelieves that domestic vendors Huawei and ZTE will win the biggest market share in China,aided by their close relationship with local carriers and strong government support.BDA believes the Chinese government will further increase investment in TD-SCDMA toexpand network coverage in 2008 and 2009. Opportunities have emerged for foreigncompanies in chipsets, T&M and network optimization software and other technologysolutions for TD-SCDMA. The TD-SCDMA ecosystem is still immature, so it needs foreignparticipants to get involved to support and improve it. This market is not highlycompetitive as domestic vendors are weak, while foreign vendors are cautious aboutinvesting in it. However, risks also exist due to the uncertain prospects of TD-SCDMA inChina, and seemingly lack of any export opportunities in the global market. o Lack of Test and Measurement (T&M) devices and power consumption problems with chipsets are the two most daunting problems ahead for volume production of TD-SCDMA terminals in China. o Furthermore, China Mobile, currently the major operator for TD-SCDMA, has also found that network planning and optimization is not in place though this is key to future network operation.BDA believes terminal and technology solutions represent the main opportunities forFinnish companies, given that entry barriers are much lower in this segment than for basictelecom services and value-added application service provisions. Although theinfrastructure market does not present high entry barriers, it is relatively crowded and isdominated by established players.8.4 Preliminary recommendationsAs to the near term 3G market, BDA believes cooperation with Huawei and ZTE would bethe best strategy for Finnish companies to penetrate the market because the twocompanies are well positioned for TD-SCDMA, WCDMA and CDMA2000 1xEV-DO. o Cooperation with existing infrastructure vendors is an efficient way for most foreign companies to penetrate the China market, whether they are selling equipment or solutions. o Through these partnerships, Finnish companies can leverage the existing distribution networks and client relationships which Huawei and ZTE have built up over years of investment. o Partnerships must be handled very carefully, however, in terms of protecting Intellectual Property, with contracts signed wherever possible in jurisdictions Page 65 of 66
    • Mobile Broadband Market Outlook in China outside China. Given that Huawei and ZTE derive most of their sales outside China, it is increasingly possible to find common ground and international-best practices being adopted within these vendors. o Foreign companies like Ericsson, Nokia Siemens Networks and Alcatel- Lucent will also be leading players in China’s 3G markets, especially for WCDMA and CDMA2000 1xEV-DO. o However, Finnish companies may find domestic vendors are more willing to engage in partnerships as they actively seek out cooperation with foreign companies to enhance their own market position.Regarding the longer term 4G market, BDA believes opportunities may increase if foreigncompanies can work together with Chinese research institutions through joint-fundedprojects to influence the adoption of 4G standards in China. o In 1H 20007, the Swedish government also agreed to invest RMB 30 million (EUR 2.9 million) in a joint 4G research project with the Chinese government, which will be kicked-off in 2008. This project involves cooperation with China’s FuTURE research team and other research institutes as well as Chinese companies, such as Datang Mobile and Huawei. Page 66 of 66
    • Mobile Broadband Market Outlook in China Prepared for Tekes September 14th, 2007 BDA China
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 2
    • Revenue growth in China’s telecom services slowed to the GDP growth level in 2006 due to flat voice growth Total Telecom Service Revenue & Annual Growth Rate RMB Billion 800 16.3% 15.4% 18% 12.5% 12.5% 15% 600 11.8% 648 584 12% 519 400 461 10.6% 9% 412 357 6% 200 3% 0 0% 2001 2002 2003 2004 2005 2006 Telecom Revenue Annual Growth Rate 2000 2001 2002 2003 2004 2005 2006 Telecom Growth Rate 24.8% 15.0% 14.4% 13.9% 12.6% 12.5% 11.0% GDP Growth Rate 8.0% 7.5% 8.3% 9.1% 9.5% 10.2% 10.7%Source: MII 3
    • Capex rebounded by 7.9% in 2006 to RMB 219 billion, but overall capex remained sluggish compared with RMB 255 billion in 2001 Telecom Revenue and Capex Growth RMB Billion 700 68.7% 648 70% 584 600 60% 49.1% 528 500 460 50% 422 41.7% 400 372 48.2% 34.8% 33.8% 40% 300 255 30% 207 222 220 203 219 200 20% 100 10% 0 0% 2001 2002 2003 2004 2005 2006 Revenue Capex Ratio of Capex to Revenue• In 2006, total capital expenditures in the Chinese telecom industry rebounded by 7.9% to RMB 219 billion, driven by investment in GSM and broadband. However, overall capex remained sluggish compared with RMB 255 billion in 2001.• Chinese carriers spent more than global peers at the same revenue level, with a capex-to- revenue ratio of 33.8% in 2006, compared with 10-20% for most tier-1 carriers worldwide. Without 3G, BDA believes the ratio will continue to decline as a result of reduced capex.Source: MII 4
    • China’s fixed-line carriers face challenges from IP cannibalization and fixed-to-mobile substitution Mobile Overtakes the Fixed-line Market Mobile and PSTN Subscribers (Dec. 2006) Local Call Volumes for Fixed-line and Mobile Billion Pulse Million 1600 30.4% 1580 500 Mobile:461 1184 % 400 1200 -1.4% 880 300 800 720 726 710 2004-06 PSTN:277 CAGR 200 400 100 PHS:91 0 0 2000 2001 2002 2003 2004 2005 2006 Fixed-line Local Call Mobile Local Call 2004 2005 2006 PSTN Mobile PHS Note: Fixed-line local call volumes includes PHSVoIP Bites into the Fixed-line Market Long distance voice revenue is being Long distance voice revenue eroded by VoIP and P2P applications RMB Billion 12.5 2004-06 11.4 -5% CAGR 30.0 28.7 -2% 2006 2004 Source: Company annual reports , MII and BDA analysis 5
    • VAS uptake is the key growth driver for telecom carriers VAS as % of Telecom Carriers’ Total Revenue 25.2% 23.5% China Mobile 20.6% 22.1% 19.5% Unicom CDMA 15.5% 20.7% 14.7% 19.5% Unicom GSM 15.2% 10.5% 9.8% China Telecom 8.3% 10.4% 6.1% 4.0% China Netcom 6.4% 7.7% 4.9% 3.8% 2004 2005 2006 1H 2007Fixed VAS Wireless VAS• Fixed-line carriers are promoting broadband • Major WVAS include SMS, MMS, WAP, CRBT, and VAS including caller ID, telephone IVR, JAVA/BREW. information services, PHS SMS, integrated • WVAS has become a key weapon for mobile information service and CRBT. operators to combat declining ARPU. Source: Company reports, BDA 6
    • BDA forecasts mobile subscribers will total 811 million by 2011; broadband subscribers will reach 133 million by 2011 Mobile, Fixed, Internet and Broadband Subscribers 5-year 2006 2011Million CAGR900 461 811 12%800700 137 332 19%600500 277 276 0%400300 55 133 19%200100 91 3 -49% 0 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F 2010F 2011F Mobile Internet PSTN Broadband PHS Note: The mobile subscriber figure is the number of active SIM cards; BDA estimates unique users represent around 70% of this number. Source: MII, CNNIC, BDA 7
    • Benefiting from the delay in 3G, China Mobile has been gaining share from the other 3 carriers Comparison of Telecom Operators’ Revenue Share 2003-2006RMB Billion700 0.3 15.5 2003 2004 2005 2006600 0.5 82.24 13.8 0.9 10.7 77.8 0% 0% 0% 0%500 0.5 91.7 72.6 7.1 66.7 91.5 2% 2% 2% 2%400 87.9 173.4 75.1 164.5 14% 14% 13% 13%300 158.3 145.2 16% 17% 16% 14%200 285.3 31% 30% 28% 27% 231.4100 171.9 198.3 37% 38% 40% 44% 0 2003 2004 2005 2006 • China Mobile was the only operator that reported faster revenue growth in 2006, a further sign of its increasingly dominant position. The other three operators all recorded slightly slower growth compared to 2005. • Benefiting from the delay in 3G, China Mobile continues to gain share from Unicom, accounting for 80% of the incremental market in Q1 2007. Source: MII 8
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 9
    • TMT Regulation in China: State oversight of telecoms is fragmented, Communist Party controls media Wen Jiabao Communist Party of China (CPC) Liu Yunshan Li Rongrong Ma Kai State Council Propaganda State-owned Assets National Development (‘Publicity’) Bureau of Supervision & Administration and Reform CPC Commission Commission Ministry of Ministry State Administration Information Of General Administration of of Radio, Industry Culture Press and Publication Film & TelevisionWang Xudong Sun Jiazheng Wang Taihua Long Xinmin 10
    • Despite the inevitability of convergence, regulatory stakeholders in China are pursuing conflicting agendas National Return on standard assets NDRCSASAC s Protect my Protect my turf turf MII SARFT 11
    • SARFT and MII fight over media and telecom convergence• Issues licenses for all audio and video services • Issues licenses for all telecom services over all networks • Promotes telecom and media convergence• Censors content• Promotes cable, radio, film and TV industries IPTV Mobile TV UGC VoIP• 300+ cable TV operators • 2000+ internet companies • 6 telecom carriers• 296 TV stations • 20,000 VAS companies Source: BDA Analysis 12
    • SASAC’s agenda: Consolidation of state-owned enterprises, pushing for telco restructuring Number of SASAC-Managed Enterprises SASAC’s Key Roles• Shareholder in all state-owned carriers Reduce competition, 200• Maximize return on state-owned assets 161 increase ROI• Consolidate stated-owned enterprises to reduce competition 100 80~100• Reduce SASAC-managed enterprises to 80-100 by 2010, down from 161 at present• To retain the top 3 players in the major industries by consolidating the smaller state- 0 owned enterprises by 2010 2006 2010 Possible 3G Restructuring Scenario R evenue Share Before and After R estructuring (P ro Form a 2006) TD-SCDMA CNC, (may be bundled with WCDMA) 13% CNC+CU, CDMA 20001X EV-DO 23% (to acquire CU’s CDMA) CM, 46% CM, 46% CT, WCDMA 26% (to build on CU’s GSM) CT, 31% CU, 15% Source: SASAC, BDA analysis 13
    • NDRC takes the lead in the push for “Indigenous Innovation”, which has been carried out in the development of home-grown standards • WCDMA • CDMA2000 EV-DONDRC • TD-SCDMA China 3G standard developed by • WAPI Datang • AVS China’s WLAN China audio security standard video coding developed by standard Iwncomm • CMMB • RFID China’s digital China is TV developing broadcast- • IGRS its own RFID terrestrial Intelligent standard standard Grouping & Resource Sharing: China’s digital home standardSource: BDA 14
    • Government needs to strike a balance between promoting the foreign investment and protecting domestic firms via indigenous standards. Balancing Act • Protects domestic firms • Boosts economic growth • Promotes domestic • Promotes foreign manufacturing investment Indigenous Open Market Innovation Implications for Foreign Vendors• Escalating R&D expenditure and manufacturing costs• Higher barriers to entering China’s market• Must develop technologies that comply with the Chinese technological standards, pushing up R&D expenditure and diverting existing R&D budgets from developing global technologies. 15
    • How to resolve conflicting agendas and strike the balance? NCCPC in 2007 and NPC in 2008 means the Party’s priorities are elsewhere • The Communist Party of China (CPC) will hold its 17th National Congress (NCCPC) in Sept or Oct 2007. The NCCPC is held every 5 years; it is a critical occasion for CPC General Secretary & State President Hu Jintao to cement his power base. – Regardless of the scope of any eventual changes, uncertainty and speculation ahead of the NCCPC is bound to generate caution and slow down the workings of government. • The National People’s Congress (NPC) will follow in March 2008. Any changes to the top layer of Party leadership at the NCCPC must be ratified by the NPC in March, and reflected in a government reshuffle. • BDA believes these two upcoming political events will slow the decision making process on telecoms industry restructuring and 3G licensing.? 16
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 17
    • Broadband has become the major internet access technology in China; China will overtake the US to become the largest broadband market in 2007 Internet Users By Different Types of Access (Million) 17 Handset 43 64 91 Broadband 17 31 Dedicated Line 7 27 29 20 27 12 59 Dial up 45 54 51 39 27 2001 2002 2003 2004 2005 2006 • Broadband has become the major type of internet access technology for users in China, taking over from dial-up and dedicated line. • Falling prices for broadband access coupled with the growing popularity of value added internet applications have been the key drivers of broadband adoption in China.Note: 1) Broadband refers to xDSL and cable modem. 2) Respondents gave multiple answersSource: CNNIC 18
    • Price falls mean broadband ARPU is declining, stimulating carriers to promote VAS Challenges Declining Broadband ARPU VAS Strategies RMBPrices dropped to 136.0 • Offering fee-basedRMB 100-150 for content via512K-2M bps per broadband portals 102.0month 100 including Vnet. 81.0 77.0 79.0 73.2 China TelecomMore low end users 65.2 66.3 67.4 • Offer IPTV services tocoming online China Netcom drive ARPU 2003 2004 2005 2006 1H 2007• Broadband ARPU is declining due to price falls, and a rise in the number of low end users. ARPU in some regions of central China can be as low as RMB 20-30 per month.• Telecom carriers must therefore look to value added services, including IPTV, to drive high bandwidth consumption and revenue growth.• Carriers’ effort on VAS has returned with slightly increased ARPU in 1H 2007 Source: Company annual report 2006 19
    • Internet users are switching to high speed applications• Internet users are increasingly using social networking and community sites (including blogs and video sharing), video and music downloads, and online gaming.• They are spending less time on regular internet services like email, news sites and search engines. Most Frequently Used Internet Services Email 85.6% 56.1% News Reading 62.0% 53.5% Search Engine 65.0% 51.5% Acquiring Information 49.9% 41.0% BBS, Online Community 20.8% 36.9% Watch/Download Video 5.1% 36.3% Listen/Download Music 8.0% 34.4% Software Downloading 37.4% Dec-04 32.9% Dec-06 Online Gaming 15.9% 26.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: CNNIC 20
    • xDSL will dominate broadband access technology; FTTH and WiMax growth will be limited in the short term Fixed Broadband Forecast Breakdown By Technology Million 3.2 2.6 36.9 2.2 32.6 1.8 28.3 Others 1.4 24.4 Cable modem 1.1 20.1 16.3 86.3 LAN 0.9 78.3 12.8 68.8 58.9 47.8 xDSL 37.2 26.4 2005 2006 2007F 2008F 2009F 2010F 2011F• Broadband ARPU is declining due to price falls and an increase in the number of low end users. In central China, ARPU in some regions can be as low as RMB 20-30 per month.• Telecom carriers therefore have to look to value added services, including IPTV, in order to drive high bandwidth consumption and revenue growth. Source: BDA 21
    • BDA believes industry restructuring is unlikely to occur in 2H 2007; we expect 3G licensing to be delayed to late 2008 or 2009 Timeline of 3G-Related Events TD-SCDMA TD-SCDMA TD-SCDMA Field TD-SCDMA equipment procured; TD-SCDMA Key MTnet Test Test with 20,000 network rollout for commercial trials in national network Milestones Phase I-II users 10 cities rollout2003 …. 2006 2007 2008 2009 TD-SCDMA WCDMA and Major 3G accepted as 3G CDMA2000 Oct. 07 - Mar. 08 - Aug. 08 - Related industry accepted as 3G 17th Olympic Events NPC Games standard industry standard NCCPC China Mobile Restructurin /CNC A- g and Share licensing? Listing Analysis of 3G Licensing • BDA believes there is a significant chance that industry restructuring and 3G licensing will be delayed until late 2008 or early 2009. • The focus on the 17th National Congress of the Communist Party of China (NCCPC) in October 2007 and National People’s Congress (NPC) in March 2008, will slow down decision making. • BDA believes the A-Share listings for China Mobile and CNC will take place ahead of industry restructuring and 3G licensing. 22
    • 3G user forecasts: TD-SCDMA will lead China’s 3G market by 2011 3G User Forecast Breakdown By Technology (Million) 2007F 2008F 2009F 2010F 2011F Share in 3G (2011) CDMA 2000 EVDO - - 1.2 6.1 15.3 38% WCDMA - - 0.3 1.6 14.7 36% TD-SCDMA 0.3 2.3 4.0 6.5 10.4 26% Total 3G Users 0.3 2.3 5.5 14.2 40.4 100% % in Total Mobile Users 0.1% 0.4% 0.8% 1.9% 5.0% -• TD-SCDMA will lead China’s 3G market by 2011, thanks to its head start, and heavy investment from China Mobile. TD-SCDMA networks will expand to 50-100 cities nationwide by 2009 with additional capex of RMB 30-50 billion.• EVDO will be ready in most areas nationwide within one year of licensing, due to ease of upgrades through software and hardware based on existing networks.• WCDMA networks may be ready in coastal areas at first, and gradually extended to inland and western China within two to three years. Its growth will surge from 2011 thanks to plenty of mature, cost effective handsets. Source: BDA 23
    • 3G evolution forecasts: HSDPA will be in place from the start of 3G 3G Evolution Roadmap in China 2007 2008 2009 2010 2011 Timeline HSDPA ready in HSDPA/MBMS Network expanded toTD-SCDMA network in 10 cities HSUPA likely commercial service most key cities to be ready early 2008 available in 2H 2008 nationwide in 2009 EVDO Rev. 0 ready in most EVDO Rev. A likelyCDMA 2000 urban areas in 2009 to be ready EVDO HSUPA/MBMS HSDPA ready in networks likely to be in key cities in 2010 WCDMA ready Licensing Time• TD-SCDMA and WCDMA will have HSDPA in place when they start network rollout after licensing.• TD-SCDMA-based MBMS is scheduled to be available by the Olympic Games in August 2008, though it will be hard to meet this goal. WCDMA-based MBMS may be provided in 2010 or 2011, when handsets are more mature.• HSUPA will take longer and won’t be introduced into China until 2010.• EVDO Rev. A may be deployed one to two years after the rollout of CDMA 2000 EVDO Rev. 0 in 2009. Source: Datang Mobile, BDA interviews 24
    • Fixed-line carriers dominate the broadband market; smaller players face pressure despite equal access to last-mile infrastructureBroadband Market Breakdown by Provider (2006) 30% • 1.1 million cable modem users served by cable operators in 6% Shanghai, Shenzhen, Beijing, etc. 2% • 1.6 million Ethernet LAN users, 5% Others served by small CPN (Customer Premise Network) providers, including Great Wall Broadband, Founder and Tailong. 57% • In January 2007, the government released a policy promoting equal access to last-mile infrastructure for all service providers to avoid duplicate investment and encourage competition for broadband access services. • However, cable and CPN operators will face increasing pressure from telecom carriers due to interconnection problems with the internet, as well as poor service. Source: BDA 25
    • WiMAX enables mobile carriers to penetrate the broadband market, and gives the two fixed-line carriers greenfield openings in the rival’s territory Mobile Carriers Need Broadband • Mobile carriers need broadband (Million) businesses so they can compete 301 better with fixed-line carriers once Mobile 142 they acquire mobile licensesSubscribers • China Mobile also needs to adopt 31.0 16.4 alternative mobile technology toBroadband Users) 0.001 1.3 offset the high potential risk associated with TD-SCDMA. Fixed-line Carriers Penetrate Greenfield Market • China Netcom had spent RMB 30 million on fixed WiMax by 2006 to serve SMEs and high-end residential areas in key cities in Guangdong province. • China Telecom is also trialing fixed WiMax for SMEs in eight provinces and two municipalities in northern China. • However, investment in greenfield was suspended, honoring an agreement the two companies signed in China Netcom’s home territory February 2007 to cease competition in the fixed-line China Telecom’s home territory market from March 2007 to year-end. Source: company information, BDA 26
    • Carriers and some small companies own 3.5Ghz spectrum in 300 cities for fixed WiMax deployment Number of Cities where Companies Won 3.5Ghz Spectrum in 2001-2004 172 150 150 143 142 30 4 4 China China China China Unicom China Mobile Chinacomm China Satcom Others Netcom Telecom Railcom• In most cities, these companies have 2X10 Mhz bandwidth in each city.• So far, independant companies have failed to compete with fixed-line carriers with fixed wireless access technologies due to high costs and poor interconnection. Note: orange means telecom carriers, green means non-carrier companies. Source: BDA 27
    • Fixed WiMax offers limited opportunities in the near term Opportunities Challenges• Telecom carriers for broadband access in • High cost compared with DSL greenfield market or provide backhaul • Competition in greenfield market is transmission controlled by government• Small companies to penetrate the • Size is small for backhaul transmission or broadband market at an already-obtained broadband access service for vertical 3.5Ghz spectrum industries• Cable operators to provide broadband • Cable and independent players have limited services and VoIP at 700Mhz access to capital and lack telecom experience Outlook• BDA forecasts a total market size of only 200,000 to 300,000 terminals by 2011, up from 10,000 in 2006. However, prospects remain weak beyond 2011 when mobile WiMax is mature and cost effective. 28
    • Mobile WiMax is a competitive technology to 3G in China, rather than a complementary solution Positioning in China Mobile WiMax: Competitive and Complementary Positions with 3G • Mobile internet applications over mobile WiMax will significantly erode the telecom carriers’ 3G business, Cost Efficiency including voice, and WVAS like mobile music and mobile TV. Data Centric Mobile WiMax 3G (HSDPA) • Mobile WiMax runs counter to the government’s initiatives to protect telecom carriers’ interests. TheData rate Mobility situation may not improve until 2010 when restructuring is complete and a new competition structure emerges. Voice Centric • Mobile WiMax will put pressure on TD-SCDMA, which is currently the Terminal Portability major focus of Chinese government promotion. Source: KT 29
    • Mobile WiMax spectrum will not be allocated soon; cost- effective terminals may be available in 2010 Spectrum Map in China 2.110 2.170 2.200 2.300 2.400 2.483 2.535 2.600 (Ghz) 3G FDD Satellite Space 3G TDD WiFi Satellite TV Research Global Mobile WiMax Roadmap Timeline2007 2008 2009 2010 2011 1H 2007: Q2 2008: 1H 2009: 1H 2010: Wave 1, certification; Wave 2 certification; High end handsets Cheaper handsets Samsung only Major vendors available in volume available in volumeSource: BDA interviews 30
    • China Mobile is the best positioned in the future mobile broadband market , if there is a viable business model for mobile WiMax Opportunities in Mobile WiMax for Different Companies Interest in Internet Company Mobile Business Capital Brand User Base Overall Broadband Initiatives China Mobile Other telecom carriers Cable operators CPN operators Very Strong Strong Medium Weak Very Weak Outlook• China Mobile is the best positioned in the future mobile broadband market because it has ample access to capital, rich mobile network operating experience, a strong brand, and a large user base as the dominant mobile operator.• It is very difficult for any other carriers, the cable operators or the independent CPNs to compete with it effectively. Source: Company information, BDA 31
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 32
    • Huawei and ZTE remain small players on the global stage, but they are closing the gap with the ‘Big 3’ European vendors Comparison of Global Telecom Suppliers’ Revenue in 2006(USD Billion) 7.6 Nokia 2.3 Siemens Alcatel Ericsson Lucent Nortel Cisco Huawei Motorola NEC ZTE Networks Note: 1) Revenue for carrier infrastructure only; 2) estimates for NEC, Motorola, Cisco Source: BDA, Nokia 33
    • Huawei reported strong growth in 2006, driven by overseas sales and its wireless and terminal businesses Huawei’s Contract Orders and Revenue Contract Orders Breakdown USD Billion USD Billion16 15.0 10 2005-2006 Growth14 3.812 11.0 8 9%10 8.2 8.5 6 3.5 8 6.0 5.6 6 4 3.3 7.2 3.8 3.8 4 3.1 2.7 2.3 2.7 2.1 2 2.8 4.7 52% 2 2.8 2.1 2.3 0 0.3 0.6 1.1 0 2001 2002 2003 2004 2005 2006 2007E 2001 2002 2003 2004 2005 2006 Overseas Domestic Contract Orders Accounting Revenue Growth Analysis and Outlook • Huawei’s contract orders increased by 41.6% in 2006, driven by rapid growth in overseas markets, especially in EMEA (Europe, Middle East and Africa) • Wireless, terminal and optical businesses were three major growth drivers in 2006. However, services and terminals reported the strongest growth, with contracts nearly doubling since 2005. • Huawei expects to maintain solid growth in 2007, driven by 3G, terminals and services Source: Huawei, BDA 34
    • ZTE’s 2006 revenue was flat, due to falling sales in China and Africa ZTE’s Contract and Accounting Revenue Contract Revenue BreakdownUSD Billion USD Billion7 6.7 66 2.6 55 4.5 4.1 3.9 44 2.0 3.0 3.0 3 1.9 2.53 2.6 2.6 2.0 2.1 4.1 1.7 2 2.42 1.2 1.3 1.1 2.5 1 1.7 2.01 0.5 1.2 1.5 1.6 0.3 0.60 0 0.2 2000 2001 2002 2003 2004 2005 2006 2007E 2000 2001 2002 2003 2004 2005 2006 2007E Overseas Domestic Contract Revenue Accounting Revenue Growth Analysis and Outlook • Asia Pacific sales rose 30% in 2006, offsetting a slight decline in China and Africa. Sales in other regions soared in 2006, thanks to sales increases in Europe and North America. • ZTE will have significant growth in both contract and accounting revenue in China in 2007 due to China Mobile TD-SCDMA contracts. Source: ZTE, BDA 35
    • Chinese equipment vendors are gaining market share in the telecoms infrastructure market; Chinese operators increasingly prefer Chinese vendorsMarket Share of China’s Telecom Equipment Sales to Carriers in 2006 • Huawei took the highest share of telecom equipment sales to Others carriers in 2006, with 22% of Huawei Fiberhome 15% 22% the market. 2% Cisco • Ericsson ranked second on 2% overall market share, with Nortel 14%, and Nokia Siemens 5% Networks (NSN) was third with Ericsson Motorola 14% 14%. 5% • Chinese firm ZTE has market Alcatel Lucent share of 11%. 10% NSN • Fiberhome, the third-ranked ZTE 14% Chinese infrastructure supplier, 11% tied for eighth place with 2% market share.Total: USD 12 BillionNote: Highlighted companies are domestic vendors Source: BDA and Company Information 36
    • China Mobile has sharply increased procurement from domestic vendors since 2005, bringing dramatic gains in market share to Huawei in particularMarket Share in CMCC’s GSM RAN • China Mobile increased procurement from 3% domestic vendors after it centralized 8% 12% Nortel procurement in 2005. 16% 13% • China Mobile has deployed completely or ASB mostly domestic vendors’ products in the following areas: 20% Motorola 25% − Optical transmission NSN − Backbone softswitch − Intelligent Network, SMS, MMS gateway 27% Ericsson • Reasons for preferring domestic vendors: 42% 5% ZTE − Tax credit; RMB 732 million in 2006, up from RMB 526 million in 2005 Huawei − Lower prices 23% 1% − China Mobile is less technology-focused 5% than China Telecom 2006 1H 2007Source: China Mobile, company information, BDA 37
    • Huawei & ZTE account for 11% of China’s 2G GSM market; BDA expects their share to rise to 39% with the advent of 3G Market share for Huawei and ZTE: 2G vs. 3G 11% 12% Other domestic vendors 39% Huawei + ZTE 89% 49% Foreign vendors 2G 3G• As leading suppliers, Huawei and ZTE will benefit most from 3G capex after China issues 3G licenses. BDA believes Huawei and ZTE will increase share further to 39% of China’s 3G market in the next 2-3 years.• Three 3G licenses, TD-SCDMA, WCDMA and CDMA 2000, are expected to be issued in 2008 or 2009. BDA estimates total capex for 3G will reach RMB 180-200 billion (USD 23-26 billion).• Huawei‘s significant presence in previous WCDMA trials will help it gain share in future WCDMA deployments. ZTE has nearly 50% of total TD-SCDMA base station contracts and a 20% share in existing CDMA network capacity.• BDA believes ZTE will become a tougher competitor to Huawei in the 3G market due to its strong foothold in the TD-SCDMA market and established position in CDMA.• Huawei will be a strong competitor to Ericsson and Nokia Siemens Networks in WCDMA. However its share will not be as big as ZTE’s in TD-SCDMA, due to intense competition in the WCDMA arena.Source: BDA 38
    • Domestic vendors benefit most from China Mobile’s TD- SCDMA investment; the biggest winners are ZTE and Datang China Mobile’s TD-SCDMA Investment Market Share Breakdown for China Mobile’s TD- SCDMA Radio Access Investment Breakdown (RMB Billion) Others, Radio 8.4 Access, 46% 6.7 28% 14% 12% 1% ZTE Datang-ASB TD Tech Ericsson Others Core Terminal, Network, 4.0 Transmis 1.9 sion, 3.0Source: TD-SCDMA Forum, BDA 39
    • Alvarion is the biggest supplier of fixed WiMax in China at present with 50% market shareMarket Share of Fixed WiMax Suppliers • The fixed WiMax market is dominated by foreign companies; Alvarion has the biggest market Others, Siemens, share with about 50%. 5% 5% • In the mobile WiMax market, Axxceler telecom equipment giants are the a, 10% major players, including Motorola, Nortel, Samsung, Alcatel Lucent and the domestic vendors Huawei and Redline, 10% ZTE. Alvarion, 50% • Early entrants like Samsung and Airspan, Nortel are well-positioned in the 20% trials at present, but competition from domestic vendors Huawei and ZTE will be intense in the future.Source: BDA 40
    • Huawei and ZTE are well positioned for China’s future mobile WiMax market TD-SCDMA WCDMA EVDO Mobile WiMax Market Position or Investment Very Strong Strong Medium Weak Very WeakSource: BDA and company Information 41
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 42
    • Entertainment and community applications over the internet are becoming popular Most Frequently Used Internet Services 85.6% Email 56.1% News Reading 62.0% 53.5% 65.0% Search Engine 51.5% Acquiring Information 49.9% 41.0% 20.8%BBS, Online Community 36.9% 5.1%Watch/Download Video 36.3% 8.0%Listen/Download Music 34.4% 37.4%Software Downloading 32.9% Dec. 2004 Online Gaming 15.9% Dec. 2006 26.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Note: Respondents gave multiple answers Source: CNNIC, BDA 43
    • Wireless internet is gaining traction; mobile subscribers have increasingly adopted WAP services Key Reasons for Using WAP Service (Apr. 2007) • Wireless internet users via handsets increased from 17 million in December On the move 53.7% 2006 to 44.3 million in June 2007, representing 27.3% of total internet Killing time 37.2% users.No alternative in case of emergency 26.1% • By June 2007, another 11.3 million Convenient and Cheap 18.5% wireless internet users were accessing Curiosity for new service 17.0% the internet with laptop data cards over WiFi or GSM/CDMA networks. Only handset available for internet 13.6% 0% 10% 20% 30% 40% 50% 60% • WAP over GPRS/EDGE or CDMA 1X network is the most widely used Most Popular WAP Services and Applications (Apr. 2007) platform to obtain wireless internet service. Picture or Ringtone Downloading 63.0% • WAP users employ these services for Search Engine 48.0% killing time, or when they are on the move, or feeling bored, indicating there Games 40.4% is genuine demand for entertainment over mobile internet. Music 40.2% E-book 34.9% • Image or ringtone downloads is the most popular WAP service, while video Video 11.7% content on mobile phones, including 0% 10% 20% 30% 40% 50% 60% 70% mobile TV, has yet to become popular. Source: CNNIC, BDA analysis 44
    • Wireless users two biggest complaints are low data rates and high prices Main Complaints about WAP Services (Apr. 2007) • Low data rates make for a poor user experience and are a Low data rate 44.4% barrier to services requiring high speed transmission, such High price 29.6% as streaming mobile TV. Lack of price 18.3% transparency • WAP services are expensiveLimited content 16.6% given their limited capacity and data rate.Poor stability of connection 14.0% • WAP costs RMB 0.03 per KB, 0% 10% 20% 30% 40% 50% compared with RMB 3 per hour for DSL. China Mobile also Comparison of China Mobile and China Unicom’s offers a flat fee package of WAP Services by March 2007 RMB 500/month for unlimited % in GRPS access, compared to the WAP Average average flat fee for GPRS of Network Infrastructure Mobile Availability User Data Rate Users less than RMB 100/month. China Mobile GPRS Nationwide 10-20 kbps 40 13% Mainly in coastal • Variety of services and content China Mobile EDGE million 100 kbps provinces is not as rich as in the internet China Unicom CDMA 1x 4 million 12% Nationwide 100 kbps space. Source: CNNIC, company information, BDA analysis 45
    • Mobile broadband will stimulate user demand and usage 3G Services That Users Are Willing to Pay ForService Information 39.9% • About one quarter of Mobile TV or Video 34.5% respondents were willing to pay News 33.9% for information services, such as Music 30.0% weather forecasts and stock Mobile E-mail 27.8% market information. E-book 25.0% • Mobile TV/video jumped to the No. 2 slot, suggesting it has Gaming 24.0% potential as a 3G killer Social Networking 17.4% application. 0% 10% 20% 30% 40% • 3G services that subscribers are most willing to pay for in future Prices WAP Users Would Accept for 3G Wireless include personalized Internet Services (RMB) entertainment, E.g. mobile music, Do Not Care The gaming and social networking. >100, Price, Free, • A CNNIC survey found most WAP 4.8% 3.0% 6.6% users are willing to pay less than 51-100, 10.2% 1-10, RMB 50 per month for wireless 21.8% internet services, very similar to what they now spend on current 2G WAP services. 21-50, 24.8% 11-20, 28.7% Source: CNNIC, company information, BDA analysis 46
    • Applications and new business models will emerge with mobile broadband VoIP Mobile GamingMobile TV & Video Mobile Music LBS Mobile SNS 47
    • Broadband VoIP is now increasingly popular, while IM has become a major communication tool 3G Services That Users Are Willing to Pay ForMillion150 40% 35.0% • With the introduction of 3G or 29.0% 116.3 30% mobile WiMax, mobile VoIP will100 24.0% become easier and more 84.3 19.0% prevalent as the primary voice 20% 15.0% 60.2 service. 11.2%50 40.7 6.5% 10% • IM services such as QQ and 26.0 1.0% 15.3 Skype will become mainstream 7.2 0 0.9 0% voice services, especially after 2004 2005 2006 2007F 2008F 2009F 2010F 2011F HSUPA is available, due to their Internet VoIP user VoIP user as % of internet user large user base and attractive, comprehensive applications. Wireless, Wireline Accounts and IM Active AccountsMillion • Mobile carriers will therefore 301 see serious IP cannibalization 223 230 in both local and long distance voice services. Mobile carriers 142 have started to fight back by 119 113 offering their own IM services, 25 24 47 E.g. China Mobile’s Fetion and China Unicom’s UM. China China China China Tencent MSN Sina Frequent IM users Mobile Telecom Unicom Netcom IM usersSource: Company information, BDA 48
    • CRBT is currently the major mobile music service; mobile music has huge growth potential Mobile Music Market Size ForecastUSD Million5,000 4,641 70% 68% • Mobile music revenues in China 60%4,000 3,803 mainly come from CRBT. Both 36% 3,137 50% China Mobile and China Unicom’s3,000 2,668 40% CRBT penetration has grown fast in 2,118 30% the past three years, bolstered by2,000 1,561 26% 21% 22% promotions. However, CRBT may hit 20%1,000 931 18% its growth ceiling within two years. 10% • Ringtone downloads account for 0 0% about 40% of WAP revenues. 2005 2006 2007F 2008F 2009F 2010F 2011F • Chinese mobile operators have Market Size Annual Growth recognized the monetizing power of China Mobile and China Unicom CRBT Penetration mobile music, and are promoting it as their primary WVAS. 60% 56.6% 46.9% • Full track music downloads are the next big application for mobile 36.5% 40% 25.9% operators. 25.2% 17.2% 23.7% • Customers are more willing to pay 13.3% 20% 9.4% for personalized, customized mobile 0.3% music services. 0% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 China Mobile China Unicom Source: Company information, BDA 49
    • Mobile TV currently faces challenges, but mobile broadband could act as a driver • Mobile operators provide streaming mobile TV services by cooperating with a restricted Service number of licensed SPs, including Dragon New Media. • Services include live programs, VOD and mobile video download. • China’s mobile TV user numbers were estimated at 5 million by end-2006; most users only watch free TV channels or content. User Base • Dragon New Media has gained 2 million mobile TV users, of whom 500,000 are paying subscribers. • SARFT is promoting DAB and CMMB standards for broadcast mobile TV services. • Mobile TV licensing is controlled by SARFT. Challenges • Mobile operators are concerned that streaming mobile TV at peak time could take up too much network capacity, reducing basic voice or other data services. • Mobile TV is attractive to users, according to CNNIC’s survey. • Mobile operators will be the key players for mobile TV services as they control billing and Outlook have strong marketing capabilities. • Unicast mode can be supported by mobile streaming technology and will be popularly used for personalized or customized VOD services. MBMS will enable mobile carriers to transmit TV programs with broadcast and multicast modes to many subscribers at one time. • MBMS will not take off in the next three years in China due to lack of terminals.Source: CNNIC, BDA 50
    • Lessons can be learned from the IPTV market for mobile TV services Forecasts on Broadband, Cable DTV and IPTV User Growth Million 132.6 116.4 100.9 Broadband user 92.6 85.5 69.4 74.6 Cable DTV user 54.6 57.6 40.2 41.6 25.6 IPTV user 12.6 9.7 4.1 0.6 2.8 5.0 7.2 0.2 1.3 2005 2006 2007F 2008F 2009F 2010F 2011F • BDA believes IPTV user growth will continue at a moderate pace in 2007, due to regulatory barriers and carriers’ concerns over technology standards and business models, as well as growing competition from digital TV services. • Competition between SARFT and MII take-off supportedthe business promotion, IPTVawill • However, compared with cable DTV’s will continue, and by SARFT’s model remains dilemma for mobile carriers. Cellular network-based broadcast, multicast or unicast mobile TV services increasingly fall behind DTV and face pressure from the DTV market. are attractive with interactivity, but have content shortages and poor video quality. It remains unclear how mobile carriers will overcome these technical and regulatory difficulties.Source: SARFT, BDA forecasts 51
    • Online games have achieved tremendous success in China, and the market will continue to grow Online Games Market Size and ForecastUSD Million4,000 78.3% 67.6% 80% • China’s online games market has 3,609 been growing at an astonishing pace 3,0453,000 37.4% 60% with over 100 game operators 2,453 competing in this crowded arena;2,000 1,891 29.7% 40% 1,377 24.1% top players include NASDAQ-listed1,000 821 18.5% 20% Shanda, Netease, The9 and Perfect World. 0 0% • The number of paying gamers has 2006 2007F 2008F 2009F 2010F 2011F risen too. More and more people are Market Size Annual Growth willing to pay to play. Online Gamers and Forecast • The item-based free-to-play model Million dominates the market. Online game 27.5% 27.8% 100 27.0% 28% operators are continuing to test new 26.0% 83.8 business models such as in-game 80 73.2 25.0% 62.4 22.6 26% advertising. 20.5 60 23.7% 51.7 18.7 • The government has recognized the 42.0 24% 40 32.5 16.5 games industry as an emerging 14.7 13.2 52.7 61.2 22% industry and is increasingly trying to 20 43.7 27.3 35.1 improve the regulation of this market. 19.3 0 20% 2006 2007F 2008F 2009F 2010F 2011F Paying Gamer Non-paying Gamer Penetration Source: CGPA, BDA 52
    • Mobile games will take off after 3G deployment, but can hardly duplicate the success of online games • Chinas mobile games industry is in the rapid growth stage, driven by user demand, Mobile Games Market Size and Forecast increasing penetration of JAVA-enabledUSD Million handsets and smart phones, and enhanced 800 37.6% 39.6% 40% data rates. 33.7% 717 • There are over 10,000 mobile console games 600 30% available in the China market. By contrast, 513 22.0% there are only about 30 mobile online games. 18.4% 373 • Mobile operators’ official platforms for 400 20% 279 JAVA/BREW applications, and free WAP 187 229 portals are major distribution channel for 200 10% mobile games. • China’s mobile games market will surge from 0 0% 2009 once multiple 3G networks are launched, 2006 2007F 2008F 2009F 2010F 2011F and HSUPA or EVDO Rev. A follows on. Market Size Annual Growth Rate • Mobile games providers will be able to adopt business models that have already proved successful in PC online games and apply them to mobile games. Source: BDA 53
    • Uptake of Location based services (LBS) has been very slow in China, but will get a boost from mobile broadband and 3G Mobile Subscribers and LBS Users Million 350 301 300 247 250 200 142 150 128 100 50 5 8 0 2005 2006 China Mobile China Unicom LBS • Despite five years of development, operators have seen very little LBS user growth. LBS made up only 1% of China Unicom’s total WVAS revenues in 2006, and the percentage was even smaller for China Mobile. • The LBS market remains immature as poor service quality, operator ambivalence and regulatory issues are all barriers to LBS uptake. • LBS has some growth potential due to latent user demand, improved services and mobile broadband technology.Source: China Mobile, China Unicom, BDA 54
    • China’s mobile social networking services will grow steadily; operator platform-based services are the biggest revenue earners Mobile SNS Market Size Mobile SNS UsersRMB million Million2,000 1,910 30% 120 26% 104.1 24% 1,584 1001,500 18% 1,298 77.7 20% 80 1,049 22% 21% 57.21,000 834 60 707 41.9 10% 40 29.9 500 18.1 20 0 0% 0 2006 2007F 2008F 2009F 2010F 2011F 2006 2007F 2008F 2009F 2010F 2011F • The mobile SNS market includes operator WAP platform-based SNS, operator platform-based mobile IM, free WAP-based SNS and independent mobile IM services. Market forecasts for each of these four sectors are shown in the following slides. • Operator platform-based mobile SNS services account for the majority of revenues in China’s mobile SNS market. The relatively slow growth of operator platform-based services also drags down the market’s overall growth rate. • Mobile SNS user growth is mainly driven by services such as free WAP-based SNS and independent mobile IM. The growing penetration of high-end handsets and the commercial launch of 3G will also drive user growth of mobile SNS services. Source: BDA 55
    • Chinese carriers are trialing IMS on a small scale; volume deployment depends on 3G licensing, making it unlikely to emerge in the next 3-4 years Carrier Location Supplier Details • Internal office communications, in use from July 2007 Beijing ZTE • ZTE is sole supplier IMS Trials China Mobile Ericsson, 10 NSN, ALU, • Trials for services and equipment provinces etc. China • Used by Ericsson and Motorola as an enterprise solution Beijing Ericsson Netcom • VoIP is the main service China Chongqing N/A • Lab test Telecom Nanning NSN • Convergent communication for government departmentsKey Drivers• China Mobile and China Netcom are interested in providing enterprise services over IMS.• The potential for fixed mobile convergence (FMC) services is attractive to all carriers.Obstacles• Immature standards are causing immature products and interoperability problems.• At present, IMS offers limited value added applications whilst softswitch is widely deployed for VoIP.• Widespread use of IMS is pending 3G licensing.Outlook• IMS may be deployed on a large scale from 2010, after 3G services are available and FMC become key for competition. Source: industry report, BDA analysis 56
    • Table of Contents• Telecom Market Overview• Regulatory Environment Analysis• Broadband Market and Service Provider Analysis• Equipment Suppliers’ Positioning in Mobile Broadband• Emerging Business Models and Consumer Demand Analysis• Opportunities for Finnish Companies and Preliminary Recommendations 57
    • Despite the strong demand for mobile broadband in China, the ability for Finnish companies to access the market hinge on how China adopting future mobile broadband standards Strong Demand for Mobile Risks Associated with Broadband “Indigenous Innovation” Policy• The world’s largest mobile broadband • China will be determined to pursue TD- market in the next 5-10 years SCDMA to reduce foreign ‘domination’ of• Users are eager to adopt innovative 3G, and to gain a better foothold in 4G applications • Both mobile WiMax or LTE may have to• Entrepreneurial ISPs and ICPs drive compromise with TD-SCDMA innovations and emerging business models Advice for Finnish Companies• BDA advises overseas companies seeking to do business in China to be cautious about how they promote new technologies and standards in China.• Where possible, companies should seek to align their interests with domestic interests (without compromising their fundamental Intellectual Property).• Balance strategies in China against other high growth markets such as India or Vietnam 58
    • Opportunities and preliminary recommendations for Finnish companies Roadmap of Mobile Broadband Evolution in China 2007 2012 2017 Timeline 3G to be Mobile WiMax to 4G may emerge in launched be introduced 2015 Opportunities with Technology• Opportunities will emerge initially in the 3G market, then in mobile WiMax and 4G in the longer term• Opportunities exist for foreign companies in chipsets, T&M and network optimization software and other technology solutions for TD-SCDMA• Terminal and technology solutions represent the main opportunities for Finnish companies, given that entry barriers are much lower in this segment than for basic telecom services and value-added application service provisions Recommendations to Finnish Companies• As to the near term 3G market, BDA believes cooperation with Huawei and ZTE would be the best strategy for Finnish companies to penetrate the market because these two companies are well positioned for TD-SCDMA, WCDMA and EVDO.• For the longer term 4G market, Finnish companies may work together with Chinese research institutions through joint research projects to influence the adoption of 4G standards in China 59
    • Contact DetailsDuncan.clark@bdaconnect.comMeiqin.fang@bdaconnect.com Ning.liu@bdaconnect.com