Xiaolin Lu Morning Forest, LLC Jan, 2004 BUILDING A VIRTUAL OPERATOR BUSINESS IN CHINA An  “@Home Plus”  Model Copyright 2...
What is this all about? <ul><li>Murdoch + Redstone + others =  $B “invasion” to China  media industry = contributions to C...
MODERN CHINA HISTORY Copyright 2004 – 2011 and Property of Morning Forest, LLC Irreversible Commercialization & Privatizat...
GROWTH POTENTIAL % $B China IT Industry Production Growth China IT Industry Revenue Source: MII Copyright 2004 – 2011 and ...
PER CAPITA INCOME & DISTRIBUTION RMB Urban Population (K) <ul><li>Average engineers salary in big cities: $20K – 30K/year ...
URBAN FAMILY SPENDING & CPE OWNERSHIP RMB/Person/Year 21.6% on communication & entertainment <ul><li>TV-centric & personal...
SERVICE PENETRATION Source: CSFB, MII Copyright 2004 – 2011 and  Property of Morning Forest, LLC   Population p.a. Income ...
TV CENTRIC ENVIRONMENT mn TV <ul><li>10% of TV household purchase new or change TV set every year </li></ul><ul><li>Boomin...
ONLINE PENETRATION mn Sub mn PC Sale Source: CSFB, MII Copyright 2004 – 2011 and  Property of Morning Forest, LLC
ONLINE USER PROFILE % of users % of Time % of users % of users User Age   Places Income   Spending Source: CNNIC “ Hidden ...
ONLINE SERVICES mn Subs <ul><li>HSD service is more and more likes a video business </li></ul>Source: CSFB Copyright 2004 ...
OPPORTUNITY FOR VIRTUAL OPERATORS:   CREATING VALUE OVER INFRASTRUCTURE <ul><li>9.8B SMS transmitted in 2004 Chinese New Y...
CABLE & MEDIA HISTORY Government Station Broadcaster/Program + Cable <ul><li>Administration TV </li></ul><ul><li>On govern...
CHINA MSOs % of systems Subscribers <ul><li>340M TV household, 100M cable TV subscribers </li></ul><ul><li>4K+ MSOs due to...
INDUSTRY AND REGULATION Copyright 2004 – 2011 and  Property of Morning Forest, LLC <ul><li>Assets: CCTV, CBN, small portio...
THE TRENDS <ul><li>Started commercialization in 2003, based on the government defined  “Culture Reform”. </li></ul><ul><li...
CHANGING POLICY & PRACTISE MII Telecom Groups Local Government BRFT Station MSOs <ul><li>Still try to consolidate from nat...
MACRO COMPARISON <ul><li>High potential on value-added services and scale based operation </li></ul>Source: SARFT, MII, NC...
OPPORTUNITIES AND ISSUES US China Copyright 2004 – 2011 and  Property of Morning Forest, LLC Basic: $13.44 Ext Basic: $40....
BUSINESS VALUATION Source: Company Data Copyright 2004 – 2011 and  Property of Morning Forest, LLC
RIDING THE WAVE Copyright 2004 – 2011 and  Property of Morning Forest, LLC <ul><li>Like culture-based services </li></ul><...
OPPORUNITIES <ul><li>Changing and favorable environment: </li></ul><ul><ul><li>Commercialization and privatization </li></...
TWO STEPS:  BUSINESS INTEGRATION TO VIRTUAL OPERATOR <ul><li>To establish relationship and trust </li></ul><ul><ul><li>Bus...
MARKET POTENTIAL <ul><li>Infrastructure business </li></ul><ul><ul><li>340M TV HHP, 100M HHP cable system, 10% upgraded </...
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Building A Virtual Operator in China

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An education material to US investors on how to enter China Cable TV Business, 2004.

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Transcript of "Building A Virtual Operator in China"

  1. 1. Xiaolin Lu Morning Forest, LLC Jan, 2004 BUILDING A VIRTUAL OPERATOR BUSINESS IN CHINA An “@Home Plus” Model Copyright 2004 – 2011 and Property of Morning Forest, LLC Macro Environment Business Environment Consumer Behavior Opportunities Culture
  2. 2. What is this all about? <ul><li>Murdoch + Redstone + others = $B “invasion” to China media industry = contributions to China dinning industry </li></ul><ul><li>But what is the China media industry, and what power control what? </li></ul><ul><li>What is the historical trend and on what wave foreign investors could ride? </li></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC
  3. 3. MODERN CHINA HISTORY Copyright 2004 – 2011 and Property of Morning Forest, LLC Irreversible Commercialization & Privatization Process 1980 1985 1990 1995 2000s Foreign investment & Private enterprises Market Price System (chaos & re-balance) Property Ownership SOE financial system Agriculture & Small Business PER CAPITA GDP (RMB) Source: China Net, CSFB
  4. 4. GROWTH POTENTIAL % $B China IT Industry Production Growth China IT Industry Revenue Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
  5. 5. PER CAPITA INCOME & DISTRIBUTION RMB Urban Population (K) <ul><li>Average engineers salary in big cities: $20K – 30K/year </li></ul><ul><li>Commercial apartment in Beijing: $1K – 3K/sqm. </li></ul>Source: CSFB, MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
  6. 6. URBAN FAMILY SPENDING & CPE OWNERSHIP RMB/Person/Year 21.6% on communication & entertainment <ul><li>TV-centric & personal ownership </li></ul><ul><li>Consumer competition </li></ul><ul><li>Blooming city-rebuild further drives advanced CPE penetration </li></ul>PER HOUSEHOLD Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
  7. 7. SERVICE PENETRATION Source: CSFB, MII Copyright 2004 – 2011 and Property of Morning Forest, LLC   Population p.a. Income Mobile PC VCD TV Internet National 7,703 63% 21% 53% 126% 6.2% Shanghai 16.1 13,250 80% 47% 58% 158% 27% Beijing 13.8 12,464 94% 56% 52% 148% 28% Zhejiang 43.2 11,716 89% 27% 55% 150% 10% Guangdong 77.8 11,137 123% 45% 73% 149% 12% Tianjin 10 9,338 39% 24% 43% 126% 14% Fujian 34.4 9,189 93% 25% 66% 137% 9% Jiangsu 73.6 8,178 61% 20% 46% 136% 8%
  8. 8. TV CENTRIC ENVIRONMENT mn TV <ul><li>10% of TV household purchase new or change TV set every year </li></ul><ul><li>Booming city re-build and “consumer competition” drive large screen and high-end TV sales </li></ul><ul><li>0.98B RMB Movie theater revenue in 2002, equals to 0.07 movie viewing/person/year </li></ul><ul><li>Consumers are more interested in TV drama serious: a culture phenomena </li></ul>Minutes/day/person Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
  9. 9. ONLINE PENETRATION mn Sub mn PC Sale Source: CSFB, MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
  10. 10. ONLINE USER PROFILE % of users % of Time % of users % of users User Age Places Income Spending Source: CNNIC “ Hidden Money Flow” Copyright 2004 – 2011 and Property of Morning Forest, LLC
  11. 11. ONLINE SERVICES mn Subs <ul><li>HSD service is more and more likes a video business </li></ul>Source: CSFB Copyright 2004 – 2011 and Property of Morning Forest, LLC
  12. 12. OPPORTUNITY FOR VIRTUAL OPERATORS: CREATING VALUE OVER INFRASTRUCTURE <ul><li>9.8B SMS transmitted in 2004 Chinese New Year </li></ul>mn Sub Source: CSFB Copyright 2004 – 2011 and Property of Morning Forest, LLC
  13. 13. CABLE & MEDIA HISTORY Government Station Broadcaster/Program + Cable <ul><li>Administration TV </li></ul><ul><li>On government budget </li></ul><ul><li>4-level: central, provincial, city, district </li></ul>BARFT THEN Copyright 2004 – 2011 and Property of Morning Forest, LLC Government Station BARFT TV Group MSO <ul><li>357 TV Networks </li></ul><ul><li>2,334 channels, including 50 national ones </li></ul><ul><li>19.7B RMB advertising revenue </li></ul><ul><li>9.56M broadcasting hours, 2.02M program hours </li></ul><ul><li>4K+ MSOs </li></ul><ul><li>$1.5 ARPU </li></ul>NOW
  14. 14. CHINA MSOs % of systems Subscribers <ul><li>340M TV household, 100M cable TV subscribers </li></ul><ul><li>4K+ MSOs due to the 4-level TV history </li></ul><ul><li>Aggressive consolidation since 2003 </li></ul><ul><li>10% of networks are upgraded </li></ul>Source: SARFT Copyright 2004 – 2011 and Property of Morning Forest, LLC
  15. 15. INDUSTRY AND REGULATION Copyright 2004 – 2011 and Property of Morning Forest, LLC <ul><li>Assets: CCTV, CBN, small portion of CCN </li></ul><ul><li>License: National video & ISP </li></ul><ul><li>Huge profit with CCTV, but 40% of programs are outsourced </li></ul>Propaganda CCTV SARFT CBN CCN Local Government BRFT Station MSOs TVG IIO <ul><li>Assets: infrastructure & station </li></ul><ul><li>License: video & limited ISP </li></ul><ul><li>Ownership: gray </li></ul>MII Telecom Groups Local Telcos <ul><li>Manufactures </li></ul><ul><li>R&D </li></ul><ul><li>Assets: national and local infrastructure </li></ul><ul><li>License: voice & ISP </li></ul><ul><li>Ownership: allow 25 – 49% foreign </li></ul>IOO policy policy
  16. 16. THE TRENDS <ul><li>Started commercialization in 2003, based on the government defined “Culture Reform”. </li></ul><ul><li>Government mandated digital pay TV. </li></ul><ul><ul><li>2003 start, 2005 DTH, 2008 Terrestrial, 2010 Complete conversion, 2015 shut down analog. </li></ul></ul><ul><ul><li>More flexible pricing, censorship, quota, distribution, & ownership </li></ul></ul><ul><li>Fast-pace consolidation (land grabbing) and moving to triple-play </li></ul><ul><li>Critical needs: </li></ul><ul><ul><li>Business operation </li></ul></ul><ul><ul><li>Infrastructure and platform readiness </li></ul></ul><ul><ul><li>Value-added services to compete with telecom systems and to increase the valuation (ARPU) </li></ul></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC
  17. 17. CHANGING POLICY & PRACTISE MII Telecom Groups Local Government BRFT Station MSOs <ul><li>Still try to consolidate from national level </li></ul><ul><li>Establishing national digital pay TV production, aggregation, distribution, and management platform </li></ul><ul><li>>50% outsourced operation & ownership is possible. </li></ul>TVG <ul><li>Manufactures </li></ul><ul><li>R&D </li></ul>Propaganda CCTV SARFT CBN CCN <ul><li>Aggressive consolidation ( province level) </li></ul><ul><li>More flexible policy & practice </li></ul><ul><li>Hungry for triple-play </li></ul><ul><li>Outsourced operation and ownership very possible </li></ul><ul><li>Start invest into cable industry </li></ul><ul><li>Aggressive move to content distribution </li></ul><ul><li>Triple play emerging </li></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC
  18. 18. MACRO COMPARISON <ul><li>High potential on value-added services and scale based operation </li></ul>Source: SARFT, MII, NCTA Copyright 2004 – 2011 and Property of Morning Forest, LLC
  19. 19. OPPORTUNITIES AND ISSUES US China Copyright 2004 – 2011 and Property of Morning Forest, LLC Basic: $13.44 Ext Basic: $40.49 Digital Tier $50.44, $60.44, $68.44, $78.99, $93.99 HDTV: extra $5 VOD& DVR: $9.95 HSD: $52.95 Telephony: $25 Basic: $2.5 HSD: $15 US China Network/HHP $175 $175 Actives -80% 1 CMTS/Sub $8 $35
  20. 20. BUSINESS VALUATION Source: Company Data Copyright 2004 – 2011 and Property of Morning Forest, LLC
  21. 21. RIDING THE WAVE Copyright 2004 – 2011 and Property of Morning Forest, LLC <ul><li>Like culture-based services </li></ul><ul><li>Herd effects </li></ul><ul><li>Other industries support penetration </li></ul>Consumer/Market Behavior <ul><li>Assets consolidation, and buildup </li></ul><ul><li>Fast growing pay DTV, triple-play </li></ul><ul><li>Desire for commercial operations </li></ul>Business Environment <ul><li>Commercialization & privatization </li></ul><ul><li>Stable growth of GDP and IT industry </li></ul><ul><li>Fast growing income and spending </li></ul>Macro Environment
  22. 22. OPPORUNITIES <ul><li>Changing and favorable environment: </li></ul><ul><ul><li>Commercialization and privatization </li></ul></ul><ul><ul><li>Consumer behavior and new revenue format </li></ul></ul><ul><li>Leverage: </li></ul><ul><ul><li>Riding the wave of commercialization of broadband and content distribution business </li></ul></ul><ul><ul><li>Utilize local & central power, and the consolidation processes </li></ul></ul><ul><ul><li>New revenue format to lead the consumption </li></ul></ul><ul><li>Strategy </li></ul><ul><ul><li>Two-step “outsourced operation” model for land-grabbing and equity buildup. </li></ul></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC
  23. 23. TWO STEPS: BUSINESS INTEGRATION TO VIRTUAL OPERATOR <ul><li>To establish relationship and trust </li></ul><ul><ul><li>Business and operation solutions </li></ul></ul><ul><ul><li>Technology solutions and system integration </li></ul></ul><ul><li>Becomes a virtual operator </li></ul><ul><ul><li>Carve out the service aggregation, distribution, and operation management </li></ul></ul><ul><ul><li>Operate value-added broadband only services </li></ul></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC
  24. 24. MARKET POTENTIAL <ul><li>Infrastructure business </li></ul><ul><ul><li>340M TV HHP, 100M HHP cable system, 10% upgraded </li></ul></ul><ul><ul><li>90M HHP to upgrade, 240M HHP to build </li></ul></ul><ul><li>Outsourced service aggregation, distribution and management platform </li></ul><ul><ul><li>Government mandated DTV ($180B market) </li></ul></ul><ul><ul><li>Revenue sharing (@Home model) on outsourced operation (current SMS VAS is based on 15:85 sharing) </li></ul></ul><ul><li>Broadband & cable only content </li></ul><ul><ul><li>Combine SMS, TV, advertising, and good-sale. </li></ul></ul><ul><ul><li>IP streaming </li></ul></ul><ul><ul><li>Current $191M online gaming and $475M SMS/VAS </li></ul></ul>Copyright 2004 – 2011 and Property of Morning Forest, LLC

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