The Emergence of a New WirelessBroadband Service ProviderChinaTel                                    A Frost & Sullivan Wh...
TABLE OF CONTENTS                    Introduction and Overview ..............................................................
INTRODUCTION AND OVERVIEW                                                                                               Ch...
EMERGENCE OF A NEW SERVICE PROVIDER BUSINESS MODEL                            In October, at 4G World in Chicago, we got a...
ChinaTel: WHO THEY ARE AND MOVES THEY HAVE MADE                                                                           ...
ChinaTel has been forthright about its intention to choose the technology that provides the                               ...
Second, VoIP traffic will continue to erode revenues for traditional telcos, while transportof VoIP traffic by traditional...
HOW IS ChinaTel POSITIONED?    One: ChinaTel is in the market at the right time. 4G technologies and high-speed    broadba...
THE FINAL WORDChinaTel may not be viewed today by Wall Street as a legitimate force to be reckoned with             The sh...
Silicon Valley                                                                                                            ...
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A whitepaper prepared for ChinaTel by James Brehm, senior mobility consultant for Frost & Sullivan.

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The Emergence of a New Wireless Broadband Service Provider

  1. 1. The Emergence of a New WirelessBroadband Service ProviderChinaTel A Frost & Sullivan White Paper Prepared by James Brehm, Senior Consultant—Frost & Sullivan
  2. 2. TABLE OF CONTENTS Introduction and Overview ............................................................................. 3 Emergence of a New Service provider Business Model................................... 4 Growth of the Chinese Market: Why China ..................................................... 4 ChinaTel: Who They Are and Moves They Have Made ..................................... 5 Next Step: A Partnership with ZTE ................................................................ 5 Why Wimax? And Did They Leave the Door Open for LTE? ........................... 5 What was Gained in the Chinacomm and Golden Bridge Acquisitions? ......... 6 Sino Crossing Fiber Assets .............................................................................. 6 What About Peru? ........................................................................................... 7 How is ChinaTel Positioned?............................................................................ 8 The Final Word ................................................................................................ 9 2 Frost & Sullivan
  3. 3. INTRODUCTION AND OVERVIEW ChinaTel’s network will beRecently, some very interesting news on the wireless broadband market has been based upon hardware whichemanating from China. A couple years ago, through a reverse merger between incorporates a softwareMortlock Ventures, Inc., a publicly traded Nevada corporation, and Trussnet USA, a small,U.S.-based, over-the-counter traded company named ChinaTel was formed. defined radio solution, allowing it to deployWith experience in the design, construction, and deployment of more than 20,000 wireless WiMAX now and upgradeprojects, management of the ChinaTel Group, Inc. is experienced in development activities, to LTE later without aincluding engineering, deployment, and operations services of wireless broadband complete ‘forklift upgrade’.telecommunications networks. Originally entering China by deploying a Wi-Fi network inBeijing in support of the 2008 Olympics, ChinaTel has had eyes on a bigger prize—broadband wireless access.After purchasing a minority stake in CECT-Chinacomm, which can be increased to 49percent, ChinaTel begins to realize its broadband vision by utilizing Chinacomm’s operatorlicenses from the Chinese goverment for the construction and operation of a 3.5 GHzwireless braodband system in a 29-city coverage area.. Chinacomm is one of five BTSlicense holders in the People’s Republic of China. The three largest carriers, China Mobil,China Unicom and China Telecom, are focused on mobile telephony and not the wirelessbroadband market segment.Additionally, ChinaTel has upped the ante in China, acquiring a stake inGolden Bridge Network Communications Company, LTD (Golden Bridge), which gives it anine-city, last-mile 4G wireless network, expandable to 100+ cities within China.Until recently, ChinaTel has been relatively quiet, blocking and tackling, taking care ofday-to-day business, and working behind the scenes setting up these and otherrelationships. But is more to come? Frost & Sullivan 3
  4. 4. EMERGENCE OF A NEW SERVICE PROVIDER BUSINESS MODEL In October, at 4G World in Chicago, we got a glimpse of things to come from ChinaTel. Coming out of “stealth mode,” George Alvarez, CEO of ChinaTel, took the stage for the annual Fierce Wireless breakfast roundtable. On introducing ChinaTel to the audience, Mr. Alvaraz stated, “Our company is, in essence, a broadband service provider focusing on China as a primary market…” During the discussion, Mr. Alvarez made it clear: ChinaTel has big things planned. With a strategic partnership with ZTE, Chinacomm’s existing Wi-Fi customer base numbering 400,000 subscribers, and the need for high-speed broadband access, we expect ChinaTel to take a substantial position in the Chinese market. Unlike many service providers, however, ChinaTel has been working with its equipment vendor partners (most notably ZTE) to utilize “the best tools for the job” instead of technologies that are hyped because of intellectual property positions. ChinaTel’s network will be based upon hardware that incorporates a software-defined radio solution, allowing it to deploy WiMAX now and upgrade to LTE later without a complete “forklift upgrade.” When addressing the LTE vs. WiMAX debate, Mr. Alvarez stated, “Obviously, a carrier doesn’t dictate technology; it has to create a foundation of flexibility to go either direction. The end result is that consumers will dictate what technology we deploy.”According to the GROWTH OF THE CHINESE MARKET: WHY CHINA?International MonetaryFund, China ranked second “Why China?” many people might ask. With a population of 1.35 billion and one of theto the United States in largest and fastest growing economies in the world, entry into China is a no-brainer forterms of nominal GDP at Alvarez and his organization. According to the International Monetary Fund, China rankedthe end of 2010, while second to the United States in terms of nominal GDP at the end of 2010, while broadbandbroadband penetration penetration ranked below many other countries.ranked below manyother countries. Although still low, Internet usage in China is up, hovering at around 29 percent. And according to China’s National Bureau of Statistics, the per-capita disposable income of the urban Chinese population was 17,175 yuan ($2,514.6) in 2009, up 8.8 percent from a year earlier. With the largest mobile population (833 million users), access to information any time, anywhere is becoming a key resource fueling the economy. China has a workforce numbering some 800 million individuals; however, the vast majority is in industrial, agricultural, public sector or services jobs. Mirroring United States population percentages after the industrial revolution, China has not yet experienced the wave of “Information Workers” seen in Western World powerhouses like Germany, the UK and the USA. The vast population of China lives in metropolitan areas. An amazing statistic in and of itself, there are more than 160 cities in China with a population over 1 million. The belief that China is on the brink of straight-line growth for information services is real. 4 Frost & Sullivan
  5. 5. ChinaTel: WHO THEY ARE AND MOVES THEY HAVE MADE "…the whole of ChinaTelChinaTel was formed in early 2008 through a reverse merger between Mortlock Ventures, may just be greater thanInc., a publicly traded Nevada corporation, and Trussnet USA. This reverse merger provided the sum of its parts."a mechanism to raise capital necessary to implement the vision. ChinaTel’s relationship withChinacomm provided spectrum and a foothold in the Chinese market. —James Brehm,Over time, and through many small and calculated moves, the ChinaTel team has evolved Frost & Sullivaninto an emerging and important market participant, with a value that may be misunderstoodby many financial analysts. Most in the financial world like to see things laid out neatly infront of them. To Wall Street, the planning, preparation and funding of Clearwire lookedgood initially, but in hindsight, changes could have been made.When a company like ChinaTel starts with a reverse merger, then gets into partnerselection and purchases its fiber infrastructure midway through the process, confusioncan occur.Like the old adage says, the whole of ChinaTel may just be greater than the sum of its parts.NEXT STEP: A PARTNERSHIP WITH ZTEIn August 2010, ChinaTel announced entering into a Memorandum of Understanding for a ZTE will treat ChinaTel asglobal strategic partnership with ZTE, a leading supplier of both WiMAX and LTE equipment its preferred customer inand backend communication software and professional services. The strategic partnership is the supply of equipment,designed to advance both parties interests in delivering telecom solutions to consumers, consumer products,enterprises, and government customers worldwide. Under the terms of the MOU, ZTE willbe the preferred and primary provider of customized equipment, software, consumer operational services,products, operational services, and financing for WiMAX networks that ChinaTel is solutions and financing.deploying in China, Peru, and other markets it may enter in the future. In return, ZTE willtreat ChinaTel as its preferred customer in the supply of equipment, consumer products,operational services, solutions and financing. The two companies will share equal ownershipof intellectual property involved in equipment, software, consumer products, services orsolutions developed through their joint efforts.WHY WIMAX? AND DID THEY LEAVE THE DOOR OPEN FOR LTE?Why would any service provider choose multiple technologies? Simple. As my father taughtme at an early age, you always need to use the right tool for the job. Many factorsdetermine the technologies ultimately deployed. Available spectrum, greenfield opportunityvs. existing infrastructure that can be used, and how the consumer will ultimately consumethe bandwidth will dictate the answer to the LTE vs. WiMAX question.Although not the networking “darling” in the United States anymore, we believe theWiMAX standard has enough subscriber volume and support globally to serve as analternative for the provisioning of mobile broadband access. It has begun to carve out atight niche tied to certain target opportunities, has imbued new wireless business models,and has a flexible, flat, all-IP network architecture better suited than HSPA to providingInternet-based services.Even so, the LTE standard has quickly gained substantial momentum. Since WiMAX 802.16eand LTE release 8 provide a similar real-world performance, ultimately the decisions ofequipment vendors and consumers of broadband usage will dictate the fate of WiMAX. Frost & Sullivan 5
  6. 6. ChinaTel has been forthright about its intention to choose the technology that provides the best business case given timing and end-user demand for service quality and devices. With ZTE entering into a strategic partnership with ChinaTel and with ZTE launching the world’s first dual-mode LTE/WiMAX RRUs, ChinaTel’s risk is minimal. If ChinaTel and ZTE decide to utilize dual-mode equipment in their deployments, they will improve the speed of network rollouts and significantly reduce the network total cost of ownership. WHAT WAS GAINED IN THE CHINACOMM AND GOLDEN BRIDGE ACQUISITIONS? The Chinacomm investment by ChinaTel set the stage for a greater move into China. With the addition of Golden Bridge to ChinaTel’s original 29-city Chinacomm footprint, ChinaTel achieves scale and has enough spectrum rights and capacity to deliver high-speed broadband services country-wide to reach more than 1 billion Chinese consumers, businesses, and government agencies in the country. SINO CROSSING FIBER ASSETS Shortly after adding Golden Bridge to the portfolio, ChinaTel made another calculated move, acquiring fiber assets of another Chinese company, Sino Crossing, to support itsThe SinoCrossing assets vision. Ultimately, ChinaTel plans on consolidating Golden Bridge and Sino Crossingare ChinaTels fiber revenues under joint venture structure. Through the investment and acquisition of the Sinobackbone network and will Crossing assets, ChinaTel controls approximately 34,000 km of fiber optic cable that connects all major population centers within China (PRC). The two strands of fiberact as the central nervous acquired is capable of transporting in excess of 100 gigabytes of data per second each,system that supports the which is the equivalent backbone of Tier 1 networks in the U.S. being deployed by Verizonlast mile wireless solutions and Qwest. This 100 Gbps backbone should be adequate to handle high-volume dataChinaTel is deploying. transmissions such as live video without jitter or latency for tens of millions of customers. Just as a spinal column supports a skeleton and provides the very conduit for human nerves and senses, the Sino Crossing assets will act as a “fiber backbone” and central nervous system that supports the last-mile wireless solutions ChinaTel is deploying. Four important factors are set to increase the value of ChinaTel’s investment in the Sino Crossing fiber assets. First, according to recent forecasts by Cisco, global IP traffic will increase by a factor of four from 2009 to 2014, approaching 64 exabytes per month in 2014, compared to approximately 15 exabytes per month in 2009. That equals nearly three-fourths of a zettabyte (767 exabytes). Globally, mobile data traffic will double every year through 2014, increasing 39 times between 2009 and 2014. 6 Frost & Sullivan
  7. 7. Second, VoIP traffic will continue to erode revenues for traditional telcos, while transportof VoIP traffic by traditional Tier 1 carriers will become more important. These internationaltelcos will be looking for additional networking partners in China.Third, China has not yet opened its networks fully and embraced social media the way theWest has. Social media traffic, especially social media sites that include video or pictures,accounts for some of the highest ranked traffic rates on the most recent Cisco VisualNetworking Index.And, most importantly, in addition to providing stability to ChinaTel by opening additionalrevenue streams, the fiber backbone network will act as the central nervous system thatsupports the last-mile wireless solutions ChinaTel is deploying. With transport andinterconnection fees typically representing 20-35 percent of network OPEX, ChinaTel hasnot only secured control over one of the major costs of the networks it will operate as ajoint venture partner, but has also created a revenue source that is independent of thoserelationships through the sale of excess data transmission capacity to other operators. Through its 95% owned subsidiary Perusat,WHAT ABOUT PERU? ChinaTel is also deployingAn emerging and growing market in Latin America, entry into Peru provides ChinaTel with wireless broadbanda jumping off point to attack the rest of the world outside of China. Peru’s Internet usage networks in seven ofhas risen from just 10 percent of the population in 2003 to 25 percent of the population at Peru’s largest cities…the end of 2008, according to statistics from the World Bank.Through its 95 percent-owned subsidiary Perusat, ChinaTel is also deploying wirelessbroadband networks in seven of Peru’s largest cities, where Perusat holds 2.5 GHzspectrum licenses. ChinaTel recently announced a $48 million contract between ZTE andPerusat for infrastructure equipment, consumer terminals and engineering services, withthe first purchase order including 50 base stations already paid for and under manufacture.ChinaTel expects the commercial launch of the Peru network by Q3 2011. Frost & Sullivan 7
  8. 8. HOW IS ChinaTel POSITIONED? One: ChinaTel is in the market at the right time. 4G technologies and high-speed broadband Internet is just becoming a household phrase now. Now that people know it exists, they will want it. Two: ChinaTel is in the right markets. The North American and European markets are dominated by Big Telco. China and Latin America are still emerging markets, underserved by wireline and wireless service providers and without the marketing muscle of Verizon and AT&T in the USA, and Vodafone, Telefonica and T-mobile in Europe. Three: ChinaTel has done its due diligence and landed on a technology supplier (ZTE) that will allow them to bring to market the right technology for the right purpose. By utilizing ZTE’s infrastructure, ChinaTel can move from WiMAX to LTE without doing a “forklift upgrade” and either do a full overlay or a concurrent network, reutilizing common components in the future. Four: By working with ZTE over the past several months, the organization created a true partnership where, according to the MoU, ZTE will treat ChinaTel as its “preferred customer in the supply of equipment, consumer products, operational services, solutions and financing…” and for both parties…“to share equal ownership of intellectual property involved in equipment, software, consumer products, services or solutions developed through their joint efforts.” This type of relationship may be one of the biggest key influencers in the success of the company. Five: By acquiring a 51 percent stake in Sino Crossing, ChinaTel controls its own destiny. Instead of relying on paying other service providers for backhaul, ChinaTel will have the luxury of Sino Crossing’s 34,000 km fiber backbone throughout 90 percent of China. Additionally, this fiber backbone could provide significant additional revenue streams, providing interconnection services in China for outside IP traffic. Six: The acquisition of 49 percent of the Golden Bridge joint venture (plus control of its board and management) kick starts the previous ChinaTel investment in Chinacomm, providing it with Golden Bridge’s nine-city, last-mile 4G wireless network today. While both Chinacomm and Golden Bridge already hold broadband licenses with the Chinese government, ChinaTel can now expand those licenses from the original 29 up to 100+ cities within China. Seven: ChinaTel’s recent move into Peru as well as its vocal interest in Eastern Europe, Latin America and other emerging markets, positions ChinaTel as a “company to watch” in the sector. By planting flags in the ground around the world and acquiring revenue- generating subscribers, ChinaTel’s value is sure to increase almost exponentially. Recently in an interview, Ahmed Julfar, COO of mega-carrier Etisalat (which operates in 18 countries) predicted further consolidation in the market over the next several years, in a market that has seen the rise of mega-service providers that acquire and integrate existing businesses and networks like NTT, Vodafone, Verizon, AT&T, etc.8 Frost & Sullivan
  9. 9. THE FINAL WORDChinaTel may not be viewed today by Wall Street as a legitimate force to be reckoned with The shear populationas a broadband wireless service provider because of its lack of inclusion on the Nasdaq or of China and growthNYSE. ChinaTel and others who follow it have hinted of an upcoming application to list on rate of the ChineseNasdaq or AMEX. Regardless of where ChinaTel’s stock trades, Frost & Sullivan believes it economy place ChinaTelhas all of the attributes necessary to garner a significant piece of 4G business in emerging in an enviable position.markets around the world. Most important to any service provider is access to underservedcustomers. The shear population of China and growth rate of the Chinese economy placeChinaTel in an enviable position.One thing that is worth noting, ChinaTel has done things a different way than many serviceproviders. Unlike Clearwire, ChinaTel has been opportunistic and rolled together a lot ofgreat resources, while keeping costs in line. Unlike Clearwire or similar service providersin the U.S., ChinaTel did not start with the formula of plan, raise capital, engineer, plan, build,raise more capital, build, upgrade, raise more capital, build some more and operate; ChinaTelmanagement prefers to live in a world where you “measure twice and cut once.” This hasgiven it a more pragmatic view and allowed it to be nimble and react to the market.Although it is early in the life of this company, Frost & Sullivan believes ChinaTel will beable to succeed as a broadband wireless service provider in an industry cluttered withfailed attempts.With their own fiber optic infrastructure, strong partnerships with vendors, access toadequate capital, necessary R&D resources, good spectral holdings and strong relationshipswith regulatory agencies, the whole of ChinaTel appears to be worth significantly more thanthe sum of its parts. Frost & Sullivan 9
  10. 10. Silicon Valley 331 E. Evelyn Ave. Suite 100 Mountain View, CA 94041 C O N TAC T Tel 650.475.4500 Fax 650.475.1570 US San Antonio 7550 West Interstate 10, Suite 400, San Antonio, Texas 78229-5616 Tel 210.348.1000 Fax 210.348.1003 London 4, Grosvenor Gardens, London SWIW ODH,UKAuckland Tel 44(0)20 7730 3438Bangkok Fax 44(0)20 7730 3343BeijingBengaluru 877.GoFrostBogotá myfrost@frost.comBuenos Aires http://www.frost.comCape TownChennaiColomboDelhi / NCRDhakaDubaiFrankfurtHong KongIstanbulJakartaKolkataKuala LumpurLondonMexico CityMilanMoscowMumbaiManhattanOxfordParisRockville CentreSan AntonioSão Paulo ABOUT FROST & SULLIVANSeoul Frost & Sullivan, the Growth Partnership Company, partners with clients to accelerate theirShanghai growth. The companys TEAM Research, Growth Consulting, and Growth TeamSilicon Valley Membership™ empower clients to create a growth-focused culture that generates,Singapore evaluates, and implements effective growth strategies. Frost & Sullivan employs over 50Sophia Antipolis years of experience in partnering with Global 1000 companies, emerging businesses, and theSydney investment community from more than 40 offices on six continents. For more informationTaipei about Frost & Sullivan’s Growth Partnership Services, visit http://www.frost.com.Tel AvivTokyoToronto For information regarding permission, write:Warsaw Frost & Sullivan 331 E. Evelyn Ave. Suite 100 Mountain View, CA 94041 10

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