An old education material for China MII (Ministry of Industry and Information Technology) and SARFT (State Administration of Radio, Film and Television).

1. INCHINA
1

2. BUILDING “@HOME” PLUS
BUSINESS IN CHINA
Xiaolin Lu
February 12, 2004
Property of Morning ForestTM LLC 2

3. What is this all about?
 Early 21 century China started the final stage of
“commercialization” – State Owned Enterprise
(SOE), including cable industry.
 MII and SARFT are fighting to get the ownership-
control.
 This is an advisory suggestion with some designs
to both sides for a profitable business
 BUT, this is China and it is not about business
and technology…. the war has been and will be
going on forever…
Proprietary Information Property of Morning ForestTM LLC 3

4. BUSINESS COMPARISON
Comcast x Cox x Gehua
Subscriber (M) 21.0 4.2 6.1 1.2 5.0
Revenue ($M) 8,079.0 169.0 5,038.6 105.4 47.8
Operation Cost ($M) 3,511.0 131.7 2,130.9 80.0 26.7
Gross Margin 57% 58% 44%
EBITDA Margin 35% 35% 24%
Revenue/Sub ($) 384.7 40.2 826.0 86.4 9.6
EBITDA/Sub ($) 134.9 43.9 291.7 94.9 3.1
Proprietary Information Property of Morning ForestTM LLC 4

5. OPPORTUNITIES AND ISSUES
US China
Telephony: $25
HSD: $52.95
VOD& DVR: $9.95
HDTV: extra $5
Digital Tier
$50.44, $60.44, $68.44,
$78.99, $93.99
Ext Basic: $40.49 HSD: $15
Basic: $13.44 Basic: $2.5
US China
Network/HHP $175 $175
CMTS/Sub $8 $35
CM/Sub $40 $100
Proprietary Information Property of Morning ForestTM LLC 5

6. BUSINESS VALUATION
US x China
ARPU/month 57.34 3.8 15.00
Gross Margin 57% 44%
EBITDA Margin 35% 1.5 24%
Multiple 16 1.6 10
Value/Sub ($) 3,853.2 8.92 432.0
EBITDA/Sub 150.00 88.2 1.70
Debt/EBITDA 4 4
Debt/Sub 600.00 88.2 6.80
Proprietary Information Property of Morning ForestTM LLC 6

7. WHAT DOES IT MEAN
Value
Time
Finance
Resource
Value
Time
Finance
Resource
Proprietary Information Property of Morning ForestTM LLC 7

8. KEY ISSUES
Business Opportunities
Operations
Reality
Regulatory
Environment
Cost Structure
( technology platform)
Proprietary Information Property of Morning ForestTM LLC 8

9. SOLUTIONS: NETWORKS
Regional Centralize all the
Regional
Data Data processing for scale,
Center Center efficiency, & low-cost
SDH Metro Rigid Flexible DWDM
Ring SDH DWDM Metro Ring
Router Simple
Primary Everywhere Headend
CMTS
Hub
Digital DWDM
Transport Ring
Headend Secondary
Manned Passive Hub
Headend DWDM
Traditional Traditional Active Passive mFN mFN
HFC HFC HFC HFC HFC HFC
Proprietary Information Property of Morning ForestTM LLC 9

10. mFN
SH
mFN mFN
PH
CMTS SH S
mFN mFN
SH
XTR XTR XTR
 Daisy Chaining mFNs Spur WDM PON
 Distributed optical add/drop
 Reduced fiber management & labor
 Provisioning for growth
Proprietary Information Property of Morning ForestTM LLC 10

11. mFN HFC: Value
 Current Network: 5.5 actives/mile
Proprietary Information Property of Morning ForestTM LLC 11

12. mFN HFC: Value
 61% reduction in active components
 21+% improvement in reliability
Proprietary Information Property of Morning ForestTM LLC 12

13. COST COMPARISON
Category Fiber Deep 860 Fiber Deep 600 HFC
Headend/Hub Optronics $3 $3 $3
Field Optronics $6 $6 $6
Pow er Supplies w ith Pow er Coax $1 $1 $2
Actives $0 $0 $6
Passives $7 $7 $7
Coax $20 $20 $20
Hardw are $0 $0 $0
Splice & Activate Coax $2 $2 $2
Turn up and Test $1 $1 $2
Project Mgmt & Design Engineering $1 $1 $1
Taxes & Freight $1 $1 $2
Labor $23 $23 $25
Material $19 $19 $26
Cost Total $42 $42 $51
Saving 17% 18%
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14. Network Comparison
20,000 Home Example
Item Traditional mFN Network Reliability
Power Supplies 60 19 100.000%
99.995%
RF Amplifiers 905 0
99.990%
99.985%
Optical Nodes 42 225
99.980%
99.975%
Total Active Devices 1,007 244
99.970%
Traditional mFN
Active Per Mile >4 <1
Cascaded RF 10 Year Operating Costs ($M)
5 0
Amplifiers
$6.00
Network Reliability 99.98% 99.999%
$5.00
$4.00
Power Cost 10 Years $762,260 $244,680
$3.00
Maintenance Cost 10 $2.00
Years $4,693,333 $1,173,333
$1.00
$0.00
Traditional mFN
Proprietary Information Property of Morning ForestTM LLC 14

15. DISTRIBUTED HEAD-END
HE
FN
Primary Primary
Hub
HE
Ring
FN
HE
 Operation complexity
 Cost of CMTS at lower take rate
Proprietary Information Property of Morning ForestTM LLC 15

16. CMTS SCALABILITY
ADC Arris Cisco
Motorola Juniper Terayon
850
Minimum Medium Maximum
 Chassis-based CMTS has 750
the most advanced 650
features & can simplify the
550
metro routing architecture
$$/Mbps
450
 Desired configuration favor
centralized approach 350
250
150
2 LCs Chassis Rack
80-400Mbps 400-1600Mbps 1200-3840Mbps
* Cost is calculated based on combined upstream and
downstream capacity, and core-redundancy
configuration
Proprietary Information Property of Morning ForestTM LLC 16

17. DWDM TRUNK
SH
FN
Primary Primary
Hub
SH
Ring
FN
SH
 DWDM transport for end-to-end transparency
 Route diversity for service protection
 Consolidate high-end terminals (CMTS)
Proprietary Information Property of Morning ForestTM LLC 17

18. DWDM TO CONSOLIDATE HEADEND
Super CO or HE Secondary Hub
l
1 x 8 DWDM
1 x 8 DWDM
l
CMTS & QAM
RF
l .
.
.
. .
. DWDM Fiber Node
RCV
Ring XTR
l RCV
1 x 8 DWDM
1 x 8 DWDM
RCV RCV
l
RF
RCV
. .
.
.
. .
l ITU laser, per PON EDFA (optional)
Proprietary Information Property of Morning ForestTM LLC 18

19. TRADITIONAL HFC INTERCONNECTION
64 SYSTEM HEADENDS
4 PRIMARY HUBS
0 SECONDARY HUBS
Proprietary Information Property of Morning ForestTM LLC 19

20. SECONDARY RING HFC INTERCONNECT
2 MASTER HEADENDS
9 PRIMARY HUBS
56 SECONDARY HUBS
Proprietary Information Property of Morning ForestTM LLC 20

21. INTELLEGENT METRO NETWORK
Insufficient
Bandwidth Split into two
Must Dilate Pipe logical network
SONET/SDH WDM Layer
Layer
Proprietary Information Property of Morning ForestTM LLC 21

22. CREATING A EFFECIENT VALUE CHAIN
ISP ICP Content
ISP Service Packaging
Backbone ICP
RDC City #2
DWDM Service Aggregation
Metro Ring and management
RDC
City #1
mFN mFN
HFC HFC Low-cost and consolidated
Networks
Proprietary Information Property of Morning ForestTM LLC 22

23. REDEFINE VOICE SERVICE
Average Monthly Phone Bill: Constant
$
Vertical Services
CallerID, VoiceMail,
Access to voiceIntegration, etc.
Price competition network Product Differentiation
(Local, Toll, LD,
etc)
Time
VoIP
 Low-cost bundled offering
 Web based provisioning
 Persistent voice
Benefit to Consumer Benefit to Cable
 Convenient  Differentiation
 Lower cost  Customer retention
 More service value  Additional revenue
Proprietary Information Property of Morning ForestTM LLC 23

24. CREATING SYNERGY-BASED TRIPLE-PLAY
Circuit IP
5ESS ISP
SDH ICP
GW
RDC City #2
DWDM
City #3 Metro Ring
City #1
 Integrated voice and data
over HFC network
 Utilize 5ESS platform for
mFN mFN
HFC HFC
voice interconnect & features
Proprietary Information Property of Morning ForestTM LLC 24

25. VALUE OF CONSOLIDATRION
MSO #1 MSO #2 MSO #3 MSO #4
Revenue • Basic video
• Basic HSD
Revenue Revenue Revenue Revenue
Cost • Network
• Platform
Cost Cost Cost Cost • Operation
• Interconnect
Revenue • Tiered video
1+1>2 • Tiered HSD
Revenue • Bundled phone
Cost • Low-cost
1+1<2 network/platform
Cost • Cost sharing
Revenue • Basic phone
Revenue Revenue Revenue • Basic HSD
Cost • Network
Cost • Platform
Cost Cost • Operation
• Interconnect
Telco #1 Telco #2 Telco #3
Proprietary Information Property of Morning ForestTM LLC 25

26. MORE ON SHARED VALUE
MSO Only for a 50K HHP City Telco Only for a 50K HHP City
100.00 200.00
80.00
150.00
60.00
100.00
40.00
20.00
50.00
MN RMB
MN RMB
Revenue Revenue
0.00 Cos t Cos t
1 2 3 4 5 6 7 8 9 10 Net CF Net CF
0.00
(20.00) 1 2 3 4 5 6 7 8 9 10
(40.00)
(50.00)
(60.00)
(100.00)
(80.00)
(100.00) (150.00)
Year Year
10 Year NPV= -82.42 M RMB 10 Year NPV= 19.43 M RMB
400.00
300.00
200.00
100.00
MN RMB
Revenue
Cos t
Net CF
0.00
1 2 3 4 5 6 7 8 9 10
(100.00)
 10 Year NPV= 262.96 M RMB
 262.96M RMB = 3 x 87.65M RMB
(200.00)
(300.00)
Year
Proprietary Information Property of Morning ForestTM LLC 26

27. SCALE UP
One 50K HHP City Ten 50K HHP City
400.00 4,000.00
300.00
3,000.00
200.00
2,000.00
100.00
mm RMB
Revenue
MN RMB
Revenue
Cost 1,000.00 Cost
Net CF Net CF
0.00
1 2 3 4 5 6 7 8 9 10
0.00
1 2 3 4 5 6 7 8 9 10
(100.00)
(1,000.00)
(200.00)
(300.00) (2,000.00)
Year Year
10 Year NPV = 262.96 M RMB 10 Year NPV = 3,724.13 M RMB
Proprietary Information Property of Morning ForestTM LLC 27

28. SHARED VALUE
Tiered VoIP
Advanced
Video
HSD
Basic
MSO/Telco
Operation
Cost Value-added
Volume efficiency Shared
services
Solution Fee Revenue
Lower cost based on
scale & efficiency
Volume & LT commitments
Our JV
Basic
Vendors
Cost Local
Manufacture
Local support
Proprietary Information Property of Morning ForestTM LLC 28

29. SHARING REVENUE & COST
Install
Install Video
1% 1%
11%
Network
31%
Voice
48%
CPE
54%
Data
Platform 40%
10%
OSS/BSS
3%
Interconnect
1%
MSO Telco JV
Revenue Video, HSD, VoIP Video, HSD, VoIP Video, HSD, VoIP
Network, Platform, CPE, CPE, Platform, Platform, OSS/BSS,
Cost
Install Interconnect Operation
Proprietary Information Property of Morning ForestTM LLC 29

30. BENEFIT ALL
Revenue Voice 263.86
HSD 215.70
Video 61.03
Total 540.59
Cost Network 22.99
Platform 7.69
OSS/BSS 2.47
Interconnet 0.48
CPE 39.18
Install 0.92
Total 73.73
Net 466.86
Revenue Voice 52.77 Revenue Voice 158.32 Revenue Voice 52.77
HSD 64.71 HSD 64.71 HSD 86.28
Video 36.62 Video - Video 24.41
Total 154.10 Total 223.03 Total 163.46
Cost Network 22.99 Cost Network 0.00 Cost Network 0.00
Platform 3.84 Platform 1.54 Platform 2.31
OSS/BSS 0.00 OSS/BSS 0.00 OSS/BSS 2.47
Interconnet 0.00 Interconnet 0.48 Interconnet 0.00
CPE 19.59 CPE 19.59 CPE 0.00
Install 0.46 Install 0.46 Install 0.00
Total 46.88 Total 22.07 Total 4.78
Net 107.22 Net 200.96 Net 158.68
MSO Telco JV
Proprietary Information Property of Morning ForestTM LLC 30

31. LONG TERM BUSINESS
Foreign Local
ISPs Production Production
China content, Content aggregation
service, goods
& packaging
in US
Service Service
Aggregation & Aggregation &
Management Operation and Management
Management
• New development
• Resorts System Integration China Broadband Net
• Hotel
Technology development
China Broadband Lab
Proprietary Information Property of Morning ForestTM LLC 31

32. BUSINESS SOLUTIONS
Efficient content aggregation
Local
Content aggregation Production
& packaging Foreign
Production
Telecom & CBN
Stations ISPs networks
GW
Service Aggregation • Scale-based operation
• Enable triple-play
& Management RDC
System Integration Low-cost solution
City Ring
HFC HFC
vendorvendor
vendorvendor
HFC HFC HFC
Volume purchasing
MSO #1 MSO #2 MSO #3
Proprietary Information Property of Morning ForestTM LLC 32

33. Thank You
33