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VASO in China

The document outlines a business plan for IBIT, Inc. to establish a value-added service operator in China, transitioning from cable to internet services due to regulatory uncertainties. It discusses the market potential, regulatory environment, and a strategic business model emphasizing diversified content aggregation and transaction-based platforms. The plan aims to leverage the growth of digital TV and broadband to create personalized media services in a rapidly changing industry landscape.

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CREATING A VALUE-ADDED SERVICE OPERATOR IN CHINA Xiaolin Lu iBIT, Inc Macro Environment Opportunities Business Consumer Environment Behavior Culture Proprietary Information Property of iBIT, Inc 1
What is this all about?  A high-level business plan for iBIT, our incubated company to become a value-added service operator (a virtual operator) in China.  All things were in places and the first market was Zhengzhou Cable (see the design: Digital ZBN).  Uncertainty of China cable regulation forced us to migrate from a cable-play to an internet-play, which resulted in the creation of BOCOO Online.  We publish this as a reference for those entering China media market or just for a laugh  Proprietary Information Property of iBIT, Inc 2
CONTENT  Introduction  Market Opportunity  Regulation & Business Environment  iBIT Business Model & Strength  Execution & Financial Forecast  Risks and Risk Management Proprietary Information Property of iBIT, Inc 3
INTRODUCTION Proprietary Information Property of iBIT, Inc 4
iBIT VISION  Be the Liberty Media of China  Scale & control of the value chain  Create a new value chain for China media business  Personalized Media: prestige life style – liberate the way of entertainment Proprietary Information Property of iBIT, Inc 5
BUSINESS SCOPE Value-added service operator (VASO) that provides transaction-based services Transaction-based platform  Control and protection  Personalized entertainment Partner with MSOs and Telcos Aggregate diversified contents  Many distribution mechanisms &  Scale and appeal to the largest many revenue streams and diversified China market Unregulated business in a regulated environment  Ride the wave of media business commercialization, the mandated digital TV roll-out, and VAS launch Proprietary Information Property of iBIT, Inc 6
MARKET OPPORTUNITY Proprietary Information Property of iBIT, Inc 7
CHINA PRIVATIZATION TIMELINE 16,000 PER CAPITA GDP (RMB) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: China Net, CSFB Agriculture & Foreign investment Market Price System Property SOE Small Business & Private enterprises (chaos & re-balance) Ownership financial system Irreversible Commercialization & Privatization Process 1980 1985 1990 1995 2000s Proprietary Information Property of iBIT, Inc 8
INCOME AND SPENDING p. a. Income 16,000 14,000 Urban Rural GDP p.a. 12,000  57.3% population resides in coastal areas, which has significant higher 10,000 income level and spending power RMB 8,000  Average engineer’s salary in big 6,000 cities: $20K – 30K/year  Commercial apartment in Beijing: 4,000 $1K – 3K/sqm. 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Urban Spending 6,000 RMB/Person/Year Others 5,000 House Entertain Communication 21.6% on communication 4,000 Medical Household Clothing & entertainment 3,000 Food 2,000 1,000 0 1985 1990 1995 1999 2000 2001 Source: CSFB, MII Proprietary Information Property of iBIT, Inc 9
SERVICE PENETRATION Population (M) p.a. Income ($) Mobile PC VCD TVsets Internet US 281 31,459 56.9% 59% 218% 64% CHINA 1,290 934 63% 21% 53% 126% 6.2% Shanghai 16.1 1,606 80% 47% 58% 158% 27% Beijing 13.8 1,511 94% 56% 52% 148% 28% Zhejiang 43.2 1,420 89% 27% 55% 150% 10% Guangdong 77.8 1,349 123% 45% 73% 149% 12% Tianjin 10 1,132 39% 24% 43% 126% 14% Fujian 34.4 1,114 93% 25% 66% 137% 9% Jiangsu 73.6 991 61% 20% 46% 136% 8%  TV-centric & in favor of advanced CPE  Show-off mindset & blooming city-rebuild further drive advanced CPE penetration Source: CSFB, MII Proprietary Information Property of iBIT, Inc 10
TV CENTRIC ENVIRONMENT 60 Export Domestic Production 52.13 50 mn TV 40 39.5 37.73  10% of TV household purchase 30 new or change TV set every year 20 10 0 2000 2001 2002 34' & above Below 21' 6% 11% 29' 25%  Booming city re-build and show-off mindset drive large screen and high- end TV sales 21' 38% 25' 20% Source: MII, CSFB Proprietary Information Property of iBIT, Inc 11
ONLINE & BROADBAND PENETRATION 90 14 80 Internet users 12 70 Dialup mn PC Sale BB 10  Fast growing broadband mn Sub 60 PC Sale 8 penetration lead by 50 telecom industry 40 6  Customers are more 30 4 happy with broadband 20 than dialup 2 10 0 0 1997 1998 1999 2000 2001 2002 2003 60.00% 50.00% Dialup BB ADSL 40.00% LAN 30.00% CM 20.00% Other 10.00% 0.00% Great Good OK Bad Very Bad Source: CSFB, MII Proprietary Information Property of iBIT, Inc 12
REGULATORY & BUSINESS ENVIRONMENT Proprietary Information Property of iBIT, Inc 13
INDUSTRY & REGULATION Propaganda IIO MII SARFT Telecom • Manufactures policy policy Groups • R&D CCTV CBN CCN Local Government BRFT TVG IIO Local Telcos  Assets: CCTV: national broadcaster Station MSOs  License: National broadcasting  Assets: programming & distribution  Assets: national and  Start loosing its  License: video & ISP local infrastructure monopoly on content distribution  Limited programming capability,  License: voice & ISP  Rely on outsourced mainly CCTV carriage  Aggressively move to programming  Flexible policy on DTV & Interactivity content distribution &  Aggressive consolidation & desire triple play, but has no for VAS content Proprietary Information Property of iBIT, Inc 14
EXPLANATION OF THE POWER BASES  Ministry of Propaganda  Policy maker for the media industry  State Administration of Radio, Film, & Television (SARFT)  Government agency managing media policy  Key asset: China Central Television (CCTV), a national broadcaster  TV Group (TVG)  Locally commercialized corporation originally 100% owned by the local government (currently minority owner)  Ministration of Information Industry (MII)  Managing Telecommunication and IT industries  Information Industry Office (IIO)  Special government agency overseeing communication and IT development and policy  Local office inside every local government Proprietary Information Property of iBIT, Inc 15
THE TRENDS  “Culture Reform” initiated by Government in 2003 signals the beginning of media business commercialization  Government-mandated digital pay TV is expedited by the “complete conversion” model  2003 start, 2005 DTH, 2008 Terrestrial, 2010 complete conversion, 2015 shut down analog.  More flexible pricing, censorship, quota, distribution, & ownership; very favorable treatment to IP streaming (telcos received IP video distribution rights, but have no content)  Fast-pace consolidation (land grabbing) and moving to triple-play  Critical needs:  Commercial operation experience and processes  Infrastructure and platform readiness  Value-added services to materialize the government-mandated DTV roll-out and to increase the valuation (ARPU) Proprietary Information Property of iBIT, Inc 16
MARKET POTENTIAL 700 16000 600 Urban Pop 14000  Steady income growth mn Population Income 500 12000 stimulates desire for 10000 new services RMB 400 300 8000  Fast growing DTV and 200 6000 broadband penetration 4000 provide platforms for 100 2000 value-added service 0 0 Today 2010 40 160 45 35 140 BB User 40 DTV Subs Paid Game User 35 30 120 mn Subs mn Subs 30 25 100 25 20 80 20 15 60 15 10 40 10 5 20 5 0 0 0 Today 2008 Today 2010 Source: CSFB, MII Proprietary Information Property of iBIT, Inc 17
CHALLENGES & OPPORTUNITIES Domestic Situation Foreign Investment Consumer Preferences  No pay TV history  No landing rights and  Diversified Preferences:  Piracy; No UHS/DVD rental brand name  Geographic market  Demographic  Quota limitations  Income level  Current content is limited  No control over content  CCTV re-broadcasted by all  Personalization: stations (very limited choice at distribution and ROI  Life style any particular time)  No dual revenues (no-  Presentation format  No dual revenues (no-coexist coexist of advertising &  Time of entertaining of advertising & pay TV) pay TV)  Easy transaction  Lack of appealing content &  No direct access to content packaging technique become the bottleneck for customers DTV roll-out  Single type of content & individual provider cannot cover & satisfy China mass market  Diversified Content Aggregation  Linear channel alone cannot differentiate from traditional free-service, difficult to sustain with single revenue stream, and provide no control to content providers.  Diversified Distribution Mechanisms + Transaction-based platform Proprietary Information Property of iBIT, Inc 18
REVENUE STRUCTURE 120% 100% 80% Others Adv 60% VAS Basic 40% 20% 0% US Aisa Pacific China Proprietary Information Property of iBIT, Inc 19
COMPETITION IN ADVERTISING BUDGET $12B Advertising Market TV Others YP Newspaper Online Outdoor 3 Magazine CCTV Others Radio 2.5 2 1.5 $B 1 0.5 0 1997 1998 1999 2000 2001 2002 Proprietary Information Property of iBIT, Inc 20
LIMITED CONTENT SPREADS ACROSS MANY CHANNELS 300 TV Drama # Channels Carried 252 Rebel 45 250 # OF TV DRAMA SERIES The Age of Excitement 43 200 Never Give up 40 Go Ahead, Dad 34 150 A Family from the Northeast 32 Don’t talk to strangers 31 100 64 My Bride 30 Celebration 30 50 3 8 The orange is red 29 0 Jealous 28 >40 >30 >20 >10 # OF CHANNELS  In 2002, 1,564 TV drama series were broadcasted in the prime time over 156 channels in 33 cities Source: CSM Proprietary Information Property of iBIT, Inc 21
DIVERSIFIED MARKET National Market An Hui Market CCTV Others Provincial SAT 0% 8% CCTV 5% 39% Provincial SAT 61% AnHui Local 87%  Nation-wide, CCTV controls  Local preference dominates substantial market share local market Source: CSM Proprietary Information Property of iBIT, Inc 22
iBIT SOLUTION Proprietary Information Property of iBIT, Inc 23
A VALUE-ADDED SERVICE OPERATOR Transaction-based platform  Control and 100% protection  New revenue opportunities and bundle-effects to MSOs/Telecos Partner with MSOs and Telcos Aggregate diversified contents  Many distribution mechanisms,  Scale and fit the mass market wide audience coverage, and  Appeals to consumer preferences many revenue streams for new services/contents Unregulated business in a regulated environment  Leverage favorable policy on interactivity: compliant with regulation while eliminating all the constraints  Non-intrusion  Enabling  Control Proprietary Information Property of iBIT, Inc 24
VAS OPERATOR BUSINESS MODEL Government Agency Enabling iBIT Platform MSO program Post-Program Sale China content Network On-demand International Telecom Promotion content Linear Satellite Channel VAS Operator Distribution Front Distribution Channel  Diversified contents  Many partnerships (fronts)  Personal media center  Aggregation, Storage,  License & Policy shelters  Many presentation formats Packaging, Distribution  Infrastructure  Cross-channel marketing &  Transaction platform  Partnership for marketing, promotion  Transaction management sales, & customer services  Customer management  Resource management Proprietary Information Property of iBIT, Inc 25
SERVICE PACKAGING Issues: Single type of content cannot satisfy diversified consumer market; Individual content provider cannot cover China mass market Solution: Diversified Content Aggregations to Many Distribution Channels (group effect) Consumer Preferences China Science  Local Syndications  31 Provincial Culture  Internet News Enabling Program Tiered Education Linear Channel On- Pop Music iBIT Demand International Package Sports  Sitcom (US) Health  Drama (Asia)  Movie (US & Asia) Weather  Sports (US) Basic Drama On-  Game demand News  Music 0 20 40 60 80 100 Source: CCTV”/SARFT Proprietary Information Property of iBIT, Inc 26
CHANGE THE RULE OF GAME MORE CONTENT CONTENT CONTENT Current Digital CHANNEL CHANNEL ... CHANNEL Pay TV Model CHANNEL CHANNEL CHANNEL CHANNEL CHANNEL ... ...  Limited content spread  Spread across even more channels across many free-channels with additional cost to consumers DESTINATION: iBIT Diversified Content Aggregation & Distribution On-demand Diversified Personal Choice: content Promotion Channel Anytime, Anywhere Proprietary Information Property of iBIT, Inc 27
DISTRIBUTION MECHANISMS iBIT Aggregation & Distribution Platform IP Streaming TV On-demand Linear Government & Downloading & STVOD Channel Agencies  Telcos just received video  Personal media center  On-demand & L-channels for distribution license, but have  Promotion from linear channels remote education, training, very limited content  Policy allows 49% ownership of L-channel government online, etc.  management Desire for flexible entertainment  Different format of content sale environment (DVD, CD, etc) Cross format content distribution (PC, TV, PDA; L-channel, On-demand, DVD, CD, etc) Broadband Penetration On-Demand Preferences Education Market Government 40 VOD COD Millions 17% On-Job 30 24% Game 20 12% Langrage 10 Tech Commerce 9% 0 Download Rt Education 2001 2003 2008 38% 0 10 20 30 40 50 60 70 Source: MII, SARFT Proprietary Information Source: CNNIC Property of iBIT, Inc 28
MULTIPLE REVENUE STREAMS Special Program Government Agencies Advertisers Special Program Sale Consumers Broadband Operators Advertise Content & Content & iBIT Advertise Advertise Providers Content Content Fee Fee Fee  On-demand revenue: subscription and ala cart  Advertising revenue: through linear channels & before/after on-demand  Post program sale: special program for education, on-job training, etc in the format of on-demand, linear channels, CD/DVD, etc, through government agencies. Proprietary Information Property of iBIT, Inc 29
TECHNICAL PLATFORM RDC Ad Content DRM/CA OSS/BSS Insertion Server Mobile Utilize operators Network metro network CA Caching server STB n x 8Mhz channels TV M U Linear Channel Access CM Others X Network m x yMpbs capacity PC HE On-demand DSL  Controllable and cost efficient platform  Centralized content aggregation, co-located with operators RDC  Distributed caching utilizing operators last mile infrastructure  CA + DRM for high security  Fiber deep HFC (mFN) with smaller node (500 HHP) for capacity needs  Many presentation format & interactivity: MPEG/IP; PC/TV; STB/CM/DSL/Cell  Flexible billing: 2-way STB, prepaid card, cell phone Proprietary Information Property of iBIT, Inc 30
BENEFITS TO CONTENT PROVIDERS iBIT Model Traditional Linear Channel Censorship Provincial Stations, Telcos, SARFT SARFT only Brand name Yes No Quota (foreign content) N/A 10% prime time, 25% total Advertising (pay TV) Yes No MSO, Station, Telco, BB, Distribution Front Government agents Station & MSO On-demand, IP streaming, Distribution Channel Downloading, Linear channel Linear channel BB customers, TV customers, Audiences government agents TV customers Subscription, Ala Cart, Revenue Advertising, B2B Subscription OR Advertising Control Contents Yes No Control Customers Yes No Proprietary Information Property of iBIT, Inc 31
BENEFITS TO DISTRIBUTION PARTNERS  The existing content and CCTV carriage are not enough to generate new revenues and help the digital TV roll-out, while complete foreign landing is not legally allowed  iBIT diversified content aggregation and transaction-based distribution compliant to current regulation, appeal to mass market and therefore providing MSOs and Telcos a new mechanism to attract customers with multiple new revenue opportunities  The traditional linear channel distribution mechanism and “all- you-can-eat” packaging are difficult to differentiate from the free- TV environment and provide no appealing content presentation to consumers  The diversified distribution mechanisms (on-demand, IP streaming, downloading, linear channels) enable multiple distribution fronts and create bundling-effect to attract different market segments  Current policy does not allow dual revenues. The Pay-TV and advertising-based broadcast TV compete for the same content, and limit operators revenue generating capability  iBIT’s transaction-platform works around this limitation, dual revenue can be effectively materialized Proprietary Information Property of iBIT, Inc 32
SUCCESS OF OTHER VASO BUSINESS IN CHINA ONLINE GAMING WIRELESS SMS/VAS 1000 800 900 700 800 600 $mn 700 $mn 600 500 500 400 400 300 300 200 200 100 100 0 0 2002 2003 2008 2001 2003 2008  Utilizing any broadband infrastructure  SMS aggregation & distribution over  HSD service reassembles traditional video China mobile’s infrastructure business with content “channels”  85/15 revenue sharing between VAS and mobile operators Proprietary Information Property of iBIT, Inc 33
A SUCCESS STORY - KongZhong.com RGU GROWTH REVENUE GROWTH 25,000 9,000 8,000 $Thousands 20,000 Thousands 7,000 6,000 15,000 5,000 10,000 4,000 3,000 5,000 2,000 1,000 0 0 May-Dec 02 2003 1Q 04 May-Dec 02 2003 1Q 04  Utilizing China Mobile’s infrastructure: 85/15 revenue sharing  First-move advantage: becomes the leading wireless VASO in China  IPO in 2004: $100M ADS on NASDAQ Proprietary Information Property of iBIT, Inc 34
iBIT STRENGTHES  Experienced team with significant US and China cable operation experience and China local market knowledge  Unique transaction-based service model widely accepted by major MSOs and Telcos in China  Diversified revenue streams: make the “pie” larger rather than cutting it into smaller pieces  Access to customers: BB, cable, wireless, government, etc  Cost-effective broadband platform solution suitable to China market and reduce the operation cost  Attractive financial model with largely success-based OpEx and CapEx capital needs  Close relationship with MSOs, Telcos, and government agencies, as well as international and domestic content providers Proprietary Information Property of iBIT, Inc 35
EXECUTION AND FINANCIAL FORECAST Proprietary Information Property of iBIT, Inc 36
MARKETING STRATEGY  Distribution: leverage on our partnerships  MSOs, Telcos, & government agents be our distribution fronts and marketing vehicles  Establish the leader: focus on strategic territories  Major metro markets with higher disposable income and rapid adoption of new services  Economic centers (provinces & cities) and strategic leadership in the industries  Move to national scale while the examples are set and the infrastructure is ready  Replicate successful deployments in major metro markets  Secure the controllable platform Proprietary Information Property of iBIT, Inc 37
MARKET FOCUS CREATING A NEW LIFE STYLE 160,000 140,000 Initial Urban Population (K) 120,000 Market 100,000 Focus 2003 80,000 2010 60,000 40,000 20,000 0 3 00 33 67 00 33 67 00 33 67 - 7 0 3 7 0 3 7 0 3 7 83 66 50 33 16 00 83 66 50 33 16 ,0 ,8 ,6 ,5 ,3 ,1 ,0 ,8 ,6 1, 2, 3, 4, 5, 5, 6, 7, 8, 9, 10 10 11 12 13 14 15 15 16 p.a. income (RMB) Proprietary Information Property of iBIT, Inc 38
iBIT CURRENT STATUS Geographic Strategic Partners Market Importance # Subs Status Gehua Beijing Capital 3M Trial in process Shanghai Cable Shanghai Economic center 2M In talk Information Tianjin Cable Tianjin Industry base 2M In talk MSO Economic center Sichuan Cable Sichuan of west China 8M RFP completed Economic center Zhengzhou Cable Zhengzhou of central China 700K Trial in process, LOI North of China #2 Telecom China Netcom Yangtze River telecom 3M BB In talk Satellite China Satellite National In talk Ministry of Agriculture, Powerful buyers Government Ministry of Special program and In talk Agencies Education, distribution distributors Peking Univ, Fudan Univ Proprietary Information Property of iBIT, Inc 39
iBIT POTENTIAL PARTNERS China Netcom Proprietary Information Property of iBIT, Inc 40
AGGREGATION & DISTRIBUTION STRATEGY  Foreign content  Initially focus on easy-censorship types and re-acquire rights for those in CCTV’s library  Focus on content with broad appeal to the China mainstream audience (Asian drama, US sitcom, Sports, Documentary, etc)  Domestic content  31 provincial satellite channels aggregation & re-packaging  Local syndications, including CCTV library  Partner with event organizer for hot-ticket events  Packaging  Linear channel for promotions  On-demand in many format (VOD, SVOD, downloading, etc)  Post-program sales (CD, DVD, etc)  Distribution  MSO: MPEG  Telco: IP streaming  B2B: through government agents Proprietary Information Property of iBIT, Inc 41
PRICING & REVENUE SHARING  Transaction-based platform Distribution allows accurate revenue Content Fronts Content iBIT Providers sharing mechanism (MSO, Telcos) Time-shift  No ambiguity on content “free on- 10% 30% 60% demand” valuation, no need for front- Movie & payment Drama 30% 40% 30%  Sharing ratio as a function of Sports 30% 40% 30% content performance Music 20% 40% 40%  Price competitive to current Events 20% 60% 20% DTV offering (e.g., 40-60 RMB/month, 2-4 RMB/order, etc) Proprietary Information Property of iBIT, Inc 42
PLATFORM BUILDUP  Server Farms  Centralized content aggregation and storages  Distributed caching for fast distribution  Leverage partners’ last-mile distribution platforms (local caching servers, QAM modulators, GbE distribution fronts, fiber deep HFC, etc)  Content Protection  Initially utilize partners CA systems  Buildup DRM-kind inside the CA systems  Flexible Transaction Management  Advanced OSS/BSS adapted to China environment  Many ordering mechanisms and billing interfaces (2- way STB, prepaid card, telephone, cell phone, etc) Proprietary Information Property of iBIT, Inc 43
PHASED APPROACH Phase One (2005) Phase Two (06-07) Phase Three (08+) Secure major aggregation & Establish the aggregation & distribution channels OBJECTIVES distribution platform Market dominance Transaction platform for many Initial operation example distribution mechanisms  1-2major metros deployment (200- 500K subs)  Majorprovinces (1-5M subs) Market  Agreements from 5-6 major  Government agents  National (~20M subs) MSOs/Telcos for next deployments Distribution Major MSO  Telco  All Fronts  Easy censorship  Local syndication Contents  CCTV foreign library  Special program  Wider international  Provincial satellite channels  Game & Music  On-demand  Many packages and Format  Linear  Downloading tiers  Buildup server farms & localize  Multi-billing systems Platform OSS/BSS  Expand to DVR  Cell & PDA  Utilize 2-way STB & PC  iBIT managed transaction platform  Real-timebilling Billing  Utilizing existing link to banks  Prepared card  Cell & others Brand With MSO & Telco  Co-branding  Own branding Proprietary Information Property of iBIT, Inc 44
MARKET PENETRATION (VOD & SVOD Only) 7 30.00% Ala Cart Olympic Game 6 SVOD 25.00% Penetration of partner's footprint 5 20.00% mn RGU 4 15.00% 3 10.00% 2 5.00% 1 0 0.00% 2005 2006 2007 2008 2009  Focus on partners’ footprint (exclusive coverage)  Conservative forecast: target at 15% of partners’ DTV subs by 2008  VOD/SVOD customers only; linear channel and B2B customers are not included Proprietary Information Property of iBIT, Inc 45
REVENUE OPPORTUNITY (VOD & SVOD Only) 60 SVOD Ala Cart 50  Solid initial metro market 40 entrance to set the example $MN 30  Expand to multiple provincial 20 markets when the platform is 10 ready 0 2005 2006 2007 1,000 900 SVOD Ala Cart 800 700 Olympic  Expedite growth stimulated 600 $MN Game by 2008 Olympic Game 500 400  Steady market penetration 300 afterward 200 100 0 2007 2008 2009 2010 Proprietary Information Property of iBIT, Inc 46
OPERATION FORECAST Year 2005 2006 2007 2008 2009 2010 SVOD Revenue ($mn) 1.7 5.2 34.9 148.5 306.6 637.2 VOD Revenue ($mn) 1.2 3.7 21.2 62.9 122.2 236.5 Total Revenue ($mn) 2.9 8.9 56.2 211.4 428.8 873.7 Total COGS 1.8 5 32 115 221 427 Gross Margin 37% 40% 43% 46% 49% 51% Opex 0.8 1.8 9.3 31.3 58.5 111.8 EBITDA 0.3 1.8 14.9 65.5 149.5 334.5 EBITDA Margin 11% 20% 27% 31% 35% 38% Capex 3.09 4.42 26.88 61.36 60.28 93.51 % of Revenues 106% 50% 48% 29% 14% 11% EBITDA - CapEx (2.8) (2.6) (11.9) 4.1 89.3 241.0 Cum. EBITDA - CapEx (2.8) (5.4) (17.3) (13.2) 76.0 317.0  Conservative model based on VOD/SVOD only  Revenue sharing (COGS) as a function of content performance  Success-based Capex/Opex, high contention ratio is assumed  FCF as a function of market penetration speed Proprietary Information Property of iBIT, Inc 47
BUSINESS MODEL ASSUMPTIONS  Market assumptions:  Focus on partners’ footprint: 30M sub-base, 20% penetration @ year five  ARPU assumption:  5 RMB for base SVOD, 35 RMB for premier SVOD  4 to 50 RMB ala cart order (e.g., movie or event)  COGS:  As a function of type of content (local & foreign) and content performance, see page “Pricing & Revenue Sharing”  Capex:  Success-based central servers, utilizing partners’ last-mile infrastructure (QAM modulator, caching servers, etc)  20% simultaneous usage is assumed  Opex:  20 people team @ year one, and ramp up to 250-300 people team @ year five  Partnering with MSOs and Telcos for marketing, sales, and customer services, therefore reducing the operation cost. Proprietary Information Property of iBIT, Inc 48
USE OF FUND & FORECAST (less aggressive approach) First Round: $10M for the first two years  $6M for engineering & platform development, target @ 0.3M RGU  $2M for content localization, packaging & distribution  $1M for sales, marketing, and initial customer services  $0.5M for corporate operation Second Round: $30M for the next two years  $14M for engineering & platform development, target @ 4M RGU  $3M for content localization, packaging & distribution  $2M for sales, marketing, and initial customer services  $0.5M for corporate operation Third Round Forecast  For further market expansion (10+M RGU) Proprietary Information Property of iBIT, Inc 49
WORKING PLAN DTH Launch DTH Launch World Cup Soccer Beijing Olympics 2005 2006 2007 2008 2009 Business Development Provincial Market Penetration (1-2 metros) (1-5M subs) Local content & existing International, games, music, National Brand Buildup (10-20M subs) approved CCTV library special program Linear channel + on-demand Launch DVR Platform Buildup Launch Cell & PDA Team Buildup Initial Fund Raising 2nd round Break even fund raising Development & Channel Building Branding/Market Expansion Market Dominance Proprietary Information Property of iBIT, Inc 50
RISKS & RISK MANAGEMENT Proprietary Information Property of iBIT, Inc 51
RISKS & RISK MANAGEMENT RISKS RISK MANAGEMENT Availability and suitable to Combine 31 provincial channels with foreign ones Contents & China market Utilizing already approved CCTV foreign content Protections Censorship barriers library Copy right protection Use combined CA/DRM, and transaction platform DTV penetration reality Utilizemany fronts, not rely on single platform Market Broadband penetration Combine Linear channels & On-demand to capture reality multiple revenue streams  Leverage our partnership and let MSO/Telco be our distribution fronts and policy shelters Legal Rights to distribute in China  Hybrid corporate structure with our China domestic company holding the licenses  US holding company be the investment carrier, no investments Money in and out China exposed to China domestic activities Financial Billing validation  Wholly owned subsidiary transfer money freely  Transaction-based system for billing validation No one be able to control all the pieces of the chain: Do it themselves: MSO, Competition content, distribution fronts, and platform Telco, Content providers, etc Partnership to bond the interests & provide incentives Proprietary Information Property of iBIT, Inc 52
SUMMARY  Creating a value-added service operator (VASO) in partnership with large MSOs & Telcos in China, riding the wave of media business commercialization  Diversified content aggregation and distribution to China mass market  Transaction-based platform for 100% control of content distribution and customers  Multiple revenue streams: on-demand, subscription, advertising, B2B, etc  First-move advantage and control of the key pieces of the value chain. Potentially becomes a dominant full-scale operator after WTO agreement is fully materialized Proprietary Information Property of iBIT, Inc 53

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VASO in China

  • 1.
    CREATING A VALUE-ADDED SERVICE OPERATOR IN CHINA Xiaolin Lu iBIT, Inc Macro Environment Opportunities Business Consumer Environment Behavior Culture Proprietary Information Property of iBIT, Inc 1
  • 2.
    What is thisall about?  A high-level business plan for iBIT, our incubated company to become a value-added service operator (a virtual operator) in China.  All things were in places and the first market was Zhengzhou Cable (see the design: Digital ZBN).  Uncertainty of China cable regulation forced us to migrate from a cable-play to an internet-play, which resulted in the creation of BOCOO Online.  We publish this as a reference for those entering China media market or just for a laugh  Proprietary Information Property of iBIT, Inc 2
  • 3.
    CONTENT  Introduction  Market Opportunity  Regulation & Business Environment  iBIT Business Model & Strength  Execution & Financial Forecast  Risks and Risk Management Proprietary Information Property of iBIT, Inc 3
  • 4.
  • 5.
    iBIT VISION  Be the Liberty Media of China  Scale & control of the value chain  Create a new value chain for China media business  Personalized Media: prestige life style – liberate the way of entertainment Proprietary Information Property of iBIT, Inc 5
  • 6.
    BUSINESS SCOPE Value-added service operator (VASO) that provides transaction-based services Transaction-based platform  Control and protection  Personalized entertainment Partner with MSOs and Telcos Aggregate diversified contents  Many distribution mechanisms &  Scale and appeal to the largest many revenue streams and diversified China market Unregulated business in a regulated environment  Ride the wave of media business commercialization, the mandated digital TV roll-out, and VAS launch Proprietary Information Property of iBIT, Inc 6
  • 7.
  • 8.
    CHINA PRIVATIZATION TIMELINE 16,000 PER CAPITA GDP (RMB) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: China Net, CSFB Agriculture & Foreign investment Market Price System Property SOE Small Business & Private enterprises (chaos & re-balance) Ownership financial system Irreversible Commercialization & Privatization Process 1980 1985 1990 1995 2000s Proprietary Information Property of iBIT, Inc 8
  • 9.
    INCOME AND SPENDING p. a. Income 16,000 14,000 Urban Rural GDP p.a. 12,000  57.3% population resides in coastal areas, which has significant higher 10,000 income level and spending power RMB 8,000  Average engineer’s salary in big 6,000 cities: $20K – 30K/year  Commercial apartment in Beijing: 4,000 $1K – 3K/sqm. 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Urban Spending 6,000 RMB/Person/Year Others 5,000 House Entertain Communication 21.6% on communication 4,000 Medical Household Clothing & entertainment 3,000 Food 2,000 1,000 0 1985 1990 1995 1999 2000 2001 Source: CSFB, MII Proprietary Information Property of iBIT, Inc 9
  • 10.
    SERVICE PENETRATION Population (M) p.a. Income ($) Mobile PC VCD TVsets Internet US 281 31,459 56.9% 59% 218% 64% CHINA 1,290 934 63% 21% 53% 126% 6.2% Shanghai 16.1 1,606 80% 47% 58% 158% 27% Beijing 13.8 1,511 94% 56% 52% 148% 28% Zhejiang 43.2 1,420 89% 27% 55% 150% 10% Guangdong 77.8 1,349 123% 45% 73% 149% 12% Tianjin 10 1,132 39% 24% 43% 126% 14% Fujian 34.4 1,114 93% 25% 66% 137% 9% Jiangsu 73.6 991 61% 20% 46% 136% 8%  TV-centric & in favor of advanced CPE  Show-off mindset & blooming city-rebuild further drive advanced CPE penetration Source: CSFB, MII Proprietary Information Property of iBIT, Inc 10
  • 11.
    TV CENTRIC ENVIRONMENT 60 Export Domestic Production 52.13 50 mn TV 40 39.5 37.73  10% of TV household purchase 30 new or change TV set every year 20 10 0 2000 2001 2002 34' & above Below 21' 6% 11% 29' 25%  Booming city re-build and show-off mindset drive large screen and high- end TV sales 21' 38% 25' 20% Source: MII, CSFB Proprietary Information Property of iBIT, Inc 11
  • 12.
    ONLINE & BROADBANDPENETRATION 90 14 80 Internet users 12 70 Dialup mn PC Sale BB 10  Fast growing broadband mn Sub 60 PC Sale 8 penetration lead by 50 telecom industry 40 6  Customers are more 30 4 happy with broadband 20 than dialup 2 10 0 0 1997 1998 1999 2000 2001 2002 2003 60.00% 50.00% Dialup BB ADSL 40.00% LAN 30.00% CM 20.00% Other 10.00% 0.00% Great Good OK Bad Very Bad Source: CSFB, MII Proprietary Information Property of iBIT, Inc 12
  • 13.
    REGULATORY & BUSINESS ENVIRONMENT Proprietary Information Property of iBIT, Inc 13
  • 14.
    INDUSTRY & REGULATION Propaganda IIO MII SARFT Telecom • Manufactures policy policy Groups • R&D CCTV CBN CCN Local Government BRFT TVG IIO Local Telcos  Assets: CCTV: national broadcaster Station MSOs  License: National broadcasting  Assets: programming & distribution  Assets: national and  Start loosing its  License: video & ISP local infrastructure monopoly on content distribution  Limited programming capability,  License: voice & ISP  Rely on outsourced mainly CCTV carriage  Aggressively move to programming  Flexible policy on DTV & Interactivity content distribution &  Aggressive consolidation & desire triple play, but has no for VAS content Proprietary Information Property of iBIT, Inc 14
  • 15.
    EXPLANATION OF THEPOWER BASES  Ministry of Propaganda  Policy maker for the media industry  State Administration of Radio, Film, & Television (SARFT)  Government agency managing media policy  Key asset: China Central Television (CCTV), a national broadcaster  TV Group (TVG)  Locally commercialized corporation originally 100% owned by the local government (currently minority owner)  Ministration of Information Industry (MII)  Managing Telecommunication and IT industries  Information Industry Office (IIO)  Special government agency overseeing communication and IT development and policy  Local office inside every local government Proprietary Information Property of iBIT, Inc 15
  • 16.
    THE TRENDS  “Culture Reform” initiated by Government in 2003 signals the beginning of media business commercialization  Government-mandated digital pay TV is expedited by the “complete conversion” model  2003 start, 2005 DTH, 2008 Terrestrial, 2010 complete conversion, 2015 shut down analog.  More flexible pricing, censorship, quota, distribution, & ownership; very favorable treatment to IP streaming (telcos received IP video distribution rights, but have no content)  Fast-pace consolidation (land grabbing) and moving to triple-play  Critical needs:  Commercial operation experience and processes  Infrastructure and platform readiness  Value-added services to materialize the government-mandated DTV roll-out and to increase the valuation (ARPU) Proprietary Information Property of iBIT, Inc 16
  • 17.
    MARKET POTENTIAL 700 16000 600 Urban Pop 14000  Steady income growth mn Population Income 500 12000 stimulates desire for 10000 new services RMB 400 300 8000  Fast growing DTV and 200 6000 broadband penetration 4000 provide platforms for 100 2000 value-added service 0 0 Today 2010 40 160 45 35 140 BB User 40 DTV Subs Paid Game User 35 30 120 mn Subs mn Subs 30 25 100 25 20 80 20 15 60 15 10 40 10 5 20 5 0 0 0 Today 2008 Today 2010 Source: CSFB, MII Proprietary Information Property of iBIT, Inc 17
  • 18.
    CHALLENGES & OPPORTUNITIES Domestic Situation Foreign Investment Consumer Preferences  No pay TV history  No landing rights and  Diversified Preferences:  Piracy; No UHS/DVD rental brand name  Geographic market  Demographic  Quota limitations  Income level  Current content is limited  No control over content  CCTV re-broadcasted by all  Personalization: stations (very limited choice at distribution and ROI  Life style any particular time)  No dual revenues (no-  Presentation format  No dual revenues (no-coexist coexist of advertising &  Time of entertaining of advertising & pay TV) pay TV)  Easy transaction  Lack of appealing content &  No direct access to content packaging technique become the bottleneck for customers DTV roll-out  Single type of content & individual provider cannot cover & satisfy China mass market  Diversified Content Aggregation  Linear channel alone cannot differentiate from traditional free-service, difficult to sustain with single revenue stream, and provide no control to content providers.  Diversified Distribution Mechanisms + Transaction-based platform Proprietary Information Property of iBIT, Inc 18
  • 19.
    REVENUE STRUCTURE 120% 100% 80% Others Adv 60% VAS Basic 40% 20% 0% US Aisa Pacific China Proprietary Information Property of iBIT, Inc 19
  • 20.
    COMPETITION IN ADVERTISINGBUDGET $12B Advertising Market TV Others YP Newspaper Online Outdoor 3 Magazine CCTV Others Radio 2.5 2 1.5 $B 1 0.5 0 1997 1998 1999 2000 2001 2002 Proprietary Information Property of iBIT, Inc 20
  • 21.
    LIMITED CONTENT SPREADSACROSS MANY CHANNELS 300 TV Drama # Channels Carried 252 Rebel 45 250 # OF TV DRAMA SERIES The Age of Excitement 43 200 Never Give up 40 Go Ahead, Dad 34 150 A Family from the Northeast 32 Don’t talk to strangers 31 100 64 My Bride 30 Celebration 30 50 3 8 The orange is red 29 0 Jealous 28 >40 >30 >20 >10 # OF CHANNELS  In 2002, 1,564 TV drama series were broadcasted in the prime time over 156 channels in 33 cities Source: CSM Proprietary Information Property of iBIT, Inc 21
  • 22.
    DIVERSIFIED MARKET National Market An Hui Market CCTV Others Provincial SAT 0% 8% CCTV 5% 39% Provincial SAT 61% AnHui Local 87%  Nation-wide, CCTV controls  Local preference dominates substantial market share local market Source: CSM Proprietary Information Property of iBIT, Inc 22
  • 23.
    iBIT SOLUTION Proprietary Information Property of iBIT, Inc 23
  • 24.
    A VALUE-ADDED SERVICEOPERATOR Transaction-based platform  Control and 100% protection  New revenue opportunities and bundle-effects to MSOs/Telecos Partner with MSOs and Telcos Aggregate diversified contents  Many distribution mechanisms,  Scale and fit the mass market wide audience coverage, and  Appeals to consumer preferences many revenue streams for new services/contents Unregulated business in a regulated environment  Leverage favorable policy on interactivity: compliant with regulation while eliminating all the constraints  Non-intrusion  Enabling  Control Proprietary Information Property of iBIT, Inc 24
  • 25.
    VAS OPERATOR BUSINESSMODEL Government Agency Enabling iBIT Platform MSO program Post-Program Sale China content Network On-demand International Telecom Promotion content Linear Satellite Channel VAS Operator Distribution Front Distribution Channel  Diversified contents  Many partnerships (fronts)  Personal media center  Aggregation, Storage,  License & Policy shelters  Many presentation formats Packaging, Distribution  Infrastructure  Cross-channel marketing &  Transaction platform  Partnership for marketing, promotion  Transaction management sales, & customer services  Customer management  Resource management Proprietary Information Property of iBIT, Inc 25
  • 26.
    SERVICE PACKAGING Issues: Single type of content cannot satisfy diversified consumer market; Individual content provider cannot cover China mass market Solution: Diversified Content Aggregations to Many Distribution Channels (group effect) Consumer Preferences China Science  Local Syndications  31 Provincial Culture  Internet News Enabling Program Tiered Education Linear Channel On- Pop Music iBIT Demand International Package Sports  Sitcom (US) Health  Drama (Asia)  Movie (US & Asia) Weather  Sports (US) Basic Drama On-  Game demand News  Music 0 20 40 60 80 100 Source: CCTV”/SARFT Proprietary Information Property of iBIT, Inc 26
  • 27.
    CHANGE THE RULEOF GAME MORE CONTENT CONTENT CONTENT Current Digital CHANNEL CHANNEL ... CHANNEL Pay TV Model CHANNEL CHANNEL CHANNEL CHANNEL CHANNEL ... ...  Limited content spread  Spread across even more channels across many free-channels with additional cost to consumers DESTINATION: iBIT Diversified Content Aggregation & Distribution On-demand Diversified Personal Choice: content Promotion Channel Anytime, Anywhere Proprietary Information Property of iBIT, Inc 27
  • 28.
    DISTRIBUTION MECHANISMS iBIT Aggregation & Distribution Platform IP Streaming TV On-demand Linear Government & Downloading & STVOD Channel Agencies  Telcos just received video  Personal media center  On-demand & L-channels for distribution license, but have  Promotion from linear channels remote education, training, very limited content  Policy allows 49% ownership of L-channel government online, etc.  management Desire for flexible entertainment  Different format of content sale environment (DVD, CD, etc) Cross format content distribution (PC, TV, PDA; L-channel, On-demand, DVD, CD, etc) Broadband Penetration On-Demand Preferences Education Market Government 40 VOD COD Millions 17% On-Job 30 24% Game 20 12% Langrage 10 Tech Commerce 9% 0 Download Rt Education 2001 2003 2008 38% 0 10 20 30 40 50 60 70 Source: MII, SARFT Proprietary Information Source: CNNIC Property of iBIT, Inc 28
  • 29.
    MULTIPLE REVENUE STREAMS Special Program Government Agencies Advertisers Special Program Sale Consumers Broadband Operators Advertise Content & Content & iBIT Advertise Advertise Providers Content Content Fee Fee Fee  On-demand revenue: subscription and ala cart  Advertising revenue: through linear channels & before/after on-demand  Post program sale: special program for education, on-job training, etc in the format of on-demand, linear channels, CD/DVD, etc, through government agencies. Proprietary Information Property of iBIT, Inc 29
  • 30.
    TECHNICAL PLATFORM RDC Ad Content DRM/CA OSS/BSS Insertion Server Mobile Utilize operators Network metro network CA Caching server STB n x 8Mhz channels TV M U Linear Channel Access CM Others X Network m x yMpbs capacity PC HE On-demand DSL  Controllable and cost efficient platform  Centralized content aggregation, co-located with operators RDC  Distributed caching utilizing operators last mile infrastructure  CA + DRM for high security  Fiber deep HFC (mFN) with smaller node (500 HHP) for capacity needs  Many presentation format & interactivity: MPEG/IP; PC/TV; STB/CM/DSL/Cell  Flexible billing: 2-way STB, prepaid card, cell phone Proprietary Information Property of iBIT, Inc 30
  • 31.
    BENEFITS TO CONTENTPROVIDERS iBIT Model Traditional Linear Channel Censorship Provincial Stations, Telcos, SARFT SARFT only Brand name Yes No Quota (foreign content) N/A 10% prime time, 25% total Advertising (pay TV) Yes No MSO, Station, Telco, BB, Distribution Front Government agents Station & MSO On-demand, IP streaming, Distribution Channel Downloading, Linear channel Linear channel BB customers, TV customers, Audiences government agents TV customers Subscription, Ala Cart, Revenue Advertising, B2B Subscription OR Advertising Control Contents Yes No Control Customers Yes No Proprietary Information Property of iBIT, Inc 31
  • 32.
    BENEFITS TO DISTRIBUTIONPARTNERS  The existing content and CCTV carriage are not enough to generate new revenues and help the digital TV roll-out, while complete foreign landing is not legally allowed  iBIT diversified content aggregation and transaction-based distribution compliant to current regulation, appeal to mass market and therefore providing MSOs and Telcos a new mechanism to attract customers with multiple new revenue opportunities  The traditional linear channel distribution mechanism and “all- you-can-eat” packaging are difficult to differentiate from the free- TV environment and provide no appealing content presentation to consumers  The diversified distribution mechanisms (on-demand, IP streaming, downloading, linear channels) enable multiple distribution fronts and create bundling-effect to attract different market segments  Current policy does not allow dual revenues. The Pay-TV and advertising-based broadcast TV compete for the same content, and limit operators revenue generating capability  iBIT’s transaction-platform works around this limitation, dual revenue can be effectively materialized Proprietary Information Property of iBIT, Inc 32
  • 33.
    SUCCESS OF OTHERVASO BUSINESS IN CHINA ONLINE GAMING WIRELESS SMS/VAS 1000 800 900 700 800 600 $mn 700 $mn 600 500 500 400 400 300 300 200 200 100 100 0 0 2002 2003 2008 2001 2003 2008  Utilizing any broadband infrastructure  SMS aggregation & distribution over  HSD service reassembles traditional video China mobile’s infrastructure business with content “channels”  85/15 revenue sharing between VAS and mobile operators Proprietary Information Property of iBIT, Inc 33
  • 34.
    A SUCCESS STORY - KongZhong.com RGU GROWTH REVENUE GROWTH 25,000 9,000 8,000 $Thousands 20,000 Thousands 7,000 6,000 15,000 5,000 10,000 4,000 3,000 5,000 2,000 1,000 0 0 May-Dec 02 2003 1Q 04 May-Dec 02 2003 1Q 04  Utilizing China Mobile’s infrastructure: 85/15 revenue sharing  First-move advantage: becomes the leading wireless VASO in China  IPO in 2004: $100M ADS on NASDAQ Proprietary Information Property of iBIT, Inc 34
  • 35.
    iBIT STRENGTHES  Experienced team with significant US and China cable operation experience and China local market knowledge  Unique transaction-based service model widely accepted by major MSOs and Telcos in China  Diversified revenue streams: make the “pie” larger rather than cutting it into smaller pieces  Access to customers: BB, cable, wireless, government, etc  Cost-effective broadband platform solution suitable to China market and reduce the operation cost  Attractive financial model with largely success-based OpEx and CapEx capital needs  Close relationship with MSOs, Telcos, and government agencies, as well as international and domestic content providers Proprietary Information Property of iBIT, Inc 35
  • 36.
    EXECUTION AND FINANCIAL FORECAST ProprietaryInformation Property of iBIT, Inc 36
  • 37.
    MARKETING STRATEGY  Distribution: leverage on our partnerships  MSOs, Telcos, & government agents be our distribution fronts and marketing vehicles  Establish the leader: focus on strategic territories  Major metro markets with higher disposable income and rapid adoption of new services  Economic centers (provinces & cities) and strategic leadership in the industries  Move to national scale while the examples are set and the infrastructure is ready  Replicate successful deployments in major metro markets  Secure the controllable platform Proprietary Information Property of iBIT, Inc 37
  • 38.
    MARKET FOCUS CREATING A NEW LIFE STYLE 160,000 140,000 Initial Urban Population (K) 120,000 Market 100,000 Focus 2003 80,000 2010 60,000 40,000 20,000 0 3 00 33 67 00 33 67 00 33 67 - 7 0 3 7 0 3 7 0 3 7 83 66 50 33 16 00 83 66 50 33 16 ,0 ,8 ,6 ,5 ,3 ,1 ,0 ,8 ,6 1, 2, 3, 4, 5, 5, 6, 7, 8, 9, 10 10 11 12 13 14 15 15 16 p.a. income (RMB) Proprietary Information Property of iBIT, Inc 38
  • 39.
    iBIT CURRENT STATUS Geographic Strategic Partners Market Importance # Subs Status Gehua Beijing Capital 3M Trial in process Shanghai Cable Shanghai Economic center 2M In talk Information Tianjin Cable Tianjin Industry base 2M In talk MSO Economic center Sichuan Cable Sichuan of west China 8M RFP completed Economic center Zhengzhou Cable Zhengzhou of central China 700K Trial in process, LOI North of China #2 Telecom China Netcom Yangtze River telecom 3M BB In talk Satellite China Satellite National In talk Ministry of Agriculture, Powerful buyers Government Ministry of Special program and In talk Agencies Education, distribution distributors Peking Univ, Fudan Univ Proprietary Information Property of iBIT, Inc 39
  • 40.
    iBIT POTENTIAL PARTNERS China Netcom Proprietary Information Property of iBIT, Inc 40
  • 41.
    AGGREGATION & DISTRIBUTION STRATEGY  Foreign content  Initially focus on easy-censorship types and re-acquire rights for those in CCTV’s library  Focus on content with broad appeal to the China mainstream audience (Asian drama, US sitcom, Sports, Documentary, etc)  Domestic content  31 provincial satellite channels aggregation & re-packaging  Local syndications, including CCTV library  Partner with event organizer for hot-ticket events  Packaging  Linear channel for promotions  On-demand in many format (VOD, SVOD, downloading, etc)  Post-program sales (CD, DVD, etc)  Distribution  MSO: MPEG  Telco: IP streaming  B2B: through government agents Proprietary Information Property of iBIT, Inc 41
  • 42.
    PRICING & REVENUESHARING  Transaction-based platform Distribution allows accurate revenue Content Fronts Content iBIT Providers sharing mechanism (MSO, Telcos) Time-shift  No ambiguity on content “free on- 10% 30% 60% demand” valuation, no need for front- Movie & payment Drama 30% 40% 30%  Sharing ratio as a function of Sports 30% 40% 30% content performance Music 20% 40% 40%  Price competitive to current Events 20% 60% 20% DTV offering (e.g., 40-60 RMB/month, 2-4 RMB/order, etc) Proprietary Information Property of iBIT, Inc 42
  • 43.
    PLATFORM BUILDUP  Server Farms  Centralized content aggregation and storages  Distributed caching for fast distribution  Leverage partners’ last-mile distribution platforms (local caching servers, QAM modulators, GbE distribution fronts, fiber deep HFC, etc)  Content Protection  Initially utilize partners CA systems  Buildup DRM-kind inside the CA systems  Flexible Transaction Management  Advanced OSS/BSS adapted to China environment  Many ordering mechanisms and billing interfaces (2- way STB, prepaid card, telephone, cell phone, etc) Proprietary Information Property of iBIT, Inc 43
  • 44.
    PHASED APPROACH Phase One (2005) Phase Two (06-07) Phase Three (08+) Secure major aggregation & Establish the aggregation & distribution channels OBJECTIVES distribution platform Market dominance Transaction platform for many Initial operation example distribution mechanisms  1-2major metros deployment (200- 500K subs)  Majorprovinces (1-5M subs) Market  Agreements from 5-6 major  Government agents  National (~20M subs) MSOs/Telcos for next deployments Distribution Major MSO  Telco  All Fronts  Easy censorship  Local syndication Contents  CCTV foreign library  Special program  Wider international  Provincial satellite channels  Game & Music  On-demand  Many packages and Format  Linear  Downloading tiers  Buildup server farms & localize  Multi-billing systems Platform OSS/BSS  Expand to DVR  Cell & PDA  Utilize 2-way STB & PC  iBIT managed transaction platform  Real-timebilling Billing  Utilizing existing link to banks  Prepared card  Cell & others Brand With MSO & Telco  Co-branding  Own branding Proprietary Information Property of iBIT, Inc 44
  • 45.
    MARKET PENETRATION (VOD & SVOD Only) 7 30.00% Ala Cart Olympic Game 6 SVOD 25.00% Penetration of partner's footprint 5 20.00% mn RGU 4 15.00% 3 10.00% 2 5.00% 1 0 0.00% 2005 2006 2007 2008 2009  Focus on partners’ footprint (exclusive coverage)  Conservative forecast: target at 15% of partners’ DTV subs by 2008  VOD/SVOD customers only; linear channel and B2B customers are not included Proprietary Information Property of iBIT, Inc 45
  • 46.
    REVENUE OPPORTUNITY (VOD & SVOD Only) 60 SVOD Ala Cart 50  Solid initial metro market 40 entrance to set the example $MN 30  Expand to multiple provincial 20 markets when the platform is 10 ready 0 2005 2006 2007 1,000 900 SVOD Ala Cart 800 700 Olympic  Expedite growth stimulated 600 $MN Game by 2008 Olympic Game 500 400  Steady market penetration 300 afterward 200 100 0 2007 2008 2009 2010 Proprietary Information Property of iBIT, Inc 46
  • 47.
    OPERATION FORECAST Year 2005 2006 2007 2008 2009 2010 SVOD Revenue ($mn) 1.7 5.2 34.9 148.5 306.6 637.2 VOD Revenue ($mn) 1.2 3.7 21.2 62.9 122.2 236.5 Total Revenue ($mn) 2.9 8.9 56.2 211.4 428.8 873.7 Total COGS 1.8 5 32 115 221 427 Gross Margin 37% 40% 43% 46% 49% 51% Opex 0.8 1.8 9.3 31.3 58.5 111.8 EBITDA 0.3 1.8 14.9 65.5 149.5 334.5 EBITDA Margin 11% 20% 27% 31% 35% 38% Capex 3.09 4.42 26.88 61.36 60.28 93.51 % of Revenues 106% 50% 48% 29% 14% 11% EBITDA - CapEx (2.8) (2.6) (11.9) 4.1 89.3 241.0 Cum. EBITDA - CapEx (2.8) (5.4) (17.3) (13.2) 76.0 317.0  Conservative model based on VOD/SVOD only  Revenue sharing (COGS) as a function of content performance  Success-based Capex/Opex, high contention ratio is assumed  FCF as a function of market penetration speed Proprietary Information Property of iBIT, Inc 47
  • 48.
    BUSINESS MODEL ASSUMPTIONS  Market assumptions:  Focus on partners’ footprint: 30M sub-base, 20% penetration @ year five  ARPU assumption:  5 RMB for base SVOD, 35 RMB for premier SVOD  4 to 50 RMB ala cart order (e.g., movie or event)  COGS:  As a function of type of content (local & foreign) and content performance, see page “Pricing & Revenue Sharing”  Capex:  Success-based central servers, utilizing partners’ last-mile infrastructure (QAM modulator, caching servers, etc)  20% simultaneous usage is assumed  Opex:  20 people team @ year one, and ramp up to 250-300 people team @ year five  Partnering with MSOs and Telcos for marketing, sales, and customer services, therefore reducing the operation cost. Proprietary Information Property of iBIT, Inc 48
  • 49.
    USE OF FUND& FORECAST (less aggressive approach) First Round: $10M for the first two years  $6M for engineering & platform development, target @ 0.3M RGU  $2M for content localization, packaging & distribution  $1M for sales, marketing, and initial customer services  $0.5M for corporate operation Second Round: $30M for the next two years  $14M for engineering & platform development, target @ 4M RGU  $3M for content localization, packaging & distribution  $2M for sales, marketing, and initial customer services  $0.5M for corporate operation Third Round Forecast  For further market expansion (10+M RGU) Proprietary Information Property of iBIT, Inc 49
  • 50.
    WORKING PLAN DTH Launch DTH Launch World Cup Soccer Beijing Olympics 2005 2006 2007 2008 2009 Business Development Provincial Market Penetration (1-2 metros) (1-5M subs) Local content & existing International, games, music, National Brand Buildup (10-20M subs) approved CCTV library special program Linear channel + on-demand Launch DVR Platform Buildup Launch Cell & PDA Team Buildup Initial Fund Raising 2nd round Break even fund raising Development & Channel Building Branding/Market Expansion Market Dominance Proprietary Information Property of iBIT, Inc 50
  • 51.
    RISKS & RISK MANAGEMENT Proprietary Information Property of iBIT, Inc 51
  • 52.
    RISKS & RISKMANAGEMENT RISKS RISK MANAGEMENT Availability and suitable to Combine 31 provincial channels with foreign ones Contents & China market Utilizing already approved CCTV foreign content Protections Censorship barriers library Copy right protection Use combined CA/DRM, and transaction platform DTV penetration reality Utilizemany fronts, not rely on single platform Market Broadband penetration Combine Linear channels & On-demand to capture reality multiple revenue streams  Leverage our partnership and let MSO/Telco be our distribution fronts and policy shelters Legal Rights to distribute in China  Hybrid corporate structure with our China domestic company holding the licenses  US holding company be the investment carrier, no investments Money in and out China exposed to China domestic activities Financial Billing validation  Wholly owned subsidiary transfer money freely  Transaction-based system for billing validation No one be able to control all the pieces of the chain: Do it themselves: MSO, Competition content, distribution fronts, and platform Telco, Content providers, etc Partnership to bond the interests & provide incentives Proprietary Information Property of iBIT, Inc 52
  • 53.
    SUMMARY  Creating a value-added service operator (VASO) in partnership with large MSOs & Telcos in China, riding the wave of media business commercialization  Diversified content aggregation and distribution to China mass market  Transaction-based platform for 100% control of content distribution and customers  Multiple revenue streams: on-demand, subscription, advertising, B2B, etc  First-move advantage and control of the key pieces of the value chain. Potentially becomes a dominant full-scale operator after WTO agreement is fully materialized Proprietary Information Property of iBIT, Inc 53