Building A Virtual Operator in China
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The document discusses opportunities for building a virtual operator business model in China's media industry. It analyzes China's macroeconomic trends toward commercialization and privatization. This has led to growing incomes, consumer spending, and penetration of technologies like broadband and smartphones. The document proposes a two-step model to first establish relationships by providing business and technology solutions, then operate value-added broadband services on an outsourced basis, similar to the @Home model in the US. This could leverage China's growing infrastructure and the commercialization of content distribution to create new revenue streams.
Building A Virtual Operator in China
- 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. What is this all about? Murdoch + Redstone + others = $B “invasion” to China media industry = contributions to China dinning industry But what is the China media industry, and what power control what? What is the historical trend and on what wave foreign investors could ride? Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 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. GROWTH POTENTIAL % $B China IT Industry Production Growth China IT Industry Revenue Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 5. PER CAPITA INCOME & DISTRIBUTION RMB Urban Population (K) Average engineers salary in big cities: $20K – 30K/year Commercial apartment in Beijing: $1K – 3K/sqm. Source: CSFB, MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 6. URBAN FAMILY SPENDING & CPE OWNERSHIP RMB/Person/Year 21.6% on communication & entertainment TV-centric & personal ownership Consumer competition Blooming city-rebuild further drives advanced CPE penetration PER HOUSEHOLD Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 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. TV CENTRIC ENVIRONMENT mn TV 10% of TV household purchase new or change TV set every year Booming city re-build and “consumer competition” drive large screen and high-end TV sales 0.98B RMB Movie theater revenue in 2002, equals to 0.07 movie viewing/person/year Consumers are more interested in TV drama serious: a culture phenomena Minutes/day/person Source: MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 9. ONLINE PENETRATION mn Sub mn PC Sale Source: CSFB, MII Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 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. ONLINE SERVICES mn Subs HSD service is more and more likes a video business Source: CSFB Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 12. OPPORTUNITY FOR VIRTUAL OPERATORS: CREATING VALUE OVER INFRASTRUCTURE 9.8B SMS transmitted in 2004 Chinese New Year mn Sub Source: CSFB Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 13. CABLE & MEDIA HISTORY Government Station Broadcaster/Program + Cable Administration TV On government budget 4-level: central, provincial, city, district BARFT THEN Copyright 2004 – 2011 and Property of Morning Forest, LLC Government Station BARFT TV Group MSO 357 TV Networks 2,334 channels, including 50 national ones 19.7B RMB advertising revenue 9.56M broadcasting hours, 2.02M program hours 4K+ MSOs $1.5 ARPU NOW
- 14. CHINA MSOs % of systems Subscribers 340M TV household, 100M cable TV subscribers 4K+ MSOs due to the 4-level TV history Aggressive consolidation since 2003 10% of networks are upgraded Source: SARFT Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 15. INDUSTRY AND REGULATION Copyright 2004 – 2011 and Property of Morning Forest, LLC Assets: CCTV, CBN, small portion of CCN License: National video & ISP Huge profit with CCTV, but 40% of programs are outsourced Propaganda CCTV SARFT CBN CCN Local Government BRFT Station MSOs TVG IIO Assets: infrastructure & station License: video & limited ISP Ownership: gray MII Telecom Groups Local Telcos Manufactures R&D Assets: national and local infrastructure License: voice & ISP Ownership: allow 25 – 49% foreign IOO policy policy
- 16. THE TRENDS Started commercialization in 2003, based on the government defined “Culture Reform”. Government mandated digital pay TV. 2003 start, 2005 DTH, 2008 Terrestrial, 2010 Complete conversion, 2015 shut down analog. More flexible pricing, censorship, quota, distribution, & ownership Fast-pace consolidation (land grabbing) and moving to triple-play Critical needs: Business operation Infrastructure and platform readiness Value-added services to compete with telecom systems and to increase the valuation (ARPU) Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 17. CHANGING POLICY & PRACTISE MII Telecom Groups Local Government BRFT Station MSOs Still try to consolidate from national level Establishing national digital pay TV production, aggregation, distribution, and management platform >50% outsourced operation & ownership is possible. TVG Manufactures R&D Propaganda CCTV SARFT CBN CCN Aggressive consolidation ( province level) More flexible policy & practice Hungry for triple-play Outsourced operation and ownership very possible Start invest into cable industry Aggressive move to content distribution Triple play emerging Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 18. MACRO COMPARISON High potential on value-added services and scale based operation Source: SARFT, MII, NCTA Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 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. BUSINESS VALUATION Source: Company Data Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 21. RIDING THE WAVE Copyright 2004 – 2011 and Property of Morning Forest, LLC Like culture-based services Herd effects Other industries support penetration Consumer/Market Behavior Assets consolidation, and buildup Fast growing pay DTV, triple-play Desire for commercial operations Business Environment Commercialization & privatization Stable growth of GDP and IT industry Fast growing income and spending Macro Environment
- 22. OPPORUNITIES Changing and favorable environment: Commercialization and privatization Consumer behavior and new revenue format Leverage: Riding the wave of commercialization of broadband and content distribution business Utilize local & central power, and the consolidation processes New revenue format to lead the consumption Strategy Two-step “outsourced operation” model for land-grabbing and equity buildup. Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 23. TWO STEPS: BUSINESS INTEGRATION TO VIRTUAL OPERATOR To establish relationship and trust Business and operation solutions Technology solutions and system integration Becomes a virtual operator Carve out the service aggregation, distribution, and operation management Operate value-added broadband only services Copyright 2004 – 2011 and Property of Morning Forest, LLC
- 24. MARKET POTENTIAL Infrastructure business 340M TV HHP, 100M HHP cable system, 10% upgraded 90M HHP to upgrade, 240M HHP to build Outsourced service aggregation, distribution and management platform Government mandated DTV ($180B market) Revenue sharing (@Home model) on outsourced operation (current SMS VAS is based on 15:85 sharing) Broadband & cable only content Combine SMS, TV, advertising, and good-sale. IP streaming Current $191M online gaming and $475M SMS/VAS Copyright 2004 – 2011 and Property of Morning Forest, LLC