Development and Transformation of Chinas Telecom Sector

1
Development and Transformation of Chinas Telecom
Sector

• Yang Zemin
• China Academy of Telecommunication Research
• July 2007

2
Agenda
Current situations and trends of Chinas telecom
sector
Understanding development and transformation of
Chinas telecom sector
3
Small to large the leap forward of Chinas
telecom sector

• In 2006, fixed telephone subscribers in China
  totaled 367.812 million, with the penetration up
  to 28.1 . Mobile phone subscriber totaled
  461.082 million, with the penetration rate hit
  35.3 . Internet subscribers amounted to 137
  million, with penetration rate reaching 10.4,
  and broadband subscribers totaled 519 million.
• In 1996, Chinas fixed and mobile phone
  subscribers totaled 618 million. After 10 years,
  the number increased 767.2 million, at a rate of
  30 annually.
• The number of Internet subscribers grew to 137
  million from 620,000 in 1997, at a rate of 82
  annually.

4
Rapid growth of Chinas telecom sector calm

• Overall, the growht of telecom revenue is slowing
  down across the world.
• From 1994 to 2004, the average growth rate was
  8.9 worldwide, 8.1 in OECD countries, and 24.7
  in China.
• From 2000 to 2004, the average growth rate was
  7.2 worldwide, 5.5 in OECD countries, and 14.5
  in China.
• In the past 3 years (2003-2006), Chinas average
  growth rate was 12 annually.
• The pattern of Chinas telecom development
  generally coincides with the other side of the
  world, but much faster than developed countries
  and world average.

5
Development of Chinas telecom sector suits the
need of rapid economic growth
Source World Telecommunication/ICT Development
Report 2006, ITU

• In 2006, Chinas telecom revenue represent 3.1
  in GDP
• The percentage was 3.19 in OECD countries
• In Asia, the average percentage was 3.8 in 2004

6
Dramatically transformation of telecom service
structureEmerging multimedia data services
Mobile data services (2005)

• Like elsewhere in the world, the structure of
  Chinas telecom service is transforming
  dramatically, with the rapid growht of data and
  multimedia service as one of the driving forces.
• In 2006, data and multimedia services acounted
  for 21.6 of mobile services .
• The proportion of data and multimedia services in
  Chinas mobile communications is relatively high
  in the world.

7
Dramatically transformation of telecom service
structure clearly substitute effect of mobile
communications
Proportion of mobile in new subscribers,
China(PHS subscribers included)

• Substitute effect of mobile is clear in China
• Proportion of mobile in new subscribers 84
  worldwide in 2004 In China, it was close to
  world average (PHS included)
• Proportion of mobile services revenues in total
  telecom revenues about 36.5 worldwide and in
  OECD in 2004 and 45 in China (PHS not
  included)
• Substitute of mobile for fixed is more manifest
  in China than in must of other countries.

Proportion of mobile communication services
revenues in total telecom revenues, China (PHS
revenues not included)
8
Dramatically transformation of telecom service
structure Development of broadband rapidly

• From 2002 to 2006, broadband subscribers in
  China were growing by 100 annually. Today China
  is the worlds second largest broadband country
• By 2006, China had 519 million broadband
  subscriber, and 907 million people using
  broadband ,near that of U.S.

Top 10 Broadband countries by number of lines
Source Point-tpoic
China Broadband lines(Millions)
9
Rapid growth of mobile Internet in China
Unit 10,000 people
Number of WAP active users
Source CNNIC
Traditional Internet users
Number of WAP active users

• Mobile Internet is developing rapidly in China.
  By March 2007, WAP active subscribers totaled 390
  million. By the end of 2006, WAP active
  subscribers accounted for 28.5 of traditional
  Internet users in China, or near all number of
  the Internet users in China 5 years ago.
• About 65,000 WAP sites with independent domain
  names 260 million WAP web pages.

10
Development of broadband and widespread use of
P2P consume lots of bandwidth

• From October 1997 to the end of 2006, the
  bandwidth of Chinas Internet international
  connection grew by 179 in average each year.
• Over 50 traffic over China Telecoms
  long-distance backbone is P2P. 60-70 traffic in
  day time and 90 at night over the Metro Area
  Network in some provinces in east China is P2P.
  (Wei Leping, CTO of China Telecom)

Worldwide Growth Rate of Internet and Bandwidth
(2003 to 2006)
Source Deloitte
Growth of Chinas Internet international
connection bandwidth (Mbit/s)
11
Innovation of broadband and Internet bring
debates between telecom and Internet industry
Last updated Nov. 7, 2006

• In 2006, the broadband revenue from Chinese basic
  telecom operators totaled RMB 35 billion, and the
  proportion of VAS revenue is estimated to be
  under 10. Revenue from Internet SP was estimated
  to be RMB40 billion, and web ad, mobile VASs and
  web games were the top revenue sources.
• The development of Internet and broadband leads
  to the focus of industry value chain shifting to
  content and application.
• The debates of network neutrality reflects the
  interdependence and conflict between telecom and
  Internet. As convergence is deepened, the model
  for sustainable development of the industry is
  still not in place.

12
Landscape of Chinas telecom market needs
optimization

• Chinas largest mobile telecom operator, with
  nearly 320 million subscribers and RMB280 billion
  revenue in 2006

• Chinas largest fixed telecom operator, with
  nearly 230 million subscribers and RMB170 billion
  revenue in 2006

• Chinas second largest fixed telecom operator,
  with 120 million subscribers and RMB90 billion
  revenue in 2006

• Chinas second largest mobile telecom company,
  with 140 million subscribers and RMB80 billion
  revenue in 2006

• Alternative fixed telecom operator

• Company focusing on satellite communications

• The landscape of Chinas telecom market consists
  of 6 basic telecom operators and over 20,000 VAS
  providers
• China Mobile is dominant in basic telecom
  service market, and full-service competition is
  still not in place
• The size of VAS market is still modest, and
  capability of service providers are not strong
  generally. Homogeneous competition is prevalent,
  and irregularities in the competition need to be
  corrected.

13
Development of Chinas telecom sector is still
investment-driven
RD intensity (2003)
Telecom Investment/ revenue
Far below 1

• Profitability of Chinas telecom industry is
  growing rapidly, but still behind the level of
  developed countries. In 2006, the investment /
  revenue ratio of telecom industry was 34.3 in
  China, 13.6 in OCED countries, and 25.5 in mid-
  and low-income countries .
• The rapid development of Chinas telecom industry
  is achieved mainly through expansion of
  subscriber base. The driving force of innovation
  is insufficient. The growth is typically
  investment-driven.

14
Chinas telecom sector has big margin for
development
Comparison of telecom penetration level

• Compared with developed countries, Chinas
  telecom penetration still has big margin for
  development.
• China has 1.3 billion people, implying for huge
  potential of development.

15
Chinas telecom sector has big margin for
development
Broadband penetration in OECD countries, June

• In the first half of 2006, the average
  penetration rate of broadband in OECD countries
  was 15.5. The rate in China at the end of 2006
  was 3.9. Although China has the worlds second
  largest broadband user base, its penetration
  level is still small.

16
Demands still strong in Chinas telecom sector
Comparison of revenue and traffic growth in
Chinas telecom sector

• Demands for telecom services is strong , and
  continuously lowering telecom tariff stimulate
  usage increase
• Chinas telecom traffic (measured at price in
  2000) has been actually growing rapidly, at 29.8
  per year from 2001 to 2006, much faster than the
  growth of telecom revenue
• The Chinese economy has been growing at about 9
  annually for years, which provides for growth
  momentum of the countrys telecom sector.

17
Informatization provides huge opportunities

• Many countries have formulated and implemented
  national informatization strategy (Japan
  e/u-Japan, ROK e/u-Korea, European Union
  e-Europe and i-2010, tremendously boosting the
  development of their telecom sector
• The State Informatization Development Strategy
  (2006-2020) promulgated by Chinese government
  asserts
• Proactively promoting informatization is the
  required move and inevitable choice for
  implementing the scientific development view,
  building a well-off society, a socialist society
  of harmony and an innovation driven nation
• A solid foundation shall be laid for moving
  towards information society by 2020
• Promote penetration level of network, the level
  of development and utilization of information
  resources and information security guarantee
  promote the convergence of networks, and develop
  and improve comprehensive information
  infrastructure, to robustly migrate to the next
  generation network.

• Defining the stage of Chinas informatization
  China has laid a sound foundation for its
  informatization, and entered a new stage of
  comprehensive development. To proactively boost
  informatization has become a critical and
  imperative task for Chinas social and economic
  development in the new stage.
• Great leap forward is made in development of
  network infrastructure. For the future, the goal
  is to develop and improve comprehensive
  information infrastructure, and complete the
  migration to the next generation network.
• Remarkable progress has been made in
  informatization application, but the overall
  effectiveness needs to be improved. The use of
  informatization in economy, society and
  government should be strengthened.
• The release and implementation of national
  informatization strategy will bring unprecedented
  opportunities for Chinas telecom industry.

18
Convergence provides new opporunity for
development of telecom
IPTV, Mobile phone TV
Content-centered consumer services
Industry Convergence
Convergence of telecom and media
ICT in daily life
Broadband and mobile digital content services
Corporate ICT integration services
Solution-centered productivity services
ICT in work
ICT penetrates traditional industries
Informatization solutions, etc.
Providing users with seamless ICT experience
across technologies
Convergence of fixed and mobile
Convergence in technology and network
Content digitization and convergence with 3C
Fixed and mobile convergence (FMC)
Cellular communications and satellite
broadcasting combine
Triple Play
Convergence of telecom, computer and consumer
electronics
Convergence of information and communication
technology (ICT)
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Summary Internal and external factors
determines transformation is the most important
strategy of Chinas telecom sector

• Dramatically changes and challenges faced by the
  telecom sector
• Dramatic change of telecom demand
  structureconverged content services and ICT
  services become new potential growth point
• Accelerating innovation of technology and
  service service innovation is moving toward
  multimedia, mobility, personalization and
  covergence technology innovation is
  accelerating, bringing both huge opportunities
  and new challenges
• Change of business modelthe development of
  Internet and broadband significantly drives the
  innovation of business model. Internet shakes the
  business model of traditional telecom services.
• Globalized competition and internationalization
  of domestic competition
• The telecom sector is facing huge opportunities
  and growth potential
• In-depth development of informatization provide
  big opportunity for the telecom sector
• Convergence of technologies brings strong growth
  momentum to telecom
• Development of digital technology enabled rich
  web content, which becomes a crucial source of
  the development and innovation of telecom sector.
• Chinas telecom sector is also faced by unique
  opportunities and problem
• Chinas telecom sector still has broad space to
  develop
• Well-established rules and promotion of industry
  development are two major topics
• Reform, exploration and the establishment of
  modern corporate system have always been and will
  continue to be the critical tasks for China
• The reform of telecom sector has not been
  completed, To optimize and improve the
  competitive landscape is an important task for
  Chinas reform of its telecom sector.

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Agenda
Current situation and trend of Chinas telecom
sector
Understanding development and transformation of
Chinas telecom sector
21
Transformation of Chinas telecom sector

• Transformation of Chinas telecom sector is a
  critical strategic action to address changes of
  technology, to improve quality and broaden space
  for development amidst dramatically changing
  internal and external environment
• Upgrading demands of users, technology and
  service innovation based on the Internet and
  development of national informatization are the
  fundamental momentum for transformation of
  Chinas telecom sector
• Transformation of telecom sector is widening
  scope of development, and changing development
  model and pattern of growth
• Transformation of Chinas telecom sector is
  reflected in 4 aspects expansion of scope
  information service industry transitions in 3
  dimensions transition of development model and
  pattern of growth to innovation-driven,
  transition of business and service to
  customer-centric, universal, informatized and
  integrated business and service, transition of
  network and technology to horizontally layered,
  converged next generation broadband network 3
  institutional adjustments adjustments of the
  system, industrial policies and regulatory
  policies 5 innovation drives service, model,
  network technology, management and institutional
  innovation
• Transformation will be a long-term task.

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Direction of Chinese telecom sectors
transformation information service industry
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System of transformation of Chinas telecom
sector(1)
Expansion of scope, transitions in 3 dimensions,
3 institutional adjustments, and 5 innovation
drives
Direction of industry development information
service industry
Transformation of regulatory regime
Transformation of industry policies
Innovation-driven development model
Transformation of development model and pattern
of growth
1
People-centered, universal, informatized and
integrated business and service
Business and service transformation
2
Network transformation
Layered, converged next generation broadband
network
3
Transformation of institution
Innovation of network technology
Innovation of manage-ment
Innovation of institution
Innovation of service
Innovation of business model
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System of transformation of Chinas telecom
sector(2)
Direction of industry

• Telecom industry expanding to information service
  industry

Development model and pattern of growth

• Innovation becomes the core drive force of
  development, and the expansionary growth relying
  on investment is transforming to compound growth
  driven by innovation, demand and investment
• Enabling an open, competitive, win-win, web-based
  new industry ecosystem and value chain
  cooperation relationship forming diversified
  value innovation group and business model

Trans-formation
Business and service

• People-centered, universal, informatized and
  integrated service and business
• Universal service communications services should
  reach and benefit all the people
• Informatized service communication services
  migrating to comprehensive information services
  to meet all kinds of demands
• Integration of application communication
  applications and information technology
  applications are unified to meet the demands of
  government, businesses and public organizations
  in their production and management

25
System of transformation of Chinas telecom
sector(3)
Enhancing the application in peoples life and
work
Enhancing 2 major applications Support social and
economic development
Enhancing the application in social and economic
activities
Essentials of transformation in the 10th
Five-year Plan period
Optimizing industry development structure
Optimizing 2 structures Drive healthy and fast
development
Optimizing competitive landscape in market
Focusing on breakthrough of service innovation
Focusing on breakthrough of technology innovation
Focusing 4 breakthroughs Promote the change of
growth pattern
Focusing on breakthrough of model innovation
Focusing on breakthrough of institution innovation
Promoting operational capability of enterprise
Promoting 2 capabilities Strengthen the
foundation for sustainable development
Promoting regulation capability for the industry
26
Practice of transformation of Chinas telecom
sector has begun!

• Faced by huge challenges and new opportunities,
  Chinese telecom operators have begun to implement
  strategic transformation
• Accelerating service innovation, and extending
  industry chain IPTV, mobile multimedia and
  information service
• Accelerating transformation of network
  infrastructure, to address the challenges of new
  technology build intelligent fixed network,
  IP-based mobile network, and increase bandwidth
• Accelerating development of emerging market
  rural informatization and rural communication,
  going to overseas market
• Enhancing technology innovation3G mobile
  communication, soft switching
• Optimizing organization structure and operational
  process, to guarantee the implementation of
  transformation
• Optimizing and improving telecom regulation
  value added service, fair competition, protection
  of consumer rights

• China Telecom comprehensive information service
  provider
• China Netcom broadband and multimedia service
  provider
• China Mobile mobile communications expert
• China Unicom the worlds first class
  comprehensive communication and information
  service provider

Goals of some Chinese operators transfor-mation
27
Thank You!
China Academy of Telecommunication Research July
2007