CHINANEBUSINESSPLANUPDATEDecember14,1999-BeijingTODAY’SOBJECTIVESReviewtheoverallanalysisofregulation,petition,andmarketdevelopmentDiscussthespecificimplicationsforCstrategyReviewthespecificdraftbusinessmodelsforCHowwemightattackthebusiness,carrier,andIDD/DLDmarketsWhatkeytrade-offsweneedtomakeWhatarethekeysuccessfactorsandassumptions?Discusstheinitialeconomicsofthesebusinessmodels,andofCoverallDiscussthespecificnextstepsintwokeyareas:HowtofinalizeandendorsetheoverallCbusinessmodelHowtomoveforwardwiththerefinedfinancials,organizationdesign,andtheplanforimplementationCONTENTKeystrategicprinciplesRegulatoryoverviewMarketoverviewCompetitionoverviewBusinessmodelsNextstepsKEYCSTRATEGICPRINCIPLESTheobjectiveoftheseprinciplesistoprovidefurtherclarityinthedevelopmentandevaluationoftheCbusinessmodelThesewillberevisitedandrefinedastheprojectprogressesOurdevelopmentofbusinessmodelswillseektobealignedwiththeprinciplesStrategicprinciplesandkeyassumptionswillbeconsideredinthefollowingaspectsCshareholdersBackbonebusinessLocalaccessbusinessInternationalgatewaybusinessRegulatorystrategyCompetitivestrategyMarketingstrategyCSHAREHOLDERSPrinciples:Leverageshareholders’concertedvisionincreatinganewgenerationIPbroadbandmunicationinfrastructureandaprofitable,successfulpanyLeverageshareholders’existingbackboneassets,localaccessassets,researchcapabilitiesandlocalgovernmentrelationshipstosecuretime-to-marketandcreatepetitiveadvantageSetamodelofanewtypeof“SOE”,asefficientasthebestoftheFIE/privatepanies;beatshareholders’expectationsbydeliveringhighreturnAssumptions:CAS:stronginterestinseeingCsuccessfulandprofitablequickly,standsreadyforfavorableregulatoryinfluenceandresearchsupport;wantsopportunitiesfornetworkingR&DMORandSARFT:extensivebackboneandaccessassetsandROWmainfocusonusingMORforrightofway,helpingthemparticipateintelwillnotuseSARFTlocalCATVinthenearterm,buttheyareakeyuserofthebackboneLeverageCATV’scitybackboneMORwillcontinuetofavorCoverUn,providedCmeetstheexpectationasaprofitcenterforMORShanghaiMunicipalGov't:EagertomakeShanghaiasChina’stestgroundforbuildinghigh-techinfrastructure(e.g.theintegrationoftel,CATV,Internet)inparticular,testingHFCtodeliverbroadbandinternetoneissue:SPTandATTJV;howtohandle?BACKBONEBUSINESSPrinciples:Targetadvancedbackboneamong15keycitiesinEasternChina;startwith2coresfromshareholdersbutquicklybuildownnetworkUsebackboneforavarietyofwholesaleandretailvoiceanddataservicesMaintaintheleadingedgeIP/packetnetwork,bothfortechnologicalsuperiorityandtofulfillshareholdermissionMaintainthebestcostposition,usingROWs,purchasingclout,righttechnologyBuildcapacity/conduittodeterothersAssumptions:ThecostsofconstructionandROWwillbethemajorityofnewnetworkcostsvirtuallyallofthenetworkwilluseMORorSARFTrightofwayNetworkwillbeIPorpacketinnatureDeploymentplanwillkeepcostslow,buildoutquickly,andcreategoodpositionlaylargenumberofconduitsinonetimelaterfill,lightup,andcolorfiberstrandsleaseoutconduit/fiber/bandwidthtomaximizereturn(utilization)LOCALACCESSBUSINESSPrinciples:Beveryfocusedinlocaldeployment,targetingprioritybusinessareasonlyEmphasizebroadbandtothecustomer,usingFTTBandLMDSwherelogicalSeekstronglocalmarketshare,especiallyinnewdataservicesgrowthareasDifferentiatefromChinaTelbysuperiorservices,quality,responsivenessBuildstronglocalteamtoenablefastserviceresponseEmphasize“endtoend”networkownershipandmanagementAssumptions:SH,BJ,GZ,andSZbusinessdistrictsastargetsfortheneartermTheseaccountforthevastmajorityofbusinessteldemandNeedtosetspecificestimatesfortimingandsequenceofdeploymentAssumethatCwillhaveaccesstokeycityROW,suchassubwaysystemsWillneedspecificassumptionsabouttheeaseandcostofhookingupbuildingsAssumethatprimaryemphasiswillbeonFTTB,butthatLMDScanplayanimportantrole,especiallyininitialdeploymentandinsecondarycitiesWillneedspecificassumptionsabouttimingofaddingsecondarycitiesINTERNATIONALGATEWAYBUSINESSPrinciples:CwillbeoneoffewplayerswithafullinternationallicenseVitaltoenableCtoprovideend-to-endservices,globaldataservices,andhighermarginIDDserviceHKgatewaylinkmaybestrategicallyimportantAssumptions:HKasoneofthekeylocationforinternationalconnectionamajortrafficdestinationamajorrelaylocationInternationalvoiceremainshighlyprofitablesegmentinmediumtermfutureExpecthighgrowthtogetherwithsteeppricedropininternationalservicesActivelyplanaheadforjoininginternationalsub-oceaniccableconsortiumREGULATORYSTRATEGYPrinciples:Mustactivelylobbyforfavorableregulatorydecisions,togetherwithshareholdersprovideregulatorswithinternationalbenchmarkingforbestpracticesalignCobjectiveswithfairpetition,andpublicinterestshaveeffectiveseniormanagementfocusonlobbyingissuesBecarefulaboutmittinginvestmentifregulatoryissuestoouncertainEnsureCstrategyaddressesnationaleconomicdevelopmentprioritiesPaycarefulattentiontomanagingrelationswithChinaTelExpectedWTOin2000willimplygreateropeningofthemarketinthefutureAssumptions:Atleasta2-3yearwindowwhenCcancontinuetoenjoyfavorablepolicytreatment,whilealsoworkingtostraightenoutregulatoryissuesatlocallevelManykeyregulationsremainingreyareas,whereCcanplayaroleinshapingthepolicyWillneedtomakespecificassumptionsonanumberofregulatoryissues,anddevelopseveralscenariosAssumethatCTandUnaretheonlyfullservicepetitors,butseveralnicheplayersWTOwillintroduceFDIintoChina’stelmarketby2002,butinfrastructureplayremaintightlycontrolled(stilllimitedpetition)until2004/5maybeopportunityforsomeformofpartnershipwithforeigntelcosCOMPETITIVESTRATEGYPrinciples:Focusonthebestservicequality,supplywhatcustomers’need,avoidpetingonpriceBuildboth“highways”and“tollbooths”P(pán)repareforrapidlychangingindustrystructureBecarefulinpositioningtowardChinaTel:complementaryandaddressingunmetneedsgrowingthewholemarketTheonlyviablealternativetoChinaTelforcarriersTheonlytrue“endtoend”networkacrossChina,withclearcentralmanagementAssumptions:TechnologyleadstocontinualchangeinindustrystructureThedecentralizednatureandbusinessorientedbehaviorsofChinaTelenablesCtopartneratthelocallevelHighopportunityforCtofillChinaTelproduct/servicebacklogUnwillbeathreattostarta“pricewar”Variousnicheplayersemergeinlateryears,morethreatthan(carrier)opportunityforCMARKETINGSTRATEGYPrinciples:Forlocalaccess,willtargetmediumandlargebusinessesintargetedbuildingsForbackbone,providecarrierservicesForinternational,supportotherbusinessesandalsoofferIDDandrefiling,etc.Inallareas,emphasizequality,service,endtoend,etc.Getafewkeycustomersearly;proveourselvesandthenbuildfurtherAssumptions:Carrierandlargeandmediumsizedcorporationsarethekeyfocusespeciallythoseintel-intensiveindustriesAssumeagrowingdemandforbusinesstelserviceswillneedbothhighandlowgrowthscenariosNeedtovalidatethewillingnessofkeycustomerstoswitch,andtheiranticipatedareasoffuturedemandgrowthIPphonestillthesourceofrevenueinthenearfutureDial-upISP(171)mayconflictwithISPcarrierinterests,butcouldalsoserveasstrategicinroadforfuture3G(1)CONTENTKeystrategicprinciplesRegulatoryoverviewMarketoverviewCompetitionoverviewBusinessmodelsNextstepsREGULATORYHIGHLIGHTSOurkeyassumptions:MIIregardsC’sIP-basedlicenseasFullServicelicense,butlacksclearregulatorydocumentation.Incaseoflocalinterpretationdifference,MIIiswillingtoclarifyonbehalfofCe.g.ambiguityonlocalfixedlineCnumber)CwillbegrantedInternationalGatewaylicenseby1Q2000CIPnetworkthecurrentfixed/mobileinterconnectregulationCnotrequiredtomeetspecificcoveragetargetsforthenearfuture(2-3years)Themarketwillbeopenedupgradually,withFDIincreasing:morevalueaddedserviceprovidersby2003moreI-Phoneprovidersby2001nonewFullServiceproviderstill2004/2005AccountsettlementspecificforI-Phonewillberegulatedafterthetrialstageends.ItwillbelowerthantheRMB0.14/minrateforbasictelnetworksonapercallbasisEqualaccessbyprefix/pre-selectin1year;numberportabilitymaytakeanother1-2yearsatleastCwillhaveLMDSspectrumCanticipatesawell-intentionedregulator,withvarieddegreesofcontroloverlocalincumbentpracticeNoneoftheseassumptionsare“guaranteed;”CmustfightaggressivelyforthemKEYREGULATORYISSUESANDIMPLICATIONSServicelicensesFullServicelicenseinterpretationInterconnectenforcementAccountsettlementPricingandrebalancingROWandaccessFrequencyspectrumallocationandfeesUniversalServiceObligationEqualAccessNumberingandportabilityIGWlicenseimportanttopetitiveness,sizeofcustomerbaseand#ofpartnersMIInotificationoneachinstanceaddsdelaytoClocalinterconnectionTimetomarketineachcityaffected,detractCresourcesFutureInterconnecteconomicsFuturepricepetitivenessvs.otherplayers(e.g.CT)economics;pricepetitivenessvs.CTCase-by-caselocalcoordinationandnegotiationdelaylocalaccessbuild-out;mayalsobeexpensivetoobtainTimetomarketforlocalaccessbuild-outbyLMDSaccesssolutionsSubsidizingincumbentforUSOaffectcoststructureofnewentrantsUnabletoreachCTlocallinecustomerMediumtermimplication:on-netvoicenottargetedforthenear4-5years3fullservicecarrierincludingCMorelicensesforvalue-addedserviceproviders(typeII)MIIsupportsCIPbasedlicenseasFullServiceLicenseButlackofcleardocumentationmaycauseconfusionatlocallevelBasedoncooperationofcarriersArbitration/settlementprocessexistbuttimeconsumingMildpunishment,suitaslastresortForcurrentIP-phonetrial,feesnotsettledLikelyfuturesettlement:LDcarrierpayslocalPSTNoperatorRMB0.14/minPricefloorlikelyspecifiedforincumbentbyregulationNoimminentinitiativeforrebalancingLegallyfeasibleforpublictelcarrier(e.g.C)PracticewillhavetocoordinatewithmunicipalitiesandinfrastructurebuildingControlledbyMIIinco-ordinationwithPTAsFrequencynotlikelytobeauctionedUSOforincumbentwithcontributionfromnewentrant2-3yearsbeforetransparentandequitableapproachPrefixbasedsolutionprovidedbyregulationin1yearNumberasnationalresourcescontrolledcentrallyFeewillbecollectedforoccupationofnumberresource2-3yearsbeforeportabilityregulationsImpactonCHighest/ImmediateHigh/MediumTermKeyissuesAssumptionImplicationtoCKEYREGULATORYBODIESANDRESPONSIBILITIESOtherdepts,e.gSETCVariousmakingbodiesNPCStateCouncilDept.ofRadioFrequencyAdministrationTelAdministrationBureauOtherdepts.ProvincialTelAdministrationBureauChinaTelNationalCompanyMunicipalLevelTelAdministrationBureauTelOperatingEntities:e.g.CTfixedlineProvincialgovernmentMIINationalProvincialMunicipalityDrafting,passingoftelsandstatues,e.g.ChinaTelsInternational,NationalandInter-ProvincialscopelicensegrantingHighestlevelofregulatoryenforcement/arbitrationInternationalGatewayadministrationNationalleveltelresourcescontrol(e.g.numbers,frequencyspectrums)ProvinciallevelteladministrationProvinciallevellicensegrantingProvinciallevelregulatoryenforcementfocusoncoordinationIntheprocessofsplittingoperationandadministrationAnumberofMunicipalLevelTABsareyettobecreatedLimitedenforcementpowerOperationandadministrationnotseparateSettleinterconnectandotherdisputesWhennotsettledbyprovincial&municipalcoordination,propagateuptoprovinciallevelandMII…PTAsPTBKEYLICENSEASPECTSANDIMPLICATIONTOCFullServiceandInternationalValueaddedservicesownershipGeographicscopeDurationlicensefeesPerformancetargetsTechnologyKeyAspectsNumberoflicensestightlycontrolled:atmost3in2003,includingCCfullservicelicenseexpected1Q2000Internationallicensestightlycontrolled:atmost4in2003,includingCCIGWlicenseexpectedbyEOY1999Morethan4value-addedservicelicensespossibleControl-shareforeignownershipnotallowedinbasictelandpublicdatatransportservicesUpto50%ofFDIinvalueaddedserviceprovidersIntraprovincialservicesundercontrolofprovincialTABsNolimitRegulationwillrequirelicensefeesRegulationwillspecifyclearservicebuildouttargetsRegulationswillbetechnologyneutralButwillgivepreferencetonewtechnologyAssumptionsCurrentregulationonlycoverinterconnectionbetween7typesoflicensedbasictelcarriers(e.g.NLD,local,wireless,international)WithIP-phonelicense,CneedstonegotiatewithCTlocalbranchescitybycityCIPbasedbandwidthwholesaleservicenotcoveredinpublishedregulation,addsdelayinlocalnegotiationNumberofpotentialcustomersforcarrier’scarrierservicesSpeedofestablishmentandcoverageoftargetedcustomerforcarrier’scarrierserviceFinancialstrengthofnewentrantcustomersIntra-provincialLMDSservicerequireapplicationineachtargetedareaCompetitor’sabilitytolockoutkeyserviceareasLimiteddegreeofimpactoneconomicsAddsplanningandlocalcoordinationpressuretoClocalaccesssolutionsCIP/DWDMbackbonereceivepositiveinfluenceImplicationtoCNATURE,SCOPEANDNUMBEROFLICENSESVSATtransportserviceInternationalNLDOn-netvoiceIPbackboneIP-phone(includinginternational)WirelessPagingVAS(e.g.ISP,VPN)ServicenatureOwningsatelliteMaintainsatellitechannelVSATbasestationsOwnership&operationofinternationalgatewaysInterconnectwithforeigncarriersLeasingIDDchannelsandlinesBuilding&operatingofnationalswitchesandtrunklinesMaintainingPOPisnationwideProvidebasicvoice&datanationaltransportOwnership&operationoflocalaccessnetworksOwnershipoflastmileProvidebasiclocalvoice/datatransportandaccesstoNLD/IDDBuildingandleasingofbroadbandIPbasedbackbonetransportcapacityProvideIPbasedvoiceserviceNorequirementininfrastructurebuildingIncludinginternationalIPbasedLDBuilding&operationoflocalBSCnetworkProvidewirelessvoiceservicesInterconnectwithnationaltransportcarrierBuilding&operationofLocalPagingNetworksInterconnectwithnationaltransportcarrierWithorwithoutbuilding&operationoflocalnetworkOfferweb-hosting,VPN,callcenterservices,etc.ScopeNationalcoverageCrossinternationalpointofpresenceServicenationaltransportcarriersCrossprovincialboardersHaveaccesstointernationalPOconnectsServicelocalPSTNsCoverslocalserviceareas,(e.g.citiesmunicipalities)CrossprovincialboardersAccesstointernationalpointsofconnectCovers12-25trailcitiesAccesstointernationalpointsofconnectCoverslocalserviceareas:citiesmunicipalitiesMajorityinlocalscope4nationalcoveragePrimarilyinlocalscopeNo.offuturelicensesRemain3forthenext6years(CT,Un,andC)3Inthenext6years(CT,Un,C)3Inthenext6years(CT,Un,C)4~5in1-2years5-6possibleinthenext1~2yearsMultiplelicensespossibleinthenext4-5yearsNumerousnationalscopelicensespossibleinthenext2yearsNumerousmorelicenses(withFDI)possibleinthenext2yearsLicensecontrolledbyMIIMIIMIIMIIMIIMIIMIIPrimarilybyprovincialgovernmentProvincialgovernmentNo.ofcurrentlicenses13223(CT,Un,C)4Trailstage22nationalscope;multiplelocalUnlimitedBasictelservicesRemain1forthenext6yearsINTERCONNECTIONISSUESANDIMPLICATIONTOCKeyIssuesAssumptionsImplicationtoCObligationclearlyspecifiedbyregulationforinterconnectionbetween7typesoftelnetworklicensedoperatorsC’sIPbroadbandnetworkreceiveequivalentprotectionMIIsetstechnicalspecificationofinterconnectsolutionsClearprovisiononcostandownershipoftechnicalassetFromtimeofwrittenrequest,interconnectpletewithin:2monthsifonlyCOdatamodificationisinvolved4monthsifcapacityexpansionneeded7monthsifnewPOI(1)neededTimeframenotstrictlyadheredto,variesfrom4-6monthsDisputesettledprimaryviacoordinationArbitratedbyMIIandlocalgovernmentViolationfineisverylow(30,000RMBmaxperoffense)Possibletoclaimforpensationduetonon-cooperationofincumbents(thelastresort)RMB0.07/minforPSTNaccessofeachendofcallpathSettlementforIPbasedwillfollowschemewhentrialfinishesIncumbentsprovidecabinetroomandconduitaccessIncasethere’snoexcessconduitcapacity,incumbenthastoprovidefeasibleexpansionplanLocalpracticewillvaryIncumbentchargesrentalfeeforconduitaccessIncumbentchargesforleasedlineneededforinterconnectInfrastructureandnetworkinvestmentrelatedtointerconnectareresponsibilityofbothparties,separatedfromPOIIncumbentobligationtointerconnectInterconnecttimeframeEnforcementAccountsettlementAccessandcollocationChargesandfeesIfCnetworkisnotcoveredbyregulation,localnegotiationwillleaveloopholeforincumbentandadddelayIncumbentlocalpracticevaries,addplexityanddelaytoprojectIncumbentcantakeadvantageoftimeframeloopholes,adddelaysatlocallevelCentralcontroloverlocalTAB(2)variesduetovarieddegreeofseparation,leadtodifferentdegreeofjustandresolutiontimeframeUpwardpropagationtoMIItimeconsuming,addingdelaystoresolutionFutureeconomics:upto30%ofrevenuepaidtoPSTNbasedon0.30/minIPrateIncumbentcantakeadvantageofcapacityconstraintstodelayinterconnectatlocallevelSomeincumbentlocalbranchesrequireCtopayforinvestment,ownershipgoestoincumbent,addscosttoCserviceCLEARGUIDANCEFORINTERCONNECTALREADYPUBLISHED,LOCALPTAOBLIGEDTOFOLLOWLocalPTAcanberesistant,alsoitsorganizationnotsuitableforquickexecutionThepolicydecisionrequestinglocalPTAstocorporatewithinterconnectiontricklesfromtopdown:thecentralTprovincialPTATcityPTACityPTAbeforeimplementationwillgenerallyaskforleadtimeforverificationwithupperlevels.E.g.insomecasesnewentranthastowaitforextendedtimeperiodforthisprocessUndertheMarketDepartment’scoordination,thereareupto18independentdepartmentswithineachcityPTAtocooperatefortheexecutionandresourceplanningofinterconnectEachofthesedepartmentcanadddelaytotheprocess,leadtimesaddupIncaseofinsufficientresource,therequestingandapprovalprocessforexpansion/upgradeisevenlongerLocalPTAcaneasilyuseresourceconstraintasanexcusefordelayininterconnection…ButinterconnectionisfeasibleChassofarbeenabletoreachinterconnectcontractatprovinciallevelsMostPTAsinC’stargetcitiesdisplayedtimelycooperationInordertoensurequickexecution,CshouldUnderstandandincorporateintoplanningprocessthestatusofincumbentnetworkresourcesGiveleadtimeinplanningandmunicatingintentiontointerconnectwiththeincumbentBuildstrongmunicationchannelwithalllevelsofPTAsCo-ordinateforgoodtimingacrossalllevels;parallelprocessingtominimizetimeneededandclearbottleneckTHEPROCESSOFLOCALINTERCONNECTISGENERALYSMOOTH

ButThere’sGreatDifficultyinSomeCitiesInterconnectinmajorcitiesissmoothe.g.BJ,SH,GZGreatdifficultyinsomecitiese.g.WuhanFastagreementreachedFromnegotiationtoimplementationusuallytakes2-3weeksTakes4-6monthtopletenegotiationIssues:- localCTbranchattemptedtocurtailCbyforbiddingconnectionsofmultiplelinesatClevelResolution:- resorttoregulatoryprovisiontoreachIPphoneinterconnectagreement- pushoffmultiplelineissueasfuturenegotiationagendaTERMINATIONSETTLEMENTMAYREDUCECMARGIN(I)CurrentLikelyscenariosforY2000EnduserCustomerpayslocalPTAforPSTNusagee.g.RMB0.1every3mintoPTANosettlementpaidbyCtoPTACustomerpayslocalPTAforPSTNusagee.g.RMB0.1every3mintoPTANosettlementpaidbyCtoPTACpaysRMB0.14/mintoPTAforbothoriginationandterminationCchargescustomerIP-phonecarrierratee.g.RMB0.3/minpaidtoC(debitfromprepaidIPphonecard)CchargescustomerIP-phonecarrierratee.g.RMB0.3/minPerminuteIPrate￥0.44/minpaidtoCotherwiseCseemarginreducingNosettlementNosettlementNosettlementCCEnduserPTASwitchSHPSTNSwitchCbackbone(1)SwitchSwitchBJPSTNPTATransmission(paidbyC)Fees:12Transmission(paidbyC)ExampleInter-connectionTERMINATIONSETTLEMENTMAYREDUCECMARGIN(II)

Example:NationalLongDistanceCpaysPTACpaysPTAKeepIP-phonepricethesameCustomerpaysPTA(1)IP-phonepriceCustomerpaysPTAIP-phonepriceNewIP-phonepriceCurrentIP-phoneTrialStagescenario:nosettlementCAlternativeICAlternativeIIPossiblescenariofor2000:nosettlement1RMB/minNote1:PTAchargescustomeron3minuteunits,RMB0.18per3min.CalculationforthisexampleusesaverageperminuterateofRMB0.06,assumingcustomercallslongenoughduration.Source:BJPTAPossiblescenariofor2000:RMB0.14/minsettlementrateforbothoriginationandterminationends2IncreaseIPpricetocoversettlementcostCustomerdoesn’tpayPTAbutperceiveIP-phonepriceincreaseCmaintaincurrentIP-phonerevenueKeepIPpricesameCustomerdoesn’tpayPTAnorperceiveIP-phonepriceincreaseCpaysPTAoutofIP-phoneieCrevenue=54%ofcurrentIP-phonerevenue0.30.440.360.36Cretains100%ofIP-phonepriceasrevenueCretains100%ofIP-phonepriceasrevenueTheRMB0.14/minsettlementratespecifiedbycurrentregulationisbasedontraditionalfixedlineeconomics.CwouldlobbyfornewsettlementratespecifictoIP-phoneeconomicsKEYPRICINGREGULATIONISSUESANDIMPLICATIONTOCKeyIssuesAssumptionsImplicationtoCRegulationfollowscost-basedpricingguidelineCarriersobligedtopublishaccountingdataassistingpricingregulationPricefloorspecifiedforincumbentNewentranthasflexiblepricerangearoundincumbentrateLocal,NLD,IDD,wireless,satelliteNationalleasedlinesPriceBureauwithineachprovincialgovernmentsetspricesaccordingtolocalstandardoflivingandinflationratesLocalPTAswillhaveautonomySincelocalnetworkshavebeenbuiltbylocalPTAinvestments,localPTAhasstronginfluenceonlocalpricelevelsGeneralpricingrulesDifferentialTreatmentCentralcontrolLocalcontrol/GeographicpracticeUsuallyhighinitialCcostpositionduetoleasingaccessandsettlementShorttermuncertaintyinpricebasedpetitivenessSomeflexibilityinpricingofCproductofferingAdvantageouslongtermpetitioncapabilityoverincumbentClarityinpricingisfavorabletoCButlimitsCpricingflexibilityDisadvantageouslocalpricebasedpetitivepositioninsomegeographiesVariedcoststructureacrossgeographiesplicatesproductmanagementprocess,difficultforCtohaveconsistentpricing,andhence,image.LEASEDLINECOSTHIGHESTAMONGINTERCONNECTCOSTS

ApproximatelyRMB134K/monthtoLinkupOneCityItemCostpermonth(inRMB1,000)LeasedlinetolocalPTACapacity:2MbpsNumberofchannels:30DomesticLDtransport(1)TotalforconnectinguponecityLeasedlinetointernationalgatewayE1capacityTotalforIDDfromonecity9100-150109-159T134average320454averageROWANDISSUESRELATEDTOBULIDINGLOCALLOOPKeyIssuesAssumptionsImplicationtoCTheoretically,Ccanassumeprivilegedaccesstopublicresources,e.g.bridgesandroadsThereisnospecificdefinitionofROWinmostlocalitiesInpractice,there’snofreeaccessOntimefeechargedfordiggingashighasRMB20KperkmreimbursementtolocalmunicipalitiesLaboraccountfor5-10%oftotalcostConduitsinbridgesandmercialbuildingsownedbymunicipalgovernmentsConduitsinresidentialarealargelyownedbyCTConduitaccessauctionedbylocalgovernmentwhenbuildingpletesOnceauctioned,additionalconduitscannotbeeasilyaddedfor4-5yearsUtilityprivilegeAccessfeesandcostOwnership&controlSchedulingTheoreticalutilityprivilegedoesnotguaranteelocalcooperationLocalaccesstoconduitinmostcitiesprimarilyrelyonrentingfromresourceholderse.g.CT,utilitiesetc.Negotiationofrentallargelyonacase-by-casebasisCase-by-casenegotiationwilldelaylocalloopbuildoutConduitaccessrightshavetobepurchasedbackfromexitingholdersPlanningandcoordinationneededtofitscheduleFREQUENCYFORWIRELESSBBNEEDTOBEALLOCATED

CurrentlyOnlyNarrowBandWirelessSpectrumAssignedKeyIssuesAssumptionsImplicationtoCNoclearregulationavailableandfiercepetitionexpectedinfrequencybandsforLMDS(25-38GHz)1890-1900MHzand1960-1980MHzdforFDDModeWLL1900-1920dforcordlessstandardse.g.DECTWirelessdatin821-825and866-870MHzrange,NOvoicetrafficispermittedinthisrangeFrequencymanagementpoliciesimplementedbylocalDTAs,inconjunctionwithPTAsandPTBsLocalfrequencyallocationisissuedafterPTAtestandMIIexamination,aprocessof6-12monthsAllocationremainsfixedfor3-5yearsonaverageFrequencypolicieshandledbylocalDTAs,problemsresolvedlocallyandappealedtoMII1975-1980MHzbandoccupiedbyDGT’swirelessaccessnetworkinSH,BJ,GZ,SZ,FZandXiamen1890-1895and1970-1975MHzoccupiedbyUninCD,TJandCQLocalwirelessaccesslicensesneedtobeobtainedfromlocalPTAsPrimarilytobecontrolledinsteadoffrequencyauctionsNooverallregulationbackingonetimesolutionRooftopaccessandbuildingaccessdependoncase-by-casenegotiationswithpropertyownersFrequencybandallocationAdministrationoffrequenciesLicenseofserviceFrequencyfeesRooftopaccessdfrequencyandavailableLMDSmodulationaffectsviabilityandqualityofCaccesssolutionsLongcircleoffrequencyallocationprocesswillimpacttime-to-marketforCsolutionsOc