Development and Transformation of China’s Telecom Sector

1. Development and Transformation of China’s Telecom Sector Yang Zemin China Academy of Telecommunication Research July 2007

2. Agenda Current situations and trends of China’s telecom sector Understanding development and transformation of China’s telecom sector

3. Small to large: the leap forward of China’s 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, China’s 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 China’s telecom sector calm 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 World OECD China • 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), China‘s average growth rate was 12％ annually. • The pattern of China‘s telecom development generally coincides with the other side of the world, but much faster than developed countries and world average.

5. Development of China’s telecom sector suits the need of rapid economic growth Source: “World Telecommunication/ICT Development Report 2006”， ITU • In 2006, China‘s 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 structure:Emerging multimedia data services Mobile data services (2005) • Like elsewhere in the world, the structure of China‘s 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 China‘s mobile communications is relatively high in the world.

7. Dramatically transformation of telecom service structure:clearlysubstitute 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 world’s 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 Worldwide Growth Rate of Internet and Bandwidth (2003 to 2006) • From October 1997 to the end of 2006, the bandwidth of China’s Internet international connection grew by 179% in average each year. • Over 50% traffic over China Telecom’s 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) Source: Deloitte Growth of China’s 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 China’s telecom market needs optimization • China’s largest mobile telecom operator, with nearly 320 million subscribers and RMB280 billion revenue in 2006 • China’s largest fixed telecom operator, with nearly 230 million subscribers and RMB170 billion revenue in 2006 • China’s second largest fixed telecom operator, with 120 million subscribers and RMB90 billion revenue in 2006 • China’s 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 China’s 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 China’s telecom sector is still investment-driven Telecom Investment/ revenue R&D intensity(2003) Far below 1% • Profitability of China‘s 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 China‘s telecom industry is achieved mainly through expansion of subscriber base. The driving force of innovation is insufficient. The growth is typically investment-driven.

14. China’s telecom sector has big margin for development Comparison of telecom penetration level • Compared with developed countries, China’s telecom penetration still has big margin for development. • China has 1.3 billion people, implying for huge potential of development.

15. China’s 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 world’s second largest broadband user base, its penetration level is still small.

16. Demands still strong in China’s telecom sector Comparison of revenue and traffic growth in China’s telecom sector • Demands for telecom services is strong , and continuously lowering telecom tariff stimulate usage increase • China’s 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 country’s 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-Europeand 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 China‘s 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 China’s 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 China‘s telecom industry.

18. Convergence provides new opporunity for development of telecom IPTV, Mobile phone TV Industry Convergence Content-centered consumer services 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)

19. Summary – Internal and external factors determines transformation is the most important strategy of China’s telecom sector • Dramatically changes and challenges faced by the telecom sector • Dramatic change of telecom demand structure:converged 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 model:the 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. • China‘s telecom sector is also faced by unique opportunities and problem • China‘s 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 China‘s reform of its telecom sector.

20. Agenda Current situation and trend of China’s telecom sector Understanding development and transformation of China’s telecom sector

21. Transformation of China’s telecom sector • Transformation of China’s 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 China’s telecom sector; • Transformation of telecom sector is widening scope of development, and changing development model and pattern of growth; • Transformation of China’s 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.

22. Direction of Chinese telecom sector’s transformation – information service industry Deepened development and expansion of demands for communications services Telecom service Network-based information service Broadcasting and TV transmission service Internet portal and data service Convergence of network Internet service Internet application service Focus on convergence and digital content service Other Internet services Digitization Consumer service Information Service AV production Non-network-based information service AV service Press and publication service CTservice Other content production services Focus on ICT integration service ITservice Hardware and software support and maintenance service Software design and production service Information technology service and software industry System integration service IT Consulting service Productivity and public service Business process outsourcing service Data processing service

23. System of transformation of China’s 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 development model and pattern of growth Innovation-driven development model Transformation of industry policies 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 business model Innovation of service Innovation of network technology Innovation of manage-ment Innovation of institution

24. System of transformation of China’s telecom sector(2) Network and technology • Multiple separate networks transforming to layered converged network • Converged Next generation broadband network • Open network, open service interface and service development model 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 China’s telecom sector(3) Enhancing 2 major applications Support social and economic development Enhancing the application in people’s life and work 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 4 breakthroughs Promote the change of growth pattern Focusing on breakthrough of technology innovation Focusing on breakthrough of model innovation Focusing on breakthrough of institution innovation Promoting 2 capabilities Strengthen the foundation for sustainable development Promoting operational capability of enterprise Promoting regulation capability for the industry

26. Practice of transformation of China’s 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 innovation:3G 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 world’s 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