By Jane Hou , Partner, and Adam Meng, Associate of the Beijing office, and Taylor Lam, SEM of the Hong Kong office A new perspective devoted to the “policy on the pilot of fixed broadband market liberalization” in China, that encourages civil capital to enter fixed broadband market in various models, a milestone of state monopolized industries’ opening up

1. Thepolicy
andprospects
ofChina’sfixed
broadband
Market
liberalization
perspective JANUARY 2015
Jane Hou, Taylor Lam, Adam Meng

2. The policy and prospects
of China’s fixed broadband
Market liberalization
Published by
Value Partners Management Consulting
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Beijing, China 100020
January 2015
Written and edited by:
Jane Hou, Taylor Lam, Adam Meng
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3. perspective The policy and prospects of China’s fixed broadband Market liberalization
OVERVIEW
In December 2014, the Ministry of Industry
and Information Technology of China
(hereinafter referred to as “MIIT” or “the Ministry”)
introduced “policy on the pilot of fixed broadband
market liberalization”, encouraging civil capital
to enter fixed broadband market in various
models, which is considered as another milestone
of state monopolized industries’ opening up.
There’re various types of participants in
fixed broadband market worldwide.
Several distinguished business models have
been outlined.

4. 4 – 5
Exhibit 1
Global Fixed Broadband Value Chain Analysis
(FBB Value Chain)
Sources: Media, Value Partners Analysis 2015
backbone network
(partially own)
network provider / Isp
network provider / Isp
network provider / Isp
network provider / Isp
intra-city
network
tier 2 operator
light tier 2 operator
cpn
brand /
marketing
offering /
tariff
distribution /
retail
customer
service /
caring
tier 3 operator / typical visp
light visp
reseller

5. perspective The policy and prospects of China’s fixed broadband Market liberalization
distinguished
business models
From a global perspective, major FBB
players – besides typical ISPs and
network providers – can be divided into
4-5 groups: tier 2 broadband operators,
light tier 2 broadband operators, tier 3
broadband operators/VISPs, light VISPs
and broadband resellers. Due to the
high liberalization level of the market,
tier 2 broadband operators are com-
monly participating in the construction
and operation of the backbone network.
Across the oversea markets, there’re
many non-telecom background com-
panies which operate fixed broadband
business, like internet, media, energy,
financial services and even NGO.
1) The entrance of FTTX, 2) Capability
of high CAPEX investment, 3) Source-
ful OTT contents to bundle formed the
key success basis for the FBB business.
There’re non-telecom background com-
panies (like internet companies Google,
Facebook and Virgin Media), typical
VISP (like British media company Sky),
light VISP (like American IP telephone
services provider Vonage) and some
resellers in the market.
Internet giant Google invested radically
in network infrustratures, including
Google Fiber project, Unity Consortium
project, Titan Aerospace project, O3B
Networks project, Project Loon and
TV Whitespace project. Google Fiber
– Google’s FTTX initiative launched in
2012 - is highly comparable to China’s
potential piloting players. Thus, its
underlyding business logics could be
inspirations to China’s incoming partici-
pants, especially to internet companies.
Google Fiber project is a high-speed
FTTX project which was launched
in 2012 by Google, now is rolling out
in 12 cities in the US as planned (by
December 2014, 3 cities had actually
launched). By possessing ample band-
width through contract with network
providers, relying on high-quality
optical fiber under the support of PON
technology, Google Fiber could provide
unprecedent high speed internet con-
nection – nearly as much as 1000 times
of market average in the US – to the
end users. Both the uplink and downlink
transmission speed are up to 1GBps.
Google has bundled pay TV, cloud
drive, mobile phone business into its
high speed internet service package.
Due to the maturity of America’s pay
TV market, Google Fiber has a very
high ARPU reaching 107 USD / month in
Kansas City. In the mean time, Google
Fiber utilized the model of “Booking
first, building afterward” to devest
unnecessary investments. And the
ultimate cost allocation of FTTX is 1100
USD per household. Therefore, Google
Fiber would be able to achieve the paid-
back in about 1 year.

6. 6 – 7
Exhibit 2
Google Fiber service offers
Sources: Google Fiber webpage, Value Partners Analysis 2015
GIGABIT + TV
$ 120 / mo
$300 waived
construction fee
GIGABIT INTERNET
$ 70 / mo
$300 waived
construction fee
FREE INTERNET
$ 0 / mo
$300 construction fee
(one time or $ 25 / mo for 12 mo)
Google Drive
(1TB storage)
Network Box
HDTV
(TV Set Not Included)
Optional Add-On:
Chromebook
Nexus 7 tabletTV BoxStorage Box

7. perspective The policy and prospects of China’s fixed broadband Market liberalization
Value Partners believes Google’s posse-
sion of network infrastructure is highly
consistent with company’s strategic
demands.
• The wholesale cost control.
By investing in network assets,
Google can significantly downsize
the bandwidth wholesale cost
from telecommunication operators,
also increase the bargaining chip
in the game.
• To improve the user experiences.
Poor internet speed will degrade
the user experience of Youtube
and other OTT services from Google.
• Driving family market product/service.
High-quality network can greatly
promote Google’s products/services
targeting on family and establish
stronger loyalty.
• To hatch things like IOT with high-
quality network. Support projects
of high data consumption such as
Google Driverless Car.
• To raise competition threshold.
The investment in telecom network
will set a high threshold for future
competitors.
In addition, FBB business model of ICP,
VAS providers such as Virgin Media
(UK), Sky (UK) and Vonage (USA) are
similar to Google. Facebook invested
heavily in the construction of the sub-
marine cable connecting the US West
Coast and for private use, in order to
support the real-time data synchroniza-
tion of different IDCs across continents.
The intention of Google’s 300 million
dollars submarine cable project Unity
Consortium is close to Facebook’s.

8. Exhibit 3
2012-2018 China fixed broadband market size
(unit: million, household)
Sources: OVUM, MIIT, Value Partners Analysis
8 – 9
Household
penetration rate
Year to year
growth rate
2012 2013 2014 E 2015 E 2016 E 2017 E 2018 E
32% 35%
12%
39%
11%
42%
9%
45%
8%
48%
6%
50%
5%
165
185
205
224
241
256
269

9. perspective The policy and prospects of China’s fixed broadband Market liberalization
In recent years, Chinese fixed broadband
user base has been expanding. By the end
of 2013, there were more than 185 million
residentials or business users nationwide.
And this figure would exceed 200 million
in 2014 even by conservative estimates.
Institutions believe that Chinese broad-
band user amount will increase steadily
with not less than 5% of an amplitude in
the next 5 years.
On the other hand, Chinese broadband
household penetration rate is still less
than 40%, especially in the vast under-
developed areas where the broadband
households penetration is only 18%.
China’s fixed broadband market potential
is still very huge.
Chinese fixed broadband
market overview
In addition, the proportion of China
FTTX among all connectivity technolo-
gies is still very low, most broadband
users are still on cable modem, DSL
and other traditional technology rather
than optic fiber.
Therefore, the broadband speed is far
behind the developed markets.
According to Akamai report, China’s
average broadband speed is merely
about 1.7Mbps, whereas Korea’s average
is at 14.2Mbps. Clear opportunities on
optic fiber broadband are set to seize.
The saturation of Chinese fixed
broadband market is deficient,
but its future growth is stable,
and fibre optic broadband has
significant market potential.

10. DSL
10 – 11
Sources: OVUM, MIIT, Value Partners Analysis
Exhibit 4
China’s FBB user bases by connectivity technologies
(unit: million, household)
20120%
100%
2013 2014 E 2015 E 2016 E 2017 E 2018 E
4% 4%
71% 56%
13%
16%
12%
22%
224
241
Cable modem
other
FTTH / B
5% 5% 5% 5% 5%
46% 39% 33% 28% 24%
19%
21%
23%
24%
25%
30%
35%
39%
43%
46%

11. perspective The policy and prospects of China’s fixed broadband Market liberalization
Based on the depth of involvement
along the FBB value chain, China’s
fixed broadband market players can be
categorized into four segments: tier 1
broadband operators (basic telecom
operators), tier 2 broadband operators,
tier 3/residential broadband operators
and broadband resellers/distributors.
• Tier 1 / broadband operators.
Owners of national, provincial and
metro backbone networks, also
involved in the construction of metro
network and CPN. They are eligible to
provide self-branded wire communi-
cations broadband service and value
added services to the end users.
Commonly they tend to collaborate
with tier 3 or residential broadband
operators in the construction and
operations of CPN. Exemplary
enterprises include China Mobile,
China Unicom, China Telecom, as well
as non-telecom enterprises such as
the branch of State Administration
of Press, Publication, Radio, Film and
Television, and CITIC.
• Tier 2 / broadband operators.
Through renting the bandwidth from
tier 1 broadband operators, these
operators construct metro broad-
band network and as well provide
additional services, such as IDC and
enterprise dedicated lines. The main
advantage of these operators is main-
ly high quality-price and enterprise-
level after sales service. Exemplary
companies include The Great Wall
Broadband, Gohoo Broadband, Aipu
Broadband.
• Tier 3 / residential broadband
operators. Usually these enterprises
are involved in the operation of CPN,
and provide resale service from the
upper-tier broadband operators.
These enterprises’ main advantage
are its in-depth involvement into
communities, residential areas and
commercial buildings, as well as
strong social networks. They can also
provide timely and direct response
along with lower and more flexible
pricing to their network services,
so as to capture a major non-
mainstream market share. Most of
these enterprises are real estate and
property management companies.
• Broadband resellers / distributors.
Through cooperating with primary
and secondary broadband opera-
tors, distributors act as sales agents
to resell the broadband services.
These enterprises include 3C/home
appliance retailers such as Gome and
Suning.

12. 12 – 13
Exhibit 5
Policy Decoding
(FBB Value Chain)
Sources: MIIT, Expert interview, Value Partners Analysis
backbone network
liberalized
intra-city
network
cpn
brand /
marketing
offering /
tariff
distribution /
retail
customer
service /
caring
1
2
3
model 1
Certificate of Network
Construction
Certificate of ISP
model 2
model 3

13. perspective The policy and prospects of China’s fixed broadband Market liberalization
Value Partners believes the liberalization
of broadband market is driven by three
main levers. Predominantly, MIIT is aiming
to better regulating the fixed broadband
market, tier 2 and tier 3 FBB operators,
in order to eliminate the ‘gray broad-
band’ services commonly available in the
Chinese market. Also, the accumulated
CAPEX on backbone network (core
network) by basic telecom operators has
been considerable, whereas the acces-
sible residential area and commercial
buildings are limited to them, largely
restricting the service expansion.
Therefore, integrating civil enterprises’
resources and service capacities can ef-
fectively promote the FTTX deployment,
and hence retrieve the return from state-
owned investment into the core networks.
Additionally, such policies are aligned
with the Central Government’s essential
statement on liberalization to civil capitals
among nationally monopolistic industries,
and to optimize the flexibility and innova-
tive advantages of civil enterprises.
MIIT encourages three service models
amongst civil capital investment to par-
ticipate in the broadband service provi-
sion, including two types of qualifications
(see Exhibit 5).
MIIT Policy Decoding
Primarily, MIIT allows civil enterprises
to construct fully or partially
the infrastructures and network equip-
ment necessary for household users’
wire communications, and the scale
shall be from user end to the Network
Access Server, i.e. FTTX (Fiber to the X).
Enterprises are also eligible to rent and
resale relevant network elements.
Enterprises acquiring the ISP qualification
are also eligible to provide self-branded
services to the end users for their broad-
band internet usage.
Currently MIIT has only opened the ‘last-
mile network’ – FTTX – resources for civil
enterprises, namely the construction and
operation of non-core / non-backbone
broadband infrustratures. After the pilot
period, MIIT may also liberalize the back-
bone network to civil enterprises.

14. 14 – 15
Immediately after the introduction
of this policy, multiple enterprises started
to pay close attention to the license;
we expect that enterprises from various
industries will participate in license ap-
plications.
Since the introduction of the policy,
a number of enterprises from different
industries have been closely following
the detailed instruction and progression
from MIIT, with some clearly stating
to apply for the license. Value Partners
believes the qualification to FBB license
application shall be much stricter than
the MVNO license issued by MIIT in 2013.
From our benchmarking with the overall
industrial data, the capital expenditure
(CAPEX) is around 1,000 RMB if investing
only the CPN to reach each household in
the residential area. If the network con-
struction is extended to metro network
scale, the CAPEX would be hard to esti-
mate considering the complexity of con-
struction conditions. The post-sale service
of broadband, moreover, requires staffing
to enter each household for network
maintenance and debugging, the service
cost (part of the operation expenditure)
would therefore be also substantial.
We presume enterprises intending to
obtain the license are most likely from
the following industries/backgrounds:
• Secondary broadband operators.
Undeniably the most competitive and
pertinent players in obtaining the li-
cense, given their business operation
advantage and the key focus of MIIT.
• Real estate / Property management
companies (third-level broadband
operator). Real estate and property
enterprises are intrinsically advan-
tageous in undertaking the fixed-
broadband service to households,
provided the ownership and manage-
ment of the residences and com-
mercial buildings, complimentary to
basic telecom operators’ resources.
The collaboration between telecom
operators and these companies
would be therefore highly prioritized.
• Internet and digital media
enterprises. Internet companies
including Baidu, Alibaba and Ten-
cent can promptly try obtaining
the license, and achieving different
objectives, such as promoting more
value added internet-based service,
assisting IDCs’ fiber connection cross
regions, and further enriching big
data accumulation.
• Cloud service / telecom value
added service provider (especially
for business clients). The fixed
broadband service can be naturally
bundled with information system ser-
vices and cloud services, considering
the strong coupling nature of the two
businesses.

15. perspective The policy and prospects of China’s fixed broadband Market liberalization
• Smart home products / smart TV
manufacturers. The target market of
smart TV and smart home appliances
manufacturers is highly overlapping
with that of fixed broadband market.
Smart home appliances companies
can integrate the broadband business
with their core business and upgrade
the service experiences through
enhanced network service, hence
augment associated user values and
user stickiness.
• Mobile virtual network operators
(3C and home appliance retailers).
Similar to the MVNO qualification
issued by MIIT in 2013, this is another
opportune business for most Chinese
3C / electronic appliance retailers on
their ongoing strategic transforma-
tion. Fixed broadband service can
enhance the users’ relationship by
diversifying the service/product
portfolio. The physical stores of these
companies are, in fact, already critical
distribution channels for primary and
secondary broadband operators.
• Additionally, private network opera-
tors (such as financial service institu-
tions, and airline companies) and
network equipment provider (such
as Huawei and ZTE) may also extend
their service realm to commercial
broadband.
Given the initiation of this pilot and the
limited resources liberalized to civil
capital, apart from secondary broad-
band operators, real estate enterprises
and other enterprises with real property
resources would become the most
prioritized partners for the telecom
operators. These enterprises are also
presumably more capable of accumu-
lating large user base within the 3-year
timeframe of pilot period.

16. 16 – 17
Currently China’s fixed broadband pen-
etration rate is still at a comparatively low
level, with low broadband access speed
and hence large profitability opportunity
to be filled. The overall development of
Chinese high-speed broadband network
has been slow, consequent to the insuf-
ficient investment in infrastructures and
basic equipment. According to the ‘China
Broadband Strategic Plan’, the number
of fixed broadband users in China is
expected to reach 0.4bn in 2020, and
the growth of households of high-speed
broadband access must be supported by
large capital investment.
On the other hand, companies in the
capital-intensive industries, such as
energy & utility and telecommunications
industry, are gradually transforming from
the long-existing monopolistic / oligopo-
listic status to more mixed ownership with
capital injections from civil enterprises.
Further, despite large investment into
the backbone network by the telecom
operators, these enterprises suffer
limited business diversity and scalability,
especially when the market demand is in-
creasingly diverse. In sum, the MIIT policy
on the introduction of civil capital into
fixed broadband service market is highly
aligned with the overall Chinese macro-
and micro-economic scenario.
Value Partners
Perspectives
Although only the peripheral resources
related to FBB is open to civil capital at
the pilot stage, we expect MIIT to deepen
the market liberalization further in the
future. Considering the complexity in
construction and difficulty in operation
of the FBB service, MIIT would strictly
ensure the qualification of licensed enter-
prises and control the number of license
issued. Therefore, we highly recommend
enterprises with particular economic and
operational strength, such as internet
companies, media, and real estate com-
panies, to proactively obtain this valuable
license.
In the meantime, from the perspective
of market opportunity and basic tel-
ecom operators’ current obstacles, civil
enterprises applying for the license shall
be particularly focusing on integrating
residential or office buildings. We believe
sufficient acess to FTTX entrances would
be the key success factor for the license
applicants.

17. perspective The policy and prospects of China’s fixed broadband Market liberalization
Such policies are aligned with
the Central Government’s
essential statement on
liberalization to civil capitals
among nationally monopolistic
industries, and to optimize
the flexibility and innovative
advantages of civil enterprises.

18. 18 – 19
AUTHORS
JANE HOU
Principal, Beijing office
jane.hou@valuepartners.com
ADAM MENG
Associate, Beijing office
adam.meng@valuepartners.com
TAYlor Lam
Associate, Hong Kong office
taylor.lam@valuepartners.com

19. perspective The policy and prospects of China’s fixed broadband Market liberalization
Currently MIIT has only opened
the ‘last-mile network’ – FTTX –
resources for civil enterprises,
namely the construction and operation
of non-core / non-backbone broadband
infrustratures. After the pilot period,
MIIT may also liberalize the backbone
network to civil enterprises.

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Management Consulting
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