Business, WiMAX and China

With all the talk about WiMax, and more recent news about Google expressing interest, it’s time we review what WiMax presents to the business community. Specifically, in this paper we present the sample plan for development of such technology in China with a potential for content distrubution strategy.

1.0 Introduction

WiMAX, the Worldwide Interoperability for Microwave Access, is a telecommunications technology aimed at providing wireless data over long distances in a variety of ways, from point-to-point links to full mobile cellular type access. WiMAX allows a user, for example, to browse the Internet on a laptop computer without physically connecting the laptop to a wall jack.

2.1 Industry

Our industry can be best described as a merger between content distribution and end-user internet connectivity (WISP/ISP). By concentrating on the end-user connectivity through WiMax related technologies we will be able to stay away from traditionally heavily regulated industries like development of interconnected networks (i.e. telecom) and content making (i.e. news, video…).

2.2 Competition

Competition in

and other parts of the world consists of several different sectors:

• established big brands within web portal industry
• cell phone carriers - since they aim to cover all sectors ranging anywhere from content distribution to development of interconnected networks
• Other end-user service providers - i.e. ISPs, Global Wifi providers

Exhibit 2: Industry Segmentation

According to leading research firms like iResearch, current industry outlooks predict wide growth in content distribution for ISPs and Carriers. For ISPs this growth will primarily be based on brand new market exposure as well as the need for additional revenue sources. However, we believe that we will grow the overall market and as such will help increase significantly the market coverage by ISP sector.

Note, this estimate doesn’t take into an account potential portal & ISP mergers and other similar strategic moves.

2.2.1 Cell phone Carriers

Cellphone carriers are expected to be our biggest competition long-term as our technology is detrimental to their emerging new business models when it comes to content distribution. They have for many years now been trying to get into “data communications” industries - slowly establishing bigger data communication channels. Brief overview follows:

Negatives:

• Current 2G data communication channels are slower than dialup
• Future “wide band” 3G technology in practice delivers maximum speeds only about 4 times that of dial-up (200Kb - 384Kb)
• Billions of $ in expenditures on 3G spectrum licenses - $350 - $1000 per user cost (although in China spectrum cost is directly linked to number of signed up users)
• The majority of consumers still need to purchase newer phones to gain access to the provided content
• High end-user fees due to high regulatory licenses and relatively expensive infrastructure development

Positives:

• High existing customer penetration
• Broader service equipment availability
• 4G technology has data rates comparable to WiMax (however, it is still 10-15 years from implementation)
• Current availability of end-user devices - i.e. modern cell phones

2.2.2 Portals & Search Engines

The recent emergence of companies like SOHU & BAIDU increasingly signifies the need for central gateways to the information and content. However, due to low technological barrier to entry these companies have to spend a lot of money on brand development and related software/web development.

Negatives:

• Low barrier to entry
• High brand related costs - development of software, web services to put a stronger grip on individual user, high R&D costs
• Currently high penetration of existing market does little to minimize the costs for gaining new users in expected much larger future market. Due to traditional isolation of exurban and rural areas from big major urban cities in developing countries, the future internet users will be part of a different demographic population and thus will require a ground up approach.

Positives:

• Relatively regulatory-safe sector
• High penetration of existing market
• No infrastructure/equipment associated costs
• Existing relationships with content providers

2.2.3 Traditional ISPs

The coverage of these companies is limited and requires high infrastructure investments as well as high landline leasing fees. A brief overview of the sector follows:

Negatives:

• Last-mile problems (very expensive to deploy in areas where telecom companies have few landlines)
• Fixed line - no wide area coverage (requires additional investment from the end-user - i.e. wifi routers, pc antennas, time, technical support…)
• Commodity service (no growth related to handheld devices, wireless laptops, … - the future…)
• Installation is a big barrier for adoption (with WiMax potentially all you need is a WiMax enabled laptop)
• Landline upgrades are highly expensive and slow; currently the most common internet line available inis DSL - no widespread availability of higher bandwidth lines (i.e. T1, fiber, …)
• Labor-intensive - individual building connectivity in exurban areas requires long land line deployment
• Traditional fee-charging model still prevents over 50 million people to become broadband subscribers

Pluses:

• Established contracts with building developers for the exclusive right to provide landline data connectivity (primarily in urban areas)
• No problems associated with unlicensed radio spectrum - i.e. interference, regulatory changes, …
• Low costs (DSL only) for end-user connectivity (little action is required if the building is already connected)
• Majority of end-user coverage inis done by 2 telecom backhaul providers (i.e. China Netcom, China Telecom)

2.2.4 Wifi Service Providers

This is a very new sector consisting of everything from volunteer organizations to small startups and companies like Google™. Currently this is virtually inexistent in

and other developing countries, however brief overview follows:

Negatives:

• High equipment costs - in practice each antenna covers the range of no more than a few dozen meters
• Low user penetration rates - due to small range
• High labor costs - technology requires deployment of many individual antennas
• QoS absence - no potential for VOIP, real time video, many other business-oriented applications
• No hand-over mechanisms - user must be in one place to stay constantly connected
• High backhaul/bandwidth fees - since technology requires many more different internet connection points

Positives:

• Existing wide availability of equipment for end-users (existing cellphones with embedded wifi) and service providers at relatively low costs
• Potential to partner with small wifi owners (cafe shops…) to use them as their subsidiaries (bus. Model of companies like AnchorFree)

2.3 Our Advantages

• Low CAPEX per user - less than $3-5 peruser (higher for business areas)
• High usage rate due to flexibility when it comes to adjusting overbooking ratio (overall coverage area to active user ratio)
• Independent online market development - we provide online media & content not just to our connected clients but to whole World Wide Web
• Low labor costs - allowing us to potentially consider entering markets in other countries of Euro-Asian region
• Low barrier for end-user adoption (i.e. no technical assistance, subscriptions required) - we are your default internet gateway from the start
• Providing high bandwidth backhaul connection for Wifi hotspots, business, internet cafes in otherwise unreachable areas
• We buy user exposure not through brand but through physical connection to our customers

3.0 Market Analysis

3.1 Summary

Our target market covers exurban consumers and small to medium businesses within rapidly developing countries in Euro-Asian region - initial target been

.

Exhibit 3: Overview of Nationwide Internet Access

Note: Percentages do not add to 100% as Internet users who adopt multiple accessing methods are recounted.

Source: CNNIC

Exhibit 4: Overview of Nationwide Internet Adoption

Source: CNNIC, iResearch

One point to note, due to our focus on exurban regions, here the number of public internet users is much higher than the national average (national: ~50%). The reason for such sharp difference is that the majority of internet users in 2006 still originate from major metropolitan costal cities in

3.2 Market Size and Growth Rate

Based on the combination of available industry-specific analysis we conservatively estimate our specific market sector to be worth $750 Million in 5 years - with potential to reach $9 billion by 2025. Currently internet penetration in China is only around 10%, however it is expected that with just current projected development of broadband & dialup, China will reach 205M (or 15%) internet subscribers by the end of 2007.

Exhibit 5: Broadband Potential Growth

By targeting exurban regions we will get into traditionally overlooked market amounting already to 1.7% growth during the last year - or something like 15million people. This is a high number considering current lack of available infrastructure, as well as expected 160% national internet adoption growth for the next year.

Source: CNNIC

3.3 Market Segmentation

Currently overall market can be divided into 3 major sectors: small/medium businesses, SOHO (covers all existing dial-up/DSL users and those without home internet access), wifi/internet cafes. Additionally, we aim to establish strategy for long-term market coverage of WiMax mobile users.

Conservative Estimates (in thousands):

Market Year 1 Year 2 Year 3 Year 4 Year 5 Bus. 3 6 12 23 32 “Café” 5 11 25 35 44 SOHO 4,400 11,000 19,000 25,000 35,000 Mobile 0 0 0.1 0.2 1-50 Based on research by Maravedis, WiMax Forum, MIT Univ., Intel, a number of equip. manufacturing companies Note: final market coverage prediction might exceed currently addressable market due to already high market growth in: business establishment, private computer ownership, public internet dependency

Analysis HH Computer Ownership: over 110M Currently Addressable HH market: ~75M HH PC Growth (last year): >200% Overbooking ratio: ~70:1 (10:1 is a commonly used in developed countries) Currently Addressable Business market: over 56K subs. Currently Addressable “Café” market: 64K (with 40% growth) WiMax Mobile Market remains hard to predict due to many external factors

Exhibit 7: Revenue Distribution ($/year)

 

 

 

 

 

Key Points

• Initially SOHO markets are less monetized due to: lower usage patterns, immature monetization system
• Business & “Café” markets are expected to experience drop after the 1^st 5-6 years
• SOHO market will experience a slowdown in adoption after the 1^st 5 years (but steady revenue increase per user)
• Mobile strategy needed to continue increase user base in long-term (after the 1^st 5 years of existence)

3.4 Segment Characteristics

• Businesses: This market segment is very often underserved in exurban areas. The WiMax technology can cost-effectively meet the requirements of small and medium size businesses in lower than urban density environments and can also provide a cost-effective alternative in highly developed regions competing with DSL and leased line services through: immediate service availability, high dedicated bandwidth, lower cost. In exurban regions these businesses can be best described as government organizations (i.e. schools, offices…), regional branches/representatives, offices of management & supervisors, private web hosting.

Key points: paying customers; smaller coverage area (due to higher bandwidth requirements); possible monetization of additional services (i.e. equipment leasing, VOIP, customized solutions)

• SOHO: Today this market segment is primarily dependent on the availability of DSL or dial-up. In some areas available services may not meet customer expectations for performance or reliability and, as most likely the case for most of China, the services are still too expensive. In many exurban areas customers either forgo (due to expense or unavailability) the use of internet at all or are limited to internet cafes/dial-up.

Key points: internet access is free; ad supported; additional monetization is done through online content offerings

• Public Places/Cafes/Wifi Hot Zones: With low average GDP, the majority of active exurban users are still limited to public internet access. One of the obstacles for continued growth of these “cafes” however, is the availability of high capacity, cost-effective backhaul solutions. This application can also be addressed with the WiMax technology. And with roaming capability, WiMax can also fill in the coverage gaps for future generations of handheld devices that are projected to appear on the market beginning with 2009.

Key points: business points apply with lesser accent on additional services; higher bandwidth fees; additional monetization for: pre-caching of highly accessed content, prioritizing gaming/video access

• Mobile/Roaming users: With the ability to deliver high broadband speeds to nomadic users, WiMax has a big potential to cover the need for good quality internet access from handheld devices. However, due to expected delay for end-customer equipment release and overall adoption lag, this becomes our long-term strategy. Nonetheless, with the adoption of mobile WiMax, we believe many new business opportunities will emerge in advertisement, ecommerce, entertainment, and even social communications.

Key points: WiMax embedded end-customer equipment will be available beginning with 2009; mobile WiMax adoption in exurban areas is expected to begin before 2011; the repeating adoption of newer handheld/mobile devices already proved to be high in China (with more than 200 million new phones bought every year) – and as such, there is a potential for fast adoption of WiMax embedded cell phones.

4.0 Costs of Operations

4.1 Assumptions

• Based on 4-5 year operations/market coverage
• Use of unlicensed spectrums in 2.4-2.4835GHz/5.725-5.85GHz ranges
• High initial SOHO overbooking ratio with 3 year operations averaging it to ~70:1
• Use of 1 channel, 1 antenna for most base stations
• Occasional use of multiple “side polarized” antennas in heavy business districts
• City Population: ~ 200K-1M; City Region: ~125 sq-km (8000HH per sq-km)
• About 10-20 Base Stations with an average spacing of 5KM
• No import-tax obligations – ways to avoid: partnerships with local manufacturers, Chinese equipment distributors, or zones with economical incentives
• The individual average internet usage initially is expected to be about 5 times less that in a metropolitan area
• Base station capacity: 128mbs (higher radius) – 384mbs depending on the region’s overbooking ratio

OPEX Item	Business Case Assumptions		Comments
Equip. Maintenance		5% of CAPEX for Base Station Equipment 7% for Operator owned CPE CAPEX 2% for backhaul associated problems	CPE covers equipment leased to businesses and other paying subscribers
Base Station Site Lease Expense & Backhaul Link Rent		$1K-$4K per month	depending on business subscriptions and combined city-wide overbooking ratio
Flat Cost Per Station		$2.5K – $7.5K	depending on overbooking ratio, region coverage, year into operations (initially expected higher prices). Due to lower incomes, higher costs will most likely take place only in regions with high business subscriptions.
Core equipment & supplies		$500K	includes initial trials, testing equipment, major data centers, phased equipment purchasing
City Backhaul Link Establishment		$50K	1 time fee for one or several backhaul gateways for all city base stations
Allowance for Bad Debts & Churn		2% of CAPEX for businesses 5% for other paying subscribers	this might come in the form of time loss, customer equipment loss, …
Combined District/Sector Acquisition & Civil Works		$50K	includes wiring, backhaul linking, equipment storage, micro labor costs) – about 10 - 20 stations depending on the regions development state, expected user adoption rate, …

4.2 Cost Distribution

Exhibition 8: Yearly OPEX Costs

Here green represents physical costs associated with ongoing development, leasing lines… and purple represents the percentage associated with unavoidable overhead in maintenance, bad payments, damages/stolen equipment….Note: office employee costs are not included

Exhibition 9: Overall Cost Breakdown (1^st year only)

54% - bandwidth/leasing costs (this is currently 80% for most ISPs in)23% - flat base station cost11% - civil works5% - company office employees4% - city initiation costs3% - core/other equipment purchases

Important Considerations:

1. bandwidth costs will partially remain about the same (per BW price will go down, overall bandwidth will go up), however after a few years of operations we will begin implementing solutions to minimize outbound bandwidth (provided right regulatory environment)
2. base station costs (23%, 11%, 4%) will begin to decrease after the 1^st 3 years due expected slowdown in deployment

4.3 Human Resources

These costs are not examined here in detail due to the insignificance these costs present relative to basic service operations costs (especially in low income environment like

). Moreover, since OPEX items already include human costs per deployed station/city, the costs associated with office employees are not directly related to the ground operations. Yet, due to the nature of the industry, it is expected that major costs would be associated with few key senior employees in certain strategic roles.

5.0 Operating Strategies

5.1 Implementation

Due to high necessity for regional presence and recruiting needs, our initial infrastructure development will be done through “contracting” companies. These developments will strictly follow the following:

• All equipment will be “decided on”/purchased/owned by us
• All long-term contracts will be established to our name
• All development will be supervised by our technical representatives
• All 3^rd party relationships/contacts will be shared
• Future development will be smoothly handed to our technical staff

5.2 Content Delivery

• Source - Since our goal is to be a content distributor (not a provider), we will seek to partner with content providers or small distributors with existing provider relationships.
• Distribution - Our method of distribution will be through our network of web sites. These web sites will be available to all internet audience - wherever they are connected through our equipment or not. However, for our physically connected users we will force the display of our home page at a certain rate - insuring the necessary exposure for the distribution of our online services.
• Ad Supported Browsing - For ourusers the internet will be provided with the support of embedded advertisements. These advertisements will come both from our own ad network as well as other ad agencies.

6.0 Sample Business & Financials

6.1 Company Core

Department	Responsibilities
Business Development	government relations, equipment channels, telecom relations, regional management relations, market evaluation
Sales & Customer Service	selling subscriptions to businesses/cafes/offices…, providing services to business
Engineering	testing equipment, planning technical layouts, R & D
Internet Development	content partnerships, content implementation, ad sales, …

6.2 Projected Costs vs. Revenue

Exhibit 10: Costs vs. Revenue Graph

Key points (revenue sources):· Ad supported free internet access forcustomers with high overbooking ratios· Paying customers originate from businesses, internet cafes, government organizations· Business servicing - i.e. equipment leasing, software/security solutions· Additional revenue through custom/prioritized business solutions - i.e. prioritizing VOIP/GAME/VIDEO traffic based on customer needs· Content Distribution

6.3 Financial Risks

Our quarterly revenues and operating costs are difficult to predict and may fluctuate significantly from quarter to quarter as a result of a variety of factors, including:

• Changes in our pricing policies or the pricing policies of our content partners
• Regional costs related to government/telecom affairs
• Fluctuations in expected revenues from ad/content partners
• Regulatory changes affecting our partners and thus consequently our equipment channels or target markets

6.4 Regulatory Changes

• content distribution policies
• radio spectrum regulations
• ISP regulations
• regional unfair regulatory legislature

Conclusion

Although markets are still in an infant stage of WiMax awareness, the technology already begins to present attractive possibilities. Recent interest in WiMax on part of companies like Google, Sprint and Verizon even further prove the likelihood of future successful implementations. In a sense, WiMax aims to bridge the gap between Europe/North America and less developed countries by providing a low cost telecom infrastructure for mass use.

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About Mirkin Group…

Mirkin Group provides consulting services in telecom related fields with strong accent on top economic developing countries like China and Russia. This paper is part of overall Mirkin Group Business Case study available to clients.

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