Network Convergence Policy in China

1. Network Convergence Policy in China July 2012

2. Introduction In China, the regulation and development of telecom/internet networks and broadcasting networks remained largely separate until 2010 3-network convergence trials, now underway, will have major impact on how China’s IT infrastructure develops Outcome of China’s final choices for convergence will impact global equipment vendors, systems and applications developers, and content providers

3. Key Points Key obstacles to convergence in China are political rather than technical Broadcasting and telecom regulators locked in long-standing turf war over convergence Telecom operators currently enjoy multiple advantages over cable companies in terms of convergence-readiness Reaching TV screens key to reaching the masses China may merge regulators or require cross-investment to break regulatory and competitive log jam

4. Convergence in China • Key obstacles to convergence are more political, less technical • Power struggle between telecom and broadcasting regulators • Cable TV network not yet ready as nationwide integrated interactive platform • Cable network still 2~3 years from ready to compete with telecom network • Telecom operators curbed by State Council policy

5. Regulators: Broadcasting vs Telecom SARFT MIIT Telecom /Internet Regulator Broadcasting Regulator • Issues broadcasting related licenses • Video content control • Broadcast network planning • Issues telecom, internet and IT licenses • Telecom and internet network planning SARFT also regulates video content on internet. MIIT also issues certification for STBs, TVs.

6. Convergence Key Battleground in Long-standing Turf War between SARFT, MIIT SARFT protects cable operators under “safeguarding government mouthpiece” rubric MIIT has repeatedly lost to SARFT in struggle for power in convergence

7. State Council’s Convergence Plan

8. Future Business Scope Broadcasting Telecom VoIP Phone No Immediate Plans Cable Broadband IPTV, Internet TV, Cable TV CMMB, Multi-screen Fixed Line Mobile Voice Internet Broadband IPTV, Internet TV Mobile Video

9. Telecom operators currently better positioned for convergence than cable companies

10. Telecom Operators Enjoy Revenue Advantage Telecom and Broadcast Network Operator Revenues

11. Telecom Operators More Commercialized and Consolidated • Telecom operators fully commercialized • Broadcasting companies propaganda focused • Telecom networks have nationwide scale • Cable networks localized, fragmented

12. Broadcasting Companies Enjoy Control of Video Content Production and Distribution Maintain control over all video content to TV terminals • SARFT issues IPTV, Internet TV licenses only to broadcasting firms Produce bulk of domestic film and TV programming

13. 4G Promise for Developing TV Services • Existing mobile video users exceed CMMB users • 4G speeds promise broadcasting-quality mobile video

14. 4G Impact on Convergence Limited in Short Term • Key obstacles to broad 4G commercialization in China • Limited TD-LTE chips and terminals • China Telecom, Unicom first need to recoup 3G capex • MIIT wants slow transition to 4G to keep competitive balance 4G？

15. Reaching TV Screens Key to Reaching the Masses • Why TV? • - 97% TV penetration vs. 38% Internet penetration (by 2011) • - Priority and price: TV or STB first, then PC • 3 ways to get to TV: Cable DTV, IPTV, and Internet TV

16. Cable TV Must Evolve to Remain Competitive with IPTV • Cable TV network operators suffer from TV stations’ betrayal • IPTV threat: content, VAS, marketing • IPTV user base small compared to cable, but growing fast Mln

17. Cable TV Network Still a Long Way to Go Cable broadband users 2% • 26 of 31 provinces have completed or almost completed cable TV network consolidation by H1 2012 • Bi-directional nationwide cable TV network still more than 3 years away Bi- cable DTV users 8% Bi- cable DTV coverage 34% Cable DTV59% Cable TV Households 201 mln Interactive Cable TV Network Development Plan Future 2012 2015

18. Ideal IPTV Model Still Evolving Old Model • 7 IPTV license holders work with local telecom operators • BesTV leads IPTV development New Model • CNTV controls sole national IPTV platform • Local TV stations must connect their platforms to CNTV national platform • Telecom operators must work with both CNTV and local TV stations • BesTV lost leadership role to CNTV, and current role not yet clear

19. Internet TV: Born an Original, May Die a Copy • IPTV vs. Internet TV • - IPTV provides a dedicatedcontent line • - Internet TV doesn’t offer live broadcasts • Internet TV originally had no operator, relied on pirated content; now 7operators and only legal content • Internet TV lacks a clear, sustainable business model

20. Possible Solutions to Break Regulatory and Competitive Log Jam • SARFT, MIIT to merge？ • - Multi-screen technology complicating convergence turf battle and policy-making • Cross-over investment • - China Mobile may invest in CMMB operator • - China Mobile may invest in national cable operator • - China Mobile to obtain fixed-line license

21. Global Impact of China’s Convergence Choices • Video Content • Pace of converged network development key demand driver for domestic and foreign content • Chinese content demand already influencing Hollywood global releases • Equipment, IT solutions • Convergence drives demand for smart terminals creating opportunities for: • Terminal makers • CA providers • Video/Audio codec developers

22. Conclusions SARFT will continue to limit IPTV growth until a bidirectional national cable DTV network is complete or the regulators are merged Internet TV likely to die, as lacks sustainable business model Commercial roll-out of 4G at least 3 years away China’s convergence choices will have global impact on related industry players

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