Exhibit 10.4
Confidential
MEMORANDUM OF UNDERSTANDING
Parties Party A: CBCom Inc.
Party B: Shanghai Stock Exchange Communication Ca
Party C: Shanghai Xingtong Telecommunications Science &
Technology Co. Ltd.
I. COMPANY OVERVIEW
CBCom Inc. is a Los Angeles based high-tech communication and investment firm.
It is especially keen on the design, development, operation and investment
activities surrounding the completion of an intelligent communication network In
addition the firm also provides research and development in accessory items used
by the network such as servers or end user platform. Both the management team
and the technical personnel have extensive experience of constructing and
operating communication networks in North America and Asia. Representative and
branch offices have been set up in Shanghai as well as Beijing.
Shanghai Stock Exchange Communication Co is a joint venture formed by Shanghai
Stock Exchange and Shanghai Stock Central Clearing Company. The staff primarily
came from the department of communications of the Shanghai Stock Exchange. The
company's services largely centers around its two-way satellite system, which
serves as a back up to DDN, to ensure uninterrupted transmission of stock data
and information. The company also provides satellite network related technology
development management and other services. The following systems are part of the
network operation and management projects that the company is currently engaged:
one one-way broadcast satellite system, three two-way satellite systems, one
2000-line switch, Utilizing the above network equipment the company provides
connection to over 2600 brokerages to ensure daily transmission of stock
information.
Shanghai Xingtong Telecommunications Science and Technology, Ltd is a
telecommunications company held by China Broadcast Satellite Communication
Company, which belongs to Ministry of Information Industry. As a subsidiary of
China Broadcast Satellite Communication Company, Xingtong can tap into the
unique satellite resources and operating license owned by China Broadcast
Satellite Communication Company to provide specialized satellite communication
services to its customers. At the present Shanghai Xingtong Telecommunications
Science and Technology, Ltd has helped numerous companies to build national
networks that service thousands of customers. Among them are Hong Kong Digital
Communications Ltd, Shanghai Stock Exchange Communications Ltd, and Zhenzhou
Jicheng Information Technology Ltd. Furthermore, Xingtong has invested in a
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joint effort with America based Wood Company to provide wide band digital TV
transmission to ABC, NBC, FOX, HBO, CCFV, STV and other Television related
companies. Xingtong specializes in design as well as construction of
communication networks.
II. OBJECTIVE OF THIS MOU
The aforementioned three parties have used over a year to perform a detailed
research and analysis on the potential and policy with regard to Chinese
Internet market This research reviewed the historical development of the
Internet in other mature markets around the globe such as the United States, and
compiled an enormous database on the content provision services within the
information industry. Consequently, all three parties have reached consensus on
the following areas:
1. The current and future potential of Chinese Internet market
2. The service standard of Shanghai Stock Exchange's satellite network
3. Key factors to building a successful commercial ISP in China
4. Initial concept and proposal for China Financial Network (CFN) as a joint
effort of the three parties
This MOU is hereby to record the consensus to establish a firm foundation for
future cooperation.
III. THE CURRENT AND FUTURE POTENTIAL OF CHINESE INTERNET MARKET
The rise of Internet popularity in the past few has generated an exceptional
growth rate of 162% per annum that astounded the world. With moth than 50
million users, hundreds of billions of dollars of revenue are generated by new
opportunities associated with the Internet. Internet usage has become a key
indicator for national governments in assessing their competitiveness against
other nations in the information industry. Moreover, the Internet has left
indelible marks in reforming the social structure and forced revolutionary
changes. As information technology rapidly develops, information becomes readily
available, which creates a wealth of opportunities while improving qualities of
life. Geographical and economical barriers are broken through the process of
information transfer. The forces of free market will finally champion making all
aspects of life such as employment, education, medicine, easily accessible to
everyone.
The Chinese Internet development came in at a later stage of the global
development Nevertheless is has been growing with an amazing fervor. The
development process can be broken into three phases.
The first phase (199874994) can be called the Email phase. During this period,
Email became a popular communication tool The ability to communicate with
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European and North American countries through dial up service and email was
realized. The second phase (1994-1995) began by farther investment from the
Department of Education on the existing education and research network,
astonishingly similar to the early stages of development in the us. TCP/IP
connection was eventually established on this network, thus realizing the full
functionality of the Internet. The third phase (1995 to present) came soon after
Internet became accessible not only to the research and educational institution,
but also to private customers through commercial 151's. In 1998, Chinese
Internet users stood at 1.2 million and is projected to growth at 220% per annum
in the coming years. China has family become an official member of the world
Internet family.
Presently, there are thirteen international gateways in China. They belong to
four networks.
Despite the promising growth, many Chinese Internet users and ISP become
increasingly concerned with the future development of Internet in China. Chinese
Internet development is unique in many aspects. Specifically, Chinese Internet
leapfrogged a number of development stages as the other countries have, such as
PC penetration. It can be said that China Internet came prematurely without all
the necessary infrastructure elements in place. Therefore, Chinese Internet is
missing some basic characteristics of the Internet Yet the demand for further
development and maturity continues to collect momentum. As we examined the
potential of commercial 151's, a set of barriers for continued development of
Chinese Internet becomes evident.
1. High operating expenses:
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All ISPs in China that do not belong to China Telecom must pay outrageous
fees for leased lines thus incurring high cost and make it difficult for ISPs to
maintain profitability. International connections are particularly expensive.
DDN lines are charged not only at a monthly rental fee, but also additional
charge according to the amount of information transmissions If an ISP intend to
build a national network, the long distance rental charges are prohibitively
high. This creates the dilemma for many ISPs: they are unable to invest in
expanding the network as the number of customers increases. While line lease
charges only consists of 5% of the total operating cost for a typical ISP in the
US, it often accounts for 70-80% of total operating cost for a ISP in China. The
financial stress leaves very little room for the Chinese ISP to invest in
further development of the network
2. Technology investment
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The information industry characterizes itself through the close link
between investment and technology. It is projected that Chinese Internet
development will require over 100 billion EMB by year 2000. The investment gap
that many ISP confront is daunting. On the other hand, much of the information
on the Internet is in English. The center of technology development and
application is also located in the US. The insufficient funds and backward
technology caused by language barriers bode ill for the future Chinese Internet
development.
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3. Content market opportunities:
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Many Chinese Internet portals (with Chinese languages) have been
unsuccessful in attracting customers due to lackluster content design. For
instance, in the US on-line banking, stock trading and purchasing have long
become popular among the users to provide additional convenience to the
customers. Currently, similar Chinese web sites are nearly non-existent As the
content of the Chinese web sites become more aggressive and creative, the market
potential will provide highly lucrative opportunities for ISPs.
IV. THE SERVICE STANDARD OF SHANGHAI STOCK EXCHANGE SATELLITE NETWORK
Shanghai Stock Exchange (SSE) became fully operations in 1990 and is the
largest, most well equipped, and best organized stock exchange in China today
with the widest reach in community (nearly 19 million customers). SSE's daily
transaction volume exceeds 10 million. Furthermore, SSE operates a satellite
network with more than 3100 receiving stations and owns the largest exchange
lobby in Asia.
SSE's satellite system is the most advanced satellite system with the widest
geographical coverage as well as largest customer base in China. It has been
approved and licensed with the right to operate VSAT related services and other
value adding communication services.
SSE's satellite system includes three systems: VAST, SCPC and TDM/TDMA. It also
provides backup for DDN. Since the stock exchange only operates four hours each
day, the utilization of this network is especially low. In addition, the network
offers the following features:
1. Network topology: The main station and the _________. This method of
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satellite network is beat used for digital communication and exactly meets the
requirement of Internet communication.
2. Network scale: Currently the network covers all Chinese provinces with
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the exception of Taiwan and has 33 key nodes with over 1000 customer connected.
Each of the nodes has comprehensive satellite communication equipment and
capability including switches, and highly competent technical support personnel
3. Price and performance ratio (compare to X.25 and DDN net): Among similar
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speeds, satellite network is comparable to XIS and DDN net in data transmission
speed. Because XIS and DDN net use fiber optic cables, satellite transmission
incurs a slightly longer delay. However, the delay bears no significance in data
transmission. The error rate of satellite transmission is between 1(P and 108,
which is similar to that of DDN error rate. Moreover, due to the stock
exchange's particular function, a high degree of reliability was required since
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the design of the network The SSE network has double backup with automatic
switching capability and has proved to be highly reliable in the last five years
of operation The network survived many severe weather conditions, as well as a
number of market irregularities such as sudden volume surge. The operational
expense comparison is attached as well (based on 64 Kbps):
Satellite network 42,000 RMB/ year
DDN net 145,000 RMB/year
X.25 163,000 RMB/ year
V. KEY FACTORS TO BUILDING A SUCCESSFUL COMMERCIAL ISP IN CHINA
This analysis demonstrates not only the factors that would make a successful
commercial ISP in China, but also why SSE satellite network is especially
fitting for such a task
1. Independent national network: an independent network that does not rely
on the network provided by China Telecom, thus avoiding the outrageous fees and
cost is critical to guarantee profitability for any ISP in China. SSE satellite
network was initially designed and constructed precisely for this objective.
After years of development, the network now operates independent and covers all
regions in China.
2. Substantive customer base: customer base is the livelihood of any ISP.
There are currently 17 million investors who have accounts at SSE. The majority
of these investors receive information and trade from various nodes on the SSE
network. The brokerages are direct customers and the investors constitute one
the most substantive and stable customer base. These investors are prone to
adopt new technology as they are generally more educated than the average
population.
3. Attractive content creative and interesting content is a key to the
success of any ISP. Stock trading has become a focal point in the Chinese
economic life Many industries have tapped into this to generate new commercial
opportunity for themselves. For example, in the last few years, the number of
stock pagers has rocketed through the roof to millions. Real time stock quotes,
information, analyst reports and most of web trading will attract millions to
visit the site.
VI. INITIAL CONCEPT AND PROPOSAL OF CNN AS A JOINT EFFORT
CFN is the ultimate - for the joint effort It will begin more like an Intranet
then expand to become a true Internet From construction to operations there are
two major phases CEN I, CEN II which are detailed as follows:
CFN I: This is a professional Intranet that is based in Hong Kong. The service
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collects and compiles global financial market information with real time stock
data as well as historical data for analysis. Most importantly, all information
will be broadcasted through the SSE satellite network in Chinese using
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proprietary software to brokerages and professional investors. It will differ
from Dow Jones and Reuters in that the information will be completely in Chinese
at a much lower rate. Our market research reveals that as China's financial
market develops, ft will eventually become an integral part of the global
financial market Financial information from other parts of the world, especially
Hong Kong Southeast Asia will impact the financial performances of Chinese stock
market Already more than 95% of the brokerages would like to access this
information. However the price tag for Reuters and Dow Jones services are simply
too much to bear. If the existing network allows transmission of similar sorts
of information and it requires no additional installation of other equipment it
sure will be welcomed by many brokerages.
CFN II: This network will create a customer interface directly to the individual
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customers, thus equivalent to a commercial ISP. The service will include various
value added services such as real time stock data and web trading. Utilizing the
current network with over a thousand connection nodes, the network will be able
to provide Email and other Internet service while allowing real time web trading
to its customers. Web trading is an unique feature that this network offers,
since the SSE is the sole clearing and settlement agency for its stocks. Thus,
only SSE network is able to realize true web trading through SSE.
The roles and responsibilities of the three parties will vary as well.
Party A will be primarily responsible for collecting and compiling global
financial information, providing funds for network reconstruction and assisting
software development in the first phase. In the second phase, party A will
provide funds to modify connection nodes, development of management software,
and operation of the Internet sites (e.g. content design).
Party B will be primarily responsible for network security and operation while
coordinating with various brokerage firms to maintain market position and direct
network design.
Party C will participate in network design and management to ensure efficient
utilization of the satellite network The majority of its operation will focus on
construction of the network in the beginning and software development at a later
stage.
This MOU will serve as the founding principles for the joint effort Formal
feasibility study and business plan will be drawn to establish the actual
structure to realize the proposed network As soon as the structure is finalized,
we will seek professional consulting firms to conduct detailed analysis to
identify optimal marketing, organization and technology management strategies.
All parties have agreed that the interest of each party in this joint venture is
allocated as follow: Party A 70%; party B 20%; party C 10%.
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VII. FINAL REMARKS
As one of the most significant document indicating commitment to form the joint
venture aforementioned, the MOU is only effective after all three parties have
signed.
Party A: CBCCom Inc.
/x/
Party B: Shanghai Stock Exchange Communication Co.
/x/ General Manager
Party C: Shanghai Xingtong Telecommunications Science & Technology Co.
Ltd
/x/ President
January 31, 1999
