Sina/CCTV6/SPT China Online Movie Service JV

Summary

July 2009

Executive Summary

• This document describes an online movie service intended to be launched in China, where SPT, along with a leading Chinese Internet portal and the leading, state-owned, movie channel operator will each owns ~33% of the branded service

• The project provides SPT a rare opportunity to invest in a consumer-facing branded entertainment operation, in one of the largest and fastest growing in the world that has been very restricted to foreign participation

• The ownership and commercial structure of this project is very complex, but is required to ensure that SPT is in compliance with China’s laws and regulations on media and foreign investment

• SPT’s mandatory funding will be between US$3.33 Mil to US$3.9 Mil (the variance will be explained in this document)

• We request approval of the Term Sheet to be sent out to the partners, and request assistance to engage Sony Corp/Sony China for their participation in the ownership structure (as will be explained in this document)

• Addressable market is extremely large and growing quickly– 300 MM Broadband Internet Users– Habit of watching long-form content through Internet is much more entrenched than the ROW

• In a Yahoo! Survey, 88% of broadband users watch TV/movies through Internet • In a SPT/Sina survey, average users watch 4.2 hours per week of content through Internet• In same survey, Hollywood content by far the most watched content, driven by regulatory

restrictions on Hollywood content selection and access during prime time on traditional channels

• Gives SPT a strategic foothold in this tough-to-enter market with a profit-making and brand-bearing opportunity that will also create a considerable licensing client in the mean time

• Fits with key SPT’s growth ambitions of nurturing businesses which are consumer-focused; online/digital-oriented; in major emerging markets; and equity participation.

• The opportunity to partner with 2 local leaders in their respective fields is rare and is a significant competitive advantage over other aspiring VOD players

– Sina: #3 site in China by traffic (#16 in the world)• Traffic and user base from Sina will save enormous marketing costs• Leverage Sina’s enormous network infrastructure for rapid nationwide distribution build-out

and bandwidth procurement– CCTV6: #1-rated, nationwide movie channel in China

• Provides strongest political coverage with its association with SARFT• Holds strong bargaining power over other content providers

Strategic Rationale

• During the time that we have been shaping the project with our partners, the Chinese government has started paying more attention to regulating online video, and has since incrementally introduced new guidelines to regulate the ownership and operations of online video services. We, along with our potential partners, have been adjusting our cooperation framework and structures to adhere to the newly introduced guidelines

• Working with outside counsel, we believe that we have reached a structure that, albeit complex, complies with these guidelines with the minimal amount of regulatory risk for SPT

• Furthermore, we have also conducted FCPA due diligence and conduced competition compliance, both of which have so far raised no alerts to the project, partner and the structure being presented

• Next Steps

– Request approval to send out Term Sheet to our partners for final review– Request assistance to engage Sony Corp/Sony China on holding equity pledges on behalf

of SPT for one of the JVs in the structure (see details in later pages)

– Upon agreement and signing of Term Sheet, we will negotiate long form agreements with the partners

Status and Next Steps

Key Deal Terms

• Investment: US$10M, ~one third from each party– At CCTV6’s request, CCTV6 has option to not fully fund further after aggregate funding reaches $8.5M. In this case, Sina

and SPT will be required to fund the gap caused by CCTV6 on a 50/50 basis, and total SPT’s and Sina’s mandatory funding will be increased to $3.9M each. CCTV6 will be diluted without penalty

• Concept of Service– the JV will be the exclusive operator of the Hollywood/CCTV6 movie channel on Sina’s web site and Sina’s soon-to-

launch client application– JV will also consider developing its own stand alone application for distribution outside of Sina’s networks– Service will be branded with the trademark owned by the JV– Client application to use industry-accepted DRM-enabled hybrid CDN-P2P solution to balance quality/cost

• Obligations of each Party– SPT & CCTV6

• >=150 SVOD titles; minimum 20% within 5 years (non-exclusive license)• >=100 FVOD titles; minimum 20% within 12 years (non-exclusive license)

– Sina• On JV’s behalf, secure bandwidth and server infrastructure from China’s telcos, actual cost charged to JV; Sina

guarantees costs to be below or at market prices• Promotes JV service from Sina.com free of charge to the JV

• Non-compete– All 3 parties not to own equity in another Internet-based VOD service in China for 3 years, except for pre-existing

investments and equity investments <=10%– Sina to give JV first offer and last matching rights to license from other Hollywood majors

• Transfer of Shares– Permitted after 5 years, with first offer and last refusal to other parties (or designees), and with conditions that incoming

new parties will not affect the JV’s business and licenses in accordance to regulations• JV Management

– Independently staffed; to contain staff for Client app development; Programming; Marketing; Content acquisition; Advertising coordination with 3rd-party ad agencies; Finance & admin

Key Financials

Project’s View

US$10M

Year 6

Year 9

Year 6

28%

$37M

SPT’s View(incl. licensing fees)

$1.3M

Year 1

Year 3

-

80%

Total Investment

Cashflow B/E

Cume Cash B/E

EBIT B/E

Post-Tax IRR(TV: 8x Year 10 EBIT)

Expected License Fee to SPT for 10 Years

At CCTV6’s request, CCTV6 has option to not fully fund further after aggregate funding reaches $8.5M. In this case, Sina and SPT will be required to fund the gap caused by CCTV6 on a 50/50 basis, and total SPT’s and Sina’s mandatory funding will be increased to $3.9M each. CCTV6 will be diluted without penalty

• Since we started exploring the concept of this project in 2007, the Chinese government has started paying more attention to regulating online video, and has since incrementally introduced new guidelines to regulate the ownership and operations of online video services. We, along with our potential partners, have been adjusting our cooperation framework and structures to adhere to the newly introduced guidelines

• On a summary level, the key guidelines are as follows:– The actual operations, i.e. the delivery of the online service, must be conducted by a

domestic Chinese company in which a state-owned Chinese company must own the largest relative shareholding

– The above company will apply for and hold Internet Content Provider license and IPTV license for delivery of content over the Internet onto PCs, in addition to the staple business operation registrations and licenses

• Adhering to the guidelines above, we have structured the project into two inter-related JVs, both with the same 3 parties:

– An OpJV, which is 100% domestic, will hold the license and deliver the service• SPT will not own direct equity, but will be pledged shares by a Sina’s vehicle owning

the equity on SPT’s behalf

– A TechJV, which is a sino-foreign entity, will effectively package, market and programme the service for OpJV to deliver

• SPT owns direct equity– OpJV will not retain any income, with all residual income flow to TechJV via a commercial

contract between the two entities

Regulatory Concerns

Op JV(100% Domestic)

Tech JV(Sino-Foreign JV)

CCTV6’s subsidiar

y

SPT

33.3%

33.3%

Sina Corp.

33.3%

34%

Sina’s Designated

“Third Party”

33%

Sony CorpLoan #1 – SPT Funding Loan

Beijing Sina

Sina’s Domestic Entity

33%

Sony China

Funding Arrangement

Loan #2 - Entrustment Loan

Equity Pledge on Op JV for Loan #2

Relevant Legal Requirements

• All shareholders must be Domestic Companies

• CCTV6 must have relative largest shareholder

• Pledge by domestic companies must be to either a) another domestic company or b) a wholly-owned foreign enterprise

Equity Pledge on Tech JV for Loan #2, and Sina’s obligation to protect SPT’s interest in OpJV

Outside ChinaIn China

3

2

4

1

# Denotes corresponding Chinese government approval requirements as described in Appendix 1

JV Shareholding Structure

• Shareholding structure of the OpJV– The use of loan and pledges by foreign entities to invest in Internet companies is not

uncommon. In fact, most of the larger, foreign-listed China Internet operations are structured similarly, including Sina itself (NASDAQ:SINA, MktCap: $1.7B; 08 Rev: $370M)

– However, if the government determines that such structures are not in compliance with the law, many of the Internet companies in China will be affected, including the OpJV. In which case the only option would be for SPT to withdraw its loan and pledge arrangement with the Sina entity holding the shares of OpJV on SPT’s behalf

– We have structured the commercial arrangements in a way that the Op JV retains no profits and has minimal assets

• Control of the OpJV

– We need the OpJV’s board of directors to pass resolutions in accordance to the directions set forth by the board of directors of the TechJV

– On both JVs, each party will have 1/3 of the directors; both Sina and CCTV6 have agreed that their directors will served concurrently on both JVs’ boards

– Furthermore, failure by Sina to cause their directors to vote on OpJV’s matters in accordance to Tech JV’s board’s decision will result in breach, causing the calls on their pledges to SPT on both JVs

Risk Considerations for the Structure

Acting as Ad Sales Rep

(30%)

Acting as Payment

and Billing Gateway

(5%)

Acting as Procurement

Agent for Bandwidth

Advertising Revenue

Subscription Revenue

Sina Tech JV

Net Ad Revenue70%

95%Net Sub Revenue

60%

60%

Content Providers

Bandwidth Cost

+

+

Net Op Income

Op JV

Adminis-tration Income

Pro-rataDividends

to Shareholders

Note: • Sina’s role as ad sales rep and payment

gateway expires in 2 years, at which time, the Tech JV can instruct the Op JV to either renew, renegotiate, outsource to a third party, or conduct the activities on its own

• Sina’s role as procurement agent for bandwidth can be terminated at any time if prices are not below market rates

1

2

3

4

# Denotes corresponding agreements between the different entities as described in Appendix 2

R&D Fee

R&D Revenue

-

*OpJV is designed to have zero operating revenue and operating expenses

Opex

-

-Adminis-

trative Expenses

Zero Net Op Income*

5

6

Revenue and Expense Flows between the JVs

Revenue Sharing Mechanism - SVOD

Gross Subscription

Rev

Sina’s commission

for payment/

collection/ billing

JV’s Net Subscription

Rev

Content Providers’

Share (60% of

Net)

JV’s Retention

100

5

90

54

36

55

VAT

Revenue Sharing Mechanism - FVOD

Gross Subscription

Rev

Sina’s commission

as advertising

rep

JV’s Net Ad Rev

Content Providers’

Share (60% of

Net)

JV’s Retention

100

66.5

40

26.5

3.5

VAT

30

Appendices

Appendix 1 Required Government Approvals for the JVs and Sony’s Entities

Appendix 2 Notes to the Revenue and Expense Flows

Appendix 3 List of Transaction Agreements

Appendix 4 List of Structural Agreements

Appendix 5 Registration and Contribution Timeline

Appendix 6 Key Revenue Assumptions & Sensitivity

Appendix 7 Sina/SPT Primary Market Survey Results

Appendix 8 Business Plan

Appendix 1 - Required Government Approvals for the JVs and Sony’s Entities

1 • When Sony Corp sends money to Sony China, it maybe in the form of loan or equity. If equity, Sony China may need to amend its articles of association. If loan (assuming Sony China has the quota to borrow from parent), the shareholder's loan needs to be registered with State Administration of Foreign Exchange (SAFE). Of course, if Sony China already has excess cash of ~US$960k(33% of the RMB20M minimum capitalization requirement, or RMB6.6M, then Sony Corp may not need to send money to Sony China

• All domestic equity pledges must be registered with the Administration of Industry and Commerce (AIC) to be effective

• According to Paul Weiss, the equity pledge under the current arrangement between Sony China and Sina China is for securing an entrustment loan obligation from Sony China to Sina China, which is familiar to AIC. AIC will generally not review the specifics of such pledges

• OpJV will apply for an IPTV license for delivering content over the Internet to PC from State Administration for Radio Film and Television (SARFT)

• OpJV will apply for an Internet Content Provider permit from Beijing Communications Administrative Bureau (assuming the OpJV is registered in Beijing)

• OpJV needs to be registered with the Beijing Administration for Industry Commerce (Beijing AIC) for business license and for registration with State Administration for Industry and Commerce (SAIC)

• Tech JV, as a sino-foreign JV, needs to be approved by the Beijing local bureau of Ministry of Commerce (MOFCOM)

• TechJV needs to be registered with the Beijing Administration for Industry Commerce (Beijing AIC) for business license and for registration with State Administration for Industry and Commerce (SAIC)

2

4

3

Appendix 2 - Notes to the Revenue and Expense Flows

• The flow of revenues and costs are being paid pursuant to the following agreements:

Agreement Parties

Advertising Sales Sina/OpJV/TechJV

Agreement Sina sells ad for OpJV’s movie service; OpJV directs Sina to send proceeds toTechJV as agent

Billing and Collection Sina/OpJV/TechJV

Services Agreement Sina provides billing and collects subscription revenue for OpJV’s movie service; OpJV directs Sina to send proceeds to TechJV as agent

Technology License and Sina/OpJV/TechJV

Services Agreement Sina to purchase bandwidth and infrastructure costs for OpJV’s movie service;

OpJV directs TechJV to pay fees to Sina on its behalf upon invoice by Sina

Programme Licensing Content Providers (SPT/CCTV6/others)/OpJV/TechJV

Agreements Content Providers license content to OpJV; OpJV directs TechJV to pay revenueshares to Content Providers on its behalf

Exclusive Services OpJV/TechJV

Agreement TechJV provides the technical and consultancy services to OpJV, pays on behalf the associated costs in 3&4 above, and keeps the residual revenue sharingfrom Sina from 1&2 above;TechJV to pay small administrative fees to OpJV tocover OpJV’s administrative costs (business license renewals, audits, legal, etc.)

1

2

3

4

5

Appendix 2 - Notes to the Revenue and Expense Flows (cont’d)

• On the R&D Fee to be paid by OpJV to TechJV– Background

• SARFT has mandated that companies such as the OpJV that will operate an IPTV service on PCs must be initially capitalized at RMB 20M (~$2.9M)

• Because legally Sony is allowed only a loan+equity pledge indirect ownership in the OpJV, it is better from Sony’s perspective for the actual operations to be “outsourced” to TechJV, which Sony holds direct equity stake and board seats, the arrangement of which is reflected in the current structure

• As a result, OpJV does not need RMB20M. The capital funding requirement occurs at the TechJV. To avoid excessively capitalizing OpJV and thus unnecessarily increasing the deep water mark, we need to find a way for TechJV to recoup the cash in OpJV

– Proposal• The three parties will fund the OpJV initially at RMB20M• Over time, OpJV will pay as cost for R&D Fee to TechJV for services for 1) development of the

client application; 2) providing management and technical consultancy services. TechJV will record the R&D Fee as revenue

6

Appendix 3 – List of Transaction Agreements

AgreementAd sales

Billing and Collection Services

Technology License and Services

Programme Licensing

Exclusive Services

Trademark

Marketing Services

PartiesSina/OpJV/TechJV

Sina/OpJV/TechJV

Sina/OpJV/TechJV

OpJV/ Content Providers/TechJV

OpJV/TechJV

OpJV/Tech JV

Sina/OpJV/TechJV

DescriptionSina to act as ad sales rep for the online movie service for sales of banner and video ads for the OpJV. OpJV will direct Sina to send net proceeds to TechJV who acts as an agent for OpJV

Sina to act as payment gateway for collecting subscription fees for the online movie service for the OpJV. OpJV will direct Sina to send net proceeds to TechJV who acts as an agent for OpJV

Sina to act as procurement agent to purchase bandwidth and data center capacities for the use of OpJV; Sina to provide DRM-protected access on its platform for the use of the OpJV. OpJV will direct Tech JV to pay Sina the associated costs on its behalf

Licensing agreements from various content providers to determine the revenue share and content availability provided to the online service. OpJV will be the licensee, and will direct TechJV to pay revenue share to pay content providers on its behalf

TechJV to provide technical, management and agency services relevant to the online movie service to OpJV. TechJV to act as agent for OpJV to collect advertising and subscription revenue (net of Sina’s commissions), and to will pay content providers license fees and Sina the bandwidth and data center costs as directed by OpJV. TechJV will get the net advertising and subscription revenues (net of payments to content providers) plus a R&D Fee as consideration of the services TechJV extends to OpJV

TechJV to license the TechJV-owned trademark to OpJV for it to use on the online movie service

Sina to provide free-of-charge cross-promotions on its web site for the online movie service for OpJV. OpJV will appoint TechJV to work with Sina on this aspect to manage such cross-promotions

1

2

3

4

5

6

7

Appendix 4 – List of Structural Agreements

AgreementTechJV Equity JV Contracts

OpJV Shareholder Agreement

Loan & Funding Arrangements (Loan#1)

Entrustment Loan (Loan#2)

Equity Pledge on OpJV

Equity Pledge on TechJV

PartiesSPT/Sina/CCTV6

Beijing Sina/Sina’s “3rd party”/CCTV6

SPT/Sony China/Sony Corp

Sony China /Sina Beijing/Entrustment Bank

Sina Beijing/Sony China

Sina Corp/ SPT

DescriptionEquity JV Contract for the TechJV; to include that Sina and CCTV6 shall cause their directors to vote on OpJV’s board matters in accordance to TechJV’s board resolution; Articles of Association

SHA for the OpJV; to include specification of how different content providers shall share the revenue attributable to content providers; Articles of Association

Sony Corp to fund, on behalf of SPT, Sony China, who will use the proceeds to extend a loan to Beijing Sina; funding to be 33% of the RMB20M minimum capitalization requirement, or RMB6.6M (~US$960k)

• A loan arrangement between SPT and Sony Corp (Loan #1)• A funding arrangement between Sony Corp and Sony China, which may be in the form of equity or loan. If

equity, Sony China may need to amend its articles of association. If loan, needs to ensure Sony China has the quota to borrow from parent, and the loan needs to be registered with State Administration of Foreign Exchange

Sony China to loan RMB6.6M(~US$960k) to Beijing Sina, who will use the proceeds for a 33% equity stake in OpJV

Collateral from Sina Beijing to Sony China for the entrustment loan (Loan#2) Sony China is extending

Collateral from Sina Corp to SPT for Loan#2, triggered if Sina’s affiliates’ breach of their obligations to SPT and or Sony China

1

2

3

4

5

6

Appendix 5 – Registration and Contribution Timeline

Signing of Shareholders’

Agreement

Signing of JV Contract

Apply for pre-approval of

company name (pre-approved

company name is valid for 6

months)

Submission of JV Contract for

Approval

Contribution of ~RMB 1.33 MM

(20% of registered

capital) by each party

1 day

Within 5 days after Issuance

Date

Finish registration; issuance of

business license

~30 days Up to 60 days

Obtain ICP License

40 days

Obtain AV Program License;

Contribution of ~RMB 5.33 MM (remaining 80%

of registered capital)

Issuance of approval

certificate by MOFCOM

Finish registration; issuance of business

license(TechJV

ESTABLISHMENT DATE)

Within 30 days

Contribution of 1st tranche (RMB 5.8 MM) by each party

Contribution of 2nd tranche (RMB

4.7MM) by each party

Contribution of 3rd tranche (RMB

2.29MM) by each party

1 year from Establishment

Date

2 years from Establishment

Date

OpJV

TechJV

Appendix 6 – Key Revenue Assumptions & Sensitivity

Subscriber Take-Up• In year 1, assume 9% of broadband users will download the client application that Sina develops, of which the Service is

featured as the exclusive movie channel. This number will increase to 25% by Year 3 and stays flat thereafter• Comparison with download rates of other video content client application: Xunlei (68%); PPLive (62%); QQLive

(28%); UUSee (7%) (Source: SPT/Sina survey 2007)• Of the users who have downloaded the client application, we assume 15% will be active (Source: Sina)• The above results in active users of the service representing 3.8% of the broadband population• Of the active users, we assume initially 3% will take up subscription plan, going up to 5% in Year 10. Subscription fee is

set at RMB 15 ($2.2) per month• The above results in SVOD user base at 0.04% of broadband users initially, increasing to 0.19% by Year 10

• Screen Digest forecasts 2012 (Year 3) online movie subscribers, at assumed monthly fee of US$8-9, to be 0.18% for Europe; 0.15% for Australia/NZ, 0.10% for US, and 0.11% for Japan

Advertising Revenue• Advertising revenue is built up by usage of the Service, which will generate ad inventories, multiplied by the prevailing

CPM and assumptions of the % of inventory sold• Broadband users are assumed to view 252 minutes of video content online per week (Source; SPT/Sina survey 2007)• Of these minutes, we assume the Service’s SVOD users will spend 15% of their time on the Service, while non-paying

users will spend 5% on the Service• 2 banner ads will be visible at all times; 1 pre-roll video ad per video started; 1mid-roll video ad every 60 minutes for

SVOD users and every 20 minutes for non-paying users• Initially, only 5% of the ad inventory will be sold, increasing to 25% in Year 10• CPM for banner ads and mid-roll starts at RMB 10 (US$1.46) and CPM for pre-roll at RMB 20 ($2.9); increases by

general inflation rate (Source: online media agencies)

• Sensitivity analysis is conducted on the following key revenue variables:

1. % of Broadband users who download and install the client application in steady state (Base Case: 25%)

2. % of active users who will subscribe to SVOD packages by Year 2019 (Base Case: 5%)

3. % of total online video viewing time a SVOD subscriber of the Service will spend on Service (Base Case: 15%)

4. % of total online video viewing time non-paying users of the Service will spend on Service (Base Case: 5%)

5. % of Ad inventory sold by 2019 (Base Case: 25%)• The “Low Case” and “High Case” scenarios are calculated by simultaneously adjusting all the above variables by -25%

and +25%, respectively

Sensitivity Analysis of Key Revenue Variables

Project’s View

US$10M

Year 6

Year 9

Year 6

28%

$37M

SPT’s View(incl. licensing fees)

$1.3M

Year 1

Year 3

-

80%

Total Investment

Cashflow B/E

Cume Cash B/E

EBIT B/E

Post-Tax IRR(TV: 8x Year 10 EBIT)

Expected License Fee to SPT for 10 Years

Project’s View

US$12.4M

Year 7

Year 10

Year 7

10%

$25M

SPT’s View(incl. licensing fees)

$1.3M

Year 1

Year 3

-

61%

Project’s View

US$8.5M

Year 5

Year 7

Year 5

40%

$52M

SPT’s View(incl. licensing fees)

$1.3M

Year 1

Year 3

-

95%

Base Case Low Case High Case

Key Financials

Project’s View

US$10M

Year 6

Year 9

Year 6

28%

$37M

SPT’s View(incl. licensing fees)

$1.3M

Year 1

Year 3

-

80%

Total Investment

Cashflow B/E

Cume Cash B/E

EBIT B/E

Post-Tax IRR(TV: 8x Year 10 EBIT)

Expected License Fee to SPT for 10 Years

• Sina and SPT conducted a primary market survey with Internet users in China in April 2007. The survey was in multiple-choice format, and was conducted via Sina.com. 4,099 completed responses were received

• The market research was conducted as Sina and SPT explore online video opportunities on which they can collaborate

• This service may take the form of a PC application (right), which is different from majority of the Internet-browser-based services which on VOD providers/pirates currently use in China, as the software application will improve user experience. At the same time, the service will also be available through browsers

• The market research was conducted to understand current users’ current behavior, as well as to find opportunities for improvements that Sina/SPT/CCTV6 can leverage

Appendix 6 – SPT/Sina Market Survey Results

My To-Watch

My Favorites

SSC Movie Blogs

My Preference

My Account

My SSC Experience

You are watching:

Anger Management

SSC Mov ie Se r v ice

Check out these Movies!

Bonus Materials

50 First Dates (2004)

Cast: Adam Sandler, Drew Barrymore

Director: Peter SegalMore info

Watch Now Add to To-Watch

Watch Now Add to To-WatchPromotional Trailer 1

Watch Now Add to To-WatchCast Interviews

Watch Now Add to To-WatchMaking-of

Watch Now Add to To-WatchMaking-of

Write Your Reviews

As Good As It Gets (1997)

Cast: Jack Nicholson, Helen Hunt

Director: James L. BrookMore info

Watch Now Add to To-Watch

About the Movie

SSC Movie Service

My To-Watch

My Favorites

SSC Movie Blogs

My Preference

My Account

My SSC Experience

You are watching:

Anger Management

SSC Mov ie Se r v ice

Check out these Movies!

Bonus Materials

50 First Dates (2004)

Cast: Adam Sandler, Drew Barrymore

Director: Peter SegalMore info

Watch Now Add to To-Watch

Watch Now Add to To-WatchPromotional Trailer 1

Watch Now Add to To-WatchCast Interviews

Watch Now Add to To-WatchMaking-of

Watch Now Add to To-WatchMaking-of

Write Your Reviews

As Good As It Gets (1997)

Cast: Jack Nicholson, Helen Hunt

Director: James L. BrookMore info

Watch Now Add to To-Watch

About the Movie

SSC Movie Service

• Online video is popular – 88% of respondents have watched 30 minutes or more video content through the Internet in a week. Average time spent per week is 4.2 hours

• >40% indicates they are not paying anything to watch online video, perhaps reflecting some FVOD services but more likely rampant online piracy

• Chinese users are accustomed to installing applications on their PCs, with 98% indicating they have installed at least 1 video-related software application

• The results show that a PC application-based SVOD service may have appeal as online users generally are not satisfied with the current VOD services in the market. Among the factors for dissatisfaction, the current Sina/SPT concept can address the following in particular:

– The speed and ease-of-use of navigation interface• Browser-based VOD services are limited in navigation designs and response speed

– Ease to find and watch content• Web sites, especially the pirated BT-sites, do not have file structures for the content

– Access to Hollywood content• 70% of respondents indicated they most desire to watch Hollywood movies• Hollywood content is harder to find now as Chinese government cracks down on piracy

and Majors have not been licensing to websites aggressively

Findings Highlights

Usage and Spending

0

5

10

15

20

25

30

35

Never <30 min 0.5-2hrs

2-4 hrs 4-10 hrs >10 hrs

How much time per week do you spend on watching TV/movies on PC through Internet?(n=4099)% of respondents

Average 4.2 hrs

0

5

10

15

20

25

30

35

40

45

0 1 to 10 11 to 30 31 to 50 51 to 80 >80

How much do you spend per month watching TV/movies on PC through Internet?(n=4099)% of respondents

Average 17 RMB

Average 29 RMB

for paying users

RMB

0 10 20 30 40 50 60

PPLive

QQLive

UUSee

Sina*

Vnet

CCTV.com

PhoenixTV.com

BBVOD

4 other VOD sites

Xunlei

VeryCD

Baidu

Others

Download (BT,

VeryCD)43%

On-demand (Sina, Vnet)29%

Linear Internet Channel (PPLive, UUSee)

28%

The most frequent way to watch TV/movies on Internet is…(n=4099)

% of respondents

Which sites do you go to the most to watch TV/movies (can choose up to 5)?(n=4099)

% of respondents

Linear Internet Channel

On-demand

Download

*Results on Sina is likely to be skewed upwards since the survey is conducted on Sina.com

Access Method and Preferred Providers

0

10

20

30

40

50

60

70

None

Xunle

i

PPLive

QQLive

Baidu

DownBar

UUSee

Other

s

On the PC that you use to watch Internet TV/movies, which of the following software have been installed?(n=4099)% of respondents

0

5

10

15

20

25

30

35

40

45

1 2 3 4 5

How many of the listed software have been installed?(n=3889)

% of respondents

Installation of PC-based Video Applications

1

2

3

4

5

Ease o

f pay

men

t

Pictur

e qua

lity

Inter

face

quali

ty

Recom

menda

tions

Easy t

o fin

d title

s

Updat

ed T

itles

Larg

e Sele

ction

Very Important

Not at all Important

How important are the following elements in your online viewing of TV/movies?(n=4099)

Average response

1

2

3

4

5

Ease o

f pay

men

t

Pictur

e qua

lity

Inter

face

quali

ty

Recom

menda

tions

Easy t

o fin

d title

s

Updat

ed T

itles

Larg

e Sele

ction

0%

20%

40%

60%

80%

100%

% Satisifed/Very Satisfied

Average response

How satisfied are you with the services you currently use on the following elements?(n=4099)

Average response

% Satisfied/ Very Satisfied

Very Satisfied

Very Dissatisfie

d

Satisfaction with Service Quality

1

2

3

4

5

Ease o

f pay

men

t

Pictur

e qua

lity

Inter

face

quali

ty

Recom

menda

tions

Easy t

o fin

d title

s

Updat

ed T

itles

Larg

e Sele

ction

Areas where the Sina/SPT/CCTV6 cooperation concept can add value

Importance to users

Current Satisfaction

Areas of Improvements

0

5

10

15

20

25

30

35

0 1 to 10 11 to 30 31 to 50 51 to 80 >80

If a service exists that makes you satisfied/very satisfied in all the elements above, how much will you spend per month on this service?(n=4099)

% of respondents

Average 24 RMB

RMB

0

5

10

15

20

25

30

35

40

45

0 1 to 10 11 to 30 31 to 50 51 to 80 >80

% of respondents who do not currently pay for content

RMB

Same question, for those who do not currently pay for content(n=1714)

Average 13 RMB

Propensity to Pay for an Improved Experience

0%

15%

30%

45%

60%

75%

Other

TV

Other

Mov

ies

Anime

Japa

n/Kor

ea T

V

Japa

n/Kor

ea M

ovies

HK/Taiw

an T

V

HK/Taiw

an M

ovies

US TV

Hollyw

ood M

ovies

Chines

e TV

Chines

e Mov

ies

What type of content do you most want to watch online (choose up to 3)?(n=4099)% of respondents

Most Desired Content to Watch Online

Home

Office

School

Internet café/others

0-500

501-1500

1501-2500

>5000

2501-5000

19-23

24-30

30-45

>45

Most Frequent Internet Access Location

Age

Personal Monthly Income (RMB)

Respondents’ Profile

Appendix 7 – Comparisons of Business Plans

• Key Changes are related to Change in Project Structure (the 2 JV model)– Due to new regulations introduced in 2008, we have to structure the project into two JVs, as

explained in the main document

– As a result, there is now a P&L for OpJV (always zero EBIT in steady state) and one for TechJV

– By regulation, OpJV needs to be funded with minimum capitalization of RMB 20MM– There are two transactions between the two JVs

• OpJV will pay TechJV an ongoing Technical Service Fee (to net out the profits of the OpJV to TechJV, such that OpJV’s EBIT is zero in steady state)

• OpJV will pay, over first 3 years, RMB 18MM of R&D Fee to TechJV (to take back the majority of the RMB 20MM minimal capitalization as mentioned above, since OpJV doesn’t have cash needs)

• These two transactions are subject to a 5% business tax

This Appendix compares the current business plan for the project with a previous version from Jan 08 (“CIMC Model Draft-01-09-08KL”)

Appendix 7 – Comparisons of Business Plans (cont’d)

• Investment Comparisons (Project View)

Total Investments

IRR

CF B/E Year

Cum CF B/E Year

EBIT B/E Year

Cume EBIT (10 years)

Current Plan

RMB 71M (US$10.4M)

26%

Year 6

Year 10

Year 6

US$12.8M

Old Plan

RMB 74M (US$9.6M)*

31%

Year 6

Year 10

Year 6

US$8.73

*RMB:US$ went from 7.7 to 6.84

Appendix 7 – Comparisons of Business Plans (cont’d)

• Other Changes– RMB to US$: 7.76.8– Subscriber Revenue Forecast

• Updated Broadband market size; changed base addressable market from # of broadband connections to # of population that have access to broadband connections

• % of broadband population who will have installed the necessary software to access Service by Year 10: 30% 25%

• Active users by Year 10: 20% 15%• % active users taking up payment plan by Year 10: 10% 5%

– Advertising Revenue Forecast• % of ad inventory sold (including video and banner ads) by Year 10: 15%25%

– Sales & Marketing• Marketing cost as a % of total revenue Year 6 onwards: 2-3% 4-5%• Note: Marketing cost does not include the free cross-promotions from Sina valued at ~$2M/year

– Staffing• Adjusted salaries upward, primarily for head of departments and GM

– Minor adjustment on G&A– Taxation

• Included Business Tax on transactions in accordance to GTO review• Losses carried forward limited to 5 years in accordance to Chinese law

– Assumptions• Salary inflation: 8%12% as advised by Sina reflecting Internet workspace