Creating the 21st Century Communications Company

Creating the 21st CenturyCreating the 21st CenturyCommunications Communications

CompanyCompany

Creating the 21st CenturyCreating the 21st CenturyCommunications Communications

CompanyCompany

Global Executive SymposiumGlobal Executive Symposium

La Costa, CaliforniaLa Costa, California

September 28, 1998September 28, 1998

Key issues facing executivesKey issues facing executives

Non-traditional Non-traditional challengers?challengers?

Regulatory Regulatory changes?changes?

Cheaper, Cheaper, better better

operations?operations?

Access to Access to

customercustomer

s?s?

One-s

top

One-s

top

shoppin

g

shoppin

g??

TechnoloTechnology gy choices?choices?

Retail-Retail-wholesalewholesalesplit?split?

Optimum Optimum

size?size?CustomCustomer er deman

demand?d?Harder choicesHarder choiceslarger stakeslarger stakes

Five sets of driversFive sets of drivers

Customer demandCustomer demand Propensity to use services, patronize providersPropensity to use services, patronize providers

TechnologyTechnology Progress on new technologies, standardsProgress on new technologies, standards

Capital marketsCapital markets Degree of support from investors, lendersDegree of support from investors, lenders

Government policyGovernment policy Impact of regulation, antitrust, taxationImpact of regulation, antitrust, taxation

ProvidersProviders Proficiency of incumbents, challengersProficiency of incumbents, challengers

Four Sets of ScenariosFour Sets of Scenarios

A. Incumbency Counts - hype evaporatesA. Incumbency Counts - hype evaporates

B. Mass Matters - megacarriers dominateB. Mass Matters - megacarriers dominate

C. Pinpointing Prevails - specialists winC. Pinpointing Prevails - specialists win

D. The Revolution comesD. The Revolution comes

Incumbency Counts: definitionIncumbency Counts: definition

Despite the hype, incumbents prove much Despite the hype, incumbents prove much stronger than initially expectedstronger than initially expected

Market share losses are small and manageableMarket share losses are small and manageable

No more big new entrants (e.g. WorldCom)No more big new entrants (e.g. WorldCom)

Former PTTs continue to dominate their home Former PTTs continue to dominate their home markets and fail everywhere elsemarkets and fail everywhere else

A few basic changes, e.g., convergence of A few basic changes, e.g., convergence of domestic-int’l in Japan, long distance-local in domestic-int’l in Japan, long distance-local in U.S.U.S.

Incumbents win: why?Incumbents win: why?

Customers:Customers: Prefer incumbents, don’t trust new Prefer incumbents, don’t trust new entrants. Demand growth is manageable. entrants. Demand growth is manageable.

Technology:Technology: New technologies slower to roll out than New technologies slower to roll out than expected; incumbents adapt fasterexpected; incumbents adapt faster

Government policy:Government policy: Continues to protect incumbents Continues to protect incumbents

Capital:Capital: Markets’ support for challengers fades Markets’ support for challengers fades

Providers:Providers: Incumbents get fresh blood and become Incumbents get fresh blood and become more entrepreneurial. Challengers fall into same old more entrepreneurial. Challengers fall into same old traps.traps.

Incumbency Counts: customer demandIncumbency Counts: customer demand

Customers Customers don’t want to switchdon’t want to switch, or require a high , or require a high premium (>25% discount) to do so -- trust premium (>25% discount) to do so -- trust incumbents, or don’t really trust challengersincumbents, or don’t really trust challengers

Demand for Demand for newnew services is unexpectedly low services is unexpectedly low

Demand Demand differs by country or territorydiffers by country or territory, not so , not so much by market segmentmuch by market segment

Demand shift from voice to data Demand shift from voice to data slowsslows

Overall demand grows fast but Overall demand grows fast but not so fastnot so fast that that incumbents simply cannot handle it, e.g., shifts incumbents simply cannot handle it, e.g., shifts from doubling every 4 months to doubling every from doubling every 4 months to doubling every yearyear

Incumbency Counts: technologyIncumbency Counts: technology

New developments occur at a New developments occur at a manageable pacemanageable pace Some important new technologies help Some important new technologies help

incumbents incumbents leverage existing investments leverage existing investments xDSLxDSL DWDM (maybe)DWDM (maybe) circuit -> packet conversion devicescircuit -> packet conversion devices

Incumbents Incumbents use their market poweruse their market power with with equipment makers to get cutting edge techequipment makers to get cutting edge tech

New, more advanced technology appears, but the New, more advanced technology appears, but the incumbents are not left behind -- they have it, tooincumbents are not left behind -- they have it, too

KEY: incumbents KEY: incumbents keep upkeep up with challengerswith challengers

Incumbency Counts: government policyIncumbency Counts: government policy

Governments Governments prefer continuityprefer continuity; leery of ; leery of disruptiondisruption

Worry aboutWorry about big job lossesbig job losses at incumbentsat incumbents

Big is badBig is bad: dubious about megacarriers: dubious about megacarriers

Strong anti-trustStrong anti-trust enforcement: less enforcement: less concerned about jump-starting competition concerned about jump-starting competition

Wary of foreign carriers: Wary of foreign carriers: maintains national maintains national domains dominated by incumbentsdomains dominated by incumbents

More on “big is bad”More on “big is bad”

The SBC-Ameritech deal is not good for what The SBC-Ameritech deal is not good for what we’re trying to get. I’m not sure bigger is going to we’re trying to get. I’m not sure bigger is going to be better. be better. Ron Johnson, Chmn., Nebraska PUCRon Johnson, Chmn., Nebraska PUC

Incumbency Counts: providersIncumbency Counts: providers

HR: Incumbent HR: Incumbent management becomes flexible management becomes flexible (may hire outside innovators and entrepreneurs)(may hire outside innovators and entrepreneurs)

HR: Incumbents not hurt by brain drainHR: Incumbents not hurt by brain drain

Incumbents are Incumbents are better lobbyistsbetter lobbyists than challengersthan challengers

Challengers have no compelling management Challengers have no compelling management advantage. advantage. Flexibility fades as scale growsFlexibility fades as scale grows..

Capital Capital markets support incumbentsmarkets support incumbents, and become , and become more wary of challengers. Huge funding for new more wary of challengers. Huge funding for new challengers starts to dry up.challengers starts to dry up.

Incumbency counts, they sayIncumbency counts, they say

A breakthrough in price or A breakthrough in price or performance is necessary performance is necessary for the [revolutionary] for the [revolutionary] scenario. I am relatively scenario. I am relatively pessimistic about it. I don’t pessimistic about it. I don’t see the shift from circuit see the shift from circuit switching to IP as switching to IP as providing a sufficient jump.providing a sufficient jump.VP, new telecom ventureVP, new telecom venture

The bulk of traffic will migrate from switched circuits over the next 10 years, but this will be a gradual process. The current circuit-based networks will be the cheapest and most convenient for most customers during that period.

SVP, European PTT

Conclusions: Why Incumbency CountsConclusions: Why Incumbency Counts

Incumbents are Incumbents are HUGEHUGE, with great brand presence, with great brand presence

They control They control thethe critical link in the network, the critical link in the network, the local looplocal loop

They are protected by governments, pampered by They are protected by governments, pampered by equipment manufacturers, trusted by customers, equipment manufacturers, trusted by customers, and massively wealthyand massively wealthy

Their managements are getting smarter all the timeTheir managements are getting smarter all the time

Mass Matters:Era of ConsolidationMass Matters:Era of Consolidation

Vertically-integratedVertically-integrated

All segments, all servicesAll segments, all services

Huge size: room for only 3 in a given marketHuge size: room for only 3 in a given market

PTTs not necessarily OK: megacarriers may invade PTTs not necessarily OK: megacarriers may invade their turftheir turf

New household names possible in 2005 New household names possible in 2005

Geographic market is regional (N. America, Europe, Geographic market is regional (N. America, Europe, Asia)Asia)

Why the giants dominateWhy the giants dominate

Customers: Brand is very important; size helps build brands. Mass market services are fine.

Technology: Economies of scale in developing and implementing new technologies (maybe with help from equipment manufacturers)

Government policy: Weak anti-trust

Capital markets: Size brings stock price advances

Providers: Vertically-integrated generalists achieve economies of scope and scale

Senate testimony by SBC chairman/CEO Edward WhitacreSenate testimony by SBC chairman/CEO Edward Whitacre

In SBC’s view, this globalization will result in a half dozen or so integrated global competitors vying with a very large number of regional, niche, and local competitors.

More supporters:More supporters:

Customers are looking for Customers are looking for single-source providers. They single-source providers. They are looking for simplicity.are looking for simplicity.Senior RBOC exec.Senior RBOC exec.

We must commit to provide end-to-end service to customers, any place anywhere, any time.Senior ATT exec There will always be some There will always be some

niche players but, basically, niche players but, basically, the world is going to be three the world is going to be three or four 300-pound gorillas. or four 300-pound gorillas. VP Canadian telco

WorldCom COO John Sidgmore: Mass Really MattersWorldCom COO John Sidgmore: Mass Really Matters

Customers say they want bundled working solutions, not just parts. They want us to show them how to deploy these products within their existing fabric of networks.

We’ve combined the 4th-largest long distance company in the U.S. with the largest provider of local-access services -- outside of the RBOCs -- with the largest ISP in the world.

Mass Matters:customer demandMass Matters:customer demand

Factors that advantage huge companies:Factors that advantage huge companies: Customers are willing to try new providers and Customers are willing to try new providers and

services services

Limited demand for specialized offerings and Limited demand for specialized offerings and personal treatment from telcospersonal treatment from telcos

Many customers (business and residential) Many customers (business and residential) prefer one-stop shoppingprefer one-stop shopping

National and trans-national brands dominate: National and trans-national brands dominate: massive marketing expenses requiredmassive marketing expenses required

Why customers like big providersWhy customers like big providers

Integrated communications carriers will be in the best position to satisfy customer demand for simplicity. Not just one-stop-shopping, but fully-integrated products. What we now see as different products will be integrated not just at the customer end but in the actual delivery so they can’t be pulled apart.

Our experiment in calling party pays (for wireless) entails the shared use of a 500 number for long distance and wireless (with a single bill). To deliver CPP, long distance must be provided. Can’t break out the two services.

SVP of large IXC/wireless carrier:SVP of large IXC/wireless carrier:

Mass Matters: technologyMass Matters: technology

Speed:Speed: New developments occur rapidlyNew developments occur rapidly

Economics:Economics: Real economies in spreading new Real economies in spreading new technology investments (including HR technology investments (including HR investments) over widest possible customer baseinvestments) over widest possible customer base

Money:Money: Huge capital investments requiredHuge capital investments required

Integration:Integration: Technology developments foster Technology developments foster integrationintegration

For example, wireless CPP is facilitated by For example, wireless CPP is facilitated by integration with long distance servicesintegration with long distance services

More technology drivers for “Mass Matters”

More technology drivers for “Mass Matters”

Intelligence in the network is key. It enables simplicity and transparency. As customers sign up for more and more services -- and indeed as bundles of services become the only way of signing up -- the intelligence in the network becomes more and more applicable.

I call this “strong bundling” or integrated bundling” as opposed to “weak bundling” that simply stuffs various services into a single package.

IXC/Wireless VP

Mass Matters:government policyMass Matters:government policy

Weak antitrustWeak antitrust vision and enforcement -- 3 vision and enforcement -- 3 dominant players per market is OKdominant players per market is OK

Megacarriers allowed into monopoly markets Megacarriers allowed into monopoly markets to challenge incumbentsto challenge incumbents

Governments don’t worry too much about Governments don’t worry too much about protecting incumbentsprotecting incumbents

Governments disinclined to protect Governments disinclined to protect incumbents from foreign predatorsincumbents from foreign predators

Mass Matters:providers, capital marketsMass Matters:providers, capital markets

Real economies of scope and scaleReal economies of scope and scale. These favor . These favor extremely large, integrated entitiesextremely large, integrated entities

(Some) management teams assemble (Some) management teams assemble andand then then run run vast enterprises successfullyvast enterprises successfully

Big companies successfully Big companies successfully leverageleverage business business infrastructure across many diverse businessesinfrastructure across many diverse businesses

Capital markets favor large, “portfolio” entities Capital markets favor large, “portfolio” entities (but not necessarily incumbents). (but not necessarily incumbents). Mergers Mergers generate increased stock values.generate increased stock values.

Acquisitions are essentialAcquisitions are essential

Where the growth rate and the change rate Where the growth rate and the change rate are so high, acquisition is often the superior are so high, acquisition is often the superior approach, even though there are these issues, approach, even though there are these issues, because you get there so much faster. because you get there so much faster.

We know how to make them workWe know how to make them work

MFS, UUNet, and WorldCom are all acquisitive MFS, UUNet, and WorldCom are all acquisitive companies. Together we’ve acquired 65 companies in companies. Together we’ve acquired 65 companies in the past 4 to 5 years. We’ve developed a significant the past 4 to 5 years. We’ve developed a significant expertise in integrating cultures and putting manage-expertise in integrating cultures and putting manage-ment teams together that balance the organizations’ ment teams together that balance the organizations’ cultures. It’s a core competency of WorldCom’s.cultures. It’s a core competency of WorldCom’s.

WorldCom COO Sidgmore sees acquisitions as core competency...WorldCom COO Sidgmore sees acquisitions as core competency...

Mass really really mattersMass really really matters

It’s the same story we’ve seen in U.S. industry for 100 years. Big companies are not as agile as smaller ones, and there are always big opportunities for smart people everywhere. But continent-wide or even global operations require a company with appropriate scale to handle that size of operations. That means a very large company.

VP, major wireless carrier

You can’t even You can’t even imagineimagine what dealing what dealingwith 70 million customers involves. with 70 million customers involves. VP, TCG (now part of AT&T)VP, TCG (now part of AT&T)

Pinpointing PrevailsPinpointing Prevails

FocusFocusisis

EverythingEverything

Pinpointing Prevails: definitionPinpointing Prevails: definition

Focused, specialized carriers have an advantage:Focused, specialized carriers have an advantage: Efficiency and profitability Efficiency and profitability

Flexible and responsive to differentiated market Flexible and responsive to differentiated market requirementsrequirements

All things to all people means mediocre performance All things to all people means mediocre performance for all customersfor all customers

Today’s megamergers are the last gasp of the Today’s megamergers are the last gasp of the dinosaurs resisting the new realitydinosaurs resisting the new reality

Strategy: FocusStrategy: Focus

Market Segment FocusMarket Segment Focus

Customer requirements differ -- sometimes Customer requirements differ -- sometimes significantlysignificantly Products and servicesProducts and services Level of service and customizationLevel of service and customization Economic viabilityEconomic viability

Organizational requirements / focus differOrganizational requirements / focus differ Service strategyService strategy Support platformsSupport platforms Alliance relationshipsAlliance relationships

Examples:Examples: Business v. consumer Business v. consumer Global Alliances - Concert, World Partners, Unisource = MNCGlobal Alliances - Concert, World Partners, Unisource = MNC Affinity groups - AARP, church groupsAffinity groups - AARP, church groups RMTS - GE Rescom, US OnlineRMTS - GE Rescom, US Online

Infrastructure focusInfrastructure focus Qwest, Level 3, NextWaveQwest, Level 3, NextWave Attraction to migrate down value chain, get higher Attraction to migrate down value chain, get higher

margins margins

Retail/customer interface focusRetail/customer interface focus ArbiNet, Excel, CLECs, LD resellersArbiNet, Excel, CLECs, LD resellers Viability a function of excess capacity or Viability a function of excess capacity or

regulatory rules on access pricingregulatory rules on access pricing

Value chain focus: examplesValue chain focus: examples

Why pinpointing prevailsWhy pinpointing prevails

Incumbents and megacarriers collapse under Incumbents and megacarriers collapse under their own weight. Size brings inflexibility, their own weight. Size brings inflexibility, bureaucracy, stagnationbureaucracy, stagnation Wrong strategy for the market, not execution failureWrong strategy for the market, not execution failure

Focus creates opportunities for real Focus creates opportunities for real efficiencies, cutting costsefficiencies, cutting costs

Customers want customized service bundles, Customers want customized service bundles, and personal treatmentand personal treatment Some want high-quality, high-touch serviceSome want high-quality, high-touch service

Others want economy class to save moneyOthers want economy class to save money

“

If you have an under-depreciated, over-regulated,

attacked, monopoly phone company, why double

the size of that?

President, RBOC subsidiary

Megacarriers collapse of their own weightMegacarriers collapse of their own weight

The colossus mergers, seeking economies of scale and geographic coverage, are solving all the problems of yesterday. You have to ask a fundamental question -- “What got better from a customer’s point of view “?

President, wireless carrier

Focused competitorsFocused competitors

Ameritech’s wholesale business has increased from $150m to more than $1bn in 2 years. The wholesale retail split is aready here.RBOC VP

Disintermediation and the collapse of the value chain is occurring in every industry affected by IT. VP Strategy, equipment manufacturer

Is owning the network necessary? NoIs owning the network necessary? No

Network ownership will be less and less important as time goes on. Network ownership will be less and less important as time goes on. Today it is reasonably important. Twenty years from now it won’t Today it is reasonably important. Twenty years from now it won’t be important at all.be important at all. President, wireless carrierPresident, wireless carrier

We already have contracts to buy long distance minutes at an 80-We already have contracts to buy long distance minutes at an 80-90% discount from retail. Why do I need to own the network?90% discount from retail. Why do I need to own the network?

RBOC VPRBOC VP

A successful carrier of the future doesn’t necessarily own networks. A successful carrier of the future doesn’t necessarily own networks. It controls and operates networks, but it may not own them. It controls and operates networks, but it may not own them.

President, equipment manufacturerPresident, equipment manufacturer

Value in telecoms: 2005Value in telecoms: 2005

Of the value created (in the telecom process), Of the value created (in the telecom process), 45% will go to the content provider, 45% will go 45% will go to the content provider, 45% will go to those that actually work with the customer, to those that actually work with the customer, and bill and innovate with the customer, and and bill and innovate with the customer, and 10% will go to the infrastructure provider.10% will go to the infrastructure provider.

President and CEO, LECPresident and CEO, LEC

W(h)ither the incumbents in this case….?W(h)ither the incumbents in this case….?

Pinpointing Prevails: customer demandPinpointing Prevails: customer demand

Both business and residential customers Both business and residential customers want want customized servicescustomized services, not mass offerings, not mass offerings

Falling prices and new services create Falling prices and new services create major major market growthmarket growth, where specialists have an , where specialists have an advantageadvantage

Differences in customer requirements help to Differences in customer requirements help to define appropriate scale for geographic focusdefine appropriate scale for geographic focus

A few comments….A few comments….

Customer service wins us customersevery day. We expect to get 80% of the GTE’s business in our town within 3 years CLEC COO

WinStar will deliver a level of personal service that will amaze businesses. Customer care will be a primary focus for WinStar."Bill Rouhana, Winstar CEOBill Rouhana, Winstar CEO

Pinpointing Prevails: technologyPinpointing Prevails: technology

Technology creates excess network capacity, helping resellers, e.g. DWDM

Open standards and open software enable 3rd party applications development

Fast change devalues legacy systems

Network intelligence migrates to customer interface or to customer’s access equipment, away from legacy switches

Gateway and intelligent agent software allow aggregators to create differentiated, value-added services, and customer self-provisioning

Pinpointing Prevails: government policyPinpointing Prevails: government policy

Policymakers support new entrantsPolicymakers support new entrantsWholesale pricing policies (resale discounts and unbundled Wholesale pricing policies (resale discounts and unbundled

elements) makeelements) make resellers viable resellers viablePro-change constituencies are strongPro-change constituencies are strongPolicy retains “hidden” subsidies, helping specialists Policy retains “hidden” subsidies, helping specialists Policymakers let incumbents suffer, shrink, or even be acquired Policymakers let incumbents suffer, shrink, or even be acquired

and broken upand broken up

“ “If regulators set the rules for the marketplace, any structure is If regulators set the rules for the marketplace, any structure is sustainable because the rules keep it in place.”sustainable because the rules keep it in place.” President, President, wireless carrierwireless carrier

Pinpointing Prevails: providers, capital marketsPinpointing Prevails: providers, capital markets

The The costscosts of operating integrated, centralized of operating integrated, centralized organizations and systems prove higher than organizations and systems prove higher than economies of scale; the latter are elusiveeconomies of scale; the latter are elusive

Operational strategies and supporting IT systems Operational strategies and supporting IT systems are so varied that integrated companies have are so varied that integrated companies have no no significant scale economies in the back officesignificant scale economies in the back office

Focused competitors steal enough high margin Focused competitors steal enough high margin market share to undermine large organizationsmarket share to undermine large organizations

Capital markets reward focused competitorsCapital markets reward focused competitors over over “portfolio” companies, i.e., incumbents worth “portfolio” companies, i.e., incumbents worth more broken up than wholemore broken up than whole

Revolutionary ChangeRevolutionary Change

Price/performance ratios Price/performance ratios shift by at least one order of shift by at least one order of

magnitude, withinmagnitude, within5-7 years5-7 years

Revolutionary scenariosRevolutionary scenarios

Data DominatesData Dominates

Cable ConnectsCable Connects

Wireless WinsWireless Wins

Unlike evolutionary scenarios, these scenarios are not mutually exclusive

Long-shot scenariosLong-shot scenarios

Voice/data over electric power linesVoice/data over electric power lines

Satellite delivery systems (LEOs)Satellite delivery systems (LEOs)

Content convergenceContent convergence


Industry evolution

0

500

1000

1500

2000

2500

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3500

4000

1998 1999 2000 2001 2002 2003 2004 2005

Voice: ILECs Voice: CLECs/Cable Data Mobile


Data traffic doubling every 4 monthsData traffic doubling every 4 months

PS networks clearly superior for handling dataPS networks clearly superior for handling data

Data could be 95% of traffic by 2005Data could be 95% of traffic by 2005

““Voice will be a pimple of the side of data”Voice will be a pimple of the side of data”

Voice infrastructure is a handicap; at a minimum, new Voice infrastructure is a handicap; at a minimum, new data-centric market entrants have big cost advantagesdata-centric market entrants have big cost advantages


IncumbentsIncumbents Can’t move to PS fast enoughCan’t move to PS fast enough Cultural shift too severeCultural shift too severe Rapid loss of dominanceRapid loss of dominance

ChallengersChallengers PS-centeredPS-centered New business models based on dataNew business models based on data Voice just another datastreamVoice just another datastream


Our business model Our business model calls for 50% revenues calls for 50% revenues from data within 5 years.from data within 5 years.VP European PTTVP European PTT

Intelligent networks areIntelligent networks areuseless in the age of data. useless in the age of data. Stupid networks win every timeStupid networks win every timeformer AT&T execformer AT&T exec

BT is spending $12bn over the next 5 years to build a world-BT is spending $12bn over the next 5 years to build a world-class data network. The main issue is migration.class data network. The main issue is migration.Dir. Strategy, European PTTDir. Strategy, European PTT


Scale will come from a focus on data,Scale will come from a focus on data,not voice, and from a willingness to benot voice, and from a willingness to bea growth company, not a safe cash cowa growth company, not a safe cash cowfor investors. IP has some advantages for investors. IP has some advantages over CS, but scale is the key.over CS, but scale is the key.

Senior exec, MicrosoftSenior exec, Microsoft

Data Dominates:customer demandData Dominates:customer demand

Internet demand Internet demand continues to grow fastcontinues to grow fast

Mass market for Mass market for video applications video applications ----videoconference, streaming video videoconference, streaming video

Interactive Interactive high bandwidth apps high bandwidth apps (IP- (IP- voicemail, video email)voicemail, video email)

TelecommutingTelecommuting

Fax and voice apps move to IPFax and voice apps move to IP

Data Dominates:technologyData Dominates:technology

IP solves IP solves QOS issues QOS issues -- priority routing, etc.-- priority routing, etc.

Bandwidth availability expands rapidly, Bandwidth availability expands rapidly, especially in the especially in the local loop local loop

Scalability Scalability problems resolved -- terabit problems resolved -- terabit routers and beyondrouters and beyond

Reliability Reliability reaches CS levelsreaches CS levels

Capacity crunch resolvedCapacity crunch resolved -- more bandwidth, -- more bandwidth, IP multicasting, premium IP networks, etc.IP multicasting, premium IP networks, etc.

Data Dominates:government policyData Dominates:government policy

Privacy/encryption issues resolvedPrivacy/encryption issues resolved

New entrants encouragedNew entrants encouraged

Access charges/taxes held off for 2-3 yearsAccess charges/taxes held off for 2-3 years

E-commerce encouragedE-commerce encouraged

Intellectual property issues resolvedIntellectual property issues resolved

None of these is mission criticalNone of these is mission critical

Data Dominates:providers, capital marketsData Dominates:providers, capital markets

Incumbents remain Incumbents remain slow-moving and bureaucraticslow-moving and bureaucratic

Incumbent Incumbent dividends dividends remain untouchableremain untouchable

Series of Series of key assumptions key assumptions retained by incumbents: retained by incumbents: Cannot cannibalize voice marketsCannot cannibalize voice markets Cannot get ahead of the data pricing curveCannot get ahead of the data pricing curve Switched networks are more reliableSwitched networks are more reliable Smart networks with central intelligence are the Smart networks with central intelligence are the

futurefuture

New entrants unencumbered by legacy networks, New entrants unencumbered by legacy networks, apps, business models, culturesapps, business models, cultures

Show-stoppersShow-stoppers

Capacity crunchCapacity crunch dries up effective demand dries up effective demand

Pricing modelsPricing models fluctuate or fail, limiting investment fluctuate or fail, limiting investment

Incumbents move fasterIncumbents move faster than expected to IP than expected to IP

Reliability, scalability issues unresolvedReliability, scalability issues unresolved

Bandwidth glutBandwidth glut crashes data market crashes data market

Last mileLast mile problems unresolved problems unresolved

Data Dominates - NaysayersData Dominates - Naysayers

Ameritech is going to replace its CS network with a state of the art packet switched design. Richard Notebaert, Ameritech

Price differences between CS and PS are based more on regulation than reality.VP Networks, global ISP

The existing network is a critical source of competitive advantage. the issue is how to take advantage of it.VP, RBOC wholesale group


Cable connections

0

5

10

15

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1998 1999 2000 2001 2002 2003 2004 2005

Pe

rce

nt

Households sw itching to cable telephony Households sw itching to cable Internet


MSOs upgradeMSOs upgrade to 750Mhz or better to meet to 750Mhz or better to meet challenge from DBSchallenge from DBS

Internet access offers substantial revenue stream, Internet access offers substantial revenue stream, at limited marginal costat limited marginal cost

With 2-way communications established, With 2-way communications established, cable cable telephony over IPtelephony over IP becomes option for additional becomes option for additional service at less than $300/popservice at less than $300/pop

Cable moves to Cable moves to “Free voice in U.S.”“Free voice in U.S.” as part of as part of bundlebundle


Cheap bandwidthCheap bandwidth for the last mile for the last mile

Stable technologyStable technology

Video services payVideo services pay for infrastructure for infrastructure

ROW in place in many countriesROW in place in many countries

IP really makes the differenceIP really makes the difference

Monopoly pricing possibilities to subsidize voice Monopoly pricing possibilities to subsidize voice investmentsinvestments

Rolling in cash right now (Rolling in cash right now (stocks flyingstocks flying) )


We plan to offer voice We plan to offer voice everywhere by 2003 everywhere by 2003 Strategy VP, major MSOStrategy VP, major MSO

Cable operators will have 2-way plant Cable operators will have 2-way plant running to 40-50m homes by the end running to 40-50m homes by the end of 1999, and will be offering high of 1999, and will be offering high speed data to 20-30m subscribers.speed data to 20-30m subscribers.Tele.com Tele.com articlearticle

You have T1 speeds inbound and half T1 You have T1 speeds inbound and half T1 speeds outbound all for $35 a month. speeds outbound all for $35 a month. Nothing else is practical or affordable.Nothing else is practical or affordable.Technology director, major universityTechnology director, major university

Cable Connects:customer demandCable Connects:customer demand

Cable overcomes traditional lousy imageCable overcomes traditional lousy image

Customers care more about Customers care more about price price than qualitythan quality

Customers buy video/Internet/telephony Customers buy video/Internet/telephony bundlesbundles

Customers don’t worry much aboutCustomers don’t worry much about security security or or reliabilityreliability

Customers don’t worry about cable’s inflexibility, Customers don’t worry about cable’s inflexibility, e.g., single ISP policy, vertical integration with e.g., single ISP policy, vertical integration with contentcontent

Cable Connects:technologyCable Connects:technology

Traditional problems with two-way cable Traditional problems with two-way cable mostly resolved now, rest will be soonmostly resolved now, rest will be soon

IP problems resolved (such as QOS)IP problems resolved (such as QOS)

Powering issues resolved Powering issues resolved

Cable Connects:government policyCable Connects:government policy

No more price capsNo more price caps

No early application of universal No early application of universal service/access chargesservice/access charges

““Must carry” and other universal Must carry” and other universal service questions resolved favorablyservice questions resolved favorably

Cross-subsidies permitted (bundling)Cross-subsidies permitted (bundling)

Economies of scale permitted Economies of scale permitted (permissive anti-trust enforcement)(permissive anti-trust enforcement)

Cable Connects:providersCable Connects:providers

HRHR: Cable MSO’s add weight and planning : Cable MSO’s add weight and planning capacity to HQ staffs; find thousands of capacity to HQ staffs; find thousands of data and telephony techniciansdata and telephony technicians

Customer careCustomer care becomes central to culture, becomes central to culture, with matching investmentswith matching investments

MSOs become more MSOs become more entrepreneurial entrepreneurial (currently, more monopolistic than the (currently, more monopolistic than the ILECs)ILECs)

ShowstoppersShowstoppers

Wall St. financing for upgrades dries upWall St. financing for upgrades dries up

IP issues unresolvedIP issues unresolved

Weak customer demand for telephony from Weak customer demand for telephony from cable customerscable customers

Universal service/access chargesUniversal service/access charges

HR: cable operators cannot retool and add HR: cable operators cannot retool and add technicians fast enoughtechnicians fast enough

Management misses the window of opportunity Management misses the window of opportunity on voice over IPon voice over IP

NaysayersNaysayers

Cable telephony faces all Cable telephony faces all the problems of voice over the problems of voice over IP, plus another layer of IP, plus another layer of cable problems.cable problems.Research analystResearch analyst

Cable has huge problems in Cable has huge problems in setting up effective back setting up effective back office and customer service office and customer service systems for Internet access, systems for Internet access, let alone Internet telephony.let alone Internet telephony.Research analystResearch analyst

Seven years is not long enough to Seven years is not long enough to change consumer behavior. change consumer behavior. Cable assoc. execCable assoc. exec

Wireless Wins:definitionWireless Wins:definition

Mobile substitutes for landlinesMobile substitutes for landlines

Fixed-mobile integration comes fastFixed-mobile integration comes fast

WLL gains volume in 3rd world, then 1stWLL gains volume in 3rd world, then 1st

Broadband fixed wireless outcompetes other delivery Broadband fixed wireless outcompetes other delivery technologies: FTTH, FTTC, HFC, xDSL, technologies: FTTH, FTTC, HFC, xDSL, LEOs….LEOs….

Wireless WinsWireless Wins

In Europe, wireless revenues are already about 20% the size of the revenues of fixed network voice traffic. …Mobile services could deliver 50% of fixed service revenues by 2001.Tele.com

Worldwide, the number of fixed wireless subscribers will grow from 4m in 1997 to more than 45m in 2001. NBI

Independent wireless companies are already cost competitive with BT’slandline rates in some cases.Dir. Strategy, European wireless co.

Why wireless world is different: problems for incumbentsWhy wireless world is different: problems for incumbents

Already a Already a competitive environmentcompetitive environment

For incumbents, means moving from For incumbents, means moving from monopoly to competition immediatelymonopoly to competition immediately

Offers some Offers some serious disadvantagesserious disadvantages for incumbents, such as:for incumbents, such as: Being blocked from entry in some Being blocked from entry in some

markets (Telecom Italia)markets (Telecom Italia) Limited resources (e.g. spectrum)Limited resources (e.g. spectrum)

Wireless Wins:customer demandWireless Wins:customer demand

Price fallsPrice falls to compete with landline (happening to compete with landline (happening now) and customers respondnow) and customers respond

Mobile becomes Mobile becomes first phonefirst phone of choice of choice (happening now in some countries)(happening now in some countries)

Either customers do not insist on Either customers do not insist on FMC/bundlingFMC/bundling, or all wireless carriers integrate , or all wireless carriers integrate to provide it. No advantage to incumbents or to provide it. No advantage to incumbents or megacarriers.megacarriers.

Wireless Wins:technologyWireless Wins:technology

QOSQOS continues to improve continues to improve

FMCFMC comes on stream smoothly comes on stream smoothly

3G wireless 3G wireless isn’t too late (a huge isn’t too late (a huge uncertainty) and fulfills its promises uncertainty) and fulfills its promises (another huge uncertainty)(another huge uncertainty)

BroadbandBroadband delivers as promised delivers as promised

Wireless Wins:government policyWireless Wins:government policy

Regulators do not attack wireless profit Regulators do not attack wireless profit margins through re-regulation margins through re-regulation

Not too many players Not too many players in each market (3 in each market (3 max in most places)max in most places)

Regulators approve unlicensed spread Regulators approve unlicensed spread spectrum technologiesspectrum technologies

Rights of way Rights of way available (legislation)available (legislation)

Wireless Wins:providers, capital marketsWireless Wins:providers, capital markets

New entrants New entrants scale effectively scale effectively

New entrants do not crash the market by New entrants do not crash the market by cutting prices to generate more business cutting prices to generate more business than the infrastructure can handlethan the infrastructure can handle

Market Market funds extensive build-out funds extensive build-out by new by new entrantsentrants

Show-stoppersShow-stoppers

Market gluts from oversupply?Market gluts from oversupply?

3G technologies badly delayed3G technologies badly delayed

Continuing standards fights (U.S. and Continuing standards fights (U.S. and global)global)

Regulators attack marginsRegulators attack margins

Prices stop falling Prices stop falling

Wireless- NaysayersWireless- Naysayers

38 GHz wireless is great in theory, but it 38 GHz wireless is great in theory, but it still has a lot of technical problems to solvestill has a lot of technical problems to solveSenior exec, new entrantSenior exec, new entrant

Landline will always haveLandline will always havea significant price advantagea significant price advantageIndustry analystIndustry analyst

Combination scenarioCombination scenario

In each of the four sets of scenarios, In each of the four sets of scenarios, drivers align to produce a single futuredrivers align to produce a single future

But more complex scenarios are also But more complex scenarios are also possible:possible:

Meltdown for incumbents?Meltdown for incumbents?

Mobile takes all growthMobile takes all growth in voice markets in voice markets

New entrants New entrants steal best customers steal best customers for voice and for voice and datadata

Cable companies offer unbeatable Cable companies offer unbeatable “free voice”“free voice”

VOIP VOIP erodes premium voice services (e.g. int’l)erodes premium voice services (e.g. int’l)

Data revenues go first to Data revenues go first to hungry challengershungry challengers

Legacy Legacy networks, networks, legacy legacy ideas, and ideas, and legacy legacy regulators hold incumbents backregulators hold incumbents back

Vicious circleVicious circle

Incumbents’ Incumbents’ position weakensposition weakens

Stock declinesStock declines

Managers and Managers and customers leavecustomers leave

Investments slipInvestments slip

Documents

Creating the 21st Century Communications Company