The W Report Media & Telco 2009

8/8/2019 The W Report Media & Telco 2009

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T H E W R E P O R T s p o n s o r e d b y C A P G E M I N I

c

MOST COMPETITIVE COMPANIES in AMERICA

Copyright 1999-2009 wRatings Corporation. All rights reserved.

No part of this publication may be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of the wRatings

Corporation. The research methods used in this report are protected by US patent 6,658,391 and certain patents pending that are under license to wRatings

Corporation from Gary A. Williams. Moat Maker, "Competitive X-Ray", and "The W Report" are trademarks of Gary A. Williams. All other trademarks used in this

report are property of their respective owners.

Media & Telecom 2009


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Rankings within industry only Trailing 12 Months as of Q1-2009 W Ratings and Scores at national level

100 = Best Possible W Score

W Scores are blended percentile ranks of the company's 5-Year Weighted Average Economic Profit and the ability of the Business Segment to meet consumer expectations

Margin of Error 0.27 for all ratings

FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database

NOTE: For comparison with our 2008 report, this year's report ranks a larger number of companies due to expanded wRatings coverage so ranks may not align.

T H E W R E P O R T

2008-

Q1

Rank

Embarq Phone

4

Ticker

Harris

2 1 Hughes Network

3 33

1 22

Business Segment

Embarq Corporation $6,124

10 Qualcomm

Parent CompanyTTM Rev

in $M

Hughes Communications Inc.

EQ

Harris Corporation

Historically, the Telecom industry remains

one of the most challenging industries to

build a consistent level of competitive

strength.

Much of this is due to the constant need to

invest capital for building out infrastructure.

The Top 20 in 2009 had a 50% turnover

since last year, although our coverage thisyear was expanded to include business-to-

business companies as well. Eight of the top

20 are B2B companies.

This year's list does include a 5W company

in telecom, Embarq Phone. We spotlight

Embarq later in this report.

HRS

MOST COMPETITIVE 2009: Telecom

2009-

Q1

Rank

!!!!

Fairpoint Communications Inc. $1,275

CommScope Inc. $4,017

6 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009

7 7

5 12 Windstream Phone WIN

HUGH

$5,654

$1,060

Windstream Corporation $3,172

Qualcomm Inc.QCOM $11,210

W Rating W Score

!!!!!

!!!!

!!!!

!!!!6 5 Juno/Netzero UNTD United Online Inc. $670 !!!!

FairPoint FRP !!!!8 9 DISH Network DISH Dish Network Corporation $11,617 !!!9 48 CommScope CTV !!!

10 47 Earthlink ELNK Earthlink Inc. $956 !!!11 4 Cincinnati Bell CBB Cincinnati Bell Inc. $1,403 !!!12 25 ADC Telecom ADCT ADC Telecommunications Inc. $1,382 !!!13 2 Frontier Phone FTR Frontier Communications Corporation $2,237

!!!14 23 Brightpoint CELL Brightpoint Inc. $4,646 !!!15 40 Brocade BRCD Brocade Communications Systems $1,551 !!!16 27 EchoStar SATS EchoStar Corporation $2,151 !!!17 18 Cricket LEAP Leap Wireless International Inc. $1,959 !!!18 13 Time Warner Cable TWC Time Warner Cable Inc. $17,200 !!!19 52 Cablevision CVC Cablevision Systems Corporation $7,230 !!!

EBAY !!!Ebay Inc. $8,541Skype20 45

82.3

76.2

73.5

72.3

70.2

61.7

61.2

58.1

57.9

57.4

56.1

55.6

54.9

51.2

51.1

48.8

48.7

48.7

47.2

46.4


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Approximate % Distribution of Companies in 2008

THE! RATINGS SYSTEM

T H E W R E P O R T

The !Ratings are similar to a five-star

rating system used for hotels. We rate

companies 1 through 5 !s, where the !"

represents Winners, with 5 the most and 1

the least competitive.

The Competitive Outlook quadrant shows

how our ratings are based on historical

results and future ability to perform. Thehistorical is a 5-yr weighted average of

economic profits. The future is the total

moats (i.e. barriers to entry) of how well a

company is beating its rivals by meeting

consumer expectations in the current year.

Changes in a companys !Ratings can be

caused by:

1) Increased Economic Profits (EP)

2) Increased performance with consumers,

resulting in higher Total Moats (TM)

3) Rivals that increase their EP or TM faster

than the company

Because the !Ratings are relative,

companies can shift up or down without

changing their performance.

We continually backtest our algorithms, and

a companys Total Moats are a leading

indicator to their ability to generate EP. In

our backtests, companies able to sustain a

high TM score (in the top quintile) have

generated the highest EP every year.

Vulnerable

Most Competitive

!!!!!

30%

PREDICTABLE RESULTSDelivering higher economic profits (EP) on a consistent basis requires companies

to meet consumer expectations better than rivals and build moats to protect their profits.

The!Ratings System blends ranks of EP and Total Moats into a single rating.

COMPETITIVE

OUTLOOK

Total Moats (Barriers to Entry)

Competitive

!!!

Emerging5-YREconomicProfit

NarrowingDURABLE

!!!!!

7Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.

25%

10%

25% High Competitive!!!!

10%Least Competitive

!

LEADING INDICATOR TO FINANCIAL RESULTS

Low Competitive

!!

-25%

-20%

-15%

-10%

-5%0%

5%

10%

15%

2002 2003 2004 2005 2006 2007

EconomicPr

ofit

(ROIC-WAC

C)

B ot to m Q ui nt il e 2 0t h Q ui nt il e 4 0t h Q ui nt il e 6 0t h Q ui nti le T OP Qu in ti le To ta l M oa ts


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Stages of Competitive Life Cycle

INVESTMENT PERIOD

Emerging ROIC with High Investment

COMPETITIVE ADVANTAGE PERIOD (CAP)

High Economic Profit with continual Fade Rate

PRICE-EFFIENCY PERIOD

Low or Negative Economic Profits

T H E W R E P O R T

DELIVERY

CHAIN

Channel Lock-Out

We measure competitive advantage in a

highly unique, but completely logical way.

Our turn-key, patented system combines

financials, behavioral psychology and

statistics to measure the durability of a

company's advantages with consumers. The

ratings serve as a leading indicator to the

sustainability of company's economic profit.The three steps are:

1. Calculate a company's Economic Profit

(EP), ROIC (return-on-invested-capital)

minus WACC (weighted average cost of

capital). Companies with 5+years of superior

EP have built some form of protection

what famous investor Warren Buffett calls a

"moat."

2. Moats are barriers to entry a company

builds to protect their economic advantage.

The precursor to every economic advantage

is a consumer advantage, and we've

statistically determined that nine moats

exist.

3. By blending the percentile ranks of a

company's ability to sustain EP and protect it

with consumers via Total Moats, we score

the competitive strength of every company

in the wRatings coverage.

For more information on the wRatings

approach, see the Appendix.Network Effect

Economies of Scale

8

Switching Lock-In

MEASURING COMPETITIVE ADVANTAGE

Economies of Skill

Cost Containment

Brand Perception

SUPPLY

CHAIN

Competitive Strength

1

3

PRODUCTS

Barriers to Entry: MOATS

Routine Reliance

Competitive Life Cycle

Design Dominance

The Moat Maker database

utilizes multiple patents

Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.

2

INVESTMENT CAP PRICE-EFFICIENCY

ROIC

WACC

C a i ta lDurable

Advantage

Narrowing

Emerging

Vulnerable

0

20

40

60

80

100

02 03 04 05 06 07 08 09e 10e 11e

WScores

Current W Scores Projected W Scores Projections with Mgmt Impact


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The wRatings company coverage is determined by company size (market cap), brand awareness and subscriber requests. Some companies listed here for historical purposes.

MEDIA CATEGORIES A&E Channel (Private) Google News (GOOG) MTV Channel (VIA/B) Thomson (TOC.TO)

ABC Network (DIS) Google Search (GOOG) MySpace (NWS) Thomson Reuters (TRI.TO)

Advertising Firm Animal Planet (DISCA) Google Tools (GOOG) NBC Network (GE) Ticketmaster Entertainment (TKTM)

Broadcast Network AOL Search (TWX) Harris Polls (HPOL) NetRatings (Private) TLC Channel (DISCA)

Cable Channel AOL.com Content (TWX) Harte-Hanks (HHS) New York Times (NYT) TNT Channel (TWX)

Entertainment Firm Apple iTunes (AAPL) HBO Channel (TWX) Nickelodeon (VIA/B) Travel Channel (DISCA)

News Company Arbitron (ARB) Headline News (TWX) Omnicom (OMC) Twitter (Private)

News TV Channel Ask.com (IACI) HGTV Channel (SNI) Paramount Studio (VIA/B) Universal Music Group (VIV)

Publishing Firm BusinessWeek (MHP) Home Shopping Network (IACI) Playboy (PLA) Universal Theme Park (GE)

Web Content Firm Carmike Cinemas (CKEC) Hoovers (DNB) QVC Channel (LBTYA) USA Today (GCI)

Web Search Firm CBS Network (CBS) Houghton-Mifflin Harcourt Books (Private) R H Donnelley (RHDC) ValueClick (VCLK)

Cinemark Hldgs. (CNK) IBD Newspaper (Private) Rackspace Hosting (RAX) VH1 Channel (VIA/B)

CKX (CKXE) IDC (IDC) Regal Entertainment Group (RGC) Vocus (VOCS)

Clear Channel (CCO) Interpublic Group (IPG) Reuters (RTRSY) Vogue & Glamour (Private)

CNBC News (GE) John Wiley & Sons (JW/A) Rhino Records (WMG) Wall Street Journal (NWS)

CNN News (TWX) Lamar (LAMR) Scholastic (SCHL) Warner Music (WMG)

Discovery Channel (DISCA) Lexis Nexis (ENL) Showtime (CBS) Washington Post (WPO)

Disney Channel (DIS) Lions Gate Entertainment (LGF) Shutterfly (SFLY) World Wrestling Ent. (WWE)

Disneyland & Disneyworld (DIS) Live Nation (LYV) Simon & Schuster Books (CBS) WPP (WPPGY)

DreamWorks Animation (DWA) Martha Stewart (MSO) Sirius XM Radio (SIRI) Yahoo! Content (YHOO)

ESPN Channels (DIS) Meredith (MDP) Six Flags (SIX) Yahoo! News (YHOO)

Facebook (Private) MLB (Private) Sony Pictures (SNE) Yahoo! Search (YHOO)

Food Network Channel (SNI) Moodys Credit Ratings (MCO) Speedway Motorsports (TRK) YouTube (GOOG)

Forbes Magazine (Private) Morningstar.com (MORN) The CW Network (CBS)

Fortune Magazine (TWX) MSN Search (MSFT)

FOX Business Network (NWS) MSN.com Content (MSFT)

FOX Network (NWS) MS-NBC Channel (GE)

FOX News (NWS)

T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.

Check our website for the most up-to-date coverage.

MEDIA COVERAGE

9


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The wRatings company coverage is determined by company size (market cap), brand awareness and subscriber requests. Some companies listed here for historical purposes.

TELECOM CATEGORIES 3Com (COMS) DirecTV (DTV) Rogers Communications (RCI)

ADC Telecom. (ADCT) DISH Network (DISH) SBA Communications (SBAC)

Cable/Satellite Provider Adelphia (Bankrupt) Earthlink (ELNK) Shaw Communications (SJRB.TO)

Internet Service Provider Alcatel-Lucent (ALU) EchoStar (SATS) Skype (EBAY)

Telecom Equipment Provider Alltel (VZ) Embarq Phone (EQ) Southwestern Bell (Bought)

Telecom Service Provider Amer. Tower (AMT) Ericsson (ERIC) Sprint Nextel (S)

Wireless Phone Provider AOL Broadband (TWX) FairPoint Communic. (FRP) Symmetricom (SYMM)

Wireline Phone Provider AT&T Telephone (T) Frontier Phone (FTR) Telephone & Data (TDS)

AT&T Wireless (T) Global Crossing (GLBC) Tellabs (TLAB)

BCE (BCE) Harris (HRS) Telus (TU)

BellSouth (Bought) Hughes Communications (HUGH) Time Warner Cable (TWC)

Black Box (BBOX) iBasis (IBAS) TiVo (TIVO)

Brightpoint (CELL) IDT (IDT) T-Mobile (DT)

Brocade Communic. (BRCD) JDS Uniphase (JDSU) U.S. Cellular (USM)

Cablevision (CVC) Juniper Networks (JNPR) Verizon FiOS (VZ)

CenturyTel (CTL) Juno/Netzero (UNTD) Verizon Phone (VZ)

Charter Cable (CHTR) Level 3 Communic. (LVLT) Verizon Wireless (VZ)

Ciena (CIEN) Loral Space & Comm (LORL) Vodafone Group (VOD)

Cincinnati Bell (CBB) Mediacom Communications (MCCC) Vonage (VG)

Comcast Cable (CMCSA) Metro PCS Communic. (PCS) Windstream Phone (WIN)

CommScope (CTV) Nextel (S) XO Communications (XOHO)

Corning (GLW) Nortel Networks (NRTLQ)

Cox Cable (Private) Qualcomm (QCOM)

Cricket (LEAP) Qwest Telephone (Q)

Crown Castle Int'l (CCI) Road Runner (TWX)


Check our website for the most up-to-date coverage.

TELECOM COVERAGE

10


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Customer Expectations & Pricing Power

T H E W R E P O R T Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.

INDUSTRY COMPETITIVENESS

Revenue & Profit 10-Year Trends

Competitive Strength & Projections

Customer vs. Financial Performance

11

Unfair Share of Economic Profits


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MEDIA INDUSTRY

TELECOM INDUSTRY

NOTE: Data as of 20-Feb-2009


-------------------------

More

Competitive

A W Score measures a company's ability to

earn a consistent return above their cost of

capital AND protect that profit through

competitive advantages with consumers.

Higher scores mean greater predictability

and financial durability over their rivals.

By trending W Scores forward, we can

project two different views of their future: 1)

A baseline view (tan striped bar) of how well

the company is likely to do based on its last

5 years of results, and 2) A projected view

(green striped bar) that includes

management's impact over the past 2 years.

The 2010e projections (generated at end of

Q1-2009) indicate a decrease in media

competitive strength, and increase in

telecom strength by 2010.

Since 2002, media and telecom competitive

strength has been relatively stagnant. The

need for new, innovative business

frameworks is critical to increasing

strength. The media industry is more

competitive than Telecom by almost 50%,

although Q1-2009 shows some stress to the

media environment.

T H E W R E P O R T

COMPETITIVE STRENGTH & PROJECTIONS

Less

Competitive

More

Competitive

----------

---------------

Less

Competitive

13

0

20

40

60

80

100

2002 2003 2004 2005 2006 2007 2008 Q1-

2009

2010e

WScores

W Scores Projections (Baseline) Projections (Management Impact)

0

20

40

60

80

100

2002 2003 2004 2005 2006 2007 2008 Q1-

2009

2010e

WScores



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Most Competitive Least Competitive

with Customers with Customers

(Highest Total Moats) (Lowest Total Moats)


------------------------------------------------------->

2009 wRatings Corporation. All rights reserved. 14

By ranking each category by their Total

Moats (TM) and Economic Profit (EP), we can

better evaluate the overall competitiveness

of a category.

The current quarter shows considerable EP

improvement for media and telecom

companies when compared to the past 10-

years. Business models are in flux as

companies seek out predictable profit

streams. Only four categories are

generating a negative return on their capital,

and three of those are building strength with

their customers. A turnaround in

Advertising, Entertainment and Telecom

Service firms show promise for 2009.

As the economy continues to struggle and

unemployment rises, consumers seek out

free or inexpensive content. This means the

top advertising firms are in higher demand,

as the ad-supported model to making money

remains viable through 2009.

The shift in competitive strength to the web

for both ads and content is well underway.

Traditional media such as broadcast

networks and even cable channels are

becoming less competitive. Wireless and

wireline providers have been commoditized.

With customer & financial strength aligned,

predictability is best found in web

content, publishing, web search, news

companies and cable channels.

CUSTOMER vs. FINANCIAL PERFORMANCE

T H E W R E P O R T

-7.0%

-9.2%

-3.3%

8.6%

0.4%

8.1%

3.7%

7.6%

5.2%

0.3%

5.3%

3.9%

-0.6%

6.0%

8.6%

-15

-12

-9

-6

-3

0

3

6

9

12

15

A

dvertisingFirm

TelecomS

erviceProvider

Ente

rtainmentFirm

WebContentFirm

TelecomE

quipmentProvider

PublishingFirm

W

ebSearchFirm

InternetS

erviceProvider

NewsCompany

Cable/Sa

telliteProvider

N

ewsTVChannel

CableChannel

Wireless

PhoneProvider

Bro

adcastNetwork

Wireline

PhoneProvider

TOTALMOATS

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

E

CONOMICPROFIT

Economic Profit as % of Revenue, TTM Q1-2009 Customer Performance (Avg Total Moats 2009-Q1)


15/29

Average Company Delivery 2008-Q1 x Customer Expectations

Average Company Delivery 2009-Q1 -- Pricing Power (Willingness to Pay X% More if Expectations Met)

Highest Lowest

Pricing Power Pricing Power

with Customers in 2009 with Customers in 2009

------------------------------------------------------->


CUSTOMER EXPECTATIONS & PRICING POWER

15

By looking at the year-to-year changes in

how companies deliver on consumer

expectations as well as their pricing power,

we can better understand how the

competitive landscape is changing.

The average pricing power increase across

all 15 categories is 0.5%, indicating that

customers are willing to pay more if

companies can better meet their

expectations. This is good news, especially

considering that customer expectation levels

have gone down by (21%) and company

delivery is up by 45% since 2008.

Given the high year-over-year volatility

across most categories though, the media

and telecom industries are struggling with

how to best serve customer needs. Virtually

all of telecom (except telecom service

providers) show a decrease in customer

expectations and pricing power from one

year ago. Commoditization and lack of

pricing power overall remains the norm.

Profits are shifting to those categories with

rising expectations and pricing power, such

as advertising, entertainment, web content

and publishing firms. Consumers remain

willing to spend money with traditionalmedia such as broadcast, cable and

news/tv channels.


80

85

90

95

100

105

110

AdvertisingFirm

Entert

ainmentFirm

TelecomSe

rviceProvider

Web

ContentFirm

TelecomE

quipm

entProvider

Pu

blishingFirm

InternetServiceProvider

N

ewsCompany

We

bSearchFirm

NewsTVChannel

Cable/Sate

lliteProvider

Broad

castNetwork

WirelinePhoneProvider

CableChannel

WirelessPhoneProvider

Expectations

(100=Median in 2004)

0%

1%

2%

3%

4%

5%

6%

Pricing Power

(Willing to Pay % More)


16/29

20th Percentile Median 80th Percentile

* Top Moat Performers determined by those companies with a 4M or higher rating for each moat.

13.9%

5.1%

10.4%

National

2009 wRatings Corporation. All rights reserved. 16

0.0% 0.0%

2.8%

10.6%

DELIVERYCHAIN

##### Most Competitive

Total Business Segments

Weak Advantage

26.2%

0.0%

72

0.0%

Switching Lock-In

Network Effect

Fear Loss of Time/Money/Status7.8% 2.8%

0.8%

103

25.2%

Media Telecom

SUPPLY

CHAIN 8.3%

19.4% 1.4%Cost Containment

Economies of Scale

5.8%

Real Functional Distinctiveness

Comparative Quality at Fair Price

17.0%

7.2%

10.2%

Economies of Skill

16.7%

Design Dominance

Time-based Core Competencies

High Volume in Focused Area

UNFAIR SHARE OF ECONOMIC PROFITS

PERCENT OF COMPANIES IN

TOP MOAT PERFORMERS*

Regular Usage Built into Schedule

Which actions, programs and other initiatives

generate an unfair share of economic

profits? Certain aspects of a company's

business model generate far superior returns

on capital than others.

In this chart, we segmented the top

performing companies (> 3Ms) for each

moat last year. We then percentile rank

economic profits (EP). When the 80th

percentile is high AND the gap with the 50th

percentile is also high, an unfair share of the

EP is going to those advantages. The % of

companies in each moat are the # of

4Ms/5Ms divided by total companies

examined.

Media and Telecom companies gravitate

to a common set of competitive moats

(e.g. scale, cost and network effect), whichin turn causes fleeting economic profit.

Copycats arise quickly and few are building a

barrier to entry to protect their profits.

Future profits will not come from

consolidation, but from innovative business

networks that connect supply and delivery

chains, as well as non-Media and non-

Telecom companies to each other.

MOAT KEY

MOAT

Routine Reliance

$" No Advantage

##

PRODUCTS

Perceived Trusted Leader

Competitive % Disadvantage

T H E W R E P O R T

###

Community Growth with Each Node

" Non-Competitive#### Strong Advantage

3.9% 5.6%

0.0% 1.4%


1,436

7.0%

Channel Lock-Out

Brand Perception

ECONOMIC PROFIT OF

TOP MOAT PERFORMERS* IN 2008

Control Distribution for Choice

6.2%

23.9%

9.9%

10.5%

15.8%

8.8%

21.9%

20.0%

10.2%

-13.2%

-18.1%

-10.2%

6.8%

-5.1%

-4.3%

-14.4%

-6.6%

5.3%


17/29

17 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009

Paramount Pictures

COMPETITIVE SPOTLIGHTS

AT&T Wireless

Apple iTunes

T H E W R E P O R T

Embarq Phone

FairPoint

USA Today


18/29

By Week

Percentile ranks within wRatings national coverage

By Week

INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH

#####

### Competitive % Disadvantage

#### Strong Advantage

T H E W R E P O R T

MOAT KEY ##

The recent economic downturn has tested

the power of Apple's competitive edge, and

the company has weathered the storm to

become a leading indicator of the broader

technology industry.

Yet, most interestingly, two of the key

sources for their success comes from beyond

their technology products: Apple retail stores

and Apple iTunes. The integration of

electronics, retail and media content with its

software development platform provides

Apple with a unique business framework,

what some call an ecosystem.

In past reports, we've detailed how iTunes

has helped build moats in Switching Lock-In

and Network Effect to keep customers

captive. Never willing to rest on past

success, Apple is now churning out profitsthrough its supply chain. With surgical level

control over pricing and costs, the company

can generate exponential volume growth

with only incremental costs.

Consumers still love the products and

experience, but iTunes taps into non-

traditional moats to keep and grow their

edge.

Most Competitive $" No Advantage

Non-Competitive

17.2%

%

"

###

#

Business

Segment Apple iTunesApple Inc. (AAPL)

83.2%

Weak Advantage

Stock

Channel Lock-Out

Economies of Skill

COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY

Cost Containment

62.8%

Brand Perception

##

2009 Rating

####Economies of Scale

Moat

45.1%

0.0%

Switching Lock-In

2009 wRatings Corporation. All rights reserved.

62.4%##


TOTAL MOATS = 16

18

Network Effect ##

Routine Reliance

Nat'l Rank

77.3%

Design Dominance

70.6%

###

61.4%


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

06-

Q3

2007

2008

2009

ROIC WACC Reinvest Rate

0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScore

s


0

50

100

150

200

250

06-

Q3

2007

2008

2009

0%

5%

10%

15%

20%

25%

30%

Stock Price Economic Profit


19/29

By Week


By Week



Moat 2009 Rating Nat'l Rank

Economies of Scale % 0.0%

## 59.5%

Economies of Skill # 40.5%

Cost Containment % 0.0%

Brand Perception

Routine Reliance " 11.4%

Channel Lock-Out % 0.0%

# 39.3%

Network Effect " 28.2%

TOTAL MOATS = 1

Switching Lock-In


T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 19

#### Strong Advantage Non-Competitive


"

##### Most Competitive $" No Advantage

MOAT KEY ## Weak Advantage

Stuck in one of the most commoditized

industries, what can a wireless service

provider do to build competitive advantage?

Why not partner with one of the coolest

brands on a new product outside of the

media and telecom industries?

AT&T Wireless (the old Cingular Wireless)

did just that when they signed on to be the

exclusive provider for Apple's iPhone. The

costs to subsidize the product have been

high, but the rewards are starting to pay off.

Consumers rank the AT&T Wireless brand at

about 60%, essentially transferring some of

the Apple brand coolness to AT&T.

So what could AT&T/Cingular offer Apple,

besides money? In 2006, Cingular had built

an advantage in the much coveted Routine

Reliance moat where consistent profits arevirtually guaranteed. Their impact on this

moat has diminished over time, but was

strong enough and unique enough to capture

the Apple iPhone partnership.

Design Dominance " 23.7%

Stock

Business

Segment AT&T WirelessAT&T Inc. (T)

0%

5%

10%

15%

20%

25%

30%

06-

Q3

2007

2008

2009


0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScore

s


0

5

10

15

20

25

30

35

40

45

06-

Q3

2007

2008

2009

0%

2%

4%

6%

8%

10%

12%



20/29

By Week


By Week

INVESTMENT OPPORTUNITY


#### Strong Advantage "

COMPETITIVE STRENGTH



Economies of Scale ### 73.9%


Cost Containment # 30.4%

Design Dominance ## 62.8%

Brand Perception " 28.7%

Routine Reliance # 35.5%

# 34.7%


Network Effect ### 75.2%

Switching Lock-In # 39.3%

Media & Telecom 2009 20

### Competitive % Disadvantage 13


TOTAL MOATS =

Non-Competitive


Channel Lock-Out

As the fifth largest wireline company in the

US, Embarq is on track to combine its

operations with CenturyTel this quarter. The

combined firms will operate in 33 states.

As the rate of local access line losses

continue to accelerate, cost cutting is key to

survival. Yet, consolidation of the two

companies will help to build an even greater

competitive advantage than each alone.

Embarq is a strong operator and has been

able to generate consistent economic profit

over the past 10 quarters. Having been

spun off from Sprint, the firm knows how to

execute in two main sources of competitive

advantage: economies of scale and network

effect.

Scale comes from their ability to controlcosts while keeping service availability high.

Embarq also uses new technology behind the

scenes to their advantage, allowing them to

offer a better and more unique experience to

their customer community.

Stock Embarq Corporation (EQ)

Embarq PhoneBusiness

Segment

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

06-

Q3

2007

2008

2009


0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScore

s


0

10

20

30

40

50

60

70

06-

Q3

2007

2008

2009

0%

2%

4%

6%

8%

10%

12%

14%

16%



21/29

By Week


By Week


21T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009

Network Effect

### Competitive % Disadvantage TOTAL MOATS =

### 75.2%Non-Competitive


#### Strong Advantage "

Channel Lock-Out ## 63.4%

Switching Lock-In ### 78.8%


FairPoint is the eighth largest telecom

company, operating in 18 states and 32 local

exchanges. Recently, FairPoint took full

control over the Verizon wireline business in

the New England local exchange. With this

change over finally implemented, customers

are welcoming a fresh view and perspective

from the new kid on the block.

Customers see the benefits of the FairPoint

approach already. Local, highly focused

phone companies typically provide superior

customer service. By pressing forward and

offering customers service bundles (phone,

internet and television), FairPoint will extend

its economies of scale advantage with

consumers. Bundles are critical to the future

of wireline providers as many consumers are

forgoing their land lines altogether.

FairPoint is also stepping up efforts to attract

business customers as well. In rural areas,

this approach can generate significantly

higher returns on the same capital deployed

already.

#### 83.2%




Stock Fairpoint Communications Inc. (FRP)

Business

Segment FairPoint

Moat 2009 Rating

Brand Perception 59.5%

70.6%

##

Cost Containment

76.9%

21


###Design Dominance ###

Nat'l Rank

Economies of Scale

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

06-

Q3

2007

2008

2009


0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScore

s


0

5

10

15

20

25

06-

Q3

2007

2008

2009

-1%

0%

1%

2%

3%

4%

5%

6%



22/29

By Week


By Week

$"


34.5%

Economies of Skill

Business

Segment Paramount Pictures

2009 Rating

Economies of Scale "

Stock

62.8%

0.0%

Cost Containment ## 55.5%

Nat'l Rank

BARRIERS TO ENTRY

Viacom Inc. (VIA/B)

Although not immune to the advertising

slowdown, Viacom continues to remain

strong due to having multiple properties

such as MTV, Nickelodeon and VH1 under

one umbrella. Paramount Pictures is its film

entertainment studio, which represents

about 37% of Viacom revenues.

With their long history of successful pictures

such as Titanic and The Godfather series,

Paramount is now transforming its business

to rebuild its economic strengths.

Paramount has a 62.8% ranking in a Design

Dominance moat, showing how strong their

movies are with consumers. Teaming up

with Dreamworks Animation, they recently

made Monsters vs. Aliens and will release

new movies to the Star Trek and

Transformers series this summer.

Future strength for Paramount will come

from their delivery chain as they release the

power of their content via the web. The

studio owns thousands of pictures and, when

unlocked in the new digital landscape, profits

at Paramount will be re-energized.


Routine Reliance "

Brand Perception " 28.7%

11.4%

Moat


39.3%

Channel Lock-Out # 34.7%

No Advantage

Network Effect # 43.1%

##### Most Competitive

#### Strong Advantage " Non-Competitive


T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 22

TOTAL MOATS = 6

Switching Lock-In #

Design Dominance ##

%

COMPETITIVE LIFE CYCLE

0%

10%

20%

30%

40%

50%

60%

06-

Q3

2007

2008

2009


0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScores


0

5

10

15

20

25

30

35

40

45

50

06-

Q3

2007

2008

2009

0%

2%

4%

6%

8%

10%

12%



23/29

By Week


By Week

Faced with declining readers, many of

today's major newspapers are struggling to

survive. USA Today is owned by the largest

newspaper operator, Gannett Company. The

Gannett news and web properties reach

about 70% of the population in their

locations, giving them a strong competitive

advantage in economies of scale.

USA Today, with its innovative multi-colorformat and unique writing style, represents

one of the most competitive news properties

today. Thinking of themselves as a clearing

house of media content available around the

clock, the "paper" is building a formula to

replace its traditional ad-supported revenue

model. For example, they recently struck a

deal to feed USA Today news articles directly

into the Apple iPhone.

Finding ways to monetize their strong

network effect advantage remains a top

priority for Gannett and other newspaper

companies, but USA Today is already

positioned well to weather this downturn.

#####

Business

Segment USA TodayStock Gannett Company (GCI)




Economies of Scale #### 83.2%

Economies of Skill % 0.0%

Cost Containment ### 70.6%

Design Dominance ### 76.9%

45.1%


MOAT KEY ## Weak Advantage Channel Lock-Out

Most Competitive $" No Advantage

#### Strong Advantage " Non-Competitive


23

Network Effect ##### 95.4%

TOTAL MOATS = 21

T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009


### 79.4%

Switching Lock-In ### 78.8%

Brand Perception #

0%

10%

20%

30%

40%

50%

60%

127

53

79

105

131

Series2 Series1 Series3

0

20

40

60

80

100

2004 2005 2006 2007 2008 Q1-2009 2010e

WScores


0

10

20

30

40

50

60

70

06-

Q3

2007

2008

2009

0%

1%

2%

3%

4%

5%

6%

7%

8%



24/29

Terminology

T H E W R E P O R T

Our Coverage


Your Competitive X-Ray

APPENDIX

Why Our Ratings Work

24


25/29

Total Moats (TM)

Delivery Scores

How well a company performs on each of 12 attributes. Each

score is indexed using 100 as the median across all national

desires in 2004. A score of 100 indicates the company is

delivering fully against consumer expectations. See Desires

Scores.

Return on Invested Capital is a non-standard accounting financial

measure that quantifies how well a company generates cash with

capital they invest in their business.

Expectation Scores

Economic Profit (EP)

Weighted Average Cost of Capital is the required return needed to

make an investment worthwhile in which each portion of capital

common stock, preferred stock or debt is proportionally weighted.

The sum of all moat ratings, which is not a simple count of M's.

Companies can receive a negative moat rating if performance is poor.

Moat or M Rating

How high up consumer expectations and needs are on each of12 attributes. Each score is indexed using 100 as the median

across all national desires in 2004. A score of 100 indicates the

company is delivering fully against consumer expectations.

See Delivery

The percentage more consumers are willing to pay if

companies met their expectations. A small gap betweenDesires and Delivery scores with a high Pricing Power indicates

an increasing demand for innovative approaches.

Weighted Average Cost of Capital (WACC)

!Rating

Similar to a five-star rating system used for hotels, we rate companies 1

through 5 Ws, with 5 the most competitive and 1 the leastcompetitive.

W Score

2009 wRatings Corporation. All rights reserved.

Pricing Power

A measurement of a companys ability to earn a consistent profit

above their cost of capital and their ability to protect that profit

through competitive advantages with consumers.

A companys ability to perform above the industrys 65%

percentile on a unique set of attributes that define competitive

advantage. Moats are barriers to entry companies create to

sustain economic profits.

T H E W R E P O R T Media & Telecom 2009 25

The difference between return on capital and opportunity cost

of capital. We define EP as ROIC minus WACC.

Return on Invested Capital (ROIC)

TERMINOLOGY


26/29

26T H E W R E P O R T Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.

WHY OUR RATINGS WORK

The Study. Ever since Gary Williams

Macintosh software company missed the

Microsoft Windows market in the late

1980s, he has been on a quest to discover

what truly drives a companys competitive

advantage.

The Benchmarks. To see if a company built

a sustainable competitive advantage, we

started with 2,628 companies and filteredthem by market cap and revenue. We then

looked for two telltale signs of competitive

advantage: 1) High market share and 2)

High ROIC. Only 15 companies met the

65th percentile mark or higher for 5

consecutive years.

The Moat Makers. We then wanted to

see HOW those top companies built barriers

to entry, or moats, to protect theiradvantages. Using the top 15 companies as

a starter set, we analyzed data from

135,000+ consumer interviews to

empirically find the nine sources of

competitive advantage. We call these

companies Moat Makers.

The Results. Our ratings work because they

use a core set of Moat Maker algorithms to

determine the strength of a companys moatin comparison to

industry peers.

3Deliver on

Consumer

Desires

Economies of Scale

High Volume in Focused Area

Economies of Skill

Time-Based Core Competencies

Cost Containment

Comparative Quality at Fair Price

Design Dominance

Real Functional Distinctiveness

Brand Perception

Perceived Trusted Leader

Routine Reliance

Frequent Usage Based on Habit

Channel Lock-Out

Control Distribution for Choice

Switching Lock-In

Fear Loss of Time/Money/Status

Network Effect

Exponential Growth with Each Node

2001

2002

2003

2004

2005

Rolling 5-year analysis

starting in 1999

Market

Share1

2 ROIC

ANHEUSER-BUSCH*

CITIGROUP*

COCA-COLA*

DELL

GLAXOSMITHKLINE

HOME DEPOT

LOREAL

MICROSOFT

MORGAN STANLEY

NOKIA

PEPSICO

TJX COMPANIES

UNITED PARCEL SERVICE

WALGREENS*

YUM BRANDS

* Ten-Year ROIC & Market Share

ANHEUSER-BUSCH*

CITIGROUP*

COCA-COLA*

DELL

GLAXOSMITHKLINE

HOME DEPOT

LOREAL

MICROSOFT

MORGAN STANLEY

NOKIA

PEPSICO

TJX COMPANIES

UNITED PARCEL SERVICE

WALGREENS*

YUM BRANDS

* Ten-Year ROIC & Market Share

SUPPLYCHA

IN

PROD

UCTS

DELIVERYCHAIN

4Out-Perform

Competitors

THE STUDY & BENCHMARKS THE MOAT MAKERS


27/29

FAIR-PRICE +

SAMPLE AREAS

FAIR-PRICE

Trust

EMOTIONAL NEEDS

PRIORITIZE SPENDING TO BUILD ADVANTAGES

- Operations:

Locations

Locations UNIQUENESS +

SafetySafety / Low-Risk

UNIQUENESS +

- Management:

FUNCTIONAL NEEDS

- Products:

Quality

UNIQUENESS

LEADERSHIP

T H E W R E P O R T

FROM MAIN STREET TO WALL STREET

Most companies today equate demand with

lead generation so they focus on internal

activities such as advertising, PR and

marketing materials.

But in order to understand how demand is

generated, we must start by examining how

consumers buy. Most researchers believethat decisions follow a logical process, where

consumers weigh the utility of an offering

against their budget to buy (or not buy).

Decisions are far more complex, and require

a series of trade-offs between emotional,

functional and economic needs. These trade-

offs are where companies must create

unique sets of advantages that cannot be

duplicated by competitors, what we callmoats. Nine moats exist within three

business areas (Supply Chain, Products and

Delivery Chain).

The wRatings' COMPETITIVE X-RAY

provides a full 9-moat analysis to help

companies prioritize their spending needs

based on their ability to build competitive

advantage.

Competence

Multi-Year Analysis

Customer Relations

PRODUCTS

Sourcing

Market Share

2009 wRatings Corporation. All rights reserved. Media & Telecom 2009

Earnings Per ShareLogistics

How Markets Evaluated

GROWTH

SUPPLY CHAINManufacturing Free Cash Flow

How to Build Pricing Power: Competitive Advantage

FAIR-PRICE +

WALL STREET DEMAND

Sales Revenue

27

MAIN STREET DEMAND

Precision

Variety

CompetenceConnection

How Consumers Buy

Usefulness

Culture

Time-Sensitivity

LEADERSHIP +

Consistency

SAMPLE AREAS

Simplicity

DELIVERY

CHAIN

Equity & Book Value

Engineering

Product Lifecycles

Business Process

DURABILITY

Stability

FAIR-PRICE +

Usefulness

CORPORATIONS

UNIQUENESS + Communities

Time-Sensitivity

Simplicity

Consistency

LEADERSHIP +

Culture R & D

SAMPLE AREAS

LEADERSHIP +

Quality Economic Profit


28/29

2009 wRatings Corporation. All rights reserved. 28Media & Telecom 2009

OUR INDUSTRY COVERAGE

T H E W R E P O R T

1,468We cover companies that represent all 10

sectors of the US economy. To make

company selection easy for customers to

rate them, we structure companies with a

more consumer-friendly nomenclature.

Because some companies generate revenue

through multiple channels (e.g. Apple's

iPhone, iPod, Macintosh, etc.), we track

companies at the business segment level.Ratings from individual business segments

can be combined to form a single rating for

a stock. Since 1999, our historical database

contains 1,500+ business segments that

contribute to 1,200+ companies. About

100+ business segments are private firms

we track in order to accurately assess their

public rivals competitive strength.

Our research team operates in 13-weekincrements. During the course of that time,

we pre-qualify a panel, conduct interviews

with them and analyze the data on each

company in our database. Our analyst team

then writes and publishes individual reports

on many of the companies covered.

For an up-to-date listing of the wRatings

coverage, go to www.wratings.com.

Business Segments Covered

58

127

52

159

108

53

125

109

79

181

134

72

108103

Automotive

Consumer Goods

Electronics

Financials

Health Care

Home

Industrials & Materials

Media

Restaurants

Retail

Technology

Telecom

TravelUtilities & Energy


29/29

Gary A. Williams Greg [email protected] [email protected]

wratings.com capgemini.com

wRATINGS CORPORATION CAPGEMINI U.S.

2325 Dulles Corner Blvd. 623 Fifth AvenueSuite 500 33rd Floor

Herndon, VA 20171 New York, NY 10022

703.788.6532 212.314.8000

FOR MORE INFORMATION


CONTACT wRATINGS


CONTACT CAPGEMINI

29

ABOUT CAPGEMINI

Capgemini, one of the world's foremost providers of consulting,

technology and outsourcing services, enables its clients to

transform and perform through technologies. Capgemini provides

its clients with insights and capabilities that boost their freedom to

achieve superior results through a unique way of working, the

Collaborative Business Experience. The Group relies on its global

delivery model called Rightshore, which aims to get the right

balance of the best talent from multiple locations, working as one

team to create and deliver the optimum solution for clients. Present

in more than 30 countries, Capgemini reported 2008 global

revenues of EUR 8.7 billion (approximately USD $12.74 billion) and

employs over 90,000 people worldwide.

More information is available at www.us.capgemini.com.

Documents

The W Report Media & Telco 2009