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University of TorontoUniversity of TorontoMaster of Engineering in TelecommunicationsMaster of Engineering in Telecommunications

Voice Over IP Voice Over IP Industry AnalysisIndustry Analysis

Katherine Lam (Class of 2003-04)

September 23, 2004.

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Key Research ObjectivesKey Research Objectives

Objectives: To answer 2 key questions:

1. Is carrier VoIP “disruptive” in the consumer market?

2. Will carrier VoIP “cross the chasm” quickly and easily in the consumer market?

In the context of the big picture of VoIP industry!

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Disruptive TechnologyDisruptive Technology

VoIP is disruptive in Enterprise space Is VoIP equally disruptive in the Consumer space?

Source: Professor Clayton Christensen’s books titled “The Innovator’s Dilemma” & “The Innovator’s Solution”

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Gorilla Game Gorilla Game Home

Networking

Main Street Main Street

Toll Bypass

Consumer

Wi-Fi VoIPEarly Market

Early Market

Enterprise Enterprise

Source: Geoffrey Moore’s book titled “The Gorilla Game”

Chasm

Hot Spots

Chasm

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MET Report ContentsMET Report ContentsObjectives and MethodologiesService ProvidersEquipment VendorsSummary of FindingsAppendix

o Gorilla Gameo Disruptive Technologyo U.S. Service Providers Profileso U.S. Overall Observationso U.S. and Canadian VoIP Markets

FOCUS

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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AcknowledgementAcknowledgement

Special Thanks to MET Advisory BoardJim Glover, BDC Venture Capital

Mark Woollam, Nortel Networks

Peter Rhamey, BMO Nesbitt Burns

Mark Goldberg, Mark H. Goldberg and Associates Inc.

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Industry Analysis MethodologiesIndustry Analysis Methodologies

Industry Analysis

MarketAnalysis

CompanyAnalysis

Competitive Analysis

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Industry Analysis MethodologiesIndustry Analysis Methodologies

Industry Analysis

MarketAnalysis

CompanyAnalysis

Competitive Analysis

VoIP in the U.S. Major battleground for Enterprise VoIP

A lot of hype and news on Consumer VoIP

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Industry Analysis MethodologiesIndustry Analysis Methodologies

Industry Analysis

MarketAnalysis

CompanyAnalysis

Competitive Analysis

Service Provider Groupings1. Existing Incumbents

• IXC, ILEC and MSO2. New Players

• Vonage-like

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Carrier VoIP in Consumer MarketCarrier VoIP in Consumer Market2003 - 20042003 - 2004

Years 2003 2004U.S. Residential Voice Lines (Million)

118 115

U.S. Consumer VoIP Subscribers (Million)

0.13 1

% of VoIP Subscribers in Consumer Market

0.1% 1%

Source: Yankee Group

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Market Dynamics 2003Market Dynamics 2003

Vonage – Consumer VoIP market leader in 2003

Vonage60%

Other11%Time Warner

7%

Cablevision22%

U.S. Consumer VoIP Market Shares as of Year-End 2003

Total: 130,000 Consumer VoIP SubscribersSource: Yankee

Group

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Current Market DevelopmentCurrent Market DevelopmentCategory of

Service ProviderCurrent Player(s) Current Business Priority

Pure VoIP Players VonageNet2Phone

Attack as new market opportunity

Incumbent Multiple Service Operator

(MSO)

ComcastTime Warner CableCablevisionCox

Attack ILECs on local voice businessDefend from satellite operators’ attacks on video business

Incumbent Local Exchange Carrier (ILEC or RBOC)

VerizonQwestSBCBellSouth

Attack IXCs in the business segment as new source of revenueDefend home base business on residential voice

Incumbent Inter-exchange Carrier

(IXC)

AT&TMCISprint

Defend home base business on business/enterprise customers

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Pure Players VoIP TimelinePure Players VoIP Timeline

Jun 01: Net2Phone announced the launch of its VoiceLine broadband telephone service

Apr 04: Vonage launched VoIP service in Canada

Jan 01: Vonage was founded and started providing service in the U.S.

Nov 02: 8x8 announced the availability of its Packet8 broadband telephone service

May 04: Vonage consumer VoIP subscriber number reached 155,000

Pure VoIP Players are the earliest entrants

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Pure VoIP Player - VonagePure VoIP Player - Vonage Nowadays, Vonage is the

most successful pure VoIP player

Significant factors to determine the future of pure VoIP players: Regulation Resell Partnership Piggybacking on

broadband connection MSOs’ market entrance

Linear Projection• In 2003, Vonage had 78,000 subscribers (60% market share)• Add 20,000 subscribers/month

78

318

558

798

1038

0

200

400

600

800

1000

1200

Num

ber o

f Sub

scrib

ers

(Tho

usan

d)

2003 2004E 2005E 2006E 2007E

Vonage VoIP Subscribers

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MSO VoIP TimelineMSO VoIP Timeline

May 03: Time Warner Cable launched the commercial VoIP service in the U.S.

Dec 03: Cox launched its residential VoIP service to customers

Sept 02: Charter launched residential VoIP service

May 04: Comcast confirmed its VoIP roll-out plans in the residential market

Sept 03: Cablevision launched “Optimum Voice” VoIP services in the U.S.

MSOs will become the most active players

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ILEC VoIP TimelineILEC VoIP Timeline

May 04: BellSouth launched IP Centrex to business customers

July 04: Verizon launched its unmanaged “VoiceWing” VoIP service to its residential customers

Nov 03: SBC launched nationwide Hosted IP service to business customers

Jun 04: Qwest launched its “OneFlex” VoIP services to both of business and residential customers

ILECs will focus on enterprise market first

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IXC VoIP TimelineIXC VoIP Timeline

Mar 04: AT&T rolled out its national VoIP service named “CallVantage”.

Dec 03: MCI and Sprint partnered with Time Warner Cable to offer VoIP service

July 04: AT&T announced to retreat from residential voice market.

Aug 04: AT&T co-markets “CallVantage” VoIP with MSOs and Best Buy in U.S.

July 04: AT&T’s “CallVantage” has been successfully launched and is available in 100 U.S. markets

IXCs will also focus on enterprise market

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Market Projection 2005Market Projection 2005

MSO56%

IXC & ILEC25%

Pure VoIP Provider

19%

U.S. Carrier VoIP Consumer Market Projection in 2005 by Yankee Group

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Carrier VoIP in Consumer MarketCarrier VoIP in Consumer Market20072007

Years 2003 2004 2005 2006 2007U.S. Residential Voice Lines (Million)

118 115 114 113 113

U.S. Consumer VoIP Subscribers (Million)

0.13 1 4 7 12

% of VoIP Subscribers in Consumer Market

0.1% 1% 3.5% 6% 10%

Source: Yankee Group

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Potential Market Dynamics 2007Potential Market Dynamics 2007

Our Market Projection (By Linear Projection) Wide deployment of VoIP by MSOs in the U.S. ILECs and IXCs are broadening their VoIP priorities to

both businesses and consumers Pure VoIP players will remain to be niche players

MSO59%

IXC & ILEC28%

Pure VoIP Provider

13%

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Potential Market Dynamics 2007Potential Market Dynamics 2007(Separate ILEC & IXC)(Separate ILEC & IXC)

ILECs show more interests and potentials than the IXCs in the consumer VoIP market

Pure VoIP Provider

13%IXC4%

ILEC24%

MSO59%

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Carrier VoIP in Consumer MarketCarrier VoIP in Consumer Market

Now, we can answer the 2 key questions.

1. Is carrier VoIP “disruptive” in the consumer market?

2. Will carrier VoIP “cross the chasm” quickly and easily in the consumer market?

The answer to both questions is NO!

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Enterprise VoIP Equipment MarketEnterprise VoIP Equipment Market

26%

27%14%

6%

4%3% 9%

4%

7%

Cisco

Avaya

Nortel

Alcatel

Mitel

Siemens

NEC

3Com

Others

Worldwide Enterprise IP Telephony (IP PBX, IP Phone & Hybrid)

Market Shares 2004 Q1

24%

25%13%

8%2%

16%

4%

7%

1%

North America Enterprise IP Telephony (IP PBX, IP Phone & Hybrid) Market Shares 2004 Q1

Total Revenue 2004 Q1 U.S. $596M

Total Revenue 2004 Q1 U.S. $307M

Source: Synergy Research

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Carrier VoIP Equipment MarketCarrier VoIP Equipment Market

28%

21%20%

5%

4%

18%

3%1%

Nortel

Cisco

Sonus

Siemens

Lucent

Telica

Alcatel

Others

Worldwide Carrier VoIP Market Shares 2004 Q1

Total Revenue 2004 Q1 U.S. $159M

40%

13%

26%

1%

1%12%

5%2%

North America Carrier VoIP Market Shares 2004 Q1

Total Revenue 2004 Q1 U.S. $90M

Source: Synergy Research

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Carrier VoIP Equipment MarketCarrier VoIP Equipment Market Lucent has created an

opportunity for Sonus Lucent acquired Telica

in May 2004 VoIP is an extremely

high growth market, but not a disruptive one in the sense of Clayton Christensen’s model

40%

13%

26%

1%

1%12%

5%2%

Nortel

Cisco

SonusSiemens

Lucent

TelicaAlcatel

Others

VoIP is not disruptive in equipment market

Sonus + Telica = 31% Market Share

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Future of VoIP in CanadaFuture of VoIP in Canada

Canada will lag behind the U.S. in the carrier VoIP deployment in the consumer market

2 Major Reasons:Less price differentiationLess direct competition

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ContentsContents

Introduction and ObjectivesMethodologiesCurrent Carrier Market DynamicsFuture Carrier Market ProjectionsEquipment MarketCanadian VoIP MarketFuture Work and Summary

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Future WorkFuture Work

Industry Analysis

MarketAnalysis

CompanyAnalysis

Competitive Analysis

2. Study on other nations such as Korea, Japan and China

1. Enterprise VoIP3. VoIP value chain and supply chain

4. Wireless Substitution

5. New Business Models (P2P/Skype)

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P2P/Skype as a disruptorP2P/Skype as a disruptor

P2P has disrupted the music industryNapster and KaZaa are the best examplesFounder of Skype is the founder of KaZaaSkype could be potentially disruptive to

the telecom industry

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SummarySummary

VoIP’s disruptiveness in carrier VoIP space

VoIP’s capability to cross the chasm

VoIP’s disruptiveness in equipment market

VoIP’s deployment in Canada

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The End.The End.Thank You!Thank You!