Emerging Trends in Telecommunications--

Business Overview

Video Services Forum

October 2001

Presented by Cindy Andreu

Creating Convergence

The 1939 New York World’s Fair featured the formal debut television broadcast. The receiver, a combination television-radio-recorder-playback-facsimile-projector set, was way ahead of its time. This suggests a fundamental desire to merge all media into a single entity long before the birth of telecommunications as we know it today.

Key Sectors in Telecommunications

• Telephone service companies

• Broadcast networks

• Cable television

Industry Subject Regulation

• Each sector’s history is filled with federal regulation

– Intended to ensure that the masses had cheap access to product offerings

– Prevent sector cross-over presumably to fend off monopolies

• Finally, in 1996 the U.S. government issued landmark regulation changing the dynamics of this industry.

The 1996 Act

• The goal: Accelerate rapid private sector deployment of advanced telecommunications and information technologies

• The intent: Facilitate by enabling competition and removing barriers to market entry across all sectors

President Clinton’s Vision:

”We will help to create an open market place where competition can move as quick as light.”

What does Today’s Competitive Landscape Look Like?

Key Competition Indicators in Local Telephone

• As of 12/2000, new entrant phone lines continue to increase– CLECs report 50% increase in

telephone lines from 1999 to 2000– But CLECs only account for 8%

of the pie

(Source: FCC)

ILEC Lines vs. CLEC Lines (In Millions)

CLEC= 8% ILEC = 92%

16.4

177.6

CLEC Lines

ILEC Lines

• CLEC customers are primarily concentrated in

Georgia Illinois

Iowa KansasMassachusetts Minnesota

New York PennsylvaniaTexas

• Accounts for about 50% of total CLEC markets, with each representing at least 10% of the market.

(Source: FCC)

Local Competition--continued

The proportion of residential to business customers varies significantly between CLECs and ILECs

(Source: FCC)

Local Competition--continued

0

0.2

0.4

0.6

0.8

CLEC ILEC

Proportion of Residential vs. Business Customer Mix

(expressed in percentages)

Residential

Business

``

Local Telephone Infrastructure Update

Capital expenditures = $105 billion from 1995 to 1999

Central office investment:– In 98% or 14,900 central offices have computerized switching – Nearly all offices offer equal access for long distance

Local transmission investment:– 80% of transmission paths to customers are linked by copper– 97% of all links tying switching offices together are fiber; up from

60% in 199O(Source: FCC, statistics as of 12/2000)

(Source: FCC)

Local Telephone Industry Fact Sheet (As of 12/2000 unless otherwise indicated)

U.S. Telephone Households 106,500,000

Households with Telephones 100,200,000

End-user Lines 193,400,000

Service Penetration Percentages:

Telephone 94.1 %

Video (TV) * .9 %

DSL * 2.1 %

Local Carriers 257

Central Offices 15,000

* as of 3/01

Long Distance Providers

Long Distance Providers

Market Overview• By the end of 2000,

700 companies offered long distance service as compared to 1 in 1976.

(Source: FCC)

AT&T 38,111$

MCI WorldCom 22,554

Sprint 9,038

Other Long Distance Carriers 30,544

Bell Operating Companies 5,865

Other ILECs 734

Other Local Carriers 1,335

Total 108,181$

2000 Revenue Analysis(In Millions)

Long Distance Providers

Historical Market Share Analysis for Annual Revenues

(Source: FCC)

Year AT&T MCI/ Sprint All other Bell Other LocalWorldCom Long-Dist. Operating Telephone

Carriers Companies Companies

1984 68.3% 3.4% 2.1% 2.0% 17.7% 6.5%1990 50.7% 11.3% 7.5% 8.4% 15.8% 6.3%1995 44.9% 21.4% 8.5% 12.0% 9.6% 3.6%2000 35.2% 20.8% 8.4% 28.2% 5.4% 2.0%

Status of FCC Approval for BOC In-Region/InterLATA Service

TelevisionMarket Place

Sector Overview

• Broadcast networks and affiliates are consumed with building new FCC mandated DTV channels

• In the meantime, Cable has been spending more on programming and stealing audience and advertising revenues from broadcast

• Cable is positioning to become a mult-service provider for high speed Internet, video services, Interactive TV and telephone

DTV Update

• Nearly 70 % of commercial TV stations expect to have DTV signals by May 2002

• 19 out of 20 American homes will have access to at least one DTV signal via over-the-air

• Depending upon the channel, viewers may be able see sports or other programming in high definition

Trends in Broadcast vs.Cable

Viewership shifts:• The most pervasive change over the past 10 years

is the shift in viewership from broadcast to cable

• Basic cable viewership more than doubled

• Cable has taken substantial advertising revenue away from broadcast– Cable represented 11% of TV advertising revenues in

1991 vs. 24% in 2000

Contributing Factors

• Overall increase in cable networks from 82 in 1991 to 224 in 2001

• Heavier investment in higher quality programming

– Program costs have increased an average of 23% per year over the past five years

– Provides more than three times as much children’s programming

– Leading source for political and public affairs programming

• New business models

What’s up with Cable?

Infrastructure update as of May 2001:

• $50 billion spent on capital expenditures over the past 5 years (Includes FY 2001 projection.)

• Heavy investment in infrastructure upgrades and facility improvements provides:– Two-way plant to 60% of all cable homes– 550 MHz to 77% of homes by the end of 2001

(Source: NCTA Web site)

Cable Update

According to an NCTA press release on 8/13/2001:

• Q2 averaged 70K new subscriptions per week for cable modems

• 200K residential telephone subscribers were added in Q2 for a total customer base of 1.3 million

• There were 15 million business customers by 6/30/01

Cable Industry Fact Sheet

U.S. Television Households (1/01) 102,184,810

Homes Passed by Cable (12/00) 97,700,000

Basic Cable Households (5/01) 69,501,440

Cable Modem Homes Passed (E12/01) 81,237,000

Cable Modem Subscribers (7/01) 5,500,000

Residential Telephone Subscribers (7/01) 1,300,000

National Cable Networks (3/01) 224

Service Penetration as Percentages:

Cable homes 95.6 %

Basic Cable 68.0 %

Residential Telephone 1.3 %

Cable Modem 5.3 %(Source: NCTA Web site)

Cable Update

Key Players as of 3/01:MSO Subscribers

(In Thousands)

AT&T Broadband 15,900

Time Warner Cable 12,800

Comcast Communications 7,733

Charter Communications 6,208

Adelphia Communications 5,723

Cablevision Systems 1,285

Total subscribers 49,649

What’s Ahead

Emerging Products and Trends

Trends in High-Speed Internet Access

• In 1999, the FCC found that 98.2 percent of Internet users accessed the Internet through dial-up facilities

• Reports from broadband front are one-sided with cable deployments growing more rapidly than DSL

Trends in High-Speed Internet Access

• Banc of America Securities analyst Douglas Shapiro sees cable modems in 18.8 million homes by 2005 compared to 13.9 million DSL installations

• Yankee Consulting predicts that cable modems will hold and even wider advantage over DSL:15.7 million to 10.5 million in 2005

• The FCC projects roughly half of Internet users will still access the Internet through dial-up by 2004

Other Frontiers in Cable

• Cable is now poised to fight off direct broadcasters• Digital video offers 4-12 video signals in a 6-MHz

channel that used to accommodate 1 analog signal– By the end of Q2, cable had 12.2 million subscribers

recovering previously lost customers

– Morgan Stanley believes that direct-broadcast subscriber adds will drop from 3.3 million per year to 2 million in 2002

– Paul Kagan projects 43.2 and 48.2 million cable subscribers by 2004 and 2005, respectively

(Source: Barron’s and NCTA)

Other Frontiers in Cable

Video-on-Demand is finally born• Charter Communications, Insight Communications and

Comcast have launched services in selected locations doubling the buy rates of older pay-per-view. However, these services offer only a meager 350 films to date.– Insight offers DIVA On Demand TV for VOD movies

accessed by a remote control and on-screen navigator that includes full VCR functionality

(Source: Barron’s and NCTA)

Video On Demand

Studio Initiatives:• Paramount, Sony Pictures, Universal, MGM and

Warner Brothers partner to create an on-demand Web service that will provide theatrical releases to viewers via the Internet. The service is scheduled to start in 2002 or 2003

• Disney and News Corp. have agreed to launch Movies.com in early 2002. Movies will be available in the pay-per-view release window

Other Frontiers in Cable

Other Enhanced and Interactive TV initiatives available in selected markets:

• Interactive Program Guides with many digital TV offerings

• AT&T teamed up with WorldGate 2000 in Cedar Falls and Waterloo, IA, to offer e-mail, e-commerce, Internet access and interactive video content/advertising through digital set-top boxes deployed with digital cable

(Source: NCTA Web site)

Other Enhanced and Interactive TV Services

• Charter Communications teamed up with the city of LaGrange, Georgia, in Spring 2000 to offer free Internet-over-TV access providing customers Internet access, e-mail and local information on TV

• Cox Communications launched Movies-on-Demand in San Diego using digital set-top boxes and remote controls with VCR ability: pause, fast-forward, rewind

• In Honolulu, Time Warner offers iControl Video on Demand ,which instantly delivers pay-per-view and Pizza-On-Demand through Pizza Hut

Overview of Interactive TV Products and Markets

Emerging Products:

• Forrester Research calls ITV the new business model for television and predicts a $20 billion industry by 2004

• Recent product offerings:– OpenTV

– Wink

Overview of Interactive TV Products and Markets

Market Penetration to date:

OpenTV 18 million set-top boxes deployed worldwide

Wink 4 million households

Overview of Interactive TV Products and Markets

Personal video recorders:

Major players are TiVO, ReplayTV, and Microsoft’s Ultimate TV, just launched this year

Overview of Interactive TV Products and Markets

• Only 300-400,000 units have been sold to-date (189,000 are TiVO units), comparable to adoption of the VCR in the late 1970’s– Analysts believe that entrants have poorly explained the

mechanics and benefits to consumers

– Often products were priced too high; Replay was priced at $1,499. Motorola will will incorporate this technology into their set-top boxes

– TiVO offers several options including a $9.95 monthly subscription or product lifetime subscription of $259.00. TiVO is current being marketed in 4000 retail outlets

The Future of Interactive TV Devices

IP Telephony

• Cable companies are bundling voice services,primarily circuit switched today, with other broadband services. AT&T and Cox are leading the way

• Bundled offerings are expected to cut customer churn by 40%

• Most MSO’s are waiting for full IP capability to emerge• AT&T and Cox are currently testing IP telephony

technology

IP Telephony

• Time Warner experienced successful trials of IP telephony over fiberoptic networks

• Current technical challenges:– Delays in voice signals or loss of voice packets

– Commercial equipment delays; missing server that will manage features such as 411, 911, and call forwarding

– Technologies to reach critical mass in 2003 and beyond

• Benefits:– Estimated to be 40% cheaper to provide and maintain

– Leverages existing infrastructure rather building dedicated circuits

Advances in Telemedicine

New Uses for Video• Ambulance Telemedicine

– U. of Maryland pilots project that integrates video images, audio, vital signs and ECGs to be transmitted from within a moving ambulance to land-based workstations where they are used to manage the patient

– Project has been underway for 18 months with over 12 patients

– A similar pilot is also underway in Las Vegas

Advances in Telemedicine

• Tele-Home Health Nursing– Using a regular phone line and an MCI videophone customized

by American Telecare, Kaiser Permanente staff can have a video visit from a healthcare center with a patient at home

– Breathing is monitored on another line using headphones while the patient’s spouse moves the stethoscope around the patient’s body

– Preliminary trial results in Sacramento indicate nurses can contact up to 15 patients per shift as opposed to 6 on face-to-face visits traveling from home to home

Questions?

Today, wireless phones, personal computers, PDAs, and televisions are taking on one another’s functions.

Content can be sent to many platforms over multiple distribution channels.

Creating Convergence

For certain, three elements of convergence are emerging:

– Content:- combination of audio, video, data or just data– Platforms:- PC, TV, Internet appliance or game

machine – Distribution:- how content gets to your platform

and they are powerfully intertwined.

Creating Convergence

The challenges:• Standard technologies and architectures must be

adopted to ensure interoperability

• Content encryption tools must be developed for copyright protection

• Profitable investment in distribution capacity robust enough for two-way communications of various media

Managing the process to Convergence

• We can expect to use multiple devices most likely connected by the Internet.

• Consumers, with new technology choices, will demand content in one source, received on a single device, delivered by a single connection.

• Although this still seems far off, the outcome has already been given a name…

Managing the process to Convergence

Emergence

–What defines telecommunications today?–Emergence since the 1996 Act?–What’s ahead?

Telecommunications

Tele:- distant or at a distance

+

Communications:- an act or an instance of transmitting information; the technology of transmission of

information

=

Telecommunications:- Communications at a distance as by cable, radio, telephone or television

Economic Factors Affecting Competition

• Legacy long-distance subsidies (roughly $30 billion annually) produce backward economics.

• Its very difficult to build profitable models that require infrastructure. The existing Bell network is valued at more than $270 billion, not feasible to duplicate

• No elasticity in voice. Revenues often suffer when prices are lowered because demand does not grow.

Economic Factors Affecting Competition

The problem:• For example, author Steve Rosenbush cites in his

book, Telecom Business Opportunities:

– Building a network from scratch including switches, transmission, equipment and phone lines can run as much as $4,000 per customer

– The FCC reports consumer payments to local telephone companies average $360 annually

– At that rate, it would take more than 11 years to break-even

Business Opportunities with DTV

Datacasting:

• Households– games, video, Internet, or ticker services to TV

• Business– sending data to businesses without using T1

lines