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Quantifying the Hype…FMC & Convergence

Quantifying the Hype…FMC & Convergence. Presented by William Markey, President and General Partner, RCBG. 250. Cellular and fixed voice lines. 225. Lines (M). 200. 175. 150. 2003. 2004. 2005. 2006. 2007. Cellphone lines. Fixed lines. Market Observations.

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Quantifying the Hype…FMC & Convergence

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  1. Quantifying the Hype…FMC & Convergence Presented by William Markey, President and General Partner, RCBG

  2. 250 Cellular and fixed voice lines 225 Lines (M) 200 175 150 2003 2004 2005 2006 2007 Cellphone lines Fixed lines Market Observations • Fixed line substitution is displacing telco lines and accelerating fixed-mobile convergence • Wireless voice services continue to grow at an increasing rate since number of lines are not tied to a household, but a number of potential individual subscribers. • Wireless voice services are substituting fixed lines at the rate of 5+% per year. • Emerging opportunities exist for Fixed-to-Mobile converged solutions with the advent of dual-mode (cellular/VoIP) phones to offer services beyond cellular alone. Source: European Information Technology Observatory 2005

  3. Handset Desk Phone UMTS GSM Presence Data CDMA VOICE Gaming Email TV PC LAN WiFi Video IM DOCSIS PDA Laptop The Convergence Universe • True convergence implies: • Multi-Access • Multi-Device • Multi-Media • Multi-Application • But this is an evolution, not a revolution • 90% of wireless revenue is still generated by voice • Wireless operators must first make the case for convergence with voice • Therefore FMC voice is the top priority on operators’ convergence agenda • Convergence-oriented operators are actively seeking suppliers of FMC voice solutions today

  4. Voice & data 88% Fixed & Mobile 77% Telco & Media 66% 51% Telco & IT Device 46% 0% 20% 40% 60% 80% 100% A Changing Landscape: Convergence • Various types of telecom convergence will emerge over the next three years. They can be categorized in five general buckets of convergence. • Voice & data convergence is occurring now, and fixed-mobile convergence (FMC) will gain measurable traction by 2009 Percentage of Telecom execs indicating “very strong” or “strong” impact of convergence types • Voice and data convergence (VoIP, voice as an application) • Access technology convergence (wireline, wireless, mobile) • Convergence of telco and broadcast (media and content services) • IP/IT network convergence (next-gen network architecture) • Device convergence (consumer electronics converging with traditional telco) Source: IBM, Economist Intelligence Unit

  5. VOICE DATA VIDEO Telcos Telcos Telcos Satellite Cos Satellite Cos FIXED MSOs MSOs MSOs MOBILE Wireless Cos Wireless Cos Wireless Cos Diminishing Boundaries of Service Providers • Fixed Telecoms, Wireless Operators, Satellite Cos, and Cable MSOs have multiple and often competing priorities • Leverageable expertise, time-to-market, and addressable market size will determine winners in each of the six following categories

  6. VOICE DATA VIDEO Cingular/SBC One Bill Cox VOD Comcast VOIP SBC IPTV FIXED BT 21CN DT IPTV BT Bluephone Bell Canada FMC T-Mobile Hotspot bundle KT One Phone Du Swisscom Mobile Unlimited DoCoMo Passage Duple FT/Orange FMC Cingular EDGE Sprint TV MOBILE TWC MVNO Vodafone Live! mmO2 mobile VOD Cingular FMC T-Mobile FMC DoCoMo imode KTF mobile video Sprint FMC Verizon EVDO Nextel PTT mmO2 Active Global Operator Initiatives • Fixed-mobile voice services are top-of-mind for every major operator in NA and Europe and AP. Operators unanimously acknowledge that FMC voice will occur in their markets.

  7. Residential Household Voice Subscriptions 140,000 120,000 Wireless Wireless (substitution) 100,000 Fixed Wireless Telco Circuit Switched 80,000 VOIP over Telco Households (000s) 60,000 Fixed POTS VOIP over Cable 40,000 20,000 VoIP - 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Drivers for Fixed-Mobile Convergence • Wireless operators: accelerate substitution by converging wireless voice with fixed VoIP • Cable MSOs: accelerate VoIP adoption by converging fixed VoIP with wireless voice • Telcos: offer VoIP, wireless, or both in order to participate in the inevitable substitution Source: RelevantC 2004, North American market trends

  8. Operator type: Cellular Operator Cable MSO Telco Operator (1) Cellular service: Branded Cellular Voice Need 3rd-party cellular partner Need cellular service or 3rd-party (2) VOIP service: Need VOIP service or 3rd-party Branded VOIP Branded VOIP (3) Broadband service: BYOBB Branded HSD Branded DSL Residential Home Customer segment: Corporate Office WiFi Public Hotspots Service Provider Positioning for FMC • All operator types are pursuing FMC voice services, but most will require 3rd party network partners • Three services are needed: (1) Cellular voice service, (2) VOIP service, (3) Broadband service • An operator must own all three, fill their gaps through partnerships, or lease turnkey networks

  9. Total Worldwide Handset Shipments, by data technology millions WCDMA CDMA2000 Non-data EDGE Dual-mode WiFi Handsets GPRS 1xEvDo/DV 1xRTT Dependency on Device Availability Dual-mode Handset Availability • Dual-mode WiFi/cellular handsets began shipping in quantities in ‘05 • Dual-mode may represent 15% of shipments by ’08, on phones with WCDMA, CDMA 2000, EDGE, and EV-DO • Some handset makers will establish PBX partnerships (e.g. Motorola with Avaya) • Some will focus solely on consumer VOIP market • Some will pursue single-mode WiFi-only handsets (e.g., UTStarcom) Dual-device Implementation is an option • This implementation would be a stop-gap measure for seeding the market until dual-mode technology is prevalent and proven • Traditional cell phone is used when the subscriber is outdoors on the cellular network • When indoor, a VOIP deskphone, VoWiFi phone, or PC-based softphone could be used for IP calls. Source: RelevantC 2005, Deutsche Bank

  10. Call routing from MSC to IP • Signaling conversion SIP/SS7 • Authentication at HLR • Location presence management • Softswitch • VOIP media gateway PSTN Outdoor GSM Network Back Office HLRVLR SGSN • Device provisioning • Feature server • Service management • Billing integration BTS BSC Softswitch Indoor Office Building Private IP Network Public IP Network WiFi AP IP-PBX Indoor Home • Handset identification • User authentication • WLAN/WAN negotiation • Domain awareness • WiFi AP management • WLAN network QoS mgt • User authentication • WLAN network QoS mgt Home network WiFi AP Source: RelevantC 2005 Dependency on Network Management Components • Operators require end-to-end system upgrades to offer FMC voice services

  11. Operators Approaches to FMC • Multiple approaches will be pursued. Tactical adoption of technologies will occur by segment. • Optimal approach depends on operator type, target customer, and billing/pricing ambitions

  12. Market Share: Increased subscriber growth due to differentiated service offering ARPU Increased MOU-per-subscriber due to “stolen” minutes from POTS at home/office Termination: Changes in termination revenue & costs due to lower VOIP interconnect fees Roaming: Changes in international roaming revenue due to international VOIP calling Capacity: Cellular network savings due to offloading traffic to the IP network VOIP investment: Installation and operation of the VOIP infrastructure FMC upgrades: Installation and operation of the FMC infrastructure software and upgrades CPE:: Increased CPE and handset subsidization costs CPGA:: Increased marketing and customer support costs from rolling out new service DSL impact: Increased sales of broadband services to support VOIP growth POTS impact: Loss of POTS voice revenue as a result of VOIP displacement Impact on Operator Revenue & Costs Implementing a converged voice service will result in significant changes to the Service Provider’s operations. FMC integration, subscriber conversion, pricing & bundling, network investments, marketing and support must all be considered. These can be quantified by modeling all systematic drivers:

  13. FMC Impact on Revenue & Costs Each of the drivers can be isolated and quantified. The following example illustrates the impact of FMC on the Operator’s annual profitability at steady-state. The impact is positive under both no-growth and growth assumptions.

  14. FMC Impact on Revenue & Costs Excerpts of ROI model for an Integrated Operator with 5.0M subscribers at Year 1

  15. 44% effective price decrease Ala Carte Pricing 27% effective price decrease Bundled Pricing 14% effective price decrease Blended Pricing Anytime/Anywhere Pricing of Cellular/VOIP Packages Note: Illustrative Examples based on Operator conversations

  16. Demand drivers for adopting mVOIP The impact of mVOIP on enterprise spending was modeled using a scenario of a 5,000-employee enterprise with pre-existing POTS service The migration to VOIP results in over $6.0M in savings over a 5-yr horizon The migration to Hosted mVOIP results in over $9.0M in savings. This savings is driven by a carrier-hosted plan that includes VOIP and cellular. Business Case for Mobile VOIP The enterprise saves $3.0M by adopting the mVOIP service, and the Service Provider increases its revenue in this account from $15.3M to $16.2M

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