The Second Derivative: New Opportunities in Telecom

1. Stratus World 2006 – Las Vegas The Second Derivative:New Opportunities in Telecom Roderick K. Randall Senior Managing Director Vesbridge Partners

2. Why Start or Invest in a Telecom Company? • Why do you rob banks, Willy? • “Cause that’s where the money is” Willy Sutton Bank Robber

3. Where are the New Opportunities? • Answer: • The Second Derivative

4. Second Derivative Plays • The Base • Internet infrastructure • Starting with narrowband and moving to broadband. • The First Derivative opportunities • Internet based companies such as AOL, Amazon, Yahoo, Google, eBay, and others • The Second Derivative Plays • Skype - $4 Billion! • Moogle, MeBay, Mamazon, Metc. • Mass Personalization and Citizen Media • MediaCos (not Telcos or CableCos, but Network TV without the Network) • Voogle – Video Search Based TV Ad Delivery

5. A Network Carol • The Ghost of Christmas Past • The Ghost of Christmas Present • The Ghost of Christmas Future

6. The Ghost of Christmas Past • Telecom was the most valuable and profitable industry in the world • When I joined AT&T Bell Labs in 1981 it was the worlds largest company and its most valuable • We’ve since seen Divestiture and Trivestiture, (and now reassembly!) along with a tremendous growth in the competitive environments… • Along with a dramatic surge in capacity and capability in the following 25 years.. • Spurring in turn a tremendous surge in innovations, not the least of which included the internet and the web

7. LGNs: Last Generation Networks • Voice and Connectivity • Local and Long Distance • Bandwidth in $/Minute, $/Mile,

8. Worldwide Telecom Service Revenues$1.4 Trillion in 2005 $1.0 Trillion Source: IDC

9. The Ghost of Christmas Present • Strong demand for higher and higher bandwidth • Increasingly Pervasive “always on” Broadband • Enabling the 1st derivative business models to enormously prosper such as those of Amazon, Yahoo, eBay, and Google • Google is now worth over $100 Billion, which is more than any telecom operator in the world, except for Vodafone Group, which has grown by acquiring over 26 operators • Skype was already acquired for $4 Billion by eBay • P2P traffic from a small percentage of subscribers dominates the internet backbone • All telcos are planning some form of IPTV in a triple play with 10s of Mbps of BB BW

10. The Ghost of Christmas Future • A number of potential futures • One is where telcos ride the new wave of opportunity by radically transforming their business models to meet the new challenge • Another where telcos are ridden by the new 2nd derivative players, some of which are the 1st derivative players who have evolved and are now gear-shifting into overdrive • Let’s look at the second one first, because that’s what Dickens would do

11. Key Catalysts • Plentiful Consumer Broadband in capacities un-dreamed of 10 years ago… • Driven by the MAD Winner-Take-All competitive threat of The Triple Play … • Driven by the push to mix Entertainment Delivery with Telecom… • Digitally using IP… • At low costs… • Even free… • Or “apparently” free to the consumer… • Using a new advertiser supported business model… • Which is no longer broadcast based… • And everything is stored on increasingly abundant cheap storage, and instantly retrievable by anyone anywhere

12. What Do You Call 1,024 Petabytes? • And the answer is… • An Exabyte • How many Petafiles could a woodchuck chuck, if a wood chuck could chuck wood? • Terabytes of Storage will become common place in the average broadband consumer home within 5 years • As the tendency to keep rather than discard data increases, along with more sources • What is a Googabyte? • 1 with 100 Zeroes of bytes

13. Magnetic Disk Storage Cost:Declining at a Rate of 45% Annually $1,000.00 $100.00 $10.00 $1.00 $0.10 $1,000.00 Cost of 1GigaByte of Hard Disk Storage Cost of 1G Byte of Capacity $303.00 $92.00 $28.00 $8.37 $2.53 $0.77 $0.23 $0.07 Source: Berghell Associates, 2001

14. A New $1 Trillion Industry… • It will be made up from the convergence and collision of three different industries • Entertainment: $72 Billion • $12 Billion Music • $60 Billion Movies • Advertising: $600 Billion • Telecom Services:$1.4 Trillion • The Tail may be wagging the Dog • Net Net: $2 Trillion  $1 Trillion • But, there will be a different set of winners and losers • Key Catalysts: Read on…

15. Enter Googlezon • EPIC 2014, a short film by Matt Thompson and Robin Sloan • Ads move from broadcast TV, newspapers, print, billboards, other, to Online • NY Times shuts down, unable to support its printing costs • Mass personalization makes advertising much more compelling both to advertisers and potential customers • Google buys Amazon to create Googlezon • Everything that’s bought begins with a search • With personalized, search driven, real-time inserted, online Ads… • People get ads that they actually want to watch, • Related to something they are interested in purchasing, • Rather than are annoyed by and seek to skip

16. Which Becomes Googlezonage • TV is offered for free, again, this time Pointcast over IP, not broadcast • All supported by a real-time hyperlinked Mass Personalized Ad model • NBC, ABC, CBS shut down, replaced by Bloggers • MTV, Fox, and Craig’s List survive as the new Ad Aggregators (a la Overture) • Telephony rides for free on IP, leading to financial crisis in network operators • All telcos learn to operate within bankruptcy like the airline industry • Google buys SBC (out of bankruptcy) and Vonage to keep the broadband pipes flowing • Wireless is the only surviving stand alone network business • But its threatened by Googlezonage’s new Global WiFiMAX FreeNet • Enter Googlezonage Mobile

17. It’s a MAD MAD World • M.A.D.: Mutually Assured Destruction for telcos and cable operators

18. But, There’s An Alternative Future • Telcos and Cablecos not only offer IPTV, but get involved in Internet TV • They add intelligence in their networks to make sure they are paid for the value of connection in order to keep the pipes alive • Nobody unsustainably gives valuable network connections away for free without someone paying the operators • The new business models that are created involve a true payment methodology for QoS that reflects value, but that could be paid by sponsors such as advertisers • New applications are spawned, which further institutionalize the network providers into the value chain, rather than Skype them out • Connection will continue to be valued and paid for

19. The Stupid Network is a Stupid Idea • Stupid Networks lead to stupid and unsustainable Business Models • Stupid Networks would ultimately only have price/bit as differentiation… • Leading to rapid commoditization… • Which drives profitability out of all competitors… • Which makes the business un attractive… • Which makes it un-finance-able… • Which makes it un-staff-able with top talent • Which leads to collapse

20. Content Instant Messaging Multimedia messaging Network Based Security Parental Control Spam Filtering Intelligent Content Delivery & Management Content Dimensions Of Network Intelligence Signaling and Control Control • AIN Services • 800/900, Caller ID/Name • Voice Mail, IVR • Mobility • SMS • SIP • Fixed/Mobile Convergence IP Enhanced 3-D Intelligence PSTN Management Management DNHR Self Healing Networks Flow Through Provisioning MPLS

21. VLR HLR HLR HLR VLR BSC WBSC Hosted Voice Svc Provider IMS WiFi/SIPBSC IP Pico Cellular L-AP WiFi L-AP Bluetooth U-AP WiMax M-AP WLAN GWY MFW IP SS/MM MG MG MS SG SG SS Fixed-Mobile Convergence Architectural Environment Pre- Paid SS7 HLR VLR SMSC RAN GSM CDMA WCDMA 1x-RTT/EV-DO HSDPA PSTN A-Interface MSC MSC

22. Pre- Paid SS7 HLR HLR HLR VLR VLR HLR VLR SMSC BSC RAN GSM CDMA WCDMA 1x-RTT/EV-DO HSDPA PSTN A-Interface MSC MSC WBSC Hosted Voice Svc Provider IMS WiFi/SIPBSC IP Broadband Residences Pico Cellular L-AP WiFi L-AP Bluetooth SIP PBX U-AP WiMax M-AP Remote Offices WLAN GWY MFW IP MG SS/MM MG MG MS SG SG SS PBX Fixed-Mobile Convergence Architectural Environment

23. Pre- Paid SS7 HLR HLR HLR VLR VLR HLR VLR SMSC BSC RAN GSM CDMA WCDMA 1x-RTT/EV-DO HSDPA PSTN A-Interface MSC MSC WBSC Hosted Voice Svc Provider IMS WiFi/SIPBSC IP Broadband Residences Pico Cellular L-AP WiFi L-AP Bluetooth SIP PBX U-AP WiMax M-AP Remote Offices WLAN GWY MFW IP MG SS/MM MG MG MS SG SG SS PBX Fixed-Mobile ConvergenceFT Server Opportunities

24. Intelligent Content DistributionEvery Song, Artist, Video, or Film Ever Recorded… On Demand Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem

25. Intelligent Content DistributionContent Replication and Pre-Caching Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem Local DVRs • Store most recent tv shows • Favorites Home Media Server • Store all purchased and downloaded content • Movies • TV shows • Pictures • MP3s • Etc. Network Edge DVR • Store the most popular content: • Most downloaded movies • New releases • Most popular MP3s Network Core DVR • Store all content: • All movies available for download • All Music available for download • All Video...

26. BW/QoSPolicy Server Real Time Billing Policy Server PCS PCS Intelligent Content DistributionPolicy Control Servers Control Network Enforcement Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem Policy Enforcement Point Local DVRs • Store most recent tv shows • Favorites Home Media Server • Store all purchased and downloaded content • Movies • TV shows • Pictures • MP3s • Etc. Network Edge DVR • Store the most popular content: • Most downloaded movies • New releases • Most popular MP3s Network Core DVR • Store all content: • All movies available for download • All Music available for download • All Video...

27. Search based Personalization Entitlement & DRM Real Time Ad Insertion P2P Swarm Controller PCS PCS Intelligent Content DistributionSearch Based Personalized Real Time Ad Insertion PCS PCS Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem Policy Enforcement Point Local DVRs • Store most recent tv shows • Favorites Home Media Server • Store all purchased and downloaded content • Movies • TV shows • Pictures • MP3s • Etc. Network Edge DVR • Store the most popular content: • Most downloaded movies • New releases • Most popular MP3s Network Core DVR • Store all content: • All movies available for download • All Music available for download • All Video...

28. Intelligent Content DistributionControlled Peer-To-Peer Swarmcasting Search based Personalization Entitlement & DRM Real Time Ad Insertion P2P Swarm Controller PCS PCS PCS PCS Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem Policy Enforcement Point Local DVRs • Store most recent tv shows • Favorites Home Media Server • Store all purchased and downloaded content • Movies • TV shows • Pictures • MP3s • Etc. Network Edge DVR • Store the most popular content: • Most downloaded movies • New releases • Most popular MP3s Network Core DVR • Store all content: • All movies available for download • All Music available for download • All Video...

29. Intelligent Content DistributionFT Server Opportunities Search based Personalization Entitlement & DRM Real Time Ad Insertion P2P Swarm Controller PCS PCS PCS PCS Guest Room Master Bedroom Home Media Server DSL Network Edge Cable Network Core Home Theatre Fiber Ethernet Switch DSL/Cable Modem Policy Enforcement Point Local DVRs • Store most recent tv shows • Favorites Home Media Server • Store all purchased and downloaded content • Movies • TV shows • Pictures • MP3s • Etc. Network Edge DVR • Store the most popular content: • Most downloaded movies • New releases • Most popular MP3s Network Core DVR • Store all content: • All movies available for download • All Music available for download • All Video...

30. $1 Trillion Market Grows to $3 Trillion • Oops, what’s that ringing sound? • Was that the alarm clock waking me up from this dream, or is it a nightmare??? • You be the judge

31. Thank You! www.vesbridge.com