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GLGi: FTTx and IPTV Rollout

GLGi: FTTx and IPTV Rollout . Joseph Savage, Managing Director, Telecom ThinkTank Inc. GLG Institute Wednesday, November 29, 2006 Penn Club, New York . Contents.

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GLGi: FTTx and IPTV Rollout

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  1. GLGi: FTTx and IPTV Rollout Joseph Savage, Managing Director, Telecom ThinkTank Inc GLG Institute Wednesday, November 29, 2006 Penn Club, New York

  2. Contents • short list of companies for FTTX deployment  would include: Verizon, AT&T, Bell South, and all-other-carriers for service providers, and would include:  Tellabs, Alcatel, Cisco, Motorola, Adtran, Corning, ADC Telecommunications and all-other-FTTx vendors.  Topics would include: • Impact of service provider choice of FTTx architecture on their roll out status – on each service provider vendor list – and on the service provider’s ability to deliver IPTV. • Effect of current legislation and regulatory status on pace and scale of FTTx deployments • Early days, but information on take-rates and subscriber satisfaction for FTTH. • Field experience, costs, forecasts and projections – speculation by an independent industry observer. TTTCo FTTX Status - 2

  3. Joseph Savage is the Managing Director at Telecom ThinkTank Inc, a telecommunications consultancy. He has more than 30 years of experience in telecommunications networking and services. He has been a consultant to equipment vendors, analyst firms, and service providers in the areas of strategic, business, technology and product line planning. Previously, he was the President and Chief Executive Officer at Broadnet Technologies Inc, Radiant Photonics Inc, Geyser Networks Inc and Vice President-Research, at RHK. He has served clients as: Alcatel, Lucent, ECI Telecom, Huawei, SBC, Verizon, Bell South, NTT, British Telecom, and FastWeb.

  4. North America Ramping Up • USA - FTTP Verizon, FTTN AT&T • Canada - FTTN and DSL, FTTH SaskTel • Mexico - Community Trials Underway, Monterrey TTTCo FTTX Status - 4

  5. Cable Operators Fierce Triple-Play Competition • Cable MSOs - $85 Billion Network Investment from 1994 to 2004 • Voice Service Deployments Accelerating • HDTV ubiquitous in 2006 • DVR, PVR part of service offerings • Interactive offerings increasing • Pursuing Business Customers • Footprint expanding to offer leased line and IP Services • Comcast, Time-Warner, Cox, Cablevision, Rogers, Shaw TTTCo FTTX Status - 5

  6. Status of US Connection Access Source: RVA Render & Associates, LLC 2006 TTTCo FTTX Status - 6

  7. FTTH Homes Passed(Cumulative – North America) Source: RVA Render & Associates, LLC 2006 TTTCo FTTX Status - 7

  8. FTTH Homes Connected(Cumulative – North America) Source: RVA Render & Associates, LLC 2006 TTTCo FTTX Status - 8

  9. Overall Take-Rate for FTTH (Cumulative – North America by Year) Source: RVA Render & Associates, LLC 2006 TTTCo FTTX Status - 9

  10. Overall Take-Rate for FTTH Non-RBOC (Cumulative – North America by Year) Source: RVA Render & Associates, LLC 2006 TTTCo FTTX Status - 10

  11. 6.0% +5.1% +4.4% +3.8% 4.0% +2.1% 2.0% 0.0% Annual Access Line Growth (%) 1997 1998 1999 2000 2001 2002 2003 -2.0% -4.0% -3.1% -3.7% -4.1% -6.0% Competition In Action • Loss of Dial-up/Fax lines • Mobile as only line Competition Attacking Core Business! TTTCo FTTX Status - 11

  12. Telco Industry Overview andG-PON deployments • RBOCs – Verizon, AT&T, Bell South • 2nd Tier IOCs – Embarq, Windstream • 3rd Tier IOCs – Hope City Tel, Windom • IOCs as CLECs – GVTC, Windstream • Overbuilder CLECs – Grande, Knology There are five segments of North American Telco’s TTTCo FTTX Status - 12

  13. FTTH Industry Overview - RBOCs • Verizon passing 3 million homes per year – Tellabs (BPON/GPON), Motorola (BPON/GPON) and Alcatel (GPON) • AT&T passing 0.5 million homes per year – Alcatel (FTTN, GPON) • Qwest has no public FTTH plans • BellSouth adding 150k new homes per year on FTTC – Tellabs (FTTC) • Bell Canada –Lucent (FTTN) TTTCo FTTX Status - 13

  14. Verizon FTTP Deployment 3Q’06 Deployment Status: • 5.4M premises passed in 16 states • 3.8M premises open for sale 2006 Deployment Objectives: • Pass 6M premises • 5M premises open for sale 2010 Deployment Objectives • Pass 18M premises by 2010 • Over 50% of households FTTP Deployed Pipeline Variations Affect Vendors QoverQ TTTCo FTTX Status - 14

  15. Distribution Terminal Verizon Access Network Status Legend: GPON -- Gigabit Passive Optical Network OLT -- Optical Line terminal Cost Per Premises Passed • Lower material cost • New & improved technology • Innovations • Training & productivity TTTCo FTTX Status - 15

  16. Verizon Maintenance (OpEx) Savings Network Report Rate - Outside Plant 80% Total field maintenance dispatches and OSP-related dispatches showing solid declines TTTCo FTTX Status - 16

  17. Improved Home Networking Today 2007 and Beyond New wiring Existing wiring New wiring Existing wiring Cost Per Premises Connected • Simplified in-home network - no new wires • Enhanced customer experience & customer interaction • Simplified installation process • Evolution toward remote service activation and maintenance TTTCo FTTX Status - 17

  18. Broadcast Video Voice, Data, IP TV Voice, Data, IP TV Serving Office Fiber Fiber Super Headend Hub Office Serving Office Splitter Serving Office Super Headend FiOS TV Deployment 2006 Video Transport Deployment Objectives: • 2 national super headends • 9 video hub offices • 292 video serving offices • 1.8M homes open for sale • Network delivers RF Video Services • Migrate to IPTV after Technical Issues Resolved • Somewhat better TV Image TTTCo FTTX Status - 18

  19. Mid-Year FiOS Internet Results Verizon FiOS Internet Subscribers and Penetration 2Q’06 Results: • Average penetration in wire centers open for sales • 6 months = 8% • 9 months = 12% • 12 months = 15% • Monthly churn less than 1.5% 725K 375K 15% 12% 70% of subscribers are new to Verizon broadband TTTCo FTTX Status - 19

  20. Video Franchise Status Number of Franchises 4Q’05 Current 2006 Projected Households with Franchises (M) Statewide legislation passed or local franchises granted 4Q’05 Current 2006 Projected TTTCo FTTX Status - 20

  21. FiOS Data – Early Results Subscribers/Penetration % Homes Marketed To 35-40% 17M 6M – 7M 15% 5M 725K • 55% market share by 2010 TTTCo FTTX Status - 21

  22. Early FiOS TV Results Verizon FiOS TV Subscribers • Monthly Churn less than 1.5% • 99.4% subscribe to Premier Tier • 60% have HD and/or DVR • 37% subscribe to movie or sports package • 12% of gross sales have included Home Media DVR 175K FiOS TV Subscribers About two-third of subscribers are cable defectors TTTCo FTTX Status - 22

  23. Penetration – FiOS Video Subscribers/Penetration % Open for Sale 20-25% 15M 3M – 4M 10% 1.8M 175K Target - 26% market share by 2010 TTTCo FTTX Status - 23

  24. Strong Demand for Bundles FiOS TV Customer Base • 99% of FiOS TV base has 2nd product • Bundled line churn is 50% lower than voice-only lines • 56% of FiOS TV sales include FiOS Internet Triple Play 79% FiOS TV Only FiOS TV + Data FiOS TV+ Voice TTTCo FTTX Status - 24

  25. Compare Verizon and AT&T: TTTCo FTTX Status - 25

  26. AT&T and Bell South • AT&T – FTTN passing 18 million homes by 2008 (behind schedule) • New technology issues (VDSL, MSoft) • Cost of Outside Plant higher than planned • U-verse and Home Zone initiating • 1 million FTTH (Alcatel 7342 B/G PON) • Video Transport in Place, VSO’s in construction TTTCo FTTX Status - 26

  27. AT&T and Bell South • Bell South – Waiting to be Acquired • Historical Leader of Fiber-in-the-Loop • History of FTTC Deployments (150,000 per year in greenfields) • Single customer for Tellabs/AFC/Marconi/Reltec FTTC products (new generation=committed levels?) • Assumed will adopt AT&T FTTN style TTTCo FTTX Status - 27

  28. Bell Canada & Qwest • Bell Canada – only customer for Lucent Stinger products (Lucatel merger issues) • Committed to FTTN architecture, “split node” migration to FTTH • FTTN issues with HDTV • Voip from CATV MSOs very successful TTTCo FTTX Status - 28

  29. Bell Canada & Qwest • Qwest Limited by debt • Recently issued RFI for GPON FTTH equipment • Pushed by Planned Community Builders • Uses Alcatel xDSL and FTTH gear • Numerous Municipal and Open networks in its area TTTCo FTTX Status - 29

  30. Market Forecast - KMI 16 million subscribers in 2011 AE – Muni’s, Utopia, Overbuilders PON – RBOC’s, IOCs, Utilities 2007 transition year BPON to GPON Almost zero GEPON TTTCo FTTX Status - 30

  31. AE & PON FTTH Vendors All Tiers of Operators TTTCo FTTX Status - 31

  32. The Rest of the MarketIOC Industry Overview • Three Groupings • 2nd Tier Multi-State holding Companies • Embarq, Frontier, Century, TDS… • 3rd Tier Single State, Single Franchise IOCs • Paul Bunyan Tel Coop, Farmers Tel, …… • Overbuilders and Municipalities • Knology, Bristol VA Utilities, ShenTel, GVTC, Comporium, Grande Communications……. TTTCo FTTX Status - 32

  33. Small IOC RBOC Access (14%) Other (4%)) USF (35%) Access (45%) Other (2%) Local Service (18%) Local Service (82%) Telco Sources of Revenues Drives different competitive dynamics for smaller Telco’s TTTCo FTTX Status - 33

  34. Valor and AllTel 2nd Tier IOC Market Largest Multi-State IOCs Largest Multi-State IOCs 5th largest LEC 7.1 million access lines in 18 states 6th largest LEC 3.4 million access lines in 16 states 7th largest LEC 2.5 million access lines in 24 states 8th largest LEC 2.4 million access lines in 22 states Approximately 20 customers Smallest is Greenpoint – 200k lines TTTCo FTTX Status - 34

  35. 2nd Tier IOC Market Embarq was formed in 2006 through the spin-off of Sprint’s landline business and Sprint North Supply. HQ in Overland Park Kansas 7.1 million access lines in 18 states – Indiana, Florida, Delaware, Kentucky, Kansas, Missouri, Nebraska, New York, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Wisconsin and Texas. TTTCo FTTX Status - 35

  36. 2nd Tier IOC Market Windstream was formed in 2006 through the spin-off of Alltel's landline business and merger with VALOR Telecom. HQ in Little Rock, Arkansas 3.4 million access lines in 16 states – Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, Nebraska, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina and Texas. TTTCo FTTX Status - 36

  37. 2nd Tier IOC Market Frontier is the nation's 7th largest telecommunications provider offering local, long distance, and Internet access services in 24 states over 2.5 million access lines HQ Citizens Tel in Chicago, Illinois Century Tel is the nation's 8th largest telecommunications provider offering local, long distance, and Internet access services in 22 states over 2.4 million access lines HQ in Monroe Louisiana TTTCo FTTX Status - 37

  38. >10K (21%) <30.9 K> 5-10K (9%) <6.2 K> <1.1 K> 0-5K (70%) CO Switch Market Segments • Base: 23,650 switches – average CO line size - 10.5 K • 70% of CO switches are “small” • 56% of “small” COs in IOCs • 18% of small COs in VZ-GTE • 26% in other RBOC’s • Nortel, Lucent and Siemens are dominant vendors • Several secondary suppliers (Ericsson, NEC, AE…..) This information will relate back to Access product requirements later in the presentation. TTTCo FTTX Status - 38

  39. Hosts (16%) Tandems (4%) Std-Alone (26%) Remotes (54%) Hosts/Remotes Dominate Small Telco's’ • 54% of All Switches Are Remotes • Average >3 Remotes Per Host • 70% of Switches Are In Host/Remote Associations Complex migration from current to next-generation IP-centric network architecture – drives big-box product selection TTTCo FTTX Status - 39

  40. FTTH Deployment Plans • 2nd Tier Independent Operating Companies • Embarq – planning G-PON in 2007 • TDS – limited trials in 2006 • Tennessee, Georgia, Oregon and Washington • Citizens - limited trials in 2006 • Windstream - limited trials in 2006 TTTCo FTTX Status - 40

  41. 2nd Tier IOC Access Market • Capital Expenditures for Tier 2 was $5 to $6 Billion in 2005 • DSLAM/DLC/FTTx portion was 25% to 30% ($1.4 Billion to $2.4 Billion • Baird Survey indicated CapEx growth of 10% per year in FTTx spending segment TTTCo FTTX Status - 41

  42. IOC Industry FTTH Overview • April 2006 Render Vanderslice Data • Non-RBOC Homes Passed – 570,000 (of 4.1 million 14%) Non-RBOC Homes Connected – 241,000 (of 671,000 36%) TTTCo FTTX Status - 42

  43. 2nd Tier IOC FTTx Vendors TTTCo FTTX Status - 43

  44. 2nd Tier IOC Favorable • Central Purchasing/Decision Point • Technical Staff • Purchasing for multiple states • Not Tied to RDUP Funding • Easier to get video franchise, often cellular provider • Less complex EMS/OSS requirements TTTCo FTTX Status - 44

  45. 3rd Tier IOC Market TTTCo FTTX Status - 45

  46. 3rd Tier IOC Industry Overview 111 M Total U.S. Households IOC Segment • 1,300-1400 Independent Telco's (IOC) • IOC’s overbuilding adjacent territory • 1,150 Municipalities • Developers/Overbuilders • Segment has approx. 28M homes – 9 million 3rd Tier • FTTH passes 1-2% of homes today • 10-15% homes passed by 2010 70M RBOC Core 28M Households in IOC Segment 20M clustered rural 4M Rural 4M Muni Owned Urban Sources: U.S. Census Bureau; FCC, 2005 TTTCo FTTX Status - 46

  47. 3rd Tier IOC Market Status • 83% responded Yes to an NTCA survey “Will you increase the amount of fiber in your access network in the next five years?” • Baird report: “Tier 3 carriers are in the early stages of an upgrade cycle with the greatest spending on next-gen equipment likely in the next two years.” TTTCo FTTX Status - 47

  48. 3rd Tier IOC Market Favorable • Funding for rural IOCs from Universal Service Fund and Rural Utility Service Loans • Usually have CATV Franchise and Cellular Operations as well • HITS and NCTC partnerships • Enthusiastic Local Support TTTCo FTTX Status - 48

  49. 3rd Tier IOC Market Statistics • 3rd Tier IOCs • 1,300 – 1,400 small operators • 8 million subscriber lines – long loops • Average access lines – 6,250 35 Emp’s • Max: 35,000 lines Min: 700 lines • Total Capital Expended by Tier 3 in 2005 - $3 Billion (average $2.3 Million per operator) • DLC/FTTX/DSLAM – 42% of CapEx ($1.26 Billion) • Segment CapEx growth – 15% per Yr TTTCo FTTX Status - 49

  50. Role of Rural Utility Service • RUS funding tied to purchase of products on RUS-approved list • Some qualifications for “USA content” in the listed products • Some loan programs not tied to listed products TTTCo FTTX Status - 50

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