The Perfect Storm The Reality of the Telecom Industry Richard Shockey IETF ENUM WG co-chair

1. The Perfect Storm The Reality of the Telecom Industry Richard Shockey IETF ENUM WG co-chair rshockey@ix.netcom.com Disclaimer: Opinions stated here are personal and not necessarily those of my employer

2. The Reality of the Telecom Industry • The Reality of Convergence • The IP and PSTN worlds are colliding

3. Where are we at … • CLEC’s have been decimated… • Long Haul Transport in C-11 • IXC’s are severely wounded… • LD revenues down 10-25% due to wireless substitution • But they still own the IP backbones … • Seasoned Enterprise Sales focus Cable operators are drowning in debt • IP products doing well but topology questionable • Ability to handle HDTV questionable • FCC Classification gives them the right to block VoIP etc. • Employment in Telecom down by over 400K

4. Where are we at … • Wireless Industry isn’t a pretty sight either • ARPU is down … Customer acquisition costs up • W-LNP, E-911, 2.5G capex eating at earnings • 3G Wireless will NEVER happen • Forget the Spectrum issues • No Vendor Financing • The real issue … Tower NIBY, 4x the number of towers required • Wireless broadband 802.11 , MMDS? • Mobility, Security … Brick & Iron problems • Overall Industry CAPEX is flat • May be returning to historical norms of 15% of revenues

5. The Industry is growing .. but landline Voice is the most profitable segment

6. ILEC Revenue Picture 1Q 02 Estimates (source Merrill Lynch) Total Revenues Land Line Service % of Total Revenue Verizon 16,266 5,620 33% SBC 13,394 5,675 43% Qwest 4,684 4,079 87% Bell South 7,477 2,983 39% Market CapAdj Net Debt Debt to Cap Ratio Verizon 115,643 61,356 53% SBC 115,464 25,463 22% Qwest 11,498 24,662 214% Bell South 60,567 19,618 32% ATT 48,144 34,400 71% WCOM 14,855 34,400 156% New Investment Potential

7. Reality Check • ILEC’s are between a rock and a hard place • The Roxanne Googin thesis • Data is growing but Voice Revenues underpin the entire Telecom Industry • ILEC Landline Business starting to shrink • 5 million landlines lost in 2001 • Second line consumer business is over • Reduction Fax Usage • Consumer disconnect from Landline to Wireless beginning • IP Communications disruptive impact • E-Mail – IM • 2nd line conversion to Cable – DSL • ( but that’s not too profitable for the ILEC’s either )

8. The next assault …. Enterprise VoIP bypass • The Business Case for Voice over IP is still compelling • Enterprises want to leverage their investment in IP networks • Cost Reduction #1 • Toll Bypass – “The Death of Distance” still makes sense • Simplified Add Modify and Delete Users • Single Wiring Harness Administration • Rapid Service Creation • Applications created at the Edge using standard tools – XML • Time to market

9. Enterprise Toll Call Destinations

10. What has changed … • Protocol Wars are over …. SIP [ IETF - RFC 2543 ] wins! • Every Copy of Windows XP is SIP enabled • Enterprise .NET server will be a SIP proxy • Every major Enterprise Phone Vendor now supports SIP • Preferred protocol for IP Centrex • SIP Unifies Real-time Communications • Voice • Text [ Instant Messaging ] • Video • Quality of Service Issues now well understood • 802.1p Ethernet Priority Bit • Remove Hubs – Convert to 10/100 switches • Overprovision IP transport

11. Real movement… • There are substantial indicators that the market for IP Telephony is turning • Enterprise driven • IP PBX sales are gaining steam, 40% year to date increase in sales • IP Centrex has the attention of service providers SP IP Centrex Revenue North America : Source Gartner Dataquest

12. The Next Tsunami : The ENUM [RFC 2916] Problem Statement How do you find a service on the Internet if all you have is a Telephone Number ? ? Voice Video Text

13. Simple ENUM Call Flow SIP ENUM Global Directory (DNS) Equates +1-202-555-1234 to sip:mark@carrier.net to enable Voice over IP using SIP 3. DNS returns NAPTR record containing SIP URL to Calling Party UA 2. Calling party proxy UAC queries DNS for location of end point 1. The caller simply dials the person’s normal telephone number 4. Calling party UA connects the call

14. Practical Problem in the Enterprise – Creating the Voice Extranet • Phone numbers only routable over PSTN network • Enterprise Dialing plans cannot be accessed by Trading Partners • Connect “Friends and Family” Customers and Suppliers to Single Dialing plan (E.164) over IP ENUM

15. What does this mean ? Have we reached a “Tipping Point” in the industry ?

16. What does this mean ? • Enterprises taking their voice traffic off the PSTN will further cannibalize ILEC revenues • ILEC’s lose high margin LD opportunity • Declines in business landlines trunks will eventually undermine residential cross-subsidies and Universal Service Fund obligations • ILEC’s left with even larger stranded costs • ILEC’s left with high cost consumer markets • Wall Street will go ballistic on the IXC’s - ILEC’s • How worse can it get? • IMHO - IXC’s have already written off C4 LD business • They win if they retrench in all IP service environment.

17. The Real Digital Divide • Its not Rich vs Poor • Its Enterprises vs Consumers Enterprises can buy rich bandwidth Enterprises can choose from multiple suppliers .. consumers cannot Enterprises will reap the benefit of Broadband Applications leaving Consumers behind Policy Nightmares …. • Will residential phone rates go up? • Congress does not like surprises !

18. Fun with numbers: • Wireless companies valued at $2 K per subscriber • ILEC at $2-3 K per line • Comcast ATT deal valued at $4500.00 per subscriber • Investors offered BT $1000.00 per sub for UK local loop • What is a ILEC really worth? • What is the Localloop really worth?

19. Conclusions .. • ILEC’S are in trouble and it just going to get worse. • It is inconceivable to believe there is any form of private capital available for carriers to deploy any form of Gig-E FTTH to residential markets given the current regulatory and financial condition of the Industry • Markets do not like declining sales / earnings • The markets might recognize the separation of content/service from the underlying physical infrastructure • Deregulation does work • Gas • Electricity (Well not in California, UK Certainly)

20. Conclusions .. • How do you finance a new Gig-E infrastructure that permits real innovation by providing unencumbered access for new entrants with fresh capital resources? • Microsoft ? • General Electric (NBC ?) • Disney • Sony? • Viacom • But does anyone care? • Accenture Study of “Networked Home” • Thank you !