Telecom Services Equity Research Broadband, Economic Growth and the Financial Crisis January 30 th , 2009

1. - Telecom Services Equity Research Broadband, Economic Growth and the Financial Crisis January 30th, 2009 Christopher C. King 443-224-1329 ccking@stifel.com

2. Current Broadband Statistics • Broadband currently available to 85%-90% of homes nationwide • 95% of cable plant has access to broadband • According to latest Pew Internet & American Life Survey, only 55% of households subscribe to broadband • Thus, approximately 30% of households have access and choose not to pay for broadband • According to the survey, 33% of those that do not have broadband access say they are simply not interested • Only 12% of those that do not use the Internet at all say it is because they don’t have access

3. Broadband Subscriber Growth Slowing Source: Company data, Stifel Nicolaus estimates

4. Grants in “Unserved Areas” • More coordinated stimulus likely required • Should include both tax credits and ongoing support mechanisms • Why?? • Case Studies— • CenturyTel October 2007 FCC Ex Parte Filing • Rosendale, Missouri • Gorin, Missouri

5. Rosendale, Missouri • 288 Access Lines (88% residential; 12% small business) • 10 miles of fiber will have to be trenched, attached to poles ($330,000); DSLAM ($6,000) and additional electronics ($14,000) purchased • Transport costs of $1,200 per month will be incurred for T-1’s to backhaul traffic to Internet node • Build will not cover everyone in the exchange because slightly less than half of households live well beyond 18,000 feet from central office • Assuming a 40% take rate over 5 years—yields 40 DSL customers at end of year 5 • DSL priced at $35 declining to $28 per month over 5 years • Retail revenues from DSL would be $48,000 over 5 years while recurring operating expenses would be $93,300 (excluding the $350,000 in capital costs) • Broadband rates would have to average $90 per month just for the carrier to break-even on operating expenses—not allowing for any return and ignoring capital commitments

6. Gorin, Missouri • 149 access lines (77% residential and 23% small business) • A new $6,000 DSLAM would need to be deployed • No additional fiber transport required, but 2 T-1’s would need to be purchased from RBOC at a cost of $1,640 per month to backhaul data traffic to Internet node • Initial build will cover 76% of the market or 113 access lines • Over five years, assume 36 DSL customers and pricing declining from $35 to $28 per month • Broadband revenues of $43,400 over five years versus operating expenses of $117,600 • Broadband rates would need to be priced at an average of $129 per month over the five-year period for company to break-even on an expense basis—ignoring capital outlays and not allowing for a return on investment

7. More RLEC Economics • A quick survey of 6 RLECs suggest an average cost of between $2,000 and $3,000 to provide DSL service to an unserved customer • Incremental investment is required to upgrade existing infrastructure by extending fiber into access plant to reduce loop lengths and installing broadband-enabling electronics into the network • Increasing downstream speeds to 6 Mbps appears to approximately double the per-home investment costs

8. RLEC Conclusion • Current plans unlikely to do much to stimulate private-sector investment in unserved areas • Comprehensive support structure needed • Capital commitment support • Grants • Operational Expense support • Tax credits to offset middle-mile investment • Potential re-regulation of special access

9. Tax Credits • ITIF (Information Technology and Innovation Foundation) has suggested tax credits of 60% in unserved areas and at least 35% to promote additional advanced broadband deployment • Capital spending for telecom is expected to fall between 10%-15% in 2009 versus 2008 levels • The CWA (Communications Workers of America) has recommended that tax credit programs assume that capital spending above 85% of 2008 levels be eligible for tax credits • Companies such as Clearwire and Qwest are unlikely to benefit at all from tax credits, given their current financial situations

10. Other Issues • Underserved Areas • High-speed thresholds in current proposals (45/15 Mbps) will likely only benefit Verizon’s FiOS and possibly cable’s DOCSIS 3.0 platforms today • Wireless broadband plans could benefit • Clearwire-WiMax • Verizon/AT&T LTE

11. Two Significant Potential Issues in Senate Bill • Draft language appears to suggest restricting company participation to public-private partnerships • Significant complication which will likely disincent investment, in our view • Failed Municipal WiFi Model • Definition of “underserved area” to include areas with only one broadband provider • Would appear to artificially incent competition against incumbent broadband provider • Failed UNE-P Model

12. Conclusion • Solutions must address both the initial investment costs of the network and the ongoing operating deficits in “unserved” areas • Could include substantial tax credits for capital expenditures that would also include “middle mile” investment • USF-like Lifeline and Link-Up programs for advanced services that would aid low-income families by relieving them of monthly fees • Support mechanisms that not only include grants for broadband deployment in rural areas, but also ongoing support that would help offset material operating expenses

13. Conclusion • We believe significant tax credits for broadband deployment is likely the most effective stimulus tool at policymaker’s disposal • Tax incentives are available on day one after legislation is signed; easy for companies to implement and normally have a quick impact on investment decisions • Tax credits also leverage substantial private investment by companies that have the capability to deploy advanced networks and generally come with very few strings, giving companies ample flexibility—particularly important in a period of economic uncertainty

14. Conclusion • We are wary of plans that include artifically incenting competition in the broadband market • This includes both a strained definition of “underserved markets” as well as a mandate for public-private partnerships to be eligible to receive grant monies

15. Disclosures Important Disclosures and Certifications I Christopher C. King, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I Christopher C. King, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report.