University of Toronto Master of Engineering in Telecommunications Voice Over IP Industry Analysis

1. University of TorontoMaster of Engineering in TelecommunicationsVoice Over IP Industry Analysis Katherine Lam (Class of 2003-04) September 23, 2004.

2. Key Research Objectives Objectives: To answer 2 key questions: • Is carrier VoIP “disruptive” in the consumer market? • Will carrier VoIP “cross the chasm” quickly and easily in the consumer market? In the context of the big picture of VoIP industry!

3. Disruptive Technology • VoIP is disruptive in Enterprise space • Is VoIP equally disruptive in the Consumer space? Source: Professor Clayton Christensen’s books titled “The Innovator’s Dilemma” & “The Innovator’s Solution”

4. Gorilla Game Home Networking Toll Bypass Main Street Main Street Enterprise Enterprise Consumer Hot Spots Wi-Fi VoIP Early Market Chasm Early Market Chasm Source: Geoffrey Moore’s book titled “The Gorilla Game”

5. MET Report Contents FOCUS • Objectives and Methodologies • Service Providers • Equipment Vendors • Summary of Findings • Appendix • Gorilla Game • Disruptive Technology • U.S. Service Providers Profiles • U.S. Overall Observations • U.S. and Canadian VoIP Markets

6. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

7. Acknowledgement Special Thanks to MET Advisory Board • Jim Glover, BDC Venture Capital • Mark Woollam, Nortel Networks • Peter Rhamey, BMO Nesbitt Burns • Mark Goldberg, Mark H. Goldberg and Associates Inc.

8. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

9. Industry Analysis Methodologies Industry Analysis Competitive Analysis Market Analysis Company Analysis

10. Industry Analysis Methodologies • VoIP in the U.S. • Major battleground for Enterprise VoIP • A lot of hype and news on Consumer VoIP Industry Analysis Competitive Analysis Market Analysis Company Analysis

11. Industry Analysis Methodologies Industry Analysis • Service Provider Groupings • Existing Incumbents • IXC, ILEC and MSO • New Players • Vonage-like Competitive Analysis Market Analysis Company Analysis

12. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

13. Carrier VoIP in Consumer Market2003 - 2004 Source: Yankee Group

14. Market Dynamics 2003 U.S. Consumer VoIP Market Shares as of Year-End 2003 Vonage – Consumer VoIP market leader in 2003 Total: 130,000 Consumer VoIP Subscribers Source: Yankee Group

15. Current Market Development

16. Nov 02:8x8 announced the availability of its Packet8 broadband telephone service May 04:Vonage consumer VoIP subscriber number reached 155,000 Jan 01: Vonage was founded and started providing service in the U.S. Jun 01:Net2Phone announced the launch of its VoiceLine broadband telephone service Apr 04: Vonage launched VoIP service in Canada Pure Players VoIP Timeline Pure VoIP Players are the earliest entrants

17. Vonage VoIP Subscribers Pure VoIP Player - Vonage • Linear Projection • In 2003, Vonage had 78,000 subscribers (60% market share) • Add 20,000 subscribers/month • Nowadays, Vonage is the most successful pure VoIP player • Significant factors to determine the future of pure VoIP players: • Regulation • Resell Partnership • Piggybacking on broadband connection • MSOs’ market entrance

18. Sept 03:Cablevision launched “Optimum Voice” VoIP services in the U.S. May 04: Comcast confirmed its VoIP roll-out plans in the residential market Sept 02: Charter launched residential VoIP service Dec 03:Cox launched its residential VoIP service to customers May 03: Time Warner Cable launched the commercial VoIP service in the U.S. MSO VoIP Timeline MSOs will become the most active players

19. Jun 04:Qwest launched its “OneFlex” VoIP services to both of business and residential customers Nov 03: SBC launched nationwide Hosted IP service to business customers July 04: Verizon launched its unmanaged “VoiceWing” VoIP service to its residential customers May 04:BellSouth launched IP Centrex to business customers ILEC VoIP Timeline ILECs will focus on enterprise market first

20. July 04:AT&T’s “CallVantage” has been successfully launched and is available in 100 U.S. markets Dec 03:MCI and Sprintpartnered with Time Warner Cable to offer VoIP service Aug 04:AT&T co-markets “CallVantage” VoIP with MSOs and Best Buy in U.S. Mar 04:AT&T rolled out its national VoIP service named “CallVantage”. July 04: AT&T announced to retreat from residential voice market. IXC VoIP Timeline IXCs will also focus on enterprise market

21. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

22. Market Projection 2005 U.S. Carrier VoIP Consumer Market Projection in 2005 by Yankee Group

23. Carrier VoIP in Consumer Market2007 Source: Yankee Group

24. Potential Market Dynamics 2007 Our Market Projection (By Linear Projection) • Wide deployment of VoIP by MSOs in the U.S. • ILECs and IXCs are broadening their VoIP priorities to both businesses and consumers • Pure VoIP players will remain to be niche players

25. Potential Market Dynamics 2007(Separate ILEC & IXC) ILECs show more interests and potentials than the IXCs in the consumer VoIP market

26. Carrier VoIP in Consumer Market Now, we can answer the 2 key questions. • Is carrier VoIP “disruptive” in the consumer market? • Will carrier VoIP “cross the chasm” quickly and easily in the consumer market? The answer to both questions is NO!

27. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

28. Enterprise VoIP Equipment Market Total Revenue 2004 Q1 U.S. $596M Total Revenue 2004 Q1 U.S. $307M Source: Synergy Research Worldwide Enterprise IP Telephony (IP PBX, IP Phone & Hybrid) Market Shares 2004 Q1 North AmericaEnterprise IP Telephony (IP PBX, IP Phone & Hybrid) Market Shares 2004 Q1

29. Carrier VoIP Equipment Market Total Revenue 2004 Q1 U.S. $159M Total Revenue 2004 Q1 U.S. $90M Source: Synergy Research Worldwide Carrier VoIP Market Shares 2004 Q1 North America Carrier VoIP Market Shares 2004 Q1

30. Carrier VoIP Equipment Market • Lucent has created an opportunity for Sonus • Lucent acquired Telica in May 2004 • VoIP is an extremely high growth market, but not a disruptive one in the sense of Clayton Christensen’s model Sonus + Telica = 31% Market Share VoIP is not disruptive in equipment market

31. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

32. Future of VoIP in Canada • Canada will lag behind the U.S. in the carrier VoIP deployment in the consumer market • 2 Major Reasons: • Less price differentiation • Less direct competition

33. Contents • Introduction and Objectives • Methodologies • Current Carrier Market Dynamics • Future Carrier Market Projections • Equipment Market • Canadian VoIP Market • Future Work and Summary

34. Future Work 1. Enterprise VoIP 3. VoIP value chain and supply chain Industry Analysis 5. New Business Models (P2P/Skype) 2. Study on other nations such as Korea, Japan and China 4. Wireless Substitution Competitive Analysis Market Analysis Company Analysis

35. P2P/Skype as a disruptor • P2P has disrupted the music industry • Napster and KaZaa are the best examples • Founder of Skype is the founder of KaZaa • Skype could be potentially disruptive to the telecom industry

36. Summary • VoIP’s disruptiveness in carrier VoIP space • VoIP’s capability to cross the chasm • VoIP’s disruptiveness in equipment market • VoIP’s deployment in Canada

37. The End.Thank You!