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Project Lightspeed

Project Lightspeed . SBC Presentation Jeff Weber VP-Product & Strategy February 1, 2005. Company assets. 53 million direct connections to homes and businesses covering 1/3 of the United States 5.1 million high-speed Internet lines

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Project Lightspeed

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  1. Project Lightspeed SBC Presentation Jeff Weber VP-Product & Strategy February 1, 2005

  2. Company assets • 53 million direct connections to homes and businesses covering 1/3 of the United States • 5.1 million high-speed Internet lines • 47 million wireless customers with the acquisition of AT&T Wireless and a wireless footprint with the industry’s largest overlap of wireline assets • 20,000 Wi-Fi hotspots in 6,000 venues throughout the 13-state SBC territory by 2006 • A nationwide IP backbone covering the nation’s largest cities • A co-branded satellite video service • One of the world’s largest directory advertising companies • A strong financial position No other communications company has our combination of assets

  3. Mission Our strategy is clear: • Grow by offering the most complete, flexible bundle of high quality communications solutions in the market, at a great value • Needed a stronger video play • Continually introduce new opportunities to meet and exceed the service and experience our customers demand • Know our customers and offer a personalized service tailored to their needs • Maintain a strong financial position and always be on the lookout for ways to be more efficient and cost effective

  4. Project Lightspeed Overview • FTTN requires approximately one-fifth the investment and one-fourth the deployment time of FTTP-only overbuild • Expected deployment cap ex of approximately $4 billion • Expect 2005 cap ex will be at the high end of our 2004 guidance range -$5 billion to $5.5 billion • Scale expected to drive cost curve down rapidly Capital Efficient Significant CostSavings • FTTN expected to generate approximately 70% of installation and maintenance savings available from FTTP

  5. Project Lightspeed Overview • Integrated IP voice, high-speed Internet access and video • IPTV – choice and control over substantial content alternatives Market-ChangingServices Powerful Network • Both FTTP and FTTN • Natural extension of current fiber deployment and broadband network • Targeted deployment to 18 million households in 3 years • To cover nearly 90% of high-value residential customers Speed To Market

  6. What it isn’t…

  7. Digital Lifestyle (U-verse branding) VDSL Fiber Wireless Enhancing communications and entertainment at home, at work, on the go … HomeNetworking IPTV WiFi

  8. Integrated Communications and Entertainment Services IPTV 4 high-quality TV streams, including high-definition TV, and video-on-demand • 20-25 Mbps • Everything IP High-Speed Internet Access IP Voice Full-featured offering – growing wireless integration

  9. The Forces are Right Global demand speeds innovation and drives down the cost curve These developments create video and consumer data growth opportunities Bandwidth Requirements New compression technologies reduce bandwidth required Deployment Costs New distribution architecturesallow delivery of higher bandwidth at a lower cost Growth Potential Global Development

  10. Significant Market Opportunity Industry RevenuesU.S. Video Market Industry RevenuesU.S. Broadband Market $63B $29B $54B Video market to grow to $63 billion over next four years, with fastest growth from new services Broadband market subscriptions expected to grow at a 16% CAGR over the next four years $16B 2004 2008 2004 2008 Source: PWC Global Entertainment and Media Outlook, 2004 - 2008 Source: IDC Worldwide Broadband Access Services 2004 – 2008

  11. High-Value Customers Total Customer Household Segmentation % of Customer $ Spend Attributed to Each Segment HighValue25% LowValue25% LowValue35% HighValue34% Medium Value40% Medium Value41%

  12. High-Value Customer Coverage Percent of Each SegmentCovered by Project Lightspeed • FTTN is efficient in how it can be deployed • Lightspeed deployment will cover approximately 90% of high-value and 70% of medium-value customers ~90% ~70% ~5% HighValue MediumValue LowValue

  13. What We Expect to Achieve • The second largest video provider in our fiber footprint within five years • A lift in high-speed Internet penetration • Differentiated product set with comparable prices • Increased share of overall spend for customers’ communications and entertainment services

  14. Strong Platform for Revenue Growth • Data Opportunity • Market share in FTTX markets grows to nearly 50% • FTTX revenues increase by nearly $300 million in 2007 • Voice Opportunity • FTTX product set increases 2007 access line market share by 300 bps • Estimated $300 million revenue lift in 2007 from improved market share • Video Opportunity • 500 bps of market share generates $550 to $600 million revenue annually • Goal is to be 2nd largest video provider within five years

  15. Superior Capabilities Versus Cable Video Data Voice • Flexible content choice and VOD capabilities • 100% digital IP network, with the latest technology in compression and DRM • Dedicated connection • Integration with WiFi, wireless • Bandwidth on demand • Upstream speeds – 1 Mbps • Functional integration with Cingular wireless service – voice, video and data The power of integration drives customer value. The key competitive differentiator

  16. Order Print ^ Power of IPTV Interactive Guides Photo and Music Sharing Multiple Camera Angles Source: Microsoft

  17. Video differentiation Advantages of SBC Video Platform

  18. Consumer Key-Product Bundle Penetration Consumer retail revenue per retail access line year-over-year growth Solid Growth RecordGrowth Driven By Bundling, LD and DSL… Consumer Wireline Revenue Year-over-Year Growth 58% 2.8% 54% 50% 1.0% 44% 9.2% 8.1% (1.8)% 36% 6.1% (3.3)% 31% 5.9% 3.1% (6.9)% 2.1% (8.2)% 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04

  19. SBC|DISH Network SBC has demonstrated great success in integrating a video offering through its relationship with SBC | DISH Network • We began marketing our integrated SBC | DISH Network satellite TV service in March, expanding from a soft launch to full sales-channel coverage in April • Growing to over 300K subs today • DBS provides a feasible interim offering to retain voice lines; however, it is not a long term solution for profitable growth • Owning a video distribution network has the greatest potential to generate profitable growth in video

  20. Market Success Drivers • Taken separately, each product offers superior value to what’s currently on the market Individual Product Capabilities IntegratedPortfolio • Cingular, wireline, high-speed Internet access and IPTV – all IP and all integrated Customer Relationships • Leveraging relationships with our existing customer base Speed To Market • We get to the rightcustomersfast

  21. Unique Operational Approach • Procurement • Partner in new ways • Choose based on what is available not what we want • Critical to trust key partners • Alcatel account team differentiated itself from competitors • Alcatel project team is part of SBC

  22. Project Lightspeed Network Plan All-digital, high-bandwidth IP network to reach more than 18 million households within three years • Fiber to the node in existing neighborhoods • Flexible and cost-efficient FTTN • Fiber to the premise for new construction and multi-dwelling units • Will deploy FTTP in selected rehab situations FTTP

  23. Network Alternatives Today Fiber to the RT (Pronto) Copper Copper Fiber RemoteTerminal Central Hub Node Fiber to within 6,000 feet of home on average; 12,000 feet maximum 1.5 - 6.0 Mbps Overbuild Fiber to the Node (FTTN) Copper Fiber CentralHub Node Fiber to within 3,000 feet of home on average; 5,000 feet maximum 20 - 25 Mbps New Build Fiber to the Premise (FTTP) Fiber CentralHub Fiber from the central office to the home Up to 39 Mbps

  24. Project Lightspeed Video Network Architecture National Local Regional SuperHead Ends to customers Video Serving Offices Video Hub Offices • National contentaggregation • Redundant infrastructure • VOD encoding • Number: 2 • Storage of content/intelligence • VOD library • Time-shifted TV • Interactive applications • Local content aggregation • Number: 40 • Distribution of video • Local aggregation point • Number: 140

  25. 3 Broadcast Video IP Video Distribution Advantages VideoServiceProvider Channel Lineup: 2 3 4 5 6 7 8 9 5 4 SBC IP Video VideoDSLAM 2 9 7

  26. Expected Deployment Costs Deployment Costs Per Household Passed • In overbuild situations,comparable deployment costs for FTTP are more than 5X costsfor FTTN • FTTN deployed by 2007, one-fourth the time vs. full FTTP deployment • FTTN deployment costs include all video infrastructure,fiber and electronics, including line cards • FTTP overbuild deployment costs include all fiber, electronics and video, plus the service drop and ONT Overbuild New Build $1,350 $1,100 $1,100 $250 RT (current) FTTP FTTN FTTP

  27. Project LightspeedExpected Subscriber Costs Success Based Subscriber Costs Deployment Costs Per Household Passed • In greenfield deployments, FTTP costs the same as copper • In overbuilds, FTTN is about one-fifth the cost of FTTP • Subscriber costs decline rapidly driven by scale and IP technology curve $1,100 Nearly one-third lower than DISH & DSL $250 Declines over 10% annually during next five years FTTP Greenfield FTTN Overbuild

  28. 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 Targeted Time To Market FTTP Field Trials (scalability, provisioning, customer experience) FTTPVoice/ Data Launch IP Video Trials (video quality, operational integration) Begin Network Construction FTTX Video Field Trials (customer acceptance) FTTXVideo Launch

  29. Project Lightspeed Overview • Capital efficient, financially disciplined approach • Creates a logical migration path with minimal risk of stranded investment Investment • Significant revenue opportunities in video, high-speed data and integrated services; improves retention of highest-value customers • Substantial opportunities for operating expense savings • Project returns are in excess of cost of capital; flexibility for continued dividend growth and share repurchase • Growth in wireline operations should more than offset up-front dilution from Project Lightspeed Return

  30. Summary • Video is important (both defense and offense) • The time is now for switched video world wide • Microsoft and Alcatel have a leadership position • Opportunity is overwhelming for Alcatel • Partner like Alcatel/SBC and there is no limit on your success

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