October 10-13, 2006• San Diego Convention Center, San Diego California

Quantifying the Hype…FMC & Convergence

Presented by William Markey, President and General Partner, RCBG

Market Observations

• Fixed line substitution is displacing telco lines and accelerating fixed-mobile convergence

• Wireless voice services continue to grow at an increasing rate since number of lines are not tied to a household, but a number of potential individual subscribers.

• Wireless voice services are substituting fixed lines at the rate of 5+% per year.

• Emerging opportunities exist for Fixed-to-Mobile converged solutions with the advent of dual-mode (cellular/VoIP) phones to offer services beyond cellular alone.

150

175

200

225

250

2003 2004 2005 2006 2007

Lin

es (

M)

Cellphone lines Fixed lines

Cellular and fixed voice lines

Source: European Information Technology Observatory 2005

The Convergence Universe

• True convergence implies:

– Multi-Access

– Multi-Device

– Multi-Media

– Multi-Application

• But this is an evolution, not a revolution

• 90% of wireless revenue is still generated by voice

• Wireless operators must first make the case for convergence with voice

• Therefore FMC voice is the top priority on operators’ convergence agenda

• Convergence-oriented operators are actively seeking suppliers of FMC voice solutions today Laptop PDA

PC

HandsetDesk Phone

TV

CDMA

LANWiFi

GSM

UMTS

DOCSIS

Data

Email

IMVideo

Presence

Gaming VOICE

A Changing Landscape: Convergence

• Various types of telecom convergence will emerge over the next three years. They can be categorized in five general buckets of convergence.

• Voice & data convergence is occurring now, and fixed-mobile convergence (FMC) will gain measurable traction by 2009

Percentage of Telecom execs indicating

“very strong” or “strong” impact of convergence types

Source: IBM, Economist Intelligence Unit

Voice and data convergence (VoIP, voice as an application)

Access technology convergence (wireline, wireless, mobile)

Convergence of telco and broadcast (media and content services)

IP/IT network convergence (next-gen network architecture)

Device convergence (consumer electronics converging with traditional telco)

88%

66%

77%

51%

46%

0% 20% 40% 60% 80% 100%

Device

Telco & IT

Telco & Media

Fixed & Mobile

Voice & data

Diminishing Boundaries of Service Providers

• Fixed Telecoms, Wireless Operators, Satellite Cos, and Cable MSOs have multiple and often competing priorities

• Leverageable expertise, time-to-market, and addressable market size will determine winners in each of the six following categories

FIXED

MOBILE

VIDEODATAVOICE

MSOs

Telcos

Wireless Cos

MSOs

Telcos

MSOs

Telcos

Satellite Cos Satellite Cos

Wireless Cos Wireless Cos

Global Operator Initiatives

• Fixed-mobile voice services are top-of-mind for every major operator in NA and Europe and AP. Operators unanimously acknowledge that FMC voice will occur in their markets.

FIXED

MOBILE

VOICE DATA VIDEO

Vodafone Live!

Sprint TV

KTF mobile video

mmO2 Active

Verizon EVDO

Nextel PTT

Cingular/SBC One Bill

T-Mobile Hotspot bundle

mmO2 mobile VODDoCoMo imode

Cingular EDGE

Comcast VOIP

BT Bluephone

Swisscom Mobile UnlimitedDoCoMo Passage Duple

Cingular FMCT-Mobile FMC

FT/Orange FMC

TWC MVNO

KT One Phone Du

Sprint FMC

Bell Canada FMC

BT 21CN

Cox VOD

DT IPTV

SBC IPTV

Drivers for Fixed-Mobile Convergence

Residential Household Voice Subscriptions

Ho

us

eh

old

s (

00

0s

)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Wireless (substitution)

Fixed Wireless

Telco Circuit Switched

VOIP over Telco

VOIP over Cable

VoIP

Fixed POTS

Wireless

• Wireless operators: accelerate substitution by converging wireless voice with fixed VoIP

• Cable MSOs: accelerate VoIP adoption by converging fixed VoIP with wireless voice

• Telcos: offer VoIP, wireless, or both in order to participate in the inevitable substitution

Source: RelevantC 2004, North American market trends

Service Provider Positioning for FMC

TelcoOperator

Cellular Operator

Branded DSLBranded HSD

Branded VOIP Branded VOIP

Cable MSO

Corporate Office

WiFi Public Hotspots

Residential Home

Need 3rd-party cellular partner

Need cellular service or 3rd-party

Need VOIP service or 3rd-party

Branded Cellular Voice

(3) Broadband service:

(2) VOIP service:

(1) Cellular service:

Customer segment:

BYOBB

Operator type:

• All operator types are pursuing FMC voice services, but most will require 3rd party network partners

• Three services are needed: (1) Cellular voice service, (2) VOIP service, (3) Broadband service

• An operator must own all three, fill their gaps through partnerships, or lease turnkey networks

Dependency on Device Availability

Dual-device Implementation is an option• This implementation would be a stop-gap measure for seeding the market until dual-mode technology is

prevalent and proven• Traditional cell phone is used when the subscriber is outdoors on the cellular network

• When indoor, a VOIP deskphone, VoWiFi phone, or PC-based softphone could be used for IP calls.

Dual-mode Handset Availability• Dual-mode WiFi/cellular handsets

began shipping in quantities in ‘05• Dual-mode may represent 15% of

shipments by ’08, on phones with WCDMA, CDMA 2000, EDGE, and EV-DO

• Some handset makers will establish PBX partnerships (e.g. Motorola with Avaya)

• Some will focus solely on consumer VOIP market

• Some will pursue single-mode WiFi-only handsets (e.g., UTStarcom)

Source: RelevantC 2005, Deutsche Bank

mill

ion

s

Total Worldwide Handset Shipments, by data technology

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008

Non-data

1xEvDo/DVGPRS

1xRTT

EDGE

WCDMACDMA2000

Dual-mode WiFi Handsets

Dependency on Network Management Components

Public IP Public IP NetworkNetwork

Public IP Public IP NetworkNetwork

BTSBSC

HLRVLR

SGSNOutdoor GSM Network

IP-PBX

WiFi AP

Home networkWiFi AP

Private Private IP IP

NetworkNetwork

Private Private IP IP

NetworkNetwork

Indoor Office Building

Indoor Home

PSTNPSTNPSTNPSTN

Softswitch

• Call routing from MSC to IP• Signaling conversion SIP/SS7• Authentication at HLR• Location presence management

• Handset identification• User authentication• WLAN/WAN negotiation• Domain awareness• WiFi AP management• WLAN network QoS mgt

• Device provisioning• Feature server• Service management• Billing integration

• Softswitch• VOIP media gateway

• User authentication • WLAN network QoS mgt

Back Office

Source: RelevantC 2005

• Operators require end-to-end system upgrades to offer FMC voice services

Operators Approaches to FMC

• Multiple approaches will be pursued. Tactical adoption of technologies will occur by segment.

• Optimal approach depends on operator type, target customer, and billing/pricing ambitions

Network-based FMC Premises-based FMC

Enterprise & SMB

• Operator offers cellular voice and hosted VOIP service to companies without PBX systems

• Cellular voice outside the office. Roams onto corporate W-LAN for VOIP calling.

• Operator bills for both VOIP and cellular on a single bill

• Single-number and single-phone for each employee

• Switching and call management occur at network MSC

• Operator offers cellular voice to company.• Companies have their own IP-PBX systems and

VOIP service.• Cellular outside the office. Roams onto corporate

W-LAN for VOIP calling. • Operators do not bill for enterprise VOIP service• Switching and roaming occur at PBX, not in

operator network

Consumer

• Operator offers cellular voice and hosted VOIP service to residential consumers

• Cellular voice outside the home. Roams onto home WiFi network for VOIP calling.

• Operator bills for both VOIP and cellular on a single bill

• Single-number and single-phone • Switching and call management occur at network

MSC

• Operator offers standard cellular voice • Consumer has hosted VOIP service or traditional

POTS service at home.• Operator offers simple call-forwarding between

phones and services.• Call forwarding preferences are manually set by

consumer, via in-home gadget or PC.• Operator does not bill for landline voice.• No roaming or handoff. No single-phone or

single-bill.

Impact on Operator Revenue & Costs

• Market Share: Increased subscriber growth due to differentiated service offering

• ARPU Increased MOU-per-subscriber due to “stolen” minutes from POTS at home/office

• Termination: Changes in termination revenue & costs due to lower VOIP interconnect fees

• Roaming: Changes in international roaming revenue due to international VOIP calling

• Capacity: Cellular network savings due to offloading traffic to the IP network

• VOIP investment: Installation and operation of the VOIP infrastructure

• FMC upgrades: Installation and operation of the FMC infrastructure software and upgrades

• CPE:: Increased CPE and handset subsidization costs

• CPGA:: Increased marketing and customer support costs from rolling out new service

• DSL impact: Increased sales of broadband services to support VOIP growth

• POTS impact: Loss of POTS voice revenue as a result of VOIP displacement

Implementing a converged voice service will result in significant changes to the Service Provider’s operations. FMC integration, subscriber conversion, pricing & bundling, network investments, marketing and support must all be considered. These can be quantified by modeling all systematic drivers:

FMC Impact on Revenue & Costs

Wireless Service Provider Metrics

No-Growth Scenario Annual impact

of converting existing subs to FMC

5% Growth ScenarioAnnual Impact

of converting subs and adding new subs

2 ARPU: Increased MOU-per-subscriber Positive Positive

3 Termination: Changes in termination fees (Negative) Positive

4 Roaming: Changes in internat’l roaming fees (Negative) Positive

5 Capacity: Cellular network traffic savings Positive Positive

6 VOIP: Operation of VOIP infrastructure (Negative) (Negative)

7 FMC: Investment in FMC infrastructure (Negative) (Negative)

8 CPE: Handset and CPE subsidization (Negative) (Negative)

9 CPGA: Marketing and customer support costs (Negative) (Negative)

10 DSL: Incremental sales of broadband services Positive Positive

11 POTS: Incremental impact on POTS voice (Negative) (Negative)

Total Impact Positive Positive

Each of the drivers can be isolated and quantified. The following example illustrates the impact of FMC on the Operator’s annual profitability at steady-state. The impact is positive under both no-growth and growth assumptions.

FMC Impact on Revenue & Costs

Wireless Service Provider MetricsNo-Growth Scenario

Annual impact of converting existing

subs to FMC

5% Growth ScenarioAnnual Impact

of converting subs and adding new subs

2 ARPU: Increased MOU-per-subscriber 81M 310M

3 Termination: Changes in termination fees (2M) 35M

4 Roaming: Changes in internat’l roaming fees (6M) 7M

5 Capacity: Cellular network traffic savings 5M 9M

6 VOIP: Operation of VOIP infrastructure (11M) (17M)

7 FMC: Investment in FMC infrastructure (6M) (8M)

8 CPE: Handset and CPE subsidization (16M) (22M)

9 CPGA: Marketing and customer support costs (3M) (16M)

10 DSL: Incremental sales of broadband services 42M 91M

11 POTS: Incremental impact on POTS voice (41M) (82M)

Total Impact € 43M € 307M

Excerpts of ROI model for an Integrated Operator with 5.0M subscribers at Year 1

Pricing of Cellular/VOIP Packages

Note: Illustrative Examples based on Operator conversations

Blended Pricing Anytime/Anywhere

Bundled Pricing

Ala Carte Pricing

PRICE PLAN

GSM MINUTES PRICE

1 200 55.00€ 2 300 80.00€ 3 500 100.00€ 4 700 130.00€ 5 1000 140.00€

PRICE PLAN

VOIP MINUTES PRICE

A 200 5.00€ B 300 10.00€ C 500 15.00€ D 800 20.00€ E 1000 25.00€

PRICE PLAN

GSM MINUTES

VOIP MINUTES PRICE

1 100 200 50.00€ 2 200 300 85.00€ 3 300 500 110.00€ 4 400 800 150.00€ 5 600 1000 175.00€

PRICE PLAN

ALL MINUTES PRICE

1 200 70.00€ 2 300 90.00€ 3 500 120.00€ 4 700 150.00€ 5 1000 160.00€

14% effective price decrease

27% effective price decrease

44% effective price decrease

Business Case for Mobile VOIP

Voice Services purchased by enterprise

NPV of 5-YR Expenditures

Service Providers & Revenue CaptureSample Scenario

Cellular Service $6.5M VZW gets $2.6M (40% share of account)

VOIP Service $12.7M VZ gets $12.7M (100% share of account)

Total Telecom Spend $19.2M VZW and VZ get $15.3M combined

FMC Service $16.2M VZW and VZ get $16.2M combined

Demand drivers for adopting mVOIP• The impact of mVOIP on enterprise spending was modeled using a scenario of a 5,000-employee enterprise

with pre-existing POTS service

• The migration to VOIP results in over $6.0M in savings over a 5-yr horizon

• The migration to Hosted mVOIP results in over $9.0M in savings. This savings is driven by a carrier-hosted plan that includes VOIP and cellular.

The enterprise saves $3.0M by adopting the mVOIP service, and the Service Provider increases its revenue in this account from $15.3M to $16.2M