the state of the net: 2012 state of the net: 2012 washington, dc ... u-verse: projected video net...

January 18, 2012

See Disclosure Appendix of this report for important Disclosures and Analyst Certifications

U.S. Telecommunications, U.S. Cable & Satellite Broadcasting

Craig Moffett • Senior Analyst • +1-212-969-6758 • [email protected]

The State of the Net: 2012

Washington, DC

January 18, 2012

mailto:[email protected]

U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 2

The State of the Infrastructure

Internet in America: What the Data Says

Competitive dynamics

The TelCo Dilemma

Returns on Capital


Penetrations Gains are Slowing at ~66% of the Market

Broadband Penetration and Delivery Technology 1

8,4

77

19

,97

8

22

,03

9

24

,08

0

26

,33

8

28

,21

5

30

,46

6

32

,64

2

35

,19

4

36

,83

9

39

,40

6

42

,03

1

44

,94

7

46

,98

7

49

,82

6

52

,25

3

55

,15

7

56

,81

9

58

,90

9

60

,66

1

63

,11

8

64

,07

1

65

,45

6

66

,51

6

68

,22

0

68

,88

4

69

,92

7

71

,03

9

72

,49

6

72

,90

6

73

,74

8

74

,70

0

76

,18

2

76

,74

0

77

,45

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Q1

20

03

Q2

20

03

Q3

20

03

Q4

20

03

Q1

20

04

Q2

20

04

Q3

20

04

Q4

20

04

Q1

20

05

Q2

20

05

Q3

20

05

Q4

20

05

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

06

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Pe

ne

trat

ion

of

Ho

use

ho

lds

Sub

scri

be

rs (

00

0s)

Cable DSL Fiber Satellite BB Penetration

Source: Company reports, Kagan, Bernstein estimates and analysis

//NTS0016/RSCH1/Cable and Satellite/Research Calls/Industry/All Multichannel/2010/Broadband End Game/Broadband End Game with 3Q11 numbers.xlsx


Incremental penetration dynamics suggest we are headed to ~85%

Penetration Change in Penetration

13

.7%

19

.9%

27

.3%

34

.6%

43

.2%

50

.8%

56

.2%

59

.8%

62

.7%

65

.5%

0%

10%

20%

30%

40%

50%

60%

70%

Q1

20

02

Q3

20

02

Q1

20

03

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Q1

20

11

Q3

20

11

Bro

adb

and

Pe

ne

trat

ion

of

U.S

. H

ou

seh

old

s

Source: Company Reports, Bernstein Estimates and Analysis

62

0.5

73

3.5

73

4.0

86

0.0

75

9.8

53

7.0

35

8.0

29

7.9

27

3.0

0

100

200

300

400

500

600

700

800

900

1,000

Q1

20

03

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Q1

20

11

Q3

20

11

Bas

is P

oin

ts

YoY Basis Point Change in U.S.

Broadband Penetration





Reasons for Not Having Broadband

Reasons for Not Having Broadband 2010 (OBI) Reasons for Not Having Broadband 2011 (NTIA)

Reasons for Not Having Broadband 2010

(OBI)

Reasons for Not Having Broadband 2011

(NTIA)

Cost, 36%

Lack of Availability,

5%

Digital Literacy,

22%

Relevance, 19%

Use high-speed at work, 3%

Combo, 4%

Other, 11%

Source: FCC, "Broadband Adoption and Use in America, OBI Working Paper Series No. 1." John B. Horrigan, Ph.D

Cost, 25%

Lack of availability,

3%

Digital Literacy,

14%

Relevance, 46%

Use internet

somewhere else, 5% Other,

7%

Source: "Exploring the Digital Nation - Computer and Internet Use at Home," U.S. Dept of Commerce




DSL is now in decline

DSL Net Additions (Losses) 1

,41

1

97

9 1,0

83

1,0

44

1,1

43

55

2 69

5

47

0

68

6

(18

6) (7

1)

(12

)

15

1

(19

9)

(22

9)

(11

)

(11

1)

(40

4) (2

56

)

(13

6)

(64

)

(20

5)

(23

4)

(750)

(500)

(250)

0

250

500

750

1,000

1,250

1,500

1,750

-5%

-3%

-2%

0%

2%

3%

5%

6%

8%

9%

11%

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

06

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Sub

scri

be

rs G

ain

s (L

oss

es)

(0

00

s)

Sub

scri

be

r G

row

th R

ate

Subscriber Gains (Losses)

Subscriber Growth Rate

Source: Bernstein Analysis



FiOS: Nearing End of Growth Cycle

FiOS: Projected Video Net Additions

-

100

200

300

400

500

600

700

800

900

1,000

2006

2007

2008

2009

2010

20

11

E

20

12E

20

13

E

20

14E

20

15E

FiO

S V

ideo N

et A

dditio

ns*

(000

s)

*estimated based on market penetration curve estimated from 1Q 2006-3Q 2011 results; assumes 18M home passings by end of 2015

and that marketed video homes/passed homes = 90% by end of 2015


Actual

Estimated*

FiOS: Projected Video Subscribers and

Subscriber Growth

35

5.6

%

103

.4% 4

9.2

%

27

.9%

13

.5%

7.5

%

4.1

%

1.4

%

0.3

%

0%

50%

100%

150%

200%

250%

300%

350%

400%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014

E

2015

E

FiO

S V

ide

o S

ub

sc

rib

ers

* (0

00

s)

Actual

Estimated*

YoY % Subscriber

Growth

*estimated based on market penetration curve estimated from 1Q 2006-3Q 20011results; assumes 18M home passings by end of 2015

and that marketed video homes/passed homes = 90% by end of 2015


//NTS0016/RSCH1/Cable and Satellite/Research Calls/Industry/All Multichannel/2010/Have the TelCos Passed Their Peak/Have the TelCos Passed Their Peak - updated 3Q 2011.xlsx



U-Verse: Nearing End of Growth Cycle

U-Verse: Projected Video Net Additions U-Verse: Projected Video Subscribers and

Subscriber Growth

-

200

400

600

800

1,000

1,200

20

07

20

08

20

09

20

10

2011E

2012

E

2013E

2014E

2015

E

U-V

ers

e V

ide

o N

et

Ad

dit

ion

s*

(00

0s

)


and that marketed homes/passed homes = 85% by end of 2014


Actual

Estimated*

352

.4%

97.5

%

44

.6%

27.5

%

20

.7%

13

.7%

11

.0%

7.9

%

0%

50%

100%

150%

200%

250%

300%

350%

400%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

20

07

20

08

20

09

20

10

2011

E

2012E

2013

E

2014

E

2015

E

U-V

ers

e V

ideo S

ubscribers

* (0

00

s)

Actual

Estimated* YoY % Subscriber

Growth


and that marketed homes/passed homes = 85% by end of 2014





7.7

5.5

2

7.7

5.1

1.6

0

1

2

3

4

5

6

7

8

9

Fiber Cable DSL

Act

ual

Do

wn

load

Sp

eed

(Mb

ps)

Average Median

Source: FCC, "Broadband Performance: OBI Technical Paper No. 4"

The Need for Speed

Actual (Realized) Broadband Speeds by

Technology


Cable is Pulling Away in the Broadband Market

Share of Broadband Net Additions


FiOS and U-Verse Are Only a Small Slice of the National Broadband Market

Broadband: Market Share (Q4 2010) Broadband: Market Share (Q4 2011E)

Source: Company reports, Bernstein analysis

Cable, 59.5%

DSL, 29.9%

U-Verse, 4.0%

FiOS, 5.5%

Other Fiber, 1.0%

Cable, 60.4%

DSL , 27.3%

U-Verse, 4.9%

FiOS, 6.1%

Other Fiber, 1.4%




FCC: “Only One Technology Meets the Demands of a 25Mbps End-user”

Cable, Fiber and/or DSL

Cable Only

Not Served

14-16% 14-16% 14-16%

23-27% 23-27%

51-57% 51-57%

2-4% 3-9% 3-9%

1 Mbps 10 Mbps 25 Mbps

Downstream bandwidth supported

78-82%

Sources: The FCC; 2009 Form 477 data; service provider, equipment manufacturer, and trade association filings and publications; analyst

//NTS0016/RSCH1/Cable and Satellite/Presentations/SDC Panel 2011/FCC Slide.xlsx


The TelCo Dilemma: Residential Access Lines Are in Free Fall

U.S. Access Lines in Service

y = -2.3043x + 196.14R² = 0.9826

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

0

50

100

150

200

250

Q4

20

00

Q2

20

01

Q4

20

01

Q2

20

02

Q4

20

02

Q2

20

03

Q4

20

03

Q2

20

04

Q4

20

04

Q2

20

05

Q4

20

05

Q2

20

06

Q4

20

06

Q2

20

07

Q4

20

07

Q2

20

08

Q4

20

08

Q2

20

09

Q4

20

09

Q2

20

10

Q4

20

10

Ind

us

try

To

tal A

cce

ss

Lin

e L

os

s R

ate

Ind

us

try

To

tal A

cc

es

s L

ine

s in

Se

rvic

e (

Mil

lio

ns

)

Total access lines Total access lines loss rate

Source: Company reports, Bernstein estimates and analysis

//NTS0016/RSCH1/Cable and Satellite/Amelia Chan/Marketing Deck Materials/Wireline Master WIP 4.xlsx


y = -1.2793x - 0.0363

R2 = 0.5601

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-20%-15%-10%-5%0%5%

Annual Change in Access Lines

An

nu

al C

han

ge in

Co

st

per

Access L

ine

y = -1.2284x - 0.0501

R2 = 0.5216

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-20%-15%-10%-5%0%5%


An

nu

al C

han

ge in

Co

st

per

Access L

ine

y = -1.2179x - 0.0078

R2 = 0.5867

-10%

-5%

0%

5%

10%

15%

20%

25%

-20%-15%-10%-5%0%5%


An

nu

al C

han

ge in

Co

st

per

Access L

ine

C

y = -1.5209x - 0.0125

R2 = 0.4658

-20%

-10%

0%

10%

20%

30%

-15%-10%-5%0%


An

nu

al C

han

ge in

Co

st

per

Access L

ine

As Access Line Losses Mount, Unit Costs are Soaring

Verizon (Legacy Bell States): Rate of Access Line

Loss Versus CAGR in Cost per Line (Individual

Years by State, 2004-07)

Verizon (Legacy GTE States): Rate of Access Line



AT&T (Legacy SBC States): Rate of Access Line



AT&T (Legacy BellSouth States): Rate of Access

Line Loss Versus CAGR in Cost per Line (Individual


Source: FCC and Bernstein estimates and analysis


As Volumes Fall, Wireline Margins Are Deteriorating

Verizon and AT&T: Wireline Margins

35.3

%

35.9

%

34.9

%

35.1

%

33.7

% 35.7

%

33.9

%

32.6

% 33.9

%

33.4

%

33.4

%

33.1

%

32.1

% 33.5

%

33.5

%

33.6

%

31.3

%

32.3

%

28.0

%

27.7

%

28.2

% 29.4

%

27.8

%

28.1

%

28.0

%

26.2

%

26.9

%

26.2

%

25.5

%

24.8

%

23.9

%

24.8

%

22.7

%

23.5

%

23.6

%

23.8

%

18%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%1Q

200

7

2Q 2

007

3Q 2

007

4Q 2

007

1Q 2

008

2Q 2

008

3Q 2

008

4Q 2

008

1Q 2

009

2Q 2

009

3Q 2

009

4Q 2

009

1Q 2

010

2Q 2

010

3Q 2

010

4Q 2

010

1Q 2

011

2Q 2

011

Wire

line

EB

ITD

A M

argi

n

AT&T Verizon

Source: Bernstein Estimates and Analysis

//NTS0016/RSCH1/Cable and Satellite/Research Calls/Telecom/2010/4Q 09 Preview/VZ & T model exhibits.xls


A Decade of ROIC (I)… Anemic Returns on Net PP&E

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

0 25 50 75 100 125 150 175 200 225 250 275 300

We

igh

ted

Av

era

ge

RO

IC E

x-U

nu

su

als

, G

oo

dw

ill,

AR

ILI

Min

us

WA

CC

, 2

00

0-0

9

Average Invested Capital Excluding Goodwill and ARILI, 2000-09 ($ billion)

IC = $146.4, ROIC spread 1.5%

IC = $129.4, ROIC spread = 0.3%

IC = $4.6, ROIC spread = -7.1%



Pre-Paid Wireless(EP = -3.3 billion)

Satellite (EP = +$4.7 billion)

Wireless (EP = +$3.2 billion)

Wireline (EP = +$22.4 billion)

Cable (EP = +$11.8 billlion)

EP = Economic profitsIC = Invested capital

Source: Capital IQ, corporate reports and Bernstein estimates and analysis

A Decade of Economic Value Added (Excluding Unusuals, Goodwill, and ARILI)

//NTS0016/RSCH1/Cable and Satellite/Research Calls/Blackbooks/2010/ROIC/Exhibits Histograms.xlsx


A Decade of ROIC (II)… and even worse returns when you include what was actually paid for the assets

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575

We

ighte

d A

ve

rage

RO

IC In

clu

dng

Un

usu

als

, G

ood

will

, A

RIL

I M

inu

s W

AC

C, 2

00

0-0

9

Average Invested Capital Including Goodwill and ARILI, 2000-09 ($ billion)

IC = $210.9, ROIC spread = -3.0%

IC = $4.8, ROIC spread = -5.9%

IC = $126.8, ROIC spread -4.9%

IC = $13.8, ROIC spread -2.1%

IC = $231.9, ROIC spread = -2.1%

Pre-Paid Wireless(EP = -3.3 billion)

Satellite (EP = -$2.8 billion)

Wireless (EP = -$63.8 billion)Wireline (EP = -$48.3 billion)

Cable (EP = -$61.9 billion)

EP = Economic profitsIC = Invested capital


A Decade of Economic Value Added (including Unusuals, Goodwill, and ARILI)


Wireline Telecom ROIC now mostly below the cost of capital… wireless is a mixed bag, with clear winners and losers


7.2%

1.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

RO

IC E

xc

lud

ing

Un

us

ua

ls, G

oo

dw

ill,

an

d A

RIL

I

AT&T

BellSouth

Verizon

12.6%

0.4%

7.3%

15.4%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

RO

IC E

xclu

din

g U

nusu

als

, G

ood

will

, a

nd

AR

ILI

AT&T

Sprint

T-Mobile

Verizon

Wireline ROICs excluding Unusuals,

Goodwill and ARILI, 2000 to 2010

Wireless ROICs excluding Unusuals,


//NTS0016/RSCH1/Cable and Satellite/Research Calls/Industry/All Multichannel/2011/ROIC update/Exhibits Basic 2010.xlsx



Cable and Satellite sub-sectors show strongly rising ROIC


24.1%

18.2%

25.6%

19.0%

-10%

0%

10%

20%

30%

40%

50%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

RO

IC E

xclu

din

g U

nusuals

, G

oodw

ill,

and A

RIL

I

Cablevision

Charter

Comcast

TWC

Cablevision ex-MSG

44.3%

46.7%

-20%

-10%

0%

10%

20%

30%

40%

50%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

RO

IC E

xclu

din

g U

nus

uals

, G

ood

will

, and

AR

ILI

DirecTV

Dish Network

Cable ROICs excluding Unusuals,


Satellite ROICs excluding Unusuals,





A Decade of Stock Performance… poor ROIC translates into poor total shareholder returns

-21

.6%

-50.6

%

-99.9

%

-46

.4%

4.2

%

-50

.5%

-94

.1%

-24

.5%

-0.6

%

-29

.9%

-99

.8%

-28.4

%

115

.9%

0.3

%

-76.9

%

0.7

%

-26.9

%

8.0

%

-97

.3%

-5.3

%

44

.2%

-35.0

%

-62

.4%

-60

.8%

-72

.1%

-20.4

%

-17.0

%

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

AT&T Cablevision Charter Comcast DirecTV Dish Network

Leap MetroPCS Sprint Time Warner

Cable

Verizon

To

tal A

bso

lute

Re

turn

fo

r P

erio

d E

nd

ed

De

c 3

1, 2

00

9

Ten-Year Total Stock Returns (YE 1999 to YE 2009)

Eight-Year Total Stock Returns (YE 2001 to YE 2009)

Two-Year Total Stock Returns (YE 2007 to YE 2009)

S&P 500 Eight-Year

Total Stock Return +13.5%

S&P 500 Ten-Year

Total Stock Return-9.1%

S&P 500 Two-Year Total Stock

Return -20.3%


A Decade of Investment Returns: Cumulative Total Stock Performance (Absolute)

//NTS0016/RSCH1/Cable and Satellite/Research Calls/Blackbooks/2010/ROIC/Exhibits Returns.xlsx


ROIC is now much better (than historical) for cable, and worse for telecom


2.9%

-0.2%

-7.4%

-0.4%

-7.4%

-1.6%

15.8% 16.4%

10.3%

17.8%

11.3%

35.6%37.7%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

AT

&T

Ve

rizo

n

Sprint

T-M

obile

Le

ap

Me

tro

PC

S

Cable

vis

ion

Ca

ble

vis

ion

ex

-MS

G

Ch

art

er

Co

mca

st

Tim

e W

arn

er

Cable

Dire

cT

V

Dis

h N

etw

ork

RO

IC E

x-U

nu

su

als

, G

oo

dw

ill,

an

d A

RIL

I M

inu

s W

AC

C

Telecommunications Cable Satellite

ROIC Excluding Unusuals, Goodwill and ARILI Minus WACC, 2010



Decomposing ROIC (II) into Asset Turnover and Margins (sub-sectors)


'06, 9.3%'10, 4.4%

'06, 7.5%

'10, 10.7%

'06, 4.4%

'10, 5.0%

'06, 14.1%

'10, 22.7%

'06, 28.7%

'10, 45.1%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%

IC T

urn

ov

er

(Ex-G

oo

dw

ill a

nd

AR

ILI)

NOPLAT Margin (Ex-Special Items)

35%

30%

25%

20%

15%

10%

5%

NOPLAT margin x IC turnover = ROIC

Satellite

Cable

WirelessWireline

Pre-paid wireless

Changes in IC Turnover excluding Goodwill and ARILI and NOPLAT Margin

excluding Unusuals Combinations by Industry, 2006 to 2010



Decomposing ROIC (I) into Asset Turnover and Margins (companies)


T

T

CVCCHTR

CMCSA

DTV

DISH

LEAP

PCS

S

TWC

T-Mo

VZVZ

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%

IC T

urn

ove

r (2

010

, E

x-G

ood

will

and

AR

ILI)

NOPLAT Margin (2010, Ex-Special Items)

5% 10% 15% 20% 25% 30% 35% NOPLAT margin x IC turnover = ROIC

Satellite

Cable

WirelineWireless

40% 45%

IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding

Unusuals Combinations by Company, 2010



Summary and Conclusions

Penetration is slowing… but the data suggests we’re far from done yet

Fiber deployments near the end

Telco share falling…

…and TelCo wireline economics are deteriorating

Cable is winning the broadband wars

Infrastructure returns are anemic – across the board


Disclosure Appendix


U.S. Telecommunications and Cable & Satellite: Coverage Universe

Source: Bloomberg, Bernstein estimates and analysis

Closing Price Closing Price

Stock Rating Target Price (01-13-12) Stock Rating Target Price (01-13-12)

VZ U $32.00 $38.92 CMCSA O $32.00 $25.38

T M $30.00 $30.07 TWC O $88.00 $65.43

S M $2.50 $2.31 CVC M $20.00 $13.97

LEAP O $12.00 $9.96 DISH M $28.00 $28.75

PCS O $13.00 $8.35 DTV O $52.00 $43.46

//NTS0016/RSCH1/Cable and Satellite/Conference Calls/2010/A Telephone Call (Robin and Craig)/Coverage Slide.xls


Valuation Methodology

We value AT&T and Verizon on a combination of P/FE and a sum of the parts analysis. Assigned multiples

are based on historical performance, colored by the company's current allocation of capital.

We value AT&T on a combination of a target P/FE multiple of 13.0x applied to our estimated forward

earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA

multiple of 5.6x after adjusting for postretirement liabilities. We add the probability-weighted expected value

associated with the proposed acquisition of T-Mobile USA.

We value Verizon on a combination of a target P/FE multiple of 13.0x applied to our estimated earnings, as

adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.7x

after adjusting for postretirement liabilities.

We value Sprint using EV/EBITDA multiples of 5.5x forward 12 month EBITDA for the wireless business

(proportionately consolidating their 54% stake in Clearwire) and 3.5x for the wireline business, adjusted for

other non-operating assets and liabilities.

We value Leap Wireless and MetroPCS based on a weighted average of derived DCF values under four

different scenarios – a base case (which is given a 50% weight in the target price derivation), high and low

scenarios (weighted at 15% each), and a realistic downside scenario (weighted at 20%). Our base case

scenario assumes that Leap and MetroPCS' unlimited pre-paid ARPU remains in the $38-$39 range through

2015 and that their penetration of covered POPs reaches 7.2% and 9.5%, respectively, with the high and

low scenarios respectively incorporating more optimistic and pessimistic assumptions for ARPU, subscriber

growth, CPGA, CPU and capex.

We value the DBS sector on the basis of Steady State Cash Flow (SSCF) multiples, adjusted for market

value estimates for non-DBS assets. SSCF multiples have historically clustered around 9-11x trailing SSCF

for DirecTV and Dish Network, with higher multiples reflecting higher growth expectations, and lower

multiples reflecting lower growth expectations. We currently apply a 7.5x SSCF multiple to our forecast

forward 12 month SSCF for DirecTV and a 6.0x multiple for Dish Network, reflecting a 12 month look

forward as the basis of our 12 month target price, and lower-than-historical SSCF multiples to reflect the

sector's and the companies' diminished longer term growth prospects. We value the company's Latin

American assets using a forward SSCF multiple of 6.5x for PanAmericana and Sky Brazil, and a 10.0x

trailing EBITDA multiple for Sky Mexico.


Valuation Methodology, continued

We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast

EBITDA multiple of 6.25x for the core cable distribution business, 8.0x forward EV/ EBITDA for the cable

networks businesses of Comcast and NBCU, and 6.0x forward EV/EBITDA for NBCU's broadcast business.

We value other consolidated and non-consolidated operations and non-public equity investments on various

bases as appropriate. Publicly traded investments are carried at current market value.

In order to derive our price target for Time Warner Cable, we use a target multiple of 6.5x forward 12 month

forecast EBITDA, and add back the NPV of Time Warner Cable's deferred tax asset. We estimate that Time

Warner Cable will realize approximately $330 million of tax savings per year for fifteen consecutive years

from the 2006 acquisition of Adelphia as a result of its step-up in basis. When calculating the net present

value of these tax shields, we apply an 7.50% discount rate, which corresponds to Time Warner Cable's

estimated weighted average cost of capital.

We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast

EBITDA multiple of 7.0x for the core cable business. We value other assets and liabilities on various bases

as appropriate.


Risks

The risks to our target price for AT&T include:

Failure to gain regulatory approval to close the proposed T-Mobile USA transaction, adverse financial or other consequences associated with any conditions required to

garner regulatory approval, or the inability to wring the expected synergies out of a combined entity.

A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower

growth, and would likely be met with severe multiple contraction, in our view.

Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment.

Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider)

would yield lower ROIC and consequent multiple contraction.

Overpayment in an acquisition, which could be a variety of potential targets.

Our target price for Verizon is below the current trading range. Upside risks to our target price include:

Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current

dividend yields more attractive relative to investment alternatives.

Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal

wireless market penetration than we forecast.

Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the

Enterprise segment.

Subscriber gains as a result of fiber expansion (FTTX) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion.

Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins.

A faster-than-expected recovery in Enterprise revenues and margins.

Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares.

Our target price for Sprint is below the current trading range. Upside risks to our Sprint target price include the following:

A potential regulatory rejection of the AT&T and T-Mobile merger, which would give Sprint more leverage to strike a replacement deal with T-Mobile.

A spin off of Nextel could results in improved operating metrics, or, alternatively, could fuel investor enthusiasm even in the absence of improvement.

The growth rate of the industry could prove stronger than we anticipate. Sprint's churn rate or share of gross additions could improve sooner or more meaningfully than

we anticipate.

The downside risks facing our target prices for Leap Wireless and MetroPCS include the following:

Irrational pre-paid price competition initiated by one of the major carriers – most likely Sprint and/or T-Mobile, who are losing post-paid subscribers irrespective of their

efforts on the pre-paid side and thus are not as concerned about cannibalization between pre-paid and post-paid.

More limited than expected ability to penetrate their respective markets due to intensified pre-paid competition and/or economic forces, which could compromise their

scale economies and overall cost structure.

Greater than expected data consumption among pre-paid subscribers, which in turn could drive higher than expected capex requirements.

Downside risks specific to Leap include the possibility its new initiatives, including its new MVNO relationship with Sprint and nationwide 3G data roaming offer, raise its

cost structure beyond expectations.

Downside risks specific to MetroPCS include a greater-than-expected negative impact from Leap eventually selling its services in MetroPCS' footprint under its MVNO

agreement with Sprint.

Upside risks to our target prices for MetroPCS and LEAP include the following:

Greater than expected growth in the pre-paid wireless market overall, due to more post-paid wireless subscribers migrating to unlimited pre-paid

Greater than expected uptake of higher priced service offerings, which could result in enhanced profitability.

More rational price activity in the pre-paid market


Upside risks to our target price for Dish Network include:

Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost.

A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU.

An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and

would raise valuation multiples for Dish Network.

Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster.

Downside risks to our target price for Dish Network include:

Slower-than-expected subscriber growth would likely yield multiple contraction.

A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU.

A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in

these expectations could result in multiple contractions.

Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may

also yield negative returns.

An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material.

Risks to our price targets for the Cable operators include the risk that the competitive pricing environment will be more aggressive than we expect. Notwithstanding our

analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in

the absence of evidence of price competition, may continue to weigh on the stocks for some time.

New pathways to the home for video or other entertainment could also reduce the value of cable's video distribution bottleneck. Deep fiber deployments by the RBOCs

will impact cable subscribers and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast.

Comcast

Video pricing could come under pressure as growth for the satellite operators and TelCos slows.

The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely.

Longer term, cable's advantaged position in broadband could result in regulation.

Time Warner Cable

Video pricing could come under pressure as growth for the satellite operators and TelCos slows.



Cablevision

Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured.

Cablevision faces a very substantial overlap with Verizon's FiOS that could result in greater share loss or lower prices than anticipated.



Risks, continued


Disclosure Appendix

SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration

number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No.

199703364C, collectively.

Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No

analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan

Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on

emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise

specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 01/17/2012, Bernstein's ratings were distributed as follows: Outperform - 45.1% (1.4% banking clients) ; Market-Perform - 46.0% (0.5% banking clients); Underperform - 8.9% (0.0%

banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment

banking services within the last twelve (12) months.

Bernstein currently makes a market in the following companies DISH / DISH Network Corp, DTV / DIRECTV Group Inc, CMCSA / Comcast Corp.

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for

such services VZ / Verizon, T / AT&T Inc, S / Sprint Nextel Corp, TWC / Time Warner Cable Inc.

An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies VZ / Verizon, T / AT&T Inc, CVC / Cablevision Systems

Corp, TWC / Time Warner Cable Inc.

This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC,

Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United

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Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and

registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.


12-Month Rating History as of 01/16/2012

Ticker Rating Changes

CMCSA O (RC) 12/14/10

CVC M (RC) 05/10/10

DISH M (RC) 10/10/08

DTV O (RC) 01/11/12 M (RC) 04/24/08

LEAP O (RC) 09/28/11 M (RC) 02/09/11 O (IC) 12/14/09

PCS O (RC) 08/10/11 M (RC) 08/09/10

S M (RC) 09/19/11 U (RC) 03/21/11 M (RC) 03/14/11 U (RC) 01/19/10

T M (RC) 10/25/11 O (RC) 03/24/11 M (RC) 01/05/09

TWC O (RC) 11/02/10

VZ U (RC) 10/12/10

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and

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