1. Waiting For IP Sandy Teger and David Waks System Dynamics Inc. Fall ’99 Voice On the Net Wednesday, September 29, 1999 Copyright © 1999 System Dynamics Inc.

2. Copyright © 1999 System Dynamics Inc. Slide 2 Summary Big MSOs view telephony as integral part of the bundle –Aspire to capture substantial market share from ILEC –Need to match ILEC features and reliability –Investing now in CBR (circuit switched) access technology for telephony over cable –Investing in circuit-switching infrastructure Switch from CBR to IP access solution requires –IP services, features and reliability comparable to or better than CBR –IP cost comparable to or lower than CBR –National and global IP networks in place to push conversion from IP to circuit switching deep into network

3. Copyright © 1999 System Dynamics Inc. Slide 3 Cable Focused on “The Bundle” Defend video services business against DBS today and others tomorrow Enter new businesses - replace lost revenue, keep growing Be first to provide all pieces of “the bundle” Video Data Analog/digital PPV/NVOD/VOD Interactive services PC and TV Local Long distance Telephony Video telephony Videoconferencing

4. Copyright © 1999 System Dynamics Inc. Slide 4 Some Cable Acronyms and Definitions HFC (Hybrid Fiber/Coax) - modern cable plant architecture Broadband access system: Cable modem + CMTS (cable modem termination system) DOCSIS (“Data Over Cable Service Interface Specifications”) - North American industry initiative for standardized cable modems, led by CableLabs OpenCable™ - NA industry initiative for digital set-tops PacketCable™ - NA industry initiative for IP voice and video

5. Copyright © 1999 System Dynamics Inc. Slide 5 Cable Standards Enable the Bundle Analog video PPV/NVOD Digital video TV Interactive services Video on demand OpenCable digital set tops Local Long distance CBR telephony PC Interactive services DOCSIS cable modems PacketCable Phase 1 Local Long distance Video telephony Videoconferencing PacketCable Phase 2 IP Telephony

6. Copyright © 1999 System Dynamics Inc. Slide 6 Telephony Market Entry: Varying MSO Approaches and Timing Deploy CBR telephony now –AT&T –Cox –MediaOne Deploy IP telephony as quickly as possible –Videotron –Cogeco Wait until completion of PacketCable initiative –Smaller MSOs

7. Copyright © 1999 System Dynamics Inc. Slide 7 Differing MSO Priorities for Telephony Strategic imperative Provide alternative to LEC access Extend the customer relationship / complete the service bundle Preserve “high quality” reputation of brand Now: Use existing circuit- switched infrastructure of AT&T and Teleport Later: Switch to packet infrastructure in orderly way without substantial “throw- away” costs Opportunistic Extend the customer relationship / tap into new revenues No significant investment in circuit-switched infrastructure Stores and distribution channels Unique Francophone community of interest Early adopter culture Now: Start with IP AT&TVideotron Ltee

8. Copyright © 1999 System Dynamics Inc. Slide 8 Packet Promises More - In The Future

9. Copyright © 1999 System Dynamics Inc. Slide 9 CBR Products For Cable - Available Now Four major products deployed worldwide –Arris Cornerstone (Antec/Nortel) –ADC HomeWorx –Tellabs CableSpan 2300 –Motorola CableComm Proprietary and mutually incompatible Cable Hub Site and/or Headend HFC distribution plant Customer Home Two-line “voice port” ( or NIU) Host digital terminal Arris Interactive Cornerstone equipment Class 5 Switch PSTN GR-303 or V5.2 (T-1/E-1)

10. Copyright © 1999 System Dynamics Inc. Slide 10 Sources: Cable World, January 18,1999, from NCTA; Multichannel News April 26, 1999 Major U.S. MSOs Deploying CBR Telephony AT&T Broadband and Internet Services (TCI) –California: Fremont –9 additional markets in 1999 –“Ramp up” in 2000 Cox –Arizona: Phoenix –California: Orange County, San Diego –Connecticut: Hartford –Nebraska: Omaha –Virginia: Hampton Roads Cablevision Systems –Connecticut: Norwalk –New York: Parts of Long Island MediaOne –California: Los Angeles –Florida: Jacksonville, 2 others –Georgia: Atlanta –Massachusetts: Boston suburbs –Michigan: Detroit suburbs –Virginia: Richmond Comcast –Washington D.C. suburbs (formerly Jones) Time Warner Cable –New York: Rochester

11. Copyright © 1999 System Dynamics Inc. Slide 11 Sample Offers First AT&T trial -- Fremont, CA –$12.50/mo for single line, $20.25/mo with call waiting, call return, 3-way calling –10 cents/min long distance –Waiving installation fee MediaOne -- Richmond –Fully-featured single line (CLASS, …) $26.95/mo –2 lines (1 fully-featured)37.95 –2 lines (both fully-featured)49.95 –Each additional line10.00 –Incentives: free installation, one month free service, 3 months free voicemail –Can keep existing phone number and long distance carrier

12. Copyright © 1999 System Dynamics Inc. Slide 12 How’s It Going? Cox Will keep on going with circuit-switched, as planned “It’s proven out for us, with penetration well beyond our business model.” Penetration exceeds 20% where Cox markets and “can end up in the 40% plus range if you add value.” During first 18 months, suffered from too much demand just from word of mouth “that we just weren’t ready for”. Now has a “favorable regulatory environment” since Bells need to demonstrate “significant competition” to enter LD market. Source: Communications Daily quotes from investors conference 5/7/99

13. Copyright © 1999 System Dynamics Inc. Slide 13 CBR Telephony Deployments Outside the U.S. -- Some Examples

14. Copyright © 1999 System Dynamics Inc. Slide 14 MSO Differentiation From ILEC MSOs need to differentiate their telephony services from incumbent LEC “Do it cheaper” - Lower price for basic service, CLASS, multi-line, long distance –Can do with CBR today, IP later “Do it better” - Value added services require IP –Self provisioning - add features or a line without waiting –Turn features on and off as needed –Simple, inexpensive multi-party calls –“Click to talk” for Web sites –Unified messaging –Higher-quality voice –Videophone, videoconferencing –Net enhanced calling -- volume enhancement, text to speech

15. Copyright © 1999 System Dynamics Inc. Slide 15 When Will MSO’s Switch to IP? (1) When IP solution is equal and cheaper –Comparable voice quality –Equal or less power –Equal or better system reliability –Equal or better installation and support (infrastructure and subscriber unit) –Stable technology, long lifetime –Packaging and house wiring worked out –Cost lower than CBR and going down faster (2) IP solution is significantly better –Roughly equal voice quality, power, reliability, installation and support, stability –Supports migration to video telephony, multimedia integration –Comparable cost to CBR for voice telephony (3) Own packet network far along in deployment –Avoid multiple IP gateway expense and call degradation

16. Copyright © 1999 System Dynamics Inc. Slide 16 Plant Requirements for Primary Telephony Availability - both MTBF and MTTR –Needs to match customer experience and expectations: “always get dial tone” Cable plant is underpinning for all services –Amplifiers in cascade, node size –Powering - centralized at node versus distributed –Redundancy - fiber, electronics –Many possible points of failure Different operational models –Twisted pair telephone plant is not monitored — single failure usually impacts only one subscriber line –Cable plant has not been monitored — single failure can impact many subscriber lines Needs proactive network management –Cable systems starting to deploy monitoring and response systems

17. Copyright © 1999 System Dynamics Inc. Slide 17 Our Forecast Large-scale deployment in 2001 –Probably two years for volume production of primary IP voice products - fully functional, interoperable, cost reduced, fully competitive with LEC and CBR products Near-term deployment strategies extend the lifetime for circuit-switched CBR telephony

18. Copyright © 1999 System Dynamics Inc. Slide 18 Primary Telephony Over Cable - Conclusions IP clearly the future of telephony –Near term, new entrants willing to accept risks –Mid term, IP will do everything CBR does... –… and offers the promise of doing it for less –Longer term, will do much more Success requires more than technology Service providers –Training –Business support systems: billing, customer support –Operational support systems: network management, traffic engineering –Service culture End users –Require clear incentive to switch providers –Choice based on pricing, features, provider reputation

19. 18 Beaver Ridge Road, Morris Plains, NJ 07950-1901 (973) 644-4739 Fax (973) 538-6003 dave @ system-dynamics.com sandy @ system-dynamics.com http://www.system-dynamics.com For More Information: System Dynamics Inc.