1. 1 University of Toronto Master of Engineering in Telecommunications Voice Over IP Industry Analysis Katherine Lam (Class of 2003-04) September 23, 2004.

2. 2 Key Research Objectives Objectives: To answer 2 key questions: 1. Is carrier VoIP “disruptive” in the consumer market? 2. Will carrier VoIP “cross the chasm” quickly and easily in the consumer market? In the context of the big picture of VoIP industry!

3. 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. 4 Gorilla Game Home Networking Main Street Toll Bypass Consumer Wi-FiVoIP Early Market Enterprise Source: Geoffrey Moore’s book titled “The Gorilla Game” Chasm Hot Spots Chasm

5. 5 MET Report Contents Objectives and Methodologies Service Providers Equipment Vendors Summary of Findings Appendix oGorilla Game oDisruptive Technology oU.S. Service Providers Profiles oU.S. Overall Observations oU.S. and Canadian VoIP Markets FOCUS

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

7. 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. 8 Contents Introduction and Objectives Methodologies Current Carrier Market Dynamics Future Carrier Market Projections Equipment Market Canadian VoIP Market Future Work and Summary

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

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

11. 11 Industry Analysis Methodologies Industry Analysis Market Analysis Company Analysis Competitive Analysis Service Provider Groupings 1.Existing Incumbents IXC, ILEC and MSO 2.New Players Vonage-like

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

13. 13 Carrier VoIP in Consumer Market 2003 - 2004 Years 2003 2004 U.S. Residential Voice Lines (Million) 118 115 U.S. Consumer VoIP Subscribers (Million) 0.13 1 % of VoIP Subscribers in Consumer Market 0.1% 1% Source: Yankee Group

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

15. 15 Current Market Development Category of Service Provider Current Player(s)Current Business Priority Pure VoIP Players Vonage Net2Phone Attack as new market opportunity Incumbent Multiple Service Operator (MSO) Comcast Time Warner Cable Cablevision Cox Attack ILECs on local voice business Defend from satellite operators’ attacks on video business Incumbent Local Exchange Carrier (ILEC or RBOC) Verizon Qwest SBC BellSouth Attack IXCs in the business segment as new source of revenue Defend home base business on residential voice Incumbent Inter- exchange Carrier (IXC) AT&T MCI Sprint Defend home base business on business/enterprise customers

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

17. 17 Pure VoIP Player - Vonage 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 Linear Projection In 2003, Vonage had 78,000 subscribers (60% market share) Add 20,000 subscribers/month Vonage VoIP Subscribers

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

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

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

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

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

23. 23 Carrier VoIP in Consumer Market 2007 Years 2003 2004 2005 2006 2007 U.S. Residential Voice Lines (Million) 118 115 114 113 113 U.S. Consumer VoIP Subscribers (Million) 0.13 1 4 7 12 % of VoIP Subscribers in Consumer Market 0.1% 1% 3.5% 6% 10% Source: Yankee Group

24. 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. 25 Potential Market Dynamics 2007 (Separate ILEC & IXC) ILECs show more interests and potentials than the IXCs in the consumer VoIP market

26. 26 Carrier VoIP in Consumer Market Now, we can answer the 2 key questions. 1. Is carrier VoIP “disruptive” in the consumer market? 2. Will carrier VoIP “cross the chasm” quickly and easily in the consumer market? The answer to both questions is NO!

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

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

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

30. 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 VoIP is not disruptive in equipment market Sonus + Telica = 31% Market Share

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

32. 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. 33 Contents Introduction and Objectives Methodologies Current Carrier Market Dynamics Future Carrier Market Projections Equipment Market Canadian VoIP Market Future Work and Summary

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

35. 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. 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. 37 The End. Thank You!