2. Copyright  2003 Global Insight, Inc. Telecommunications Industry Teleconference Technology and Substitution: The End of Boundaries in Telecommunications October 30, 2003 11:00 a.m. – 12:00 noon

3. Copyright  2003 Global Insight, Inc. October 30, 2003 2 Overview of Global Insight  Global Insight provides the most comprehensive economic and financial data and forecast coverage of countries, regions, and industries available from any source.  Our economic data, models, analyses, and forecast services help 3,000 organizations worldwide develop business strategies, control for business risks, and make key decisions.  Our custom consulting services leverage a wealth of business, financial, and economic information to analyze real-world problems and provide custom solutions to our clients.

4. Copyright  2003 Global Insight, Inc. October 30, 2003 3 A systematic, comprehensive, and consistent approach provides economic, industry, and market insights. Market Data Solutions Research and Analysis Information, Answers, Success

5. Copyright  2003 Global Insight, Inc. October 30, 2003 4 Unique Telecom and IT Modeling Framework Hardware Information Technology Computers Networks Communications SoftwareServices Packaged Custom In-House Computer Information Communications Linkages are built in throughout the model.

6. Copyright  2003 Global Insight, Inc. October 30, 2003 5 Today’s Presentation Topic:  Competition and substitution among telecom technologies in the United States Participants:  Mike Raimondi, Executive Managing Director, Global Insight’s IT/Telecom Consulting practice  Chris Swann, PhD, Economist, Global Insight  Paul Rappoport, PhD, Economist and Associate Professor of Economics, Temple University  Mark Lowenstein, Managing Director, Mobile Ecosystem

7. Copyright  2003 Global Insight, Inc. Traditional Wireline Services Chris Swann

8. Copyright  2003 Global Insight, Inc. October 30, 2003 7 Questions/Issues – Moving Beyond Stovepipes  How will competition affect ILEC-CLEC shares?  What is the impact of wireless substitution on wireline access?  What is the impact of broadband on local wireline markets?  How will price movements in DSL affect penetration? Cable modem share?  How will demographic changes affect wireless and broadband development?

9. Copyright  2003 Global Insight, Inc. October 30, 2003 8 Overview  What do we mean by substitution?  Usage substitution between communications alternatives  Competition and access substitution  Why is it relevant?  Changes within markets are linked across markets  Disruption to market positions  How does this project address it and do we have any preliminary results?

10. Copyright  2003 Global Insight, Inc. October 30, 2003 9 What Do We Mean by Substitution?  Wireline to wireless  Shifting usage to mobile wireless  Shifting access to mobile wireless  Wireless to wireless  Voice usage to data (e.g., SMS) usage  Wireline to wireline  Voice to data (e.g., e-mail and IM)  Secondary lines to broadband/WLAN  Switched to special access and IP

11. Copyright  2003 Global Insight, Inc. October 30, 2003 10 Relevance to the Communications Industry  Traditional boundaries of wireline markets eroded  Technology and cost economies  Deregulation and entry  Value of mobility and wireless competition  Intense competition  Expanded coverage and reduced prices  Portfolio of communications options  Voice communications  Data communications

12. Copyright  2003 Global Insight, Inc. October 30, 2003 11 Relevance to the Communications Industry  Loop competition and implications for revenue and facilities planning  Reductions in total access lines – structural change not just cyclical change  Switching from additional lines for voice and dial-up to wireless and high-speed service

13. Copyright  2003 Global Insight, Inc. October 30, 2003 12 Local Exchange Competition

14. Copyright  2003 Global Insight, Inc. October 30, 2003 13 Where Are the Lines Going?

15. Copyright  2003 Global Insight, Inc. October 30, 2003 14 Trends in Total Communications Access

16. Copyright  2003 Global Insight, Inc. October 30, 2003 15 Revenue Shares in Communications Markets

17. Copyright  2003 Global Insight, Inc. October 30, 2003 16 Think: System WIRELINE Relative prices and loop competition, age – income demographics Density, technology Wireless impact, broadband impact …. WIRELESS Relative prices, age – income demographics Density, technology Voice/data usage BROADBAND Relative prices, availability, employment Density, technology

18. Copyright  2003 Global Insight, Inc. October 30, 2003 17 Linking Changes Across Markets ILEC-CLEC Wireless Voice/Data DSL/CABLE TOTAL COMMUNICATIONS Wireline Wireless Broadband

19. Copyright  2003 Global Insight, Inc. October 30, 2003 18 What Do We Mean By Substitution?  Wireline  Primary lines (ILEC)  Additional lines (ILEC)  Wireline  Primary lines (CLEC)  Wireless  Subscribers  Usage substitution  Broadband  DSL  Cable modem  Usage substitution

20. Copyright  2003 Global Insight, Inc. October 30, 2003 19 What Do We Mean By Substitution? Preliminary Results  Wireline –Primary lines (ILEC) –Additional lines (ILEC)  Wireline  Every 10 new CLEC lines reduce ILEC lines by 6  Wireless  5% of total lines result exclusively in wireless  Broadband  Every 10 new DSL lines results in 12 ILEC lines lost  Every 10 new cable modems results in 7 ILEC lines lost

21. Copyright  2003 Global Insight, Inc. Broadband: Stimulating Growth and Its Impact on Traditional Telephony Paul Rappoport

22. Copyright  2003 Global Insight, Inc. October 30, 2003 21 Simulating the Impact(s) of Broadband  Growth rate?  Role of regulation?  Broadband packaging  Role of new technologies and applications How do these factors impact residential access line demand?

23. Copyright  2003 Global Insight, Inc. Broadband Growth From New Applications?

24. Copyright  2003 Global Insight, Inc. October 30, 2003 23 Consider the Demand for New Applications  Is VOIP the “killer application”?  Will “entertainment” drive new demand? –VOIP –Digital TV and music –New applications and technologies  What is the role of price?

25. Copyright  2003 Global Insight, Inc. October 30, 2003 24 Knowledge of and Interest in VOIP (Voice over IP)

26. Copyright  2003 Global Insight, Inc. October 30, 2003 25 Broadband for Access Line Substitution Is Real

27. Copyright  2003 Global Insight, Inc. Price

28. Copyright  2003 Global Insight, Inc. October 30, 2003 27 Preliminary Findings: Demand for Cable Modem Service

29. Copyright  2003 Global Insight, Inc. October 30, 2003 28 Price  If price of broadband access drops to $25:  50% of Internet households would be broadband subscribers  This switch would occur even if there were no new applications  Switch occurs even if intellectual property rights are not solved

30. Copyright  2003 Global Insight, Inc. October 30, 2003 29 Potential Market Size  There are approximately 54 million Internet households  There are approximately 16 million broadband households (~30% of all Internet)  If price drops to $25, the number of broadband households increases to 27 million (~50% of all Internet)

31. Copyright  2003 Global Insight, Inc. October 30, 2003 30 Implications  In the short run, the largest impetus for growth in broadband will come from reducing prices  This growth would be at the expense of second lines  DSL and cable modems are substitutes. The choice of type of broadband access is and will continue to be critical to ILEC performance  To be sure, there are other avenues of growth (new adoption), such as from household formation, better content, new services, etc.  But these will play a secondary role to changes in price

32. Copyright  2003 Global Insight, Inc. October 30, 2003 31 Factors that Could Negatively Affect Growth  Imposition of taxes on Internet transactions  Spam  Viruses  Identity theft  Regulation and regulatory uncertainty

33. Copyright  2003 Global Insight, Inc. Impact on Wireless Mark Lowenstein

34. Copyright  2003 Global Insight, Inc. October 30, 2003 33 020406080100 3 or more 4 or more 5 or more 6 or more 7 or more # of Competitors % of Population Covered  Most competitive segment of telecom  Network investment remains high  Price erosion has stabilized Intense Competition, Rapid Usage Growth Pricing Competition Monthly MOU 0 100 200 300 400 500 600 2000200120022003 Avg MOU/Mo. Usage

35. Copyright  2003 Global Insight, Inc. October 30, 2003 34 Changing Wireless Industry: New Elements Landline displacement is largest growth opportunity for wireless carriers. $77B Mobile 11¢ /min Landline 5¢ /min $250B 1. Share of Overall Voice Minutes Pie  Maturing sub and rev. growth, but high cost structure  Substitution a new reality 2. “Battle for the Building”  New in-building strategies for both consumers and business customers  Changes thinking about capex, equipment, and enhanced services 3. Accelerated Switch/Replacement Cycle $- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 1993199419951996 1997 19981999200020012002 Cumulative Capex/Total Subs Capex/Sub

36. Copyright  2003 Global Insight, Inc. October 30, 2003 35 Relationship Between Price and Usage  During 2003, the number of wireless subscribers exceeded the number of fixed access lines  In developed economies, substitution and wireless data are becoming the growth engines for wireless  There are important differences between the premiums for wireless-wireline and voice versus data that influence substitution 0 50 100 150 200 250 300 350 400 450 500 USA Canada UK Germany Italy France Finland Japan South Korea Australia Monthly MOU $- $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 Carrier Revenue per Minute

37. Copyright  2003 Global Insight, Inc. October 30, 2003 36 Product and Service Evolution to Address Substitution  Network solutions -Increase coverage and capacity  Equipment solutions -Handoff to LL network  In-building solutions -Bluetooth/VoWLAN  Bundling

38. Copyright  2003 Global Insight, Inc. October 30, 2003 37 Implications of Wireless Substitution  Landline service proposition and priorities  Capital expenditure  Economics  Spectrum  Industry structure  Regulation

39. Copyright  2003 Global Insight, Inc. October 30, 2003 38 Barriers to Substitution  High quality, low price of landline  Coverage, by far the #1  Pricing  Issue of person, not location specificity  Battery life  Data capabilities

40. Copyright  2003 Global Insight, Inc. Technology and Substitution: The End of Boundaries in Telecommunications A Multi-Client Study

41. Copyright  2003 Global Insight, Inc. October 30, 2003 40 Study Overview The rapid adoption of high-speed cable access and DSL services, and the replacement of traditional telephones with mobile service, has caused the demand for landlines to plummet. As a result, we are in the midst of the most significant change in communications since the introduction of services more than 100 years ago. Technology and Substitution: The End of Boundaries in Telecommunications, a new multi-client study from Global Insight, takes an in-depth look at the issues of technology and wireless substitution. Written by a team of leading telecommunications experts, Global Insight provides a comprehensive review of the industry, including a detailed discussion of the economics, regulatory issues, and technological trends.

42. Copyright  2003 Global Insight, Inc. October 30, 2003 41 Objectives and Focus of the Study  User-friendly model for forecasting and simulation  Access substitution, usage shifting, and market outcomes  Identify key drivers of demand  Total market, consumer and business markets  National and state coverage – drive to MSA

43. Copyright  2003 Global Insight, Inc. October 30, 2003 42 Deliverables  Indicators  Switched lines: total, consumer, business  Wireless subscribers  DSL/Cable modem  Expenditures by market  Usage shifting  Geographic Coverage  National  State  MSA  Telecom Drivers  Access line prices  Wireless prices  DSL and cable modem prices  Technology changes  Market Drivers  Population demographics  Location density  Economic conditions

44. Copyright  2003 Global Insight, Inc. October 30, 2003 43 Deliverables – Market Simulator  User-friendly interface for forecasting and simulation on wireline/wireless access  Price changes  Demographic changes  Technology changes  Scenario planning  Financial planning  Operations and cost planning  Competitive analysis

45. Copyright  2003 Global Insight, Inc. October 30, 2003 44 Market Simulator  Allow user to adjust assumptions  Age/Income demographics  Access mode price  View effects of changes to access line shares  View effect on usage rates for wireless – both voice and data  View usage and penetration for voice over IP (VOIP)

46. Copyright  2003 Global Insight, Inc. October 30, 2003 45 User-Friendly Simulator for Telecom Industry

47. Copyright  2003 Global Insight, Inc. October 30, 2003 46 Future Major Enhancements  Impact of demand on network capacity and cost  Implication of wireline to wireless usage change on network capacity  Implication of shifting usage from switched to IP networks  Impact of demand and cost change on industry organization  Winners and losers

48. Copyright  2003 Global Insight, Inc. October 30, 2003 47 Contacts  If you have any questions regarding this presentation or our multi-client study Technology and Substitution, please contact: Mike Raimondi 1-781-301-9124 mike.raimondi@globalinsight.com mike.raimondi@globalinsight.com  More information about this study can also be found at: www.globalinsight.com/substitution www.globalinsight.com/substitution