Rural Telecom Today

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Rural Telecom Today

• A. Bernardin Arnason
• for Telcom Insurance Group
• Risk Management Conference
• June 7, 2004

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Who we are

• We are the National Telecommunications
  Cooperative Association. Since 1954, the voice of
  small, rural telecommunications carriers
  connecting the heartland of America to the world.
  We are community-based, locally owned companies,
  dedicated to providing vital telecommunications
  services ensuring the economic future of rural
  America.  

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Agenda

• The Rural Telecom Environment
• Telecommunications Convergence
• Voice over Internet Protocol
• Video
• Conclusions and Discussion

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The Rural Telecom Environment Today
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The Changing Landscape

• Universal Service
• Safe to say things are changing
• Much debate about how the fund should be
  collected and distributed
• Many would argue that universal service is being
  improperly used to promote and stimulate
  competition
• ETC debate
• Cost structures
• VoIP and broadband fueling this debate
• Should there be universal service for broadband?
• Inter-Carrier compensation and access reform
• What is the landscape after MAG?
• Bill and keep or something else

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The Changing Landscape

• Decline of revenues based on Interstate and
  Intrastate minutes
• Technology and regulatory environment are
  conspiring to reduce access charge revenues.
• 2003 saw the first negative line growth in
  history
• 2002 saw the first negative MOU growth in history
• Companies that rely heavily on access revenues
  need to rethink this strategy for the future.
• Strategic planning should include strategies for
  generating non-traditional revenues
• Safe to say that things are changing

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Lines and Minutes of Use Declines
Courtesy of NECA
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Increased Competition

• Competition from non-traditional service
  providers
• Cable TV
• Should start to get real interesting over the
  next 5 years
• Electric power companies
• mainly Internet competition
• look out for BPL in the future
• VoIP Providers
• Vonage, etc
• Wireless Competition
• Mobile wireless service providers taking minutes
  and long distance traffic from traditional
  wireline providers
• Indirect effect your subscribers see wireless
  benefits/pricing through national ad campaigns
  and begin to demand comparable service
• Universal Service Competition
• Probably represents the biggest current threat
• Multiple companies/sectors chasing universal
  service dollars, threatening its intent

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All leading to an incredible amount of uncertainty

• Telecommunications sector used to be a very
  stable business no more!
• Regulatory decisions over the next three years
  will have profound implications on our future
• Re-write of the telecom act is pretty much a
  given
• Environment is quite different than in 96 how
  will we favor?
• Shouldnt under estimate the competitive
  implications
• Vonage, cable industry, WISPs today
• Tomorrow, in theory, VoIP empowers any company
  with a viable customer base to offer telephony
• Why not Microsoft, Amazon, AOL, Wal-Mart?
• SIP is already built into Windows XP and Windows
  CE
• In theory, any PC/laptop or PocketPC device could
  become a SIP phone
• But at least it makes things interesting and fun!
• Contrary to some opinion rural telecom is going
  to be fine but we will have to adjust and be
  prepared to change

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Which approach will legislators take?
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Name of the Game - Revenue Streams Ask yourself,
what you are capturing?
The average household spends 116 per month on
telecommunications (USA Today)
As traditional revenue sources come under
pressure, companies must diversify their
revenue streams as a hedge against the future
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Telecommunications Convergence
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Telecommunications Convergence

• Definition The convergence of telephone
  networks and data networks into one single
  network offering voice, video, and data.
  Consumers will place telephone calls and not know
  (nor care) that there call was transmitted over a
  data network.
• In theory, creates tremendous efficiencies for
  network operators maintain one network, as
  opposed to two or three
• Allows one service provider to deliver voice,
  data, and video over one network the triple
  play.

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Enabling Technology for Convergence Internet
Protocol

• Internet Protocol (IP)
• All telecom information (voice, video and data in
  the form of packets) can be delivered in packets
  over a IP data network.
• If one company can deliver voice, video, and
  data/Internet services, why have multiple service
  providers and receive multiple bills?
• Allows for easier entry into telecom market
• Evens the playing field as regulators like to
  say
• Vonage spent 14 million in capital expense for a
  network that can scale into the hundreds of
  thousands, if not millions

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VoIP many different flavors
Courtesy of Pannaway Technologies
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VoIP What is the promise?

• Promises a more economical network to operate.
• Doesnt translate well to ILECs, because you
  still need to maintain your TDM network as well
• Service provider company size may not matter.
• Service provider location may not matter.
• Skype is located in Finland
• Shared medium for voice, video and data no need
  for multiple networks.
• May accelerate broadband adoption
• Bundling of services.
• One bill for all telecom services.
• Possibility for online billing and service
  provisioning.

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VoIP Where is the Threat?

• VoIP technology is advancing rapidly.
• Will your company be ready?
• Empowers your competitors
• Questionable regulatory environment
• The FCC doesnt have a clue on how to regulate
  Internet telephony.
• Regulatory efforts may make VoIP more OR less
  attractive too early to tell
• Puts traditional long distance access charge
  revenues under pressure
• Could eventually replace the PSTN as we know it
  today

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Video Services

• Why are telecom carriers interested in video?
• Generate incremental revenue for broadband
  investments
• Spent a lot of money getting DSL out to those
  customers!
• Competitive Response
• Cable companies trying to steal your voice
  revenues, why not go after their video revenues
• Build barriers to entry
• Lock up a significant customer base with the
  triple play, your territory is less attractive to
  competitors
• Customers are demanding it
• They want these advanced video services, and are
  looking to someone to offer it

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Video service challenges

• Expensive!
• Margin challenged service/application
• Expensive to build primarily because of head-end
  costs
• Expensive to operate, primarily because of
  programming cost
• Learning curve
• Many companies are not traditional video
  providers there is a lot to learn
• Customer expectations are different
• If the phone service goes out (which we know it
  never does), patience is the order of the day
• If the video service goes out, panic is the order
  of the day!

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Video is here to stay

• Over 100 deployments and growing
• TelcoTV model (video via broadband)
• Approx. 350K subs. today
• Over 900 people attended the TelcoTV Conference
  and Expo
• Larger carriers starting to get aggressive
• SureWest
• It completes the triple play strategy of voice,
  video, and data
• Allows carriers to be true full service
  communications companies to their subscribers
• Dont need to go anywhere else.
• Dont forget about wireless!

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Rural Telco Advantages for Convergence

• Superior existing telco plant
• Invested in building networks to die for.
• More leverage opportunities of existing copper
  plant
• Talk of DSL being extended to 100 Mbps
• Customer relationships
• Superior knowledge of customer base
• Community focused
• Less bureaucracy and red tape
• Allows for quicker deployments
• Experience in multi-service offerings
• Ahead of the curve
• No one can serve your customers better than you
  but dont give them a chance

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National Telecommunications Cooperative
Association

• Rural telecommunications is our business.
• We are more than 550 community-based, locally
  owned carriers.
• Visit us at http//www.ntca.org.
• barnason_at_ntca.org - 703/351-2032

Thank you!