Project Lightspeed

1
Project Lightspeed

• SBC Presentation
• Jeff Weber
• VP-Product Strategy
• February 1, 2005

2
Company assets

• 53 million direct connections to homes and
  businesses covering 1/3 of the United States
• 5.1 million high-speed Internet lines
• 47 million wireless customers with the
  acquisition of ATT Wireless and a wireless
  footprint with the industrys largest overlap of
  wireline assets
• 20,000 Wi-Fi hotspots in 6,000 venues throughout
  the 13-state SBC territory by 2006
• A nationwide IP backbone covering the nations
  largest cities
• A co-branded satellite video service
• One of the worlds largest directory advertising
  companies
• A strong financial position

No other communications company has our
combination of assets

3
Mission

• Our strategy is clear
• Grow by offering the most complete, flexible
  bundle of high quality communications solutions
  in the market, at a great value
• Needed a stronger video play
• Continually introduce new opportunities to meet
  and exceed the service and experience our
  customers demand
• Know our customers and offer a personalized
  service tailored to their needs
• Maintain a strong financial position and always
  be on the lookout for ways to be more efficient
  and cost effective

4
Project Lightspeed Overview

• FTTN requires approximately one-fifth the
  investment and one-fourth the deployment time of
  FTTP-only overbuild
• Expected deployment cap ex of approximately 4
  billion
• Expect 2005 cap ex will be at the high end of our
  2004 guidance range -5 billion to 5.5 billion
• Scale expected to drive cost curve down rapidly

• Capital Efficient

Significant CostSavings

• FTTN expected to generate approximately 70 of
  installation and maintenance savings available
  from FTTP

5
Project Lightspeed Overview

• Integrated IP voice, high-speed Internet access
  and video
• IPTV choice and control over substantial
  content alternatives

Market-ChangingServices

• Both FTTP and FTTN
• Natural extension of current fiber deployment and
  broadband network

• Powerful Network

• Targeted deployment to 18 million households in 3
  years
• To cover nearly 90 of high-value residential
  customers

Speed To Market
6
What it isnt
7
Digital Lifestyle (U-verse branding)
VDSL
Fiber
Wireless
Enhancing communications and entertainment at
home, at work, on the go
HomeNetworking
IPTV
WiFi
8
Integrated Communications and Entertainment
Services
IPTV 4 high-quality TV streams, including
high-definition TV, and video-on-demand

• 20-25 Mbps
• Everything IP

High-Speed Internet Access
IP Voice Full-featured offering growing
wireless integration
9
The Forces are Right
Global demand speeds innovation and drives down
the cost curve
These developments create video and consumer data
growth opportunities
Bandwidth Requirements
New compression technologies reduce bandwidth re
quired
Deployment Costs
New distribution architecturesallow delivery of
higher bandwidth at a lower cost
Growth Potential
Global Development
10
Significant Market Opportunity
Industry RevenuesU.S. Video Market
Industry RevenuesU.S. Broadband Market
63B
29B
54B
Video market to grow to 63 billion over next
four years, with fastest growth from new services
Broadband market subscriptions expected to grow
at a 16 CAGR over the next four years
16B
2008
2004
2008
2004
Source PWC Global Entertainment and Media
Outlook, 2004 - 2008
Source IDC Worldwide Broadband Access Services
2004 2008
11
High-Value Customers
Total Customer Household Segmentation
of Customer Spend Attributed to Each Segment
HighValue25
LowValue25
LowValue35
HighValue34
Medium Value40
Medium Value41
12
High-Value Customer Coverage
Percent of Each SegmentCovered by Project
Lightspeed

• FTTN is efficient in how it can be deployed
• Lightspeed deployment will cover approximately
  90 of high-value and 70 of medium-value
  customers

90
70
5
HighValue
MediumValue
LowValue
13
What We Expect to Achieve

• The second largest video provider in our fiber
  footprint within five years
• A lift in high-speed Internet penetration
• Differentiated product set with comparable prices
• Increased share of overall spend for customers
  communications and entertainment services

14
Strong Platform for Revenue Growth

• Data Opportunity
• Market share in FTTX markets grows to nearly 50
• FTTX revenues increase by nearly 300 million in
  2007

• Voice Opportunity
• FTTX product set increases 2007 access line
  market share by 300 bps
• Estimated 300 million revenue lift in 2007 from
  improved market share

• Video Opportunity
• 500 bps of market share generates 550 to 600
  million revenue annually
• Goal is to be 2nd largest video provider within
  five years

15
Superior Capabilities Versus Cable
Voice
Data
Video

• Functional integration with Cingular wireless
  service voice, video and data

• Flexible content choice and VOD capabilities
• 100 digital IP network, with the latest
  technology in compression and DRM

• Dedicated connection
• Integration with WiFi, wireless
• Bandwidth on demand
• Upstream speeds 1 Mbps

The power of integration drives customer value.
The key competitive differentiator
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Power of IPTV
Interactive Guides
Photo and Music Sharing
Multiple Camera Angles
Source Microsoft
17
Video differentiation
Advantages of SBC Video Platform
18
Solid Growth Record Growth Driven By Bundling,
LD and DSL
Consumer Wireline Revenue Year-over-Year Growth
58
2.8
54
50
1.0
44
9.2
8.1
(1.8)
36
6.1
(3.3)
31
5.9
3.1
(6.9)
2.1
(8.2)
3Q03
4Q03
1Q04
2Q04
2Q03
3Q04
4Q03
1Q04
2Q04
3Q03
3Q04
2Q03
19
SBC DISH Network
SBC has demonstrated great success in integrating
a video offering through its relationship with
SBC DISH Network

• We began marketing our integrated SBC DISH
  Network satellite TV service in March, expanding
  from a soft launch to full sales-channel coverage
  in April
• Growing to over 300K subs today
• DBS provides a feasible interim offering to
  retain voice lines however, it is not a long
  term solution for profitable growth
• Owning a video distribution network has the
  greatest potential to generate profitable growth
  in video

20
Market Success Drivers

• Taken separately, each product offers superior
  value to whats currently on the market

Individual Product Capabilities

• Cingular, wireline, high-speed Internet access
  and IPTV all IP and all integrated

• IntegratedPortfolio

Customer Relationships

• Leveraging relationships with our existing
  customer base

Speed To Market

• We get to the right customers fast

21
Unique Operational Approach

• Procurement
• Partner in new ways
• Choose based on what is available not what we
  want
• Critical to trust key partners
• Alcatel account team differentiated itself from
  competitors
• Alcatel project team is part of SBC

22
Project Lightspeed Network Plan
All-digital, high-bandwidth IP network to reach
more than 18 million households within three years

• Fiber to the node in existing neighborhoods
• Flexible and cost-efficient

FTTN

• Fiber to the premise for new construction and
  multi-dwelling units
• Will deploy FTTP in selected rehab situations

FTTP
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Network Alternatives
Today
Fiber to the RT (Pronto)
Copper
Copper
Fiber
RemoteTerminal
Central Hub
Node
Fiber to within 6,000 feet of home on average
12,000 feet maximum
1.5 - 6.0 Mbps
Overbuild
Fiber to the Node (FTTN)
Copper
Fiber
CentralHub
Node
Fiber to within 3,000 feet of home on average
5,000 feet maximum
20 - 25 Mbps
New Build
Fiber to the Premise (FTTP)
Fiber
CentralHub
Fiber from the central office to the home
Up to 39 Mbps
24
Project Lightspeed Video Network Architecture

• National

Regional
Local


SuperHead Ends

to customers
Video Serving Offices
Video Hub Offices

• National contentaggregation
• Redundant infrastructure
• VOD encoding
• Number 2

• Distribution of video
• Local aggregation point
• Number 140

• Storage of content/intelligence
• VOD library
• Time-shifted TV
• Interactive applications
• Local content aggregation
• Number 40

25
Broadcast Video
IP Video Distribution Advantages
VideoServiceProvider
Channel Lineup
2
3
4
5
6
7
8
9
5
4
SBC IP Video
VideoDSLAM
2
9
7
26
Expected Deployment Costs
Deployment Costs Per Household Passed

• In overbuild situations, comparable deployment
  costs for FTTP are more than 5X costs for FTTN
• FTTN deployed by 2007, one-fourth the time vs.
  full FTTP deployment
• FTTN deployment costs include all video
  infrastructure, fiber and electronics, including
  line cards
• FTTP overbuild deployment costs include all
  fiber, electronics and video, plus the service
  drop and ONT

Overbuild
New Build
1,350
1,100
1,100
250
RT (current)
FTTP
FTTN
FTTP
27
Project LightspeedExpected Subscriber Costs
Deployment Costs Per Household Passed
Success Based Subscriber Costs

• In greenfield deployments, FTTP costs the same as
  copper
• In overbuilds, FTTN is about one-fifth the cost
  of FTTP
• Subscriber costs decline rapidly driven by scale
  and IP technology curve

1,100
Nearly one-third lower than DISH DSL
250
Declines over 10 annually during next five years
FTTP Greenfield
FTTN Overbuild
28
Targeted Time To Market
FTTP Field Trials (scalability, provisioning,
customer experience)
FTTPVoice/ Data Launch
IP Video Trials (video quality, operational
integration)
Begin Network Construction
FTTX Video Field Trials (customer acceptance)
FTTXVideo Launch
29
Project Lightspeed Overview

• Capital efficient, financially disciplined
  approach
• Creates a logical migration path with minimal
  risk of stranded investment

• Investment

• Significant revenue opportunities in video,
  high-speed data and integrated services improves
  retention of highest-value customers
• Substantial opportunities for operating expense
  savings
• Project returns are in excess of cost of
  capital flexibility for continued dividend
  growth and share repurchase
• Growth in wireline operations should more than
  offset up-front dilution from Project Lightspeed

Return
30
Summary

• Video is important (both defense and offense)
• The time is now for switched video world wide
• Microsoft and Alcatel have a leadership position
• Opportunity is overwhelming for Alcatel
• Partner like Alcatel/SBC and there is no limit on
  your success