Telecommunications Industry Brief

1
Telecommunications Industry Brief
2
Strategic Challenge

• How to keep up with the pace of change?

High uncertainty about future No time to make
decisions Difficult to catch-up as pace
increases Tough competition penalizes mistakes
Planning is limited Reacting is
insufficient Traditional strategies of build
and defend a position are inadequate
3
Fortresses No Longer Exist

• Intel could try to defend its fortress

but chooses not to

• Superior technical capabilities
• Substantial capital barriers to entry
• Dominant market share

• Only the paranoid survive
• Advantage is assumed temporary
• Strategy is complicated and surprising
• Price cutting in NICs
• Innovation into MMX technology
• 500 million investment in over 50 media,
  Internet and graphics companies
• Downmarket microprocessors for under 1,000 PCs
• Expanded product line
• Laptop-specific microprocessor
• New, cheap chips
• New express bus chips

4
Time Pacing

• Common experience

Myths
Best practice

• Need for change is not anticipated
• Initiating change takes too long
• Change frequently loses momentum

• Best solution is to react to events as quickly as
  possible (event triggered)

• Drive change with internal metronome (clock
  driven change)
• Monitor own processes and the market for rhythms
• Set the pace
• Choreograph transitions

Footnote Source Sources
5
Time Pacing Examples

• Company

Activity
Pacing
Addition of new manufacturing capacity
Builds new facility every 9 months
Opening of new retail outlet
Opens 300 stores each year to hit target of 2,000
by year 2000
Launch of new products
40 of sales from products launched in last 5
years (in 1997 achieved 49)
Jack Welchs calendar
Like seasons of the year, Welch manages through a
rhythm of regular, seasonal activities
6
Improvisation

• Common experience

Myths
Best practice

• Innovative ideas suffer from poor execution
• Company aspires to lead, but always seems to
  follow industry
• Analysis-paralysis

• Successful companies are run by a braintrust of a
  few, smart senior executives
• Success is driven by an army of revolutionaries
• Successful companies
• Operate on the fly
• Limit information
• Eliminate conflict

• A few rules, neither bureaucracy nor chaos
• Structure key outcomes with responsibilities
• Structure key activities with priorities
• Success is driven by more information (real
  time), not less and fact-based debate

7
Improvisation Semi-Structure Examples

• Company

Limited set of rules

• Strict product development priorities
• Products released in three stages internal,
  beta, full launch
• Priorities managed, not projects spontaneous
  content encouraged
• We live on the edge

• Clear ranking of which types of molecules are
  research priorities
• Maximum number of molecule types pursued at any
  one time
• Projects killed according to step charts

• Movies must
• Center on a basic human condition and a flawed,
  but sympathetic character
• Have a clear beginning, middle, and end
• Disciplined financing (50 more efficient than
  industry standard)

F I L M
S
(The Crying Game Pulp Fiction The English
Patient Chasing Amy Cinema Paradiso)
8
Probing

• Common experience

Myths
Best practice

• Annual strategic plans are created, then filed
  and ignored
• Strategic plans are often wrong in hindsight
• Short-term performance pressure takes priority
  over future thinking

• Planning predicts the future
• Planning is a waste of time, it is better just to
  react

• Build vision of business, not industry
• Probe the future
• Wide variety (time and content) of low-cost
  probes to create insight
• Constant, thin attention
• Hypotheses and evaluation metrics tied to probes
• 5-week schedule, 5-month plan, 15-month intuition

9
Probing Examples

• Company

Examples

• Youve got to experimentstrategy is about
  buying optionsthen picking the best ones to
  pursue John Browne, CEO
• Drilling experiments on Andrew oil field led to
  revolutionary horizontal drilling technique
• Used limited JV with Safeway to experiment with
  integrated food and fuel convenience stores

• Schwabs approach is to use market to fine-tune
  new products as a result, they release products
  at a blistering rate, some hit and some wither,
  but the flood keeps coming Forbes
• Develop experimental products/services in-house
• Futures trading
• Market Buzz
• AdvisorSource
• Uses alliances for further experiments
• IPOs with Goldman Sachs
• Direct life insurance with Great West Life

• Gates calls probes feelers
• Youve got to make sure you have feelers out to
  see when things are about to achieve critical
  mass
• Currently limited backing of three different
  video compression technologies
• Creates probes with internal projects, alliances,
  and acquisitions
• Both shorter term probes and Blue Sky projects

10
Making Probing Happen
Future focused meetings
5 years
Acquisitions
3 years

• Design a probe portfolio
• Range of time frames
• Range of technologies
• Range of probe types
• Always low cost
• More random probes when more uncertainty
• Measure results
• At some point, accelerate investment in direction
  of probe or eliminate it

Futurists
Scenario planning
2 years
18 months
6 months
Market research
Alliances/ JVs
Pilot markets
Experimental products and services
11
Regeneration

• Common experience

Myths
Best practice

• New business opportunities suffocate in shadow of
  legacy ones
• New businesses thrive while traditional
  businesses languish
• Roadblocks on previously successful growth paths

• New businesses succeed only when isolated from
  traditional ones
• Diversification is successful when managers build
  and extend a tightly woven set of competencies

• Drive successful diversified growth when
• Traditional businesses are combined with new
  approaches
• Multiple growth paths are traveled
• 3 Rs rearchitecture, recombination, and refresh
  are used
• Thinking is modular
• Existing businesses are culled

12
Regeneration Examples

• Company

Examples

• Recognized modularity of brewery, wholesale
  business, and retailing/hospitality skills
• Diversified into resort hotels, restaurants,
  nursing homes, and health clubs based on
  retailing/hospitality skills
• Divested smaller, less profitable brewery
  operations

• Diversified into high-volume, low-cost, in-store
  banking outlets with supermarket-style service
  sales force
• Newly trained salesforce used to re-vitalize
  traditional branch network

• Entry into luxury market with Lexus, built on
• Discarded, experimental, midsize, Asian market
  product platform
• New dealerships, brand images, styling,
  technology
• Rearchitected selected engineering features
• Refreshed lower priced name plates with Lexus
  technology

• Sophisticated combination of varied mutations,
  recombinations, and refreshers
• Combined camera skills (optics technology,
  management of dealers, high-volume assembly) and
  new copier product
• Combined print engines from copiers with new
  laser printers product and OEM channel into print
  engine business
• Refreshed copier business with sophisticated
  control technology from laser printers
• Recombined dealer management, high-volume
  assembly, copier and laser printer technology to
  launch fax machines business

13
Agenda

• Local Services and Strategies
• Long Distance Service and Strategies
• Integrated Carrier Strategies
• Voice over Whatever

14
Local Market Dynamics

• Large, slow growth market
• Competition really just beginning
• Lots of MA activity
• SBC/Pac Bell/ SNET/ Ameritech
• Bell Atlantic/ NYNEX/ GTE
• WorldCom/MFS/Brooks
• ATT/ TCG/ TCI

15
ILEC Local Market Revenues98.6 Billion, 1997
Revenues for ILECs only, excludes non-telecom
revenues
16
ILEC Local Services Market51.1 Billion, 1997
Residential - 54 Business - 42
17
What Defines the CLECs?

• The Telecom Act of 1996 transformed CAPs into
  CLECs and created the rise of an integrated
  carrier approach. It also sparked the entrance
  of other new competitive local exchange
  carriers- both start-ups and existing carriers.
• CLECs are among the fastest growing , and are
  clearly the first wave of Integrated Carriers
  because they were able to leverage existing
  infrastructure to offer a broader portfolio of
  services.
• CLECs are diverse different target markets,
  service mixes and technology solutions.
• Competition is driving carriers to unprecedented
  levels of business, service and infrastructure
  complexity

18
CLEC Revenue Mix1997 2000
1997- 3.1B
2000- 9B
Domestic Revenues Only
19
CLEC Profiles
Geographic service area
Key Customer Focus
Sales Organization
Intermediate

• East Coast emphasis with extended Frame Relay
  to the West Coast and Texas
• Nationwide Frame Relay servicethrough the
  UNISPAN consortium

• The target market for Intermedia isbusinesses
  with between 50 and 500lines that can ultimately
  be servedon-net.
• Also targeting larger accounts with its
  inter-city data services andinternet services

• 365 Intermedia sales peopleand a total of 617
  salespeople when Shared Tech.,LDS, and national
  Tel areadded
• 102 Sales Offices located throughout the US

ICG

• Regional carrier
• Focuses on clusters in OhioValley, Texas
  SouthernCalifornia ColoradoNorth Carolina
  Alabamaand Tennessee.
• New network in Atlanta for 1998 and no
  additionalnetworks planned
• Primarily focuses on Tier Iand Tier II.

• Sells to small and medium-sizedbusinesses of 5
  to 100 lines with astrong emphasis on accounts
  with15 to 50 lines.
• Utility agreements will bring onMultiple-dwelling
  units as a target market
• ICG is trying to leverage its existing client
  relationships to sell bundledsolutions.

• Sales force is estimated at roughly 300.
• Also leverages itsrelationship with utilities
  toexpand into residential andbusiness markets.

TCG

• Nationwide footprint covering 28 of the 30
  largest MSAs.
• BizTel footprint-206 areasincluding 96 of the
  top 100 MSAs.
• Focus on Tier I cities someemphasis on Tier II
  andTier III cities.
• New emphasis on regional corridors.

• Target larger businesses (550 linesor more) in
  certain verticals such asFinancial Services,
  Healthcare,Education, Govt and Mediacompanies.
• Other Key market is on-netsmall/medium
  businesses (500 linesor less.)
• Very limited residential play.

• Sales channels include bothdirect sales force
  (689 salesrepresentatives) and agentsand
  resellers (approx. 2000.)

20
CLEC Profiles
Geographic service area
Key Customer Focus
Sales Organization
GST

• Regional player-mostly West andSouthwest U.S.
  and Hawaii.
• Not looking to go national.
• Mostly Tier II and Tier III cities.

• Target SMBs business-between2 to 200 access
  lines.
• Continue to serve wholesale and retail
  businesses.

• Sales force approx. 290
• Focus on customer care andholding-the-hand of
  the customer.

E-spire

• Southeast and Southwest U.S.
• Tier II and III cities.
• Accelerating roll out in 98.

• Targeting small to mediumbusinesses spending.
• Targets firms in professional services,health
  care, govt, and financialservices.
• No interest in residential.

• Sales and Marketing staff grewfrom 56 people in
  1996 to 277 people in 1997.

USN

• Regional focus - Midwest, New England, and Mid
  Atlantic.
• All TRS based.

• Target businesses with 2-10 businesslines.
• Focus on providing full bundles andsuperior
  customer service.

• Direct Sales focus.
• Sales force grew from 206in 1996 to 426 in 1997.

21
Key Market Trends and Influences Affecting the
CLEC Market

• Wall Street
• Deregulation
• Mergers and Acquisitions
• Alliances and Partnerships
• Integrating the product portfolio
• Network Build-out
• Growth- Can they sustain their current growth and
  will they be able to manage and survive their
  growth

22
Wall Street and Deregulation

• Wall Street
• Pressure to show profit- EBIDTA positive
• None of the CLECs EBIDTA positive except for TCG
• Wall Street looking for a return on investments
• Push towards deployment of success-based capital
• Deregulation
• Telecom Reform Act of 1996
• Required the RBOCs to open the local markets via
  resale, UNE and facilities based
• Competition in the business market.
  Cherry-picking the profitable customers.
  Residential markets have seen very little to any
  competition.

23
Deregulation (Continued)

• 8th Circuit court interconnection rulings
• Removed the ILECs burden of recombining UNEs and
  placed that burden on the competing carrier.
  Ruling now under consideration by the Supreme
  Court.
• Interconnection pricing in the hands of the
  state regulatory commissions. Leaves competition
  fragmented and makes a national TSR or UNE local
  entry strategy difficult.
• RBOCs into Long Distance
• RBOCs need to meet 14 point checklist to gain
  entry into in-region Long Distance,
• FCC vs. SBC granted RBOCs the ability to
  immediately enter in-region. Overturned on
  appeal.
• RBOCS plannin ressive attack of the
  in-region long distance market. Expecting to take
  most market share in the small and medium
  business market and the consumer market.

24
Mergers / Acquisitions and Alliances /
Partnerships

• CLECs are positioning themselves both to be
  acquired or to acquire. Are the CLECs looking
  for an exit strategy?
• Acquisitions, alliances, and partnerships have
  allowed for quick, lower-cost entry into new
  markets
• Large IXCs continue to look to the CAPs turned
  CLECs as an access alternative to the ILECs
• Internets demand for dedicated access, the call
  for alternatives to the PSTN, and the lure of the
  ISP retail business have driven many CLECs to
  acquire ISPs
• ICG/Netcom, Intermedia/Digex, MFS/UUNET,
  TCG/Cerfnet, RCN/ UltraNEt and Erols
• Challenge is integrating acquisitions.
  Importance of a seamless entity to customers

25
Network Build-out Expansion Today Growth
Tomorrow

• Still in the Build Out Stage for Most CLECs
• Many Are Expanding Into New Cities, Others Are
  Consolidating their existing networks to Ensure
  Seamless Regional corridors
• Third Tier Cities Now the Focus of New CLEC
  Opportunities (i.e., Cities With 750,000
  Population or Less) Tier 1 and many Tier 2
  cities saturated
• Move into Switched Services Long Distance
  helping to achieve profitability and positive
  cash flow while traditional CAP segment faces
  threat from IXC acquisitions

26
Network Build-out Expansion Today Growth
Tomorrow (Continued)

• Yankee Group Forecasts More MFS-Style Exit
  Strategies for facilities-based CLECs. Network
  build-out is expensive and it is less expensive
  to buy the networks
• Move towards 3rd generation CLECs- dropping in
  switches and leasing the fiber between the
  switches. Allows for a faster turn-up time and
  generation of positive cash flow. CLECs to look
  for in this category include US LEC Allegiance
  and Focal

27
Network Expansion Growing CLEC
Switch Deployment
28
Can the CLECs Survive Growth?

• Managing Growth
• Customer Growth- can they meet customer
  expectations and demand
• Market Growth- Are they going too fast too
  quickly? Do they have the resources to maintain
  their current pace or are they trying to be
  everything to everyone? Example being US ONE
  which crashed and burned
• Ensuring Quality while Maintaining Growth
• Leased Networks
• Manage unbundled elements- need to own the
  customer end-to-end and control the customers
  entire experience
• Talent Finite number of talented people in the
  industry

29
Local Exchange Market - 200044 billion
ILECs
CLECs
88.9
3.6
IXCs
7.4
CLEC revenues EXCLUDES MFS MCImetro (MFS and
MCImetro included in IXCs) revenues for dial
tone ONLY,EULC, taxes, and toll are not included
30
CLEC Market Dynamics 36 to 48 Months

• Multiple facilities-based CLECs in major Tier 1
  and 2 cities
• Tier 3 cities offer some growth opportunity
• UNEs widely available
• RBOCs have gained In-region LD relief
• Technology increases bandwidth
• Potential for oversupply of inventory

• Bandwidth Exchange prices fall
• CLECs Employing Exit Strategies
• Increased IXC / ILEC Partnerships

31
Long Distance Market
32
1997 Long Distance The 86.7 Billion Market
Business 54 Residential 46
33
1997 Business Long Distance 46.7 billion
Grew approx. 10.9 from 1996
34
Key Segment Growth (1996-97)
35
Business Long-Distance Market Shares (1996)
The Big 2 85
36
ATT Consolidations and Acquisitions, in
defense of the core business

• Divesting non- core assets and businesses
• ATT Universal Card to Citibank
• ATT Solutions customer care to Cincinnati Bell
• Termination of Direct TV marketing agreement
• Acquires TCG and Defines Local Business Entry
  Strategy
• Paid 11.3 billion in stock
• Time to market a key factor in influencing the
  acquisition decision
• ATT gains Cost efficiencies, Local network
  coverage, and Local market experience
• TCG gains scale, access to the ATT brand, and
  easier access to capital and other resources

37
Sprint Looking for Partners?

• With MCIWorldCom merger, Sprint falls further
  behind
• Existing Local properties not all that attractive
• However, with its LD brand, Wireless assets, and
  local presence, it is well positioned to partner
  or merge with
• LECs with national ambitions
• Foreign PTTs that are seeking a US presence
• WorldCom acquires MCI to become the leading
  integrated carrier
• MCI spurns GTE and leaves BT standing at the
  altar
• Overnight, MCIWorldCom becomes
• the second largest LD carrier with 25 share
• the largest CLEC, with 56 share
• the leading global ISP
• Fourth largest international telco

38
WorldCom and MCI A comparison
Assets
WorldCom
MCI
Long Distance

• 7 Billion Annual revenue (1997)
• former Wiltel wholesale LD

• 16.5 billion annual revenue (1996)
• 7.06 billion in consumer revenue
• 9.4 million households

Local

• Estimated 1996 CLEC revenues of 1.9 bn
• 52 MFS Metros
• 34 Brooks Metros
• 23 markets under development
• 7500 on-net buildings (est)
• 75 Class 5 switches
• 25 of all competitive access lines

• CLEC (Metro) Revenue of 450 million
• Presence in 36 cities
• Local switched service in 32 cities
• 30 Class 5 switches

39
WorldCom and MCI A Comparison
WorldCom
MCI
Internet

• UUNet, largest global ISP
• 50,000 business customers (access andhosting)
• Compuserve Network Services
• ANS ISP
• Provides transport to America Online,Earthlink,
  Microsoft Network
• 500 million in Internet Revenue

• 400,000 dial-up customers
• Private wholesale services to 25-35 of all
  ISPs.
• 200 million estimated revenue
• Sold to CW as part of EU approval

International

• 60 settlement agreements globally
• 470 million in revenues
• Metro infrastructure in 12 cities
• UUNets European backbone in 10 cities

• 200 settlement agreements globally
• Licenses in UK, Germany
• Top bid on Embratel

Wireless

• Choicecom
• Few of its other LD or CLEC acquisitionshave
  major wireless play

• Holds on wireless licenses
• Nationwide Cellular Services (a reseller)
• Operates in 15-20 markets
• 400,000 subscribers
• Paging reseller (through PagNet),over 600k subs.

40
RBOCs into Long Distance
41
Telecom Act of 1996New Competitive Telecom
Services Market

• An act to promote competition and reduce
  regulation in order to secure lower prices and
  higher quality services for American
  telecommunications consumers and encourage the
  rapid deployment of new telecommunications
  technologies
• IXCs, Cable and CAPs Allowed to Enter Local
  Exchange
• IXCs with more than 5 of the nations
  presubscribed lines is not able to joint market
  local and long distance services until RBOCs are
  granted in-region relief
• Mandated LEC Resale at Fair and Reasonable Prices
• RBOCs Enter Out-of-Region Long Distance
  immediately
• RBOCs Open Local Markets in Exchange for
  In-Region Long Distance
• Pressure of New Integrated Telecom MarketBeyond
  Resale/Bundling to Service Innovation

42
RBOC Entry into Long Distance
Offering Services
Approved Services
WholesaleSupplier
In-regionLaunch
Ameritech

• Announced it will begin offering long distance
  in Missouri
• Marketing Alliance with Qwest (in-region)

• 45 States

• WorldCom

• 1999

Bell Atlantic /NYNEX

• 34 States

• 34 States and plans to file in Minnesota and
  Oklahoma

• Sprint

• 1998?

Bell South
-----

• 39 states and applications pending in Vermont and
  Alaska

• ATT

• 1999

SBC / PacTel

• 5 States

• Sprint

• 1999

• 5 States

US WEST

• NONE
• Marketing Alliance with Qwest (in-region)

• 34 States

• FrontierCard
• Williams?
• Qwest?

• 1999

Leveraging Established Customer Relationshipsto
Provide New Services
43
Biggest Hurdle for the RBOCsOSS Access and
Interconnection

• Required under the Act
• ILEC must provide access to its OSSs on terms
  that are just reasonable, and non discriminatory
• RBOCs have been frustrated in their 271
  applications by OSS issues
• Not able to show flow through of orders and
  service transactions from CLECs
• Push for National Gateway in some quarters, but
  who pays the bill?
• Call for Standards by many parties (NARUC, ATIS,
  etc.)
• Manual processes pre te

44
Conclusions

• Nice try but too early. Not likely to make
  first-round approval based on Track A (of two
  tracks) benchmarks
• Lack of competing providers to residential and
  business subscribers by companies that offer
  services predominantly over their own telephone
  service facilities
• Competition and interconnect deals are with
  competitors that are focused on business
• ATT, has stopped marketing to residential
  customers in the six markets where it resells
  ILEC services to the residential market
• the Yankee Group believes that the first approval
  for RBOC entry into in-region LD will be around
  4Q98 or early 99. BANY is most likely to succeed

45
Integrated Carrier Strategies Large Business
Market Issues
46
Do Large Biz Customers Care About Service
Integration?

• If Given A Choice
• 70 of Businesses Say They Would Use One Company
  for All Their Communication Needs
• Key Reasons
• Less Effort to Manage the Network 68
• One Stop Shopping 62
• Lower Costs 59

source YC100 1996
47
but Price isnt Everything
How important to the purchasing decision are the
following factors? 5 very important 1
not important
Source YG WSTA Survey 1996
48
Long Distance Integrated Carriers
Brand
Local
Internet
Wireless
Enhanced Telephony
Video
49
Wholesale Services
50
Wholesale

• All facilities based LD carriers, whether they
  are national or regional in nature wholesale LD
  services to each other, to smaller carriers and
  to resellers
• Over time, the four largest LD carriers have
  increased their revenue contribution from the
  wholesale channels
• Frontiers agreement to sell capacity to Level 3
  is an example of the renewed focus on wholesale
  by smaller LD carriers such as CW and LCI

51
Wholesale (Continued)

• New entrants such as Qwest, IXC, Williams and
  Level 3 will expand the wholesale market but will
  also put significant price pressure on wholesale
  rates
• New services such as IP, and new entrants in
  local and LD market are expected to feed the
  demand for wholesale service
• We estimate the wholesale market to be around
  8.3 billion

52
ELDP Diversification Strategies

• IXC Communications
• in addition to carriers carrier services,
  offering switched, freephone, calling card and
  data services
• Looking to acquire smaller retail players
• Qwest Communications
• direct retail plays through VoIP, dial-around
• acquisitions of LCI, SuperNet
• looking to enter the large corporate market
• Williams Companies
• leverage already large network integration
  business
• Level 3 Communications
• purchased Data CLEC XCOM

53
Voice Over WhateverDemand for Alternative Voice
Services
54
Key Issue What is the current status of Voice
Services Over Alternative Networks (TCP/IP, Frame
Relay and ATM)?
55
Key Context Issue How much data is moving over
TCP/IP, Frame Relay and ATM today...
56
Key Context Issue How much data is moving over
TCP/IP, Frame Relay and ATM in 5 years...
Frame Relay takes over
57
Key Issue How much voice traffic will migrate to
VSANs over the next five years?
Slow migration of voice, for all services
58
Fax keeps pace
59
Key Issue What are the reasons for choosing
VSANs?
60
IP Telephony MOUs as a Percentage of Total
Consumer MOUs (1998-2005)