Waiting For IP Sandy Teger and David Waks

Waiting For IP Sandy Teger and David Waks System Dynamics Inc. Fall ’ 99 Voice On the Net Wednesday, September 29, 1999 System Dynamics Inc. Copyright © 1999

Summary • Big MSOs view telephony as integral part of the bundle – Aspire to capture substantial market share from ILEC – Need to match ILEC features and reliability – Investing now in CBR (circuit switched) access technology for telephony over cable – Investing in circuit-switching infrastructure • Switch from CBR to IP access solution requires – IP services, features and reliability comparable to or better than CBR – IP cost comparable to or lower than CBR – National and global IP networks in place to push conversion from IP to circuit switching deep into network Copyright © 1999 System Dynamics Inc. Slide 2

Cable Focused on “The Bundle” • Defend video services business against DBS today and others tomorrow • Enter new businesses - replace lost revenue, keep growing • Be first to provide all pieces of “the bundle” Data Telephony Interactive services PC and TV Local Video telephony Long distance Videoconferencing Video Analog/digital PPV/NVOD/VOD Copyright © 1999 System Dynamics Inc. Slide 3

Some Cable Acronyms and Definitions • HFC (Hybrid Fiber/Coax) - modern cable plant architecture • Broadband access system: Cable modem + CMTS (cable modem termination system) • DOCSIS (“Data Over Cable Service Interface Specifications”) - North American industry initiative for standardized cable modems, led by Cable. Labs • Open. Cable™ - NA industry initiative for digital set-tops • Packet. Cable™ - NA industry initiative for IP voice and video Copyright © 1999 System Dynamics Inc. Slide 4

Cable Standards Enable the Bundle DOCSIS cable modems Analog video PPV/NVOD Packet. Cable Phase 1 PC Interactive services CBR telephony Packet. Cable Phase 2 Local Long distance IP Telephony Local Long distance Video telephony Videoconferencing Open. Cable digital set tops Digital video TV Interactive services Video on demand Copyright © 1999 System Dynamics Inc. Slide 5

Telephony Market Entry: Varying MSO Approaches and Timing • Deploy CBR telephony now – AT&T – Cox – Media. One • Deploy IP telephony as quickly as possible – Videotron – Cogeco • Wait until completion of Packet. Cable initiative – Smaller MSOs Copyright © 1999 System Dynamics Inc. Slide 6

Differing MSO Priorities for Telephony AT&T • Strategic imperative • Provide alternative to LEC access • Extend the customer relationship / complete the service bundle • Preserve “high quality” reputation of brand • Now: Use existing circuit- switched infrastructure of AT&T and Teleport • Later: Switch to packet infrastructure in orderly way without substantial “throwaway” costs Copyright © 1999 System Dynamics Inc. Videotron Ltee • Opportunistic • Extend the customer relationship / tap into new revenues • No significant investment in circuit-switched infrastructure • Stores and distribution channels • Unique Francophone community of interest • Early adopter culture • Now: Start with IP Slide 7

Packet Promises More - In The Future Copyright © 1999 System Dynamics Inc. Slide 8

CBR Products For Cable - Available Now HFC distribution plant Arris Interactive Cornerstone equipment Host digital terminal Customer Home Two-line “voice port” ( or NIU) Class 5 Switch PSTN GR-303 or V 5. 2 (T-1/E-1) Cable Hub Site and/or Headend • Four major products deployed worldwide – Arris Cornerstone (Antec/Nortel) – ADC Home. Worx – Tellabs Cable. Span 2300 – Motorola Cable. Comm • Proprietary and mutually incompatible Copyright © 1999 System Dynamics Inc. Slide 9

Major U. S. MSOs Deploying CBR Telephony • AT&T Broadband Internet Services (TCI) – California: Fremont – 9 additional markets in 1999 – “Ramp up” in 2000 • Cox – Arizona: Phoenix – California: Orange County, San Diego – Connecticut: Hartford – Nebraska: Omaha – Virginia: Hampton Roads • Cablevision Systems • Media. One – California: Los Angeles – Florida: Jacksonville, 2 others – Georgia: Atlanta – Massachusetts: Boston suburbs – Michigan: Detroit suburbs – Virginia: Richmond • Comcast – Washington D. C. suburbs (formerly Jones) • Time Warner Cable – New York: Rochester – Connecticut: Norwalk – New York: Parts of Long Island Sources: Cable World, January 18, 1999, from NCTA; Multichannel News April 26, 1999 Copyright © 1999 System Dynamics Inc. Slide 10

Sample Offers • First AT&T trial -- Fremont, CA – $12. 50/mo for single line, $20. 25/mo with call waiting, call return, 3 -way calling – 10 cents/min long distance – Waiving installation fee • Media. One -- Richmond – Fully-featured single line (CLASS, …) $26. 95/mo – 2 lines (1 fully-featured) 37. 95 – 2 lines (both fully-featured) 49. 95 – Each additional line 10. 00 – Incentives: free installation, one month free service, 3 months free voicemail – Can keep existing phone number and long distance carrier Copyright © 1999 System Dynamics Inc. Slide 11

How’s It Going? Cox • Will keep on going with circuit-switched, as planned • “It’s proven out for us, with penetration well beyond our business model. ” Penetration exceeds 20% where Cox markets and “can end up in the 40% plus range if you add value. ” • During first 18 months, suffered from too much demand just from word of mouth “that we just weren’t ready for”. • Now has a “favorable regulatory environment” since Bells need to demonstrate “significant competition” to enter LD market. Source: Communications Daily quotes from investors conference 5/7/99 Copyright © 1999 System Dynamics Inc. Slide 12

CBR Telephony Deployments Outside the U. S. -- Some Examples Copyright © 1999 System Dynamics Inc. Slide 13

MSO Differentiation From ILEC • MSOs need to differentiate their telephony services from incumbent LEC • “Do it cheaper” - Lower price for basic service, CLASS, multi-line, long distance – Can do with CBR today, IP later • “Do it better” - Value added services require IP – Self provisioning - add features or a line without waiting – Turn features on and off as needed – Simple, inexpensive multi-party calls – “Click to talk” for Web sites – Unified messaging – Higher-quality voice – Videophone, videoconferencing – Net enhanced calling -- volume enhancement, text to speech Copyright © 1999 System Dynamics Inc. Slide 14

When Will MSO’s Switch to IP? • (1) When IP solution is equal and cheaper – Comparable voice quality – Equal or less power – Equal or better system reliability – Equal or better installation and support (infrastructure and subscriber unit) – Stable technology, long lifetime – Packaging and house wiring worked out – Cost lower than CBR and going down faster • (2) IP solution is significantly better – Roughly equal voice quality, power, reliability, installation and support, stability – Supports migration to video telephony, multimedia integration – Comparable cost to CBR for voice telephony • (3) Own packet network far along in deployment – Avoid multiple IP gateway expense and call degradation Copyright © 1999 System Dynamics Inc. Slide 15

Plant Requirements for Primary Telephony • Availability - both MTBF and MTTR – Needs to match customer experience and expectations: “always get dial tone” • Cable plant is underpinning for all services – Amplifiers in cascade, node size – Powering - centralized at node versus distributed – Redundancy - fiber, electronics – Many possible points of failure • Different operational models – Twisted pair telephone plant is not monitored — single failure usually impacts only one subscriber line – Cable plant has not been monitored — single failure can impact many subscriber lines • Needs proactive network management – Cable systems starting to deploy monitoring and response systems Copyright © 1999 System Dynamics Inc. Slide 16

Our Forecast • Large-scale deployment in 2001 – Probably two years for volume production of primary IP voice products - fully functional, interoperable, cost reduced, fully competitive with LEC and CBR products • Near-term deployment strategies extend the lifetime for circuit-switched CBR telephony Copyright © 1999 System Dynamics Inc. Slide 17

Primary Telephony Over Cable - Conclusions • IP clearly the future of telephony – Near term, new entrants willing to accept risks – Mid term, IP will do everything CBR does. . . – … and offers the promise of doing it for less – Longer term, will do much more • Success requires more than technology • Service providers – Training – Business support systems: billing, customer support – Operational support systems: network management, traffic engineering – Service culture • End users – Require clear incentive to switch providers – Choice based on pricing, features, provider reputation Copyright © 1999 System Dynamics Inc. Slide 18

For More Information: System Dynamics Inc. 18 Beaver Ridge Road, Morris Plains, NJ 07950 -1901 (973) 644 -4739 Fax (973) 538 -6003 dave @ system-dynamics. com sandy @ system-dynamics. com http: //www. system-dynamics. com