Larry Babbio

1
Telecommunications Growth Engines
Marilyn OConnell
Vice President VZ Marketing Services
2
The telecom sector will return to healthy growth
rates over the next five years
Year 2001 Total U.S. Market Size 435B
Year 2006 Total U.S. Market Size 690B
2001-2006 CAGR 9.7
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
3
Data and wireless will be the primary engines of
growth for the US telecom industry
2001-2006 CAGRs
Voice Revenues will actually decline due to new,
lower cost technologies (VoP) and intense
competitive pressures
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
4
The Business segment represents the greater
growth opportunity
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
5
Data and wireless services will provide the
greatest growth contribution within the Business
segment...
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
6
While residential customers will dominate the
wireless and video sectors
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
7
Residential Growth Drivers

• Wireless
• Data (Broadband)
• Video

Sources
8
Consumer wireless subscriber growth continues at
8.6 CAGR.
ARPU 43.90 43.47 43.43 44.12 45.07
46.37
Source Behavioral-Shifting Wireless
Applications and Bundling U.S. Consumer
Wireless Market Forecast and Analysis 2001-2006.
IDC
9
Wireless MOU will continue to increase...
Source Forrester, Sizing US Consumer Telecom
10
Usage and access line migration will intensify,
driven by changing consumer trends

• Economic Trends
• Wireless price decreased 25 annually over past
  3 years
• Ten per cent of users wireless for all LD
  calls and most local calls
• New plans (e.g. prepaid) appealing to new
  segments

• Technology
• 3G Service enables speedy data delivery
• Internet, gaming, instant messaging, and
  personalized information further entice customers
  to cellular

11
Wireless Data Market Projections, 2000-2005 (
Billions)
High End Analyst Forecast
Analyst Average
Low End Analyst Forecast
Includes forecasts from Legg Mason, Bernstein,
JP Mprgan/McKinsey, Gartner, IDC, Kagan, Morgan
Stanley, Credit Suisse, Goldman Sachs, Lehman,
Merrill Lynch, UBS Warburg
12

Wireless Data Opportunities are also projected to
grow
U.S. Wireless Data Market 2001-2006
Billions
13
Consumers will migrate from basic to more complex
data applications

• Higher-Value Next-
• Generation
• Voice
• SMS/IM
• Text email
• Unified Messaging
• Fullest Internet
• ephoto
• MMS
• Streaming audio/
• video

• Early Next-Generation Applications
• Voice
• SMS/IM
• Personal information mgmt.
• Fuller Internet
• MMS
• Unified Messaging

Customer Value

• Early
• Applications
• Voice
• SMS/IM
• Basic Internet

Migration Drivers - ephoto, MMS, streaming video
Migration Driver - Fuller Internet Experience
Migration Driver - SMS
Mobile Functionality
Source Behavioral-Shifting Wireless
Applications and Bundling U.S. Consumer
Wireless Market Forecast and Analysis 2001-2006.
IDC
14
However, there are challenges to wireless growth
opportunities...

• Spectrum capacity
• Infrastructure shortcomings
• Lack of a killer app for next generation wireless
  (3G)

15
Residential Growth Drivers

• Wireless
• Data (Broadband)
• Video

Sources
16
By 2006, 38 of all HHs, and 60 of online HHs
will be broadband connected, a 17 billion
revenue opportunity
Source JP Morgan Industry Analysis The Cable
Industry 11/02/01
17
To reach the mass market, broadband data must
address the following requirements

• Price
• Applications
• Service/Availability

18
Residential Growth Drivers

• Wireless
• Data (Broadband)
• Video

Sources
19
Faster speed and freeing up a phone line were the
highest motivators for getting broadband
Source Strategis Group, Broadband Users Cable
vs. DSL, 2002 11/15/01
20
Cable companies have stated their goal is
tocontrol the home by pursuing the Triple Play
of video, broadband data, and voice
Cable Strategy
Win Video Digital Cable
Exploit Video Interactive TV
Upgrade Network
Control Home
Penetrate Voice Cable Telephony
Win Data Cable Modem
Integrate Data Data/Video Bundles
Video
Data
Voice
Double Play
Triple Play
21
As cable looks to offset flattening subscriber
growth by offering advanced digital services...

• Interactive TV especially VOD and TV portals
  with local content -- should increase digital
  penetration and reduce churn
• Digital cable subscribers projected to surpass
  DBS subscribers this year
• Digital cable penetration projected to max out at
  65-70 of cable subscribers
• HOWEVER
• Cable households have an average of 2.9 TV sets.
  Only 2.5 are connected to cable, and only one has
  a set-top box, limiting consumers ability to
  make impulse purchases such as PPV and VOD
• Cable companies experience churn of between 30
  and 50 of digital cable subscribers each year

Source The Yankee Group Digital Cable New
Services Set the Stage for Soaring Growth, 12/01
22
Digital cable is projected to have high growth...

Source The Yankee Group Digital Cable New
Services Set the Stage for Soaring Growth, 12/01
23
Consumer interest in interactive services has yet
to be realized...

• Consumers top interactive programming desires
  are pause and rewind, recording with no tapes,
  and video-on-demand
• Gaming is expected to rise from 10 to 30 of a
  households electronic entertainment time
• Penetration of devices such as DVRs (digital
  video recorders) has been low due to high
  hardware costs, poor marketing, and poor consumer
  education
• Cable companies have been reluctant to offer
  consumers functionality that would allow
  advertising to be skipped since they dont want
  to undermine advertising revenue
• Satellite continues to be better positioned to
  capitalize on a growing awareness and desire by
  consumers to own DVR technology through
  aggressive pricing and promotions

24

• DBS customers spend 8 more/mo than cable
• 20 of new DBS subscribers had cable last year
• Digital cable churn is from 30-50
• DBS earned a 68 approval rating while digital
  cable scored 36
• 1Q02 digital cable growth slowed somewhat

Source (chart) Forrester Consumer
Technographics 2001. 3rd bullet--Taylor Research
5/02.4th bullet-- Sanford Bernstein Inc. 5/13/02
25
Although potential constraints, cable
companieswill offer telephony service
Availability Constraints
Deployment Speed Constraints
Operations Constraints
Operations Constraints
Technical Constraints

• OSS/Provisioning processes
• Customer Acquisition
• Truck Roll/Install
• Interconnection Provisioning
• Scalability

• Cable modem and CMTS Docsis 1.1 certification
• PacketCable telephony equipment certification
• Reliability
• Line Powering
• CALEA/E911 Compliance
• Features
• Interoperability
• Network Powering
• OSS/Provisioning Infrastructure

Financial Constraints

• Capital Budget
• Earnings Dilution
• Line Powering

Network Constraints

• IP Long-haul

26
Business Growth Drivers

• Wireless
• Data
• Competition
• Enterprise Business

The Business sector is divided into two
segments-- General Business and Enterprise..
Sources
27
Within General Business, growth will be driven by
wireless, data, and value-added services
Total U.S. Telecommunications Market Incremental
Revenues, between 2001-2006 (100 255 Billion)
General Business
Enterprise
Consumer
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
28
SMB Wireless represents an area of opportunity...
Percent of SMBs that Pay for Employee Wireless
Service (By Size)
of SMBs (By Size)
Within the General Business segment, a growing
number of SMBs purchase wireless for their
employees.
Source Yankee Group Mobile User Survey, CSMG
Analysis, Jan 21, 2001
29
with ARPUs that are 50 higher than average
15 percent of wireless users have some (or all)
of their wireless service subsidized by their
employer
50
16
25 percent of employers select the wireless plan
Although the number of wireless accounts that are
currently purchased by businesses is relatively
small, these accounts on average, have higher
ARPUs.
Source Yankee Group Mobile User Survey, CSMG
Analysis, Jan 21, 2001
30
The wireless data sector will reach 11.5
billion by 2006, a 38CAGR
Business Size
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
31
WLANs will replace wired in some smallenterprises

• Basic printer sharing

• Collaboration apps/file or info sharing

• Email

• Internet connectivity

• Remote access

Increasing Complexity

• Network fax

• Shared access to high-speed copier

• Interconnection with co. LANs

• Shared access to color copier

• Integrated messaging

• Interconnection with other customer or branch LANs

Small enterprises with LANs
Source IDC U.S. LAN Small Enterprise Report,
2000
32
For remaining SMBs, WLAN is a desirable service
because of low cost, ease of set up and use,
portability and flexibility
Source BCG regional interviews (n160) BCG
client work Cisco study literature search
33
Industry-specific solutions represent the
largestimmediate market...
Market Arising From Industry Specific Solutions
Enterprise Segment Largest of WLAN Market
Total U.S. Enterprise Opportunity by Industry
Vertical(1)
(U.S.M)

• First WLAN deployments were in specialist
  environments within industry verticals
• E.g., warehouses, retail, courier services,
  factory floor
• Current industry leaders in WLAN penetration
• Education
• Healthcare/Medical
• Government
• Manufacturing
• In addition, verticals such as wholesale/retail,
  financial services, and other services
  (hospitality, professional, etc.) leading
  wireless data and applications use
• WLAN subset of larger wireless data and
  applications opportunity

Enterprise share of market ()
Other
Utilities
Education
Enter- prise
Comm.
Transport.
Healthcare
FS
Mfg.
SMB
Other Services
SOHO
Wholesale Retail
Home

• (1) Estimates based on mean of third-party
  forecasts of total U.S. WLAN equipment and
  service revenues
• Source Gartner Wireless LAN Market Segments,
  2001 Cisco Wireless LAN Benefits Study, 2001
  BCG analysis

34
Mobile office applications represent greatest
growth opportunity within the mobile data sector
01 - 05 CAGRs Field Service 58 Field
Sales 93 Mobile Office 101 Fleet Mgmt
39
Source Yankee Group The Enterprise Wireless
Data Application Opportunity A Segmentation
Analysis
35
Mobile data faces some challenges

• Customer
• Complexity Multiple networks, devices
  applications and providers
• Security concerns
• Confusion over standards and platforms
• Provider
• Business model/ pricing - will there be a payback
  on massive investments for 2.5G/3G?
• OSS Customer Care, QoS, Billing

Source Yankee Group Pricing Bytes, Will the
Carriers Ever Make Money from Wireless Data
Billing for Wireless Content, Examining the
Complexities of the Delivery Chain The
Enterprise Wireless Data Application Opportunity
36
Business Growth Drivers

• Wireless
• Data
• Competition
• Enterprise Business

Sources
37
Opportunity for broadband expansion exists inthe
SMB market...

• Many SMBs continue to use dial up access.
  Opportunities exist for providers to convert this
  market to broadband access
• Adoption of Broadband is forecast to grow at a
  CAGR of 53.8 (2001-2007).

Reviewing other data sources for dif chart ...
Sources Verizon Market Sciences Analysis 2001
38
VoP service strategy will be driven by
segmentation
Voice over Broadband (VoBB) Voice Access plus
enhanced services Unified Communication Presence
Find Me (Mobility) Call Logs IP Centrex IP Call
Centers Web-base Mgmt Conferencing
VoP technology is evolving from a hybrid
environment towards a purer IP model.
Converged Access Service - VoP 20 - 40 Lines -
VoP, VoBB ISDN PRI, DID , Toll Usage Dedicated
LD Frame Relay, ATM H.S. Internet Access
Increasing Service Needs and Complexity
Integrated Access Channelized T1 8 - 20 Lines
Voice Access Toll Usage Frame Relay H.S.
Internet Access
VoDSL up to 8 Lines High Speed Internet Toll
Usage Voicemail
Increasing Sophistication of Small-Medium
Establishment
Sources Verizon Market Sciences Analysis 2002
39
Research confirms SMB interest in Integrated
Access
High Value SMB Telecom Preferences
Source Arbor Research, 2002 CSMG Analysis
40
Revenue growth from IP will come from
applications services
Represents a CAGR over the forecast period of
74.9 Includes Audio, Video and Web/Data
Conferencing, Find Me/Follow Me, Instant and
Unified Messaging Services.
Source IP-Based Applications Services Market,
2002-2007 Insight Research Corporation
41
Businesses with data churn less frequently
of customers somewhat to very likely to switch
service provider in the next twelve months if
there were a viable alternative
Source JP Morgan 2002 Annual Telecom Services
Survey
42
Business Growth Drivers

• Wireless
• Data
• Competition
• Enterprise Business

Sources
43
CLECs have garnered significant marketshare, in
part by undercutting ILEC prices
Source Analyst Reports, Verizon Internal Analysis
44
ILECs must improve position in the data
marketplace to capture growth

• Provisioning intervals, service reliability and
  price may inhibit adoption of data services.
• Must increase competency and gain credibility as
  data providers may require partnerships.
• In the long term, all carriers must offer a
  variety of value-added services/applications. As
  the momentum for these services builds, bundles
  of services, along with transport, can be offered
  to the business market.

Source Verizon Internal Analysis
45
Data CLECs also face challenges

• Businesses remain leery of residual fall-out from
  the dot-bomb and favor well known, financially
  stable providers
• Despite receiving more competitive pricing, many
  businesses find Customer Service provided by
  CLECs lacking

Source New Paradigm Resources Group, Inc., 16th
annual CLEC Report Verizon Internal Analysis
46
CLECs can remain a player in the data market
through...

• Availability, reliability and price.
• Broadband becoming a commodity long term,
  carriers must offer a variety of value-added
  services.
• Maintaining low per building capex even as new
  services added.

Source Yankee Group Metro Strategies 2002,
Verizon Internal Analysis
47
Business Growth Drivers

• Wireless
• Data
• Competition
• Enterprise Business

Sources
48
The Enterprise segment represents a significant
revenue growth pool
U.S. Enterprise Market Revenues ( Billions)
Total U.S. Telecommunications Market Incremental
Revenues, 2001-2006 (100 255 Billion)
218
General Business
Enterprise
Value-added Services
122
Professional Services
Data/ISP
Wireless
LD
Local
Consumer
Includes access charges Includes VOIP,
adjusted for carriercarrier access Hosting,
content delivery, storage and application service
providers desktop management services unified
messaging
Source Financial Analyst reports, Verizon Global
Telecommunications Market Size Analysis
49
Data and Professional Services will be keys for
growth

• The Enterprise market was severely impacted by
  911
• Before 911, more than 65 of large business
  customers had disaster recovery plans in place
• After 911, more than half stated those plans were
  inadequate
• Network diversity, security services and remote
  access are also driving market direction
• Customers are looking to upgrade their networks
  to make them stronger, more reliable and more
  comprehensive

Source ESG Internal Analysis
50
The vendor of choice must have a diverse product
portfolio to build a customized solution
A complete set of Capabilities for Enterprise
Customers
WAN Solutions

Customized Managed Network Solutions for the
Enterprise Customer
IP Solutions
Network Integration

LAN Solutions
Voice Switching Solutions
Voice Access Transport
Source Verizon Internal Analysis
51
Summary

• Telecom sector will lag general economic
  recovery upturn in 2003
• Voice revenues will continue to decline
• Surviving CLECs will be fewer, but stronger
• Video (consumer), Wireless and Data will be
  sources of highest growth