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The Perfect Storm

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Title: The Perfect Storm


1
  • The Perfect Storm
  • The Reality of the Telecom Industry
  • Richard Shockey
  • IETF ENUM WG co-chair
  • rshockey_at_ix.netcom.com
  • Disclaimer Opinions stated here are personal and
    not necessarily those of my employer

2
  • The Reality of the Telecom Industry
  • The Reality of Convergence
  • The IP and PSTN worlds are colliding

3
Where are we at
  • CLECs have been decimated
  • Long Haul Transport in C-11
  • IXCs are severely wounded
  • LD revenues down 10-25 due to wireless
    substitution
  • But they still own the IP backbones
  • Seasoned Enterprise Sales focus
  • Cable operators are drowning in debt
  • IP products doing well but topology questionable
  • Ability to handle HDTV questionable
  • FCC Classification gives them the right to block
    VoIP etc.
  • Employment in Telecom down by over 400K

4
Where are we at
  • Wireless Industry isnt a pretty sight either
  • ARPU is down Customer acquisition costs up
  • W-LNP, E-911, 2.5G capex eating at earnings
  • 3G Wireless will NEVER happen
  • Forget the Spectrum issues
  • No Vendor Financing
  • The real issue Tower NIBY, 4x the number of
    towers required
  • Wireless broadband 802.11 , MMDS?
  • Mobility, Security Brick Iron problems
  • Overall Industry CAPEX is flat
  • May be returning to historical norms of 15 of
    revenues

5
The Industry is growing ..
but landline Voice is the most profitable segment
6
ILEC Revenue Picture
  • 1Q 02 Estimates (source Merrill Lynch)
  • Total Revenues Land Line Service of Total
    Revenue
  • Verizon 16,266 5,620 33
  • SBC 13,394 5,675 43
  • Qwest 4,684 4,079 87
  • Bell South 7,477 2,983 39
  • Market CapAdj Net Debt Debt to Cap
    Ratio
  • Verizon 115,643 61,356 53
  • SBC 115,464 25,463 22
  • Qwest 11,498 24,662
    214
  • Bell South 60,567 19,618
    32
  • ATT 48,144 34,400
    71
  • WCOM 14,855 34,400
    156

New Investment Potential
7
Reality Check
  • ILECs are between a rock and a hard place
  • The Roxanne Googin thesis
  • Data is growing but Voice Revenues underpin the
    entire Telecom Industry
  • ILEC Landline Business starting to shrink
  • 5 million landlines lost in 2001
  • Second line consumer business is over
  • Reduction Fax Usage
  • Consumer disconnect from Landline to Wireless
    beginning
  • IP Communications disruptive impact
  • E-Mail IM
  • 2nd line conversion to Cable DSL
  • ( but thats not too profitable for the ILECs
    either )

8

The next assault . Enterprise VoIP bypass
  • The Business Case for Voice over IP is still
    compelling
  • Enterprises want to leverage their investment in
    IP networks
  • Cost Reduction 1
  • Toll Bypass The Death of Distance still makes
    sense
  • Simplified Add Modify and Delete Users
  • Single Wiring Harness Administration
  • Rapid Service Creation
  • Applications created at the Edge using standard
    tools XML
  • Time to market

9
Enterprise Toll Call Destinations
10
What has changed
  • Protocol Wars are over . SIP IETF - RFC 2543
    wins!
  • Every Copy of Windows XP is SIP enabled
  • Enterprise .NET server will be a SIP proxy
  • Every major Enterprise Phone Vendor now supports
    SIP
  • Preferred protocol for IP Centrex
  • SIP Unifies Real-time Communications
  • Voice
  • Text Instant Messaging
  • Video
  • Quality of Service Issues now well understood
  • 802.1p Ethernet Priority Bit
  • Remove Hubs Convert to 10/100 switches
  • Overprovision IP transport

11
Real movement
  • There are substantial indicators that the market
    for IP Telephony is turning
  • Enterprise driven
  • IP PBX sales are gaining steam, 40 year to date
    increase in sales
  • IP Centrex has the attention of service providers

SP IP Centrex Revenue
North America Source Gartner Dataquest
12
The Next Tsunami The ENUM RFC 2916 Problem
Statement
  • How do you find a service on the Internet if all
    you have is a Telephone Number ?

?
Voice
Video
Text
13
Simple ENUM Call Flow SIP
ENUM Global Directory (DNS) Equates
1-202-555-1234 to sipmark_at_carrier.net to enable
Voice over IP using SIP
3. DNS returns NAPTR record containing SIP URL to
Calling Party UA
2. Calling party proxy UAC queries DNS for
location of end point
1. The caller simply dials the persons normal
telephone number
4. Calling party UA connects the call
14
Practical Problem in the Enterprise Creating
the Voice Extranet
  • Phone numbers only routable over PSTN network
  • Enterprise Dialing plans cannot be accessed by
    Trading Partners
  • Connect Friends and Family Customers and
    Suppliers to Single Dialing plan (E.164) over IP

ENUM
15
What does this mean ?
Have we reached a Tipping Point in the industry
?
16
What does this mean ?
  • Enterprises taking their voice traffic off the
    PSTN will further cannibalize ILEC revenues
  • ILECs lose high margin LD opportunity
  • Declines in business landlines trunks will
    eventually undermine residential cross-subsidies
    and Universal Service Fund obligations
  • ILECs left with even larger stranded costs
  • ILECs left with high cost consumer markets
  • Wall Street will go ballistic on the IXCs -
    ILECs
  • How worse can it get?
  • IMHO - IXCs have already written off C4 LD
    business
  • They win if they retrench in all IP service
    environment.

17
The Real Digital Divide
  • Its not Rich vs Poor
  • Its Enterprises vs Consumers
  • Enterprises can buy rich bandwidth
  • Enterprises can choose from multiple suppliers ..
    consumers cannot
  • Enterprises will reap the benefit of Broadband
    Applications leaving Consumers behind
  • Policy Nightmares .
  • Will residential phone rates go up?
  • Congress does not like surprises !

18
Fun with numbers
  • Wireless companies valued at 2 K per subscriber
  • ILEC at 2-3 K per line
  • Comcast ATT deal valued at 4500.00 per
    subscriber
  • Investors offered BT 1000.00 per sub for UK
    local loop
  • What is a ILEC really worth?
  • What is the Localloop really worth?

19
Conclusions ..
  • ILECS are in trouble and it just going to get
    worse.
  • It is inconceivable to believe there is any form
    of private capital available for carriers to
    deploy any form of Gig-E FTTH to residential
    markets given the current regulatory and
    financial condition of the Industry
  • Markets do not like declining sales / earnings
  • The markets might recognize the separation of
    content/service from the underlying physical
    infrastructure
  • Deregulation does work
  • Gas
  • Electricity (Well not in California, UK
    Certainly)

20
Conclusions ..
  • How do you finance a new Gig-E infrastructure
    that permits real innovation by providing
    unencumbered access for new entrants with fresh
    capital resources?
  • Microsoft ?
  • General Electric (NBC ?)
  • Disney
  • Sony?
  • Viacom
  • But does anyone care?
  • Accenture Study of Networked Home
  • Thank you !
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