NCTIA 2005 Annual Convention Taking Charge of your Telcos Future

1
NCTIA 2005 Annual ConventionTaking Charge of
your Telcos Future

• Manny Staurulakis
• John Staurulakis, Inc.
• August 23, 2005

2
A Need for Change

• It is almost certain that traditional regulated
  revenue streams will be diminished over time due
  to regulatory changes, competition, and
  technology. Regardless, incumbent communications
  providers can remain viable and successful. In
  order to do so, ILECs need to diversify their
  revenue streams, control their expenses, and
  become market focused.

3
Market Focused

• Market focused means
• learning what your customers want
• creating services to meet customer expectations
• putting together attractive plans to meet their
  needs

4
Commitment

• With a dedicated plan, it is possible to
  significantly shift revenues from highly
  regulated based sources to more competitive/
  commodity based sources.

5
Regulatory Issues
6
State Regulation Trends

• A number of states are providing ILECs with the
  opportunity to seek alternative forms of
  regulation or deregulation
• Impact on rural exemption
• Impact on future universal service funding

7
Brand X

• The U.S. Supreme Court ruled in the so-called
  Brand X case that the FCC acted properly in
  declaring cable modem offerings as information
  services not subject to common carrier
  regulation under Title II of the Communications
  Act. The FCC provided similar relief to
  facilities-based wireline broadband Internet
  access service providers on August 5, 2005.

8
ICC FNPRM - Notable Quotes

• The record confirms the need to replace the
  existing patchwork of ICC rules with a unified
  approach
• With respect to rate-of-return LECs in
  particular, we recognize that an approach that
  retains some ICC payments from IXCs for switched
  access services may be appropriate

9
Intercarrier Compensation

• FCC released a FNPRM in the Matter of Developing
  a Unified Intercarrier Compensation regime on
  March 3, 2005
• Comments were filed May 23rd
• Reply comments filed July 20th

10
COBAK Impact/LinePer NTCA Ex Parte
Impact Per Access Line Per Month
Interstate
State
Total
Common Line Elimination
-


(4.93)


(4.93)


Local Switching Elimination
(3.48)


(4.90)


(8.38)


Originating Local Transport
Elimination
(1.34)


(1.50)


(2.84)


Elimination of Net Settlement
(1.54)


(0.39)


(2.28)


Payment for Transiting Orig. Transport
(0.64)


(0.55)


(1.18)


Optional Calling Plan CCL, LS Orig
Trans. Elim.
(0.41)


(0.41)


Optional Calling Plan Paymnt for CCL,
LS Elim.
0.01


0.01

Optional Calling Plan Orig. Transit
Payment Inc.
-


-


Estimated special access reduction
(2.49)


(2.49)



Total (including special access)
(9.50)


(12.67)


(22.16)


11
JSI Peer Group Data - 2003

• 148 client company LECs included in database
• LECs from 31 states included in database
• Largest LEC in database over 100,000 A.L.
• Smallest LEC in database approx. 200 A.L.
• 1,476,000 total access lines
• 1.5 billion in regulated revenue - 2003
• 5.3 billion state interstate access MOU

12
Summary of Plan Impacts Per A.L.
13
Plan Impacts on JSI Peer GroupRevenue
Percentages - 2003
14
Summary of Plan Impacts SLC Caps

• Increase in SLC Caps
• ICF
• NARUC (optional for non-rural LECs only)
• EPG (optional)
• Decrease or no change in SLC Caps
• ARIC (possible decrease in SLC charges)
• Home/ PBT

15
Plan Impacts MOU Charges

• Retention of MOU charges
• ICF retains terminating MOU charge for CRTCs
• ARIC retains orig. term. MOU charges
• EPG retains orig. term. MOU charges for common
  trunks
• NARUC retains terminating MOU charge
• Elimination of MOU charges
• ICF non rural LECs
• Home/ PBT eliminates orig. term. charges for
  all LECs

16
Plan Impacts USF

• Increase in federal and/or state USF
• ARIC (via creation of SEF)
• NARUC (via creation of RACTF)
• EPG (via creation of ARC)
• ICF (via creation of TNRM for rural carriers)
• Restructure of federal and/or state USF
  mechanisms
• Home/PBT (bulk access charge mechanism)

17
Take it to the Bank

• Increased Accountability and Scrutiny for
  Universal Service Support
• Need for ILECs to prepare
• Continued FCC examination on scope of program
• Increased state examination of purpose and need
  of universal service

18
Federal-State Joint Board On Universal Service -
Proposals

• Several proposals released on August 17, 2005
  relating to high-cost support
• Proposals recommendations being made by
  individual JB members staff
• Comments due September 16, 2005
• Reply comments due October 3, 2005

19
Four Recommendations/Proposals

• The State Allocation Mechanism (SAM) Ray Baum
• Three Stage Package for Universal Service Reform
  Billy Jack Gregg
• A Holistically Integrated Package Robert Nelson
• Universal Service Endpoint Reform Plan (USERP) -
  Joel Shifman, Peter Bluhm Jeff Pursley

20
State Allocation Mechanism (SAM)

• Plan would begin in June 2009 (4 year transition)
• FCC to allocate high cost USF lifeline/linkup
  funds to accounts for each State maintained by
  USAC
• Each State would determine distribution of funds
  to ETCs
• USAC to remain as fund administrator
• States would be allowed to support additional
  universal service efforts via increments to
  federal funding mechanism

21
SAM Contd

• Allocation of federal USF to States determined
  via
• Forward-looking or embedded cost models
• A rate affordability benchmark
• The intercarrier compensation reform plan adopted
  by the FCC
• Number of consumers in the State eligible for
  Lifeline and Linkup support

22
Three Stage Package

• Stage 1 five parts (short term plan 3 5
  years)
• Combine Study Areas within a state
• Large rural carriers (gt100,000 lines) would have
  support determined via FCCs High Cost Model but
  not subject to state averaging of costs
• For rural LECs, per line support frozen upon
  competitive entry
• Support based on each ETCs own costs
• Rate comparability review extended to rural
  carriers

23
Three Stage Package Contd

• Stage 2 Mid-Term Plan
• Support to be based on total costs of rural
  carriers
• Federal support based on a comparison of embedded
  costs of rural carriers to available revenues
• Amount of federal support received would be based
  on a percentage of excess costs (not 100)

24
Three Stage Package Contd

• Stage 3 Long-Term Plan
• Unified system of support to high-cost areas to
  be developed. Differences in carrier status,
  technologies, etc., would be eliminated
• Federal support would be allocated to states in
  the form of block grants
• Amount of block grants would be adjusted annually
  for changes in the GDP-CPI index

25
Holistically Integrated Package

• Reflects portions of other proposals submitted
• Allocation of federal USF to states via block
  grants
• Eliminates rural vs. non-rural carrier
  distinction all carriers serving rural areas
  eligible for support
• Combination of study areas within a state
• Existing support mechanisms to be combined
• Change in contribution methodology through use of
  connections, bandwidth or numbers

26
USERP

• Addresses changes in support to ILECs and CETCs
• States commissions would determine allocations to
  wireline ILECs within the state
• Costs used to determine amounts of funding and
  allocation to states would be based on embedded
  or accounting costs
• Costs would be non-jurisdictional
• Existing state averaging policy would be adopted
• Affordability index equal to 125 of the national
  average urban cost would be established

27
USERP Contd

• Wireless CETCs
• Support no longer based on support received by
  incumbent ILEC ( except for wireline CETCs)
• Creation of a separate Portability Fund
  available only to wireless carriers and capped at
  1 billion/year
• Portability Fund to last 5 years and then sunset
• State commissions would allocated funds to
  wireless carriers using a competitive grant
  method

28
Regulatory Conclusions

• Monitor Federal Activity
• Be Proactive
• Vocalize Positions
• Work with Associations
• Strategically Plan for the Future
• Take full advantage of existing settlement
  mechanisms
• Firm up Cap X Plans
• Have Flexible Long Range Plans

29
Technology Trends
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Where Are We Headed?

• All Communications is moving towards IP Voice
  and Video migrating toward data structure
• Once all services are on the same platform, new
  applications can link all the media
• The network will evolve and become a platform to
  support applications developed by multiple
  sources
• Similar to a PC with several different software
  applications

31
IP Impact on Technology

• IP provides a stable well know protocol which is
  inexpensive with proven performance
• IP is an enabler for packet technologies and is
  embedded in electronic equipment
• Outside Plant technologies
• Switching
• Transport
• Video
• Keep in mind that IP is a technology that can be
  implemented just like any other technology in the
  network without impacting settlements

32
IP Technology

• Telecommunications architecture is migrating to
  the IP model.
• Intelligence continues to become distributed
• Circuit Switching migrating to Packet Switching
• SONET structure moving Ethernet structure
• Software control becoming available to end users
  via standard data interfaces
• LECs must analyze both the technology and their
  market to offer as many services as possible
  while keeping it affordable based on revenues
  generated.

33
Broadband
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Broadband is thefirst step to the future of
communications/entertainment
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The New Basic Service

• Broadband service tomorrow will be the
  equivalent of local service today. It should be
  considered our basic service which will provide
  our subscribers access to feature rich advanced
  services.

36
Broadband Today

• Rural markets are often underserved
• Coverage is excellent
• Prevailing retail rates are too high
• Margins are perceived as being anemic
• JSI believes
• Broadband margins improve dramatically with
  increased penetration
• Rural Broadband penetration equal to Urban
  penetration is realistic and achievable

37
Broadband Growth

• It is projected that the US home broadband
  audience will double from approximately 55
  million in 2004 to approximately 108 million by
  2009

38
Services
39
VoIP
40
ILEC VoIP

• ILECs need to view VoIP as an evolutionary
  technology service. In the near term, we need to
  use VoIP to lower operating costs and be prepared
  to meet a competitive challenge. In the future,
  VoIP will be our platform as the technological
  and regulatory environments change.

41
VoIP Technology vs. Service
VOIP can be used in three ways

• Technology
• Lower cost equipment
• Packet Voice
• Efficient, shared transport

• Service
• Pressure to further lower prices
• Web-based account management
• Advanced calling features

• Arbitrage
• Loss of Revenue
• Elimination of access charges and taxes
• Per minute access savings 1 - 5
• Tax / Surcharge savings 10 - 20
• Some carriers dont assess access charges for
  VoIP calls

42
Video Services
Business Strategies
Financial Assessment
43
Telco Move into Video

• It is less of a question of whether or not we
  should start providing a video signal. It is
  more of a question of when and how to do it.

44
Technological Advancements

• Advances in video technologies are increasing at
  a rapid pace. Video compression, head-end
  applications over the Internet, set top boxes,
  MPEG encoders are all areas seeing positive
  changes in terms of their application to ILECs.

45
IPTV

• By capitalizing on technologies such as IP video
  and xDSL, Internet management, middleware
  applications, etc., ILECs can offer cable TV
  type services, high-speed Internet access, voice
  services, and other attractive services over
  existing copper and fiber facilities

46
Options to offer Video

• Purchase existing CATV provider
• Offer Satellite based services as reseller
• Over-build service area with HFC/FTTH
• Leverage existing copper/fiber facilities (IPTV)

47
Decision to Overbuild

• Technology
• Timing
• Cost

48
Copper as Triple Play

• Is Copper Enough?
• DSL data rates are increasing
• Video compression allows more video channels to
  be delivered on DSL
• Copper loop distance is the big gamble
• Will Video and Data compression techniques keep
  pace with bandwidth demand of Gaming applications
  and HDTV?
• Advantages
• Video over DSL (IPTV) leverages existing
  investment
• Implementation is faster than a complete overbuild

49
HFC

• Video is migrating from Analog to Digital
• Digital Programs make up approx. 50 of the
  available channels
• As more programs become available in digital
  format, HFC capacity for video will increase
• Video is migrating to IP
• New Providers will implement IP Video
• Traditional CATV has not yet embraced full
  transfer to IP video
• Internet and VoIP technology is very compatible
  with HFC RF architecture
• Drives new service revenues margins
• Low cost to add customers
• Can expand bandwidth available for voice/data

50
Fiber to the Home

• Can be more economical for very rural areas
  because ILEC only purchases electronics for
  customers that buy service.
• Fiber is a very future proof technology
• Not susceptible to water damage
• Capacity is only dependent on electronics
• No electronic interference
• Both LECs with copper plant and CATV companies
  with HFC plant are evolving their plant to have
  fiber closer to the home.

51
Rural IPTV VoD / PPV Market Opportunity

• VoD/ PPV are needed to augment broadband and
  video margins
• Rural subscribers do buy VoD/ PPV services once
  theyve tried them
• Expensive front end server costs can be defrayed
  by pooling resources amongst companies

52
Video Market Summary

• There is increasing demand for entertainment
  services
• CATV adding new services with
• Digital Channels
• Video On Demand
• Digital Video Recording
• Gaming
• Bundling with the triple play services is
  becoming a reality for CATV companies.
• Who will offer the triple play first?

53
Entertainment
54
Just How BIG is Gaming?

• Young people -- those under 30 -- see games as a
  mainstream entertainment medium just like we
  think of TV, music or movies
• 8 Billion and growing industry
• Game introductions often gross more than movies!
• 49 of kids own games (i.e. Xbox, PlayStation)
• Kids spend 1 2 hours playing per day!

55
Online Music / Video Market

• The distribution system for the 35B global
  recorded music market is shifting to the Internet
• Who owns an iPod or MP3 player?
• 20 of Americans under 30
• 14 of users between 30 and 48
• 15 of Internet users
• 23 of users with broadband at home
• 31 of users with broadband at home AND work

Source Pew Internet American Life Project, 2005
56
Broadband Entertainment Service Observations

• Aim Higher! Expect More!
• Rural markets are untapped
• Profitability is driven by new services (as
  proven by the cable companies)
• Business opportunities abound and rural markets
  are ripe for rolling out broadband enabled
  entertainment services!
• New services provide ground-floor business
  opportunities
• Create and market bundles to encourage usage of
  value added services

57
Bundling
58
Why Bundle Services?

• Subscribers buy bundles
• Value
• Simplicity
• LECs benefit from bundles
• Bundles increase revenue per subscriber
• Can be used to protect access lines and reduce
  churn

Marketing Is A BIG Reason Why BundlesAre So
Effective
59
Financial Impact

• Customers with bundles of local, LD, data, and
  wireless generate an expected lifetime revenue of
  25,508 versus 10,251 for those without bundles
• The prime reason is that the value of the churn
  reduction exceeds the bundle discount
• Churn is reduced by two thirds
• Cable companies are proof that bundling works!

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What does our future hold?
61
Can We succeed?

• Pros
• Advanced networks
• Existing customer base/relationship
• Strong resources
• Rural nature
• Continued regulatory support

• Cons
• Not market driven
• Need for additional expertise
• Decision paralysis

62
Viability of Local Market

• While change will occur, ILECs are well
  positioned to be successful in the future
• There will be continued availability of federal
  and state support for carriers
• Control of the last mile and the broadband
  connection is key

63
Outlook

• While there are uncertain times ahead, the ILEC
  sector is still an attractive market. There
  continues to be a high interest in this space by
  investors who see the markets as somewhat
  protected with good growth potential. While
  there will be some losers, we believe the bulk of
  the industry will survive and survive well

64
Customers are the Key

• In the end as long as we have a reasonable
  customer base we will be able to sell a
  profitable mix of services to them. In saying
  this, it is important to note that we will need
  to modify our operating structure as we go. As
  much as we hate the concept, we need to convert
  our platform to one of a commodity provider.

65
Keys to Success

• Build a superior network, but not at all costs
• Only spend what we have to spend
• We can no longer be the end all, be all
• Partner
• The ultimate service platform needs to be based
  on what the customer wants and what we can afford
  to provide them

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Any Questions?
Contact Information Manny
Staurulakis mstaurulakis_at_jsitel.com 30
1-459-7590 www.jsitel.com