October 10 13 2006 San Diego Convention Center
October 10 -13, 2006 • San Diego Convention Center, San Diego California Quantifying the Hype…FMC & Convergence Presented by William Markey, President and General Partner, RCBG
Market Observations • Fixed line substitution is displacing telco lines and accelerating fixed-mobile convergence • Wireless voice services continue to grow at an increasing rate since number of lines are not tied to a household, but a number of potential individual subscribers. • Wireless voice services are substituting fixed lines at the rate of 5+% per year. • Emerging opportunities exist for Fixed-to-Mobile converged solutions with the advent of dual-mode (cellular/Vo. IP) phones to offer services beyond cellular alone. Cellular and fixed voice lines 250 Lines (M) 225 200 175 150 2003 2004 2005 Cellphone lines 2006 2007 Fixed lines Source: European Information Technology Observatory 2005
The Convergence Universe • True convergence implies: Handset Desk Phone – Multi-Access – Multi-Device UMTS – Multi-Media – Multi-Application • But this is an evolution, not a revolution • 90% of wireless revenue is still generated by voice • Wireless operators must first make the case for convergence with voice • Therefore FMC voice is the top priority on operators’ convergence agenda • Convergence-oriented operators are actively seeking suppliers of FMC voice solutions today CDMA TV Presence Gaming Wi. Fi VOICE Video GSM Data Email IM PC LAN DOCSIS Laptop PDA
A Changing Landscape: Convergence • Various types of telecom convergence will emerge over the next three years. They can be categorized in five general buckets of convergence. • Voice & data convergence is occurring now, and fixed-mobile convergence (FMC) will gain measurable traction by 2009 Percentage of Telecom execs indicating “very strong” or “strong” impact of convergence types Voice & data 88% Fixed & Mobile 66% § Convergence of telco and broadcast (media and content services) 51% Telco & IT Device 0% § Access technology convergence (wireline, wireless, mobile) 77% Telco & Media § IP/IT network convergence (next-gen network architecture) 46% 20% 40% § Voice and data convergence (Vo. IP, voice as an application) § Device convergence (consumer electronics converging with traditional telco) 60% 80% 100% Source: IBM, Economist Intelligence Unit
Diminishing Boundaries of Service Providers • Fixed Telecoms, Wireless Operators, Satellite Cos, and Cable MSOs have multiple and often competing priorities • Leverageable expertise, time-to-market, and addressable market size will determine winners in each of the six following categories VOICE Telcos VIDEO Telcos Satellite Cos MSOs Wireless Cos FIXED MOBILE DATA
Global Operator Initiatives • Fixed-mobile voice services are top-of-mind for every major operator in NA and Europe and AP. Operators unanimously acknowledge that FMC voice will occur in their markets. VOICE DATA Cingular/SBC One Bill Cox VOD Comcast VOIP FIXED BT Bluephone Bell Canada FMC KT One Phone Du Do. Co. Mo Passage Duple FT/Orange FMC MOBILE VIDEO TWC MVNO Cingular FMC T-Mobile FMC Sprint FMC Nextel PTT SBC IPTV BT 21 CN DT IPTV T-Mobile Hotspot bundle Swisscom Mobile Unlimited Cingular EDGE Vodafone Live! Do. Co. Mo imode Verizon EVDO mm. O 2 Active Sprint TV mm. O 2 mobile VOD KTF mobile video
Drivers for Fixed-Mobile Convergence • Wireless operators: accelerate substitution by converging wireless voice with fixed Vo. IP • Cable MSOs: accelerate Vo. IP adoption by converging fixed Vo. IP with wireless voice • Telcos: offer Vo. IP, wireless, or both in order to participate in the inevitable substitution Residential Household Voice Subscriptions 140, 000 Households (000 s) 120, 000 Wireless (substitution) Wireless 100, 000 Fixed Wireless Telco Circuit Switched 80, 000 VOIP over Telco 60, 000 VOIP over Cable Fixed POTS 40, 000 20, 000 Vo. IP 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Relevant. C 2004, North American market trends
Service Provider Positioning for FMC • All operator types are pursuing FMC voice services, but most will require 3 rd party network partners • Three services are needed: (1) Cellular voice service, (2) VOIP service, (3) Broadband service • An operator must own all three, fill their gaps through partnerships, or lease turnkey networks Operator type: (1) Cellular service: (2) VOIP service: (3) Broadband service: Cellular Operator Cable MSO Telco Operator Branded Cellular Voice Need 3 rd-party cellular partner Need cellular service or 3 rd-party Need VOIP service or 3 rd-party Branded VOIP BYOBB Branded HSD Branded DSL Residential Home Customer segment: Corporate Office Wi. Fi Public Hotspots
Dependency on Device Availability Total Worldwide Handset Shipments, by data technology millions Dual-mode Handset Availability • Dual-mode Wi. Fi/cellular handsets began shipping in quantities in ‘ 05 • Dual-mode may represent 15% of shipments by ’ 08, on phones with WCDMA, CDMA 2000, EDGE, and EV-DO • Some handset makers will establish PBX partnerships (e. g. Motorola with Avaya) • Some will focus solely on consumer VOIP market • Some will pursue single-mode Wi. Fionly handsets (e. g. , UTStarcom) WCDMA 2000 Non-data EDGE GPRS 1 x. Ev. Do/DV 1 x. RTT Dual-mode Wi. Fi Handsets Dual-device Implementation is an option • This implementation would be a stop-gap measure for seeding the market until dual-mode technology is prevalent and proven • Traditional cell phone is used when the subscriber is outdoors on the cellular network • When indoor, a VOIP deskphone, Vo. Wi. Fi phone, or PC-based softphone could be used for IP calls. Source: Relevant. C 2005, Deutsche Bank
Dependency on Network Management Components • Operators require end-to-end system upgrades to offer FMC voice services • • • Softswitch • VOIP media gateway Call routing from MSC to IP Signaling conversion SIP/SS 7 Authentication at HLR Location presence management PSTN Outdoor GSM Network SGSN BTS BSC HLR VLR Back Office • • Softswitch Indoor Office Building Private IP Network Wi. Fi AP Device provisioning Feature server Service management Billing integration Public IP Network IP-PBX • • • Handset identification User authentication WLAN/WAN negotiation Domain awareness Wi. Fi AP management WLAN network Qo. S mgt Indoor Home Wi. Fi AP Home network • User authentication • WLAN network Qo. S mgt Source: Relevant. C 2005
Operators Approaches to FMC • Multiple approaches will be pursued. Tactical adoption of technologies will occur by segment. • Optimal approach depends on operator type, target customer, and billing/pricing ambitions Network-based FMC Premises-based FMC Enterprise & SMB • Operator offers cellular voice and hosted VOIP service to companies without PBX systems • Cellular voice outside the office. Roams onto corporate W-LAN for VOIP calling. • Operator bills for both VOIP and cellular on a single bill • Single-number and single-phone for each employee • Switching and call management occur at network MSC • Operator offers cellular voice to company. • Companies have their own IP-PBX systems and VOIP service. • Cellular outside the office. Roams onto corporate W-LAN for VOIP calling. • Operators do not bill for enterprise VOIP service • Switching and roaming occur at PBX, not in operator network Consumer • Operator offers cellular voice and hosted VOIP service to residential consumers • Cellular voice outside the home. Roams onto home Wi. Fi network for VOIP calling. • Operator bills for both VOIP and cellular on a single bill • Single-number and single-phone • Switching and call management occur at network MSC • Operator offers standard cellular voice • Consumer has hosted VOIP service or traditional POTS service at home. • Operator offers simple call-forwarding between phones and services. • Call forwarding preferences are manually set by consumer, via in-home gadget or PC. • Operator does not bill for landline voice. • No roaming or handoff. No single-phone or single-bill.
Impact on Operator Revenue & Costs Implementing a converged voice service will result in significant changes to the Service Provider’s operations. FMC integration, subscriber conversion, pricing & bundling, network investments, marketing and support must all be considered. These can be quantified by modeling all systematic drivers: • Market Share: Increased subscriber growth due to differentiated service offering • ARPU Increased MOU-per-subscriber due to “stolen” minutes from POTS at home/office • Termination: Changes in termination revenue & costs due to lower VOIP interconnect fees • Roaming: Changes in international roaming revenue due to international VOIP calling • Capacity: Cellular network savings due to offloading traffic to the IP network • VOIP investment: Installation and operation of the VOIP infrastructure • FMC upgrades: Installation and operation of the FMC infrastructure software and upgrades • CPE: : Increased CPE and handset subsidization costs • CPGA: : Increased marketing and customer support costs from rolling out new service • DSL impact: Increased sales of broadband services to support VOIP growth • POTS impact: Loss of POTS voice revenue as a result of VOIP displacement
FMC Impact on Revenue & Costs Each of the drivers can be isolated and quantified. The following example illustrates the impact of FMC on the Operator’s annual profitability at steady-state. The impact is positive under both no-growth and growth assumptions. Wireless Service Provider Metrics No-Growth Scenario 5% Growth Scenario Annual impact of converting existing subs to FMC Annual Impact of converting subs and adding new subs Positive 2 ARPU: Increased MOU-per-subscriber 3 Termination: Changes in termination fees (Negative) Positive 4 Roaming: Changes in internat’l roaming fees (Negative) Positive 5 Capacity: Cellular network traffic savings Positive 6 VOIP: Operation of VOIP infrastructure (Negative) 7 FMC: Investment in FMC infrastructure (Negative) 8 CPE: Handset and CPE subsidization (Negative) 9 CPGA: Marketing and customer support costs (Negative) 10 DSL: Incremental sales of broadband services Positive 11 POTS: Incremental impact on POTS voice (Negative) Positive Total Impact
FMC Impact on Revenue & Costs Excerpts of ROI model for an Integrated Operator with 5. 0 M subscribers at Year 1 Wireless Service Provider Metrics No-Growth Scenario 5% Growth Scenario Annual impact of converting existing subs to FMC Annual Impact of converting subs and adding new subs 2 ARPU: Increased MOU-per-subscriber 81 M 310 M 3 Termination: Changes in termination fees (2 M) 35 M 4 Roaming: Changes in internat’l roaming fees (6 M) 7 M 5 Capacity: Cellular network traffic savings 5 M 9 M 6 VOIP: Operation of VOIP infrastructure (11 M) (17 M) 7 FMC: Investment in FMC infrastructure (6 M) (8 M) 8 CPE: Handset and CPE subsidization (16 M) (22 M) 9 CPGA: Marketing and customer support costs (3 M) (16 M) 10 DSL: Incremental sales of broadband services 42 M 91 M 11 POTS: Incremental impact on POTS voice (41 M) (82 M) € 43 M € 307 M Total Impact
Pricing of Cellular/VOIP Packages Ala Carte Pricing 44% effective price decrease Bundled Pricing 27% effective price decrease Blended Pricing Anytime/Anywhere 14% effective price decrease Note: Illustrative Examples based on Operator conversations
Business Case for Mobile VOIP Demand drivers for adopting m. VOIP • The impact of m. VOIP on enterprise spending was modeled using a scenario of a 5, 000 -employee enterprise with pre-existing POTS service • The migration to VOIP results in over $6. 0 M in savings over a 5 -yr horizon • The migration to Hosted m. VOIP results in over $9. 0 M in savings. This savings is driven by a carrier-hosted plan that includes VOIP and cellular. Voice Services purchased by enterprise Cellular Service NPV of 5 -YR Expenditures Service Providers & Revenue Capture Sample Scenario $6. 5 M VZW gets $2. 6 M (40% share of account) VOIP Service $12. 7 M VZ gets $12. 7 M (100% share of account) Total Telecom Spend $19. 2 M VZW and VZ get $15. 3 M combined FMC Service $16. 2 M VZW and VZ get $16. 2 M combined The enterprise saves $3. 0 M by adopting the m. VOIP service, and the Service Provider increases its revenue in this account from $15. 3 M to $16. 2 M
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