1

“From TV to Telco”Transformation of Cable

IndustryFebruary 6, 2002 – Miami, FL

Ahmet OzalpVP, Strategic MarketingNarad Networks

2

The Transformation started in Early 90’sThe Transformation started in Early 90’s

Residential Telephony

3%

Hi-Speed Data10%

Digital Video

6%

Premium Video21%

Analog Video60%

Source: Morgan Stanley

Total: ~$39 Billion

• Broadband revolution has been transforming cable industry rapidly since early 90s

Cable Industry Revenues

• For most MSOs 50% of revenue growth is coming from non-video services

• Cable modem penetration in U.S. is leading DSL 2 to 1

• Voice deployments has been lagging high-speed access, BUT momentum is building behind voice as the right technologies emerge

3

U.S. Cable Telephony Deployments -U.S. Cable Telephony Deployments -Where are we today?Where are we today?

U.S. Cable Telephony Penetration (2002E)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

TelephonyHomes Passed

ResidentialTelephony

Subs

00

0 s

AT&T Comcast Cox Insight

Cablevision Charter

• Almost 15% of U.S. homes will have cable telephony available at the end of 2002

• More than 2 Million new cable telephony subscribers within the last 4 years

• Penetration of upgraded homes > 16%

• Predominantly “Proprietary Circuit Switched” technology

Source: Morgan Stanley

4

Cable HeadendCMTS

Fiber Nodes

HFCAccess Network

Class 5 SwitchPSTN

IP Backbonedata

voice HDT

Router

NIU

CM

Customer Premise

How does it work ? How does it work ?

Proprietary Circuit- Switched Telephony Architecture

6 MHz Channel

2 MHz => 24 Voice Circuits (TDM)

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Circuit Switched vs. VoIPCircuit Switched vs. VoIP

Circuit Switched VoIPBenefits Benefits

Faster time to market

Proven technologies

Low incremental CAPEX once in place

Lower operating costs

Lower overall CAPEX

Conserves valuable spectrum

Drawbacks DrawbacksHigher operating costs

Higher CAPEX per customer

Low spectrum efficiency

Proprietary

High upfront costs for new system

Newer, less well-proven technology

6

DOCSIS 1.0 DOCSIS 1.0 DOCSIS 1.1 DOCSIS 1.1 DOCSIS 2.0 DOCSIS 2.0

Packet Cable 1.0 Packet

Cable 1.0 Packet

Cable 1.1 Packet

Cable 1.1 Packet

Cable 1.2 Packet

Cable 1.2

Best effort high speed access

Quality of Service (QoS) for voice support

Improved modulation to increase upstream bandwidth

Standardization Efforts by CableLabsStandardization Efforts by CableLabs

Packet voice over DOCSIS in the access network

Support for Pure IP and Hybrid (GR-303) based approach in the Headend

Support for lifeline service

Interconnection of local packet cable zones via SIP protocol

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Cable HeadendCMTS

Fiber Nodes

DOCSIS 1.1 or 2.0

MTA

CM

Customer Premise

Class 5 SwitchPSTN

IP Backbone

Hybrid Switched/Packet ArchitectureHybrid Switched/Packet Architecture

data

voice

GR-303 Gateway

Router

Packet Cable - “Line Control Signalling (LCS)” based on GR-303

8

Cable Headend

CMTS

Optical MAN

Fiber Nodes

MTA

CM

Customer Premise

RouterRouter

CMSMGC

Media Servers

Media Gateway

PSTN

Reginal Headend or Data Center

IP Backbone

VoIP – Pure IP ArchitectureVoIP – Pure IP Architecture

data

voice

DOCSIS 1.1 or 2.0

NCS: network based call signalling (MGCP)MTA: Multimedia Terminal AdapterCMS: Call Management Server (softswitch)

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Capital Costs per Subscriber

0

100

200

300

400

500

600

700

Circuit SwitchedNew entrant

VoIP Incremental Costfor Existing Circuit

SwitchedInfrastructure

Cable Telephony EconomicsCable Telephony Economics

VoIP is expected to provide CAPEX savings of up to 40% for a new entrant

Savings $50 to $ 75 less for service providers with existing Class 5 infrastructure

Primary line monthly revenue per sub ~ $54 (AT&T)

Revenue Payback in less than 12 months

$600-700

$400-500

$525 - 600

Source: Morgan Stanley

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Primary or Secondary Line ?Primary or Secondary Line ?

Primary Line Secondary Line High revenue per

subcriber

Higher cost and complexity

• Network or Battery power• E911 and other requirements

Revenue per subscriber 1/3 of primary line (What happens then to local voice business?)

25% - 30% less CAPEX per sub

Smaller upfront CAPEX • No need for major upgrade of the

network powering infrastructure

MSOs with existing voice offerings (AT&T, Cox) primary line service via hybrid-IP or circuit-switched

solutions New players (AOLTW, Comcast, Cablevision etc)

pure VoIP or Hybrid VoIP solutions and mostly secondary line services only

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Residential VoIP over Cable Residential VoIP over Cable Projections (U.S.)Projections (U.S.)

VoIP Homes Marketed

02,369

13,792

31,697

55,292

0

10,000

20,000

30,000

40,000

50,000

60,000

2002 2003 2004 2005 2006

Nu

mb

er o

f H

om

es (

000s

)

primary secondary

Source: Kinetic Strategies

VoIP Subscribers

0 95

677

2,482

5,851

0

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005 2006

Nu

mb

er

of

Su

bs

(0

00

s)

primary secondary

5%penetration

10%penetration

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What about selling Voice Services to What about selling Voice Services to Commercial Customers ?Commercial Customers ?

Voice Lines and Revenue

0%

20%

40%

60%

80%

100%

Voice Lines Revenue

% o

f T

ota

l

Residential Business

66%

34%52%

48%

Source: US FCC

Commercial services market is significantly larger than the residential market

voice, VPN, internet access, T1/T3 connectivity and private lines, centrex, frame relay

The Cable plant passes 65% of businesses in U.S.

Specifically small and medium business market provides a major opportunity

underserved by the ILEC too costly to serve with

fiber, but easily reachable by cable

SMB Services Revenue PotentialSMB Services Revenue Potential

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Data ManagedVPN

ManagedFirewall

Voice Storage

Services Revenue per Customer

Mo

nth

ly R

even

ue

Source: IDC, Narad Analysis

~ $925 / month(10 – 20 employees)

~ $8000 / month(100 – 250 employees)

$100 - $1000

$200 - $1500$200 - $1500

$250 - $1500$175 - $3500

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Cable plant historically designed for broadcast...

The upstream spectrum is limited to 5Mhz to 42Mhz, out of which roughly 20Mhz really usable (noise and interference issues)

Only QPSK or QAM 16 possible

Both voice and data services are competing for the same limited upstream bandwidth

As penetration grows, bandwidth per user drops.

DOCSIS 2.0 is expected to provide 3 x the bandwidth – good for residential, but not enough for business customers !

Cable’s Upstream Bandwidth Cable’s Upstream Bandwidth

0%

5%

10%

15%

20%

25%

less than 5 5 to 9 10 to 19 20 to 49

Number of Employees

Source: AMI Research – 2001 Small Business Survey

Cable Modem Penetration among SMBs

•Cable modem penetrationfalls as the company size and needs grow

•Issues:•bandwidth•QoS•SLAs•ability to support voice

•symmetric bandwidth

Cable Modem Take Rates drops with Cable Modem Take Rates drops with Increasing SMB SizeIncreasing SMB Size

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Cost

Customer Size

New Technologies are enriching the New Technologies are enriching the MSO’s Toolbox MSO’s Toolbox

Very Small Business and SOHO

Small and Medium Size Business

(10 – 500 empl.)

Large Business

Fiber to Business

Cable Modem(HFC)

low

Gig-Eon

HFC

low - medium high – very high

Gigabit Ethernet on HFC – How does Gigabit Ethernet on HFC – How does it work?it work?

Extends the usable spectrum well above 2GHz by switching and regenerating the packets within the access network

Adds symmetrical 1Gb on trunks and 100Mb on drops to customers

Coexists with current services (analog and digital TV, cable modem)

ATM-like QoS built into standard Ethernet model Services: Tiered symmetrical HSA(1Mb – 100Mb), VPN,

T-1/T-3, remote storage, centrex services

Current Cable Spectrum in UseCurrent Cable Spectrum in Use

5 42 50 750/860 1GHz 2.5Ghz (MHz)

downstreamupstream

6 Mhz

..............

New Spectrum AddedNew Spectrum Added

100 MbUpstream and Downstream

1 GbUpstream and Downstream

W

W

W

W

W

W

W

W

WW

W

...

Gigabit Ethernet on HFC Deployment Gigabit Ethernet on HFC Deployment ExampleExample

W

Optical Network Distrbution

Switch (ONDS)

Optical Network Distrbution

Switch (ONDS)

Network Distribution

Switch (NDS)

Network Distribution

Switch (NDS)

Subscriber Access Switch

(SAS)

Subscriber Access Switch

(SAS)

•Areas without businesses are untouched•No headend equipment required beyond a standard GigE port

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Cable Headend

Fiber Nodes

Business Premise

Optical Switch/Router

Service Examples: TDM over IP and Service Examples: TDM over IP and IP PBXIP PBX

HFC with DICSIS and

Gig-EOverlay

N x T-1

BIU + IP MUX

PBX

Router

100BT

IP

T-1/T-3

Class 5PSTN

IP-Mux

Service Delivery Platform

RouterBIU

IP PBX

CMS

MGC

Media ServersMediaGateway

or or

IP

100BT

• High Speed Access–beat the competition by performance and price

–1Mbps to 100Mbps dedicated, flexible bandwidth–Security and performance guarantee (SLA)

• Telephony–beat the competition by low price and/or quick delivery

of services–Voice, Video Telephony, T1 PBX Access, IP PBX,

Centrex• VPN

– site-to-site, telecommuter access• Storage Services

–remote file systems, data backup, disaster recovery

It is all about Bundled ServicesIt is all about Bundled Services

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Cable Industry is transforming...

Data (CM) is leading the way, but voice may be the next killer application

Early adopters (circuit-switched telephony) will continue towards a hybrid-IP telephony at least initially

With VoIP reaching maturity, more MSOs will get into voice business

There will be a mix of primary and secondary line offerings

New technologies such as Gig-E over HFC will open up new opportunities in the business services (VoIP and other IP services)

In the next 5 years we may witness a transformation from “TV service provider” to a “super-carrier”

SummarySummary

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Questions ?Questions ?

P_SMBBusinessCase_v3.3Narad Networks - Proprietary and

Confidential