Xiaolin Lu

TREND: Broadband Business

An Industry Perspective

August 26. 2002

What is this all about?What is this all about?

Bubble burst, led by the US communication

industry – what to do in new environment?

European has similar and also different

regulatory and business environment.

What could learn from the US?

CHALLENGESCHALLENGES

Opportunities Street

Perspectives

Technology

Innovations

Industry

Environment

Operation

Reality

Assets

Financial

Markets

Competition Regulation

TOPICSTOPICS

Industry Perspectives

Technology Platform

Operation Challenges

PerspectivesPerspectives

andand

DynamicsDynamics

LANDSCAPELANDSCAPE

TELECOM IN USTELECOM IN US

AT&T

Worldcom

Spring

Qwest

AT&T

Worldcom

Spring

Qwest

“Unregulated” “Unregulated” Regulated or

Semi-Regulated

Long-Haul Metro Access

MSO

ILEC

CLEC

MSO

ILEC

CLEC

REGULATION AND BUSINESSREGULATION AND BUSINESS

Communication

Services

Title 2

Regulation

Requirement

VOICE DATA VIDEO

Open Pipe Franchising

Business Selling Minutes Flat rate

+ Usage

Information

Services

Title 1

Content

Service

Title 6

None

Flat rate

Regulation Business Platform

HARVEST ON REGULATIONHARVEST ON REGULATION

Open Access

Regulation (intend) Harvest

Open Conditional

Access

Open platform

CPE innovation

Digital Video Full digital platform

Managed Infrastructure

Managed Services: multi-

dimension business

INDUSTRY DYNAMICSINDUSTRY DYNAMICS

Cable ILECs Other

Video Voice Data

Cable Dominates

Video Market

ILECs Dominates

Voice Market

Cable Leads HSD

Market

Competition

from Satellite

Desire for more

revenue stream

Reduced margin

on circuit sale

Desire for change

of service nature

Reduced margin on

access sale

New business more

looks like video

CHANGING PERSPECTIVESCHANGING PERSPECTIVES

Competition

Digital Technology

New revenue

VideoVideo

ProprietaryProprietary

MonopolyMonopoly

Standard based

Capture shares

Expand the pie

Managed infrastructureManaged infrastructure

Service PackageService Package

New business modelNew business model

VoIP platformVoIP platform

Vertical serviceVertical service

DifferentiationDifferentiation

DataData

AccessAccess

Flat fee modelFlat fee model

VoiceVoice

Costly Costly

propositionproposition

Reduced margin

Regulatory

Changing service

nature

VoIP possible

Opportunity to

change the nature

of voice service

REALITYREALITY

Fantasy

New technology

Sale pitch

Assets

Embedded base

Investments

Opportunity

New revenue

Competition

How to maximize operation and economic scale?

How to differentiate our business from others’?

How to evolve the business and define the future?

What technology direction MSO should direct vendors to?

How to maximize operation and economic scale?

How to differentiate our business from others’?

How to evolve the business and define the future?

What technology direction MSO should direct vendors to?

Looking Forward: Triple PlayLooking Forward: Triple Play

Video

$128B

Voice

$75B

Data

$28B

CableCable VoIPVoIP

ILECILEC SDVSDV

VDSLVDSL

Standard based equipment

IP Infrastructure

OSS/BSS

New Services

Standard based equipment

IP Infrastructure

OSS/BSS

New Services

2002

POSITIONINGPOSITIONING

Content aggregation & delivery

Service-base infrastructure

Core Competence

Expand business

Go digital

Video Change service

nature

Data

Change service

nature

Voice

INTERDEPENDENCYINTERDEPENDENCY

Regional HFC

IP – DOCSIS

Service Platforms

OSS/BSS

Vertical and horizontal interdependent

Any change at any layer or any segment will affect others

Vertical and horizontal interdependent

Any change at any layer or any segment will affect others

UPGRADE

INDUSTRY EFFORTSINDUSTRY EFFORTS

DWDM

RF

DSP

Capacity

Quality

Reliability

Open CableOpen Cable

Universal set Universal set

top boxtop box

Packet CablePacket Cable

EndEnd--toto--end IP end IP

platformplatform

Broadband Full Service Platform

DOCSIS

Cable HomeCable Home

Home Home

networknetwork N

G

C

N

Strategy

Network

System

Operation

Standards CL efforts MSO efforts

NETWORKSNETWORKS

HISTORICAL OVERVIEWHISTORICAL OVERVIEW

Class 4

Switch Class 5

Switch

SS7

Headend

FN FN

FN FN

Content Service (Title 6)Content Service (Title 6)

Selling contentSelling content

Broadcast, pushBroadcast, push--andand--pickpick

Content Service (Title 6)Content Service (Title 6)

Selling contentSelling content

Broadcast, pushBroadcast, push--andand--pickpick

Communication Service (Title 2)

Selling connection

Circuit, connection orientated

Communication Service (Title 2)

Selling connection

Circuit, connection orientated

Telco

Cable

LD

Internet

OPTIONSOPTIONS

LEC

Narrowband

Switched DLC

Rebuild

Network Upgrade

Cable modem

Deep Fiber Deep Fiber

PenetrationPenetration

Wireless

Mobility

Broadband

Cable

Broadband

Broadcast

FTTH

Photonic Moore’S LawPhotonic Moore’S Law: Unlimited: Unlimited

0.1

1

10

100

1K

10K

1985 1990 1995 2000

Year

Ca

pa

city (G

b/s)

TDM Commercial

WDM Commercial

TDM Research

WDM Research

DWDM Price Performance

0

200

400

600

800

1000

1200

1400

1996 1997 1998 1999 2000 2001

Year

Gb

ps

$0

$50

$100

$150

$200

$250

$300

$350

$/G

bp

s/K

m

Capacity Cost

Photonic Moore’S LawPhotonic Moore’S Law: Positive Trend: Positive Trend

DWDM IN CABLEDWDM IN CABLE

0

20

40

60

80

100

120

96 97 98 99 00 01 02

1

10

100

1000

10000

100000

1.5 Xmod EDFA DWDM HHP

Year

Co

st D

eclin

e %

HH

P/W

ave

le

ng

th

CABLE NETWORK EVOLUTIONCABLE NETWORK EVOLUTION CABLE NETWORK EVOLUTIONCABLE NETWORK EVOLUTION

Demand

Take Rate

Applications

User Behavior

Demand

Take Rate

Applications

User Behavior

Ban

dw

idth

per

Cu

sto

mer

Push Fiber

Deeper

Push Fiber

Deeper

Split Nodes Split Nodes

Higher RF

Efficiency

Higher RF

Efficiency

Time

HE/Hub FN

CO/HE RT

RT

RT

HFC

Migration

Switched

Structure

Cell-Bus

Volume

switching

Multi-stage

star

Predefined

PTP BW &

connection

switching Segregation

Aggregation Segregation

Aggregation Aggregation

Aggregation

It’s all about resource sharing through multi-stage

aggregation and segregation

Different cost structure, different efficiency

It’s all about resource sharing through multi-stage

aggregation and segregation

Different cost structure, different efficiency

NETWORK RATIONALITYNETWORK RATIONALITY

APPLICABILITYAPPLICABILITY

Switched

“Overlay”

Residential SOHO Large Business

HFC

Migration P

lug

-in

HE

HE

HFC IN THE MAKINGHFC IN THE MAKING

HE Primary

Ring

Primary

Hub

FN

FN

Broadcast Multi-Service

Segmentation

4X capacity

HFC IN THE MAKINGHFC IN THE MAKING

SH

SH

SH Primary

Ring

Primary

Hub

FN

FN

DWDM Transport

End-to-end Transparency

OXiomOXiomTMTM

CMTS

PH

mFN mFN

mFN mFN

mFNs replace all coax amplifiers Less active components

More bandwidth and flexibility

Deep fiber penetration with cell structure

Optical add/drop to daisy chain mFNs Reduced fiber management & labor

Provisioning for growth

Distributed processing at mFN

SH

SH

SH

XTR XTR XTR

WDM PON

S

Network Buildouts Network Buildouts -- CableCable

0

5

10

15

20

25

30

Ho

me

s (

Millio

ns

)

AT&T AOL-TW Comcast Charter Cox Adel Cblvsn Rogers Mcom Insight Classic

2-Way Homes Homes Not Upgraded

Source: Kagan

105.4M TV HH, 72.95M Cable HH, 69.2%

NETWORK MIGRATIONNETWORK MIGRATION

Continually improve current HFC capability DOCSIS 2.0 and beyond

Optimization of network architectures for opex reduction

Investigating new architecture for more flexibility and scalability New build

Expansion

Single platform, Core competence, Lower Capex and Opex

VIDEOVIDEO

5

59

30

89

22

45

25

70

36

82

106100

111

0

10

20

30

40

50

60

70

80

90

100

110

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Households

Analog Only Houses

Total Digital

Digital Cable

Satellite Digital

Analog Only

VIDEO: GOING DIGITAL!VIDEO: GOING DIGITAL!

Source = Kagan 2000 Databook

Today

DIGITAL CABLE SUBSCRIPTIONDIGITAL CABLE SUBSCRIPTION

0

5

10

15

20

25

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Cablevision

Cox

Adelphia

Charter

Comcast

AOL TW

AT&T

00 01

Millio

n

Source: UBS Warburg

US CABLE DIGITAL PENETRATIONUS CABLE DIGITAL PENETRATION

0

5

10

15

20

25

30

35

40

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

% o

f B

asic

Su

b

00 01 02

Source: UBS Warburg

STRATEGIES

“Video”

“Video”

Growth

Strategies

Expand Expand

“Video”

Pie

Capture Capture

“Video”

Share

Recapture DBS Subs

Increase Subscription Rev$ Increase Subscription Rev$

Recapture Tape Rental

Get Ad Share From B’Cast

Own The Content

Non-TV Ad Market

Get Paid To Carry Content

Transaction Revenue

PRODUCT EVOLUTIONPRODUCT EVOLUTION PRODUCT EVOLUTIONPRODUCT EVOLUTION D

igit

al P

en

etr

ati

on

VOD VOD

Digital Plus Digital Plus

Digital Basic Digital Basic

Time

Extended VOD/PVR Extended VOD/PVR

ITV ITV

HDTV HDTV

Reduce churn Reduce churn

More revenue opportunity More revenue opportunity

INTERACTIVE TV MARKETINTERACTIVE TV MARKET

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2003 2005 2007 2009 2011

Interenet TV

Direct Response

Internet Portals

IPG

VOD

T-Comm

$M

Source: Kagan

CONTENT DISTRIBUTIONCONTENT DISTRIBUTION

HE HFC Network

Regional

Network

CPE

DMC

Post production

Aggregation

1st level distribution

Post production

Aggregation

1st level distribution

Store and distribution

Conditional access

Store and distribution

Conditional access

Scale Flexibility

Open, managed infrastructure

HIGH SPEED HIGH SPEED

DATADATA

HIGH SPEED ACCESSHIGH SPEED ACCESS

North AmericanNorth American

7

13

22

30

3640

4448

5156

0

10

20

30

40

50

60

70

80

90

100

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09

HP

(M

illi

on

s)

Marketed Cable HSD HP Marketed DSL HP Other Subs Total HSD Subs

Source: Kagan

SPLIT THE PIE: 2001SPLIT THE PIE: 2001

US OnlyUS Only

32%

2%

66%

Cable

DSL

Other

Source: Kinetic Strategies

CABLE MODEM SUBSCRIBERCABLE MODEM SUBSCRIBER

0

2

4

6

8

10

12

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Adelphia

Cablevision

Charter

Cox

Comcast

AT&T

TW

00 01

Millio

n

Source: UBS Warburg

MARKET DYNAMICS OF DATA BUSINESSMARKET DYNAMICS OF DATA BUSINESS

A Land Grab For 40 Million Existing Narrowband SubscribersA Land Grab For 40 Million Existing Narrowband Subscribers

0.32

0.240.6

13.9

7.9

5.4

4.119.8

15.7

15.4

1994

$0.6 B 2002

$28 B 2007

$55 B

$5.0B

18% Cable 57% 57%

E-Commissions

Advertising

Content

Access 50% 50%

36% 36% $9.9B

18% Cable

Increasingly difficult to capture value merely with access fee

Key sources of future value in the data business Advertising

Ability to close the transaction

Data business starts to look a lot like the video business

Increasingly difficult to capture value merely with access fee

Key sources of future value in the data business Advertising

Ability to close the transaction

Data business starts to look a lot like the video business

IP INFRASTRUCTUREIP INFRASTRUCTURE

CMTS HFC Network

(DOCSIS)

Managed

IP Network

CM

OSS

Server

Farm

MPLS/VPN/BGP

Optical Networking

Advanced OSS/BSS

MPLS/VPN/BGP

Optical Networking

Advanced OSS/BSS

Many IP Technologies DOCSIS Standard

Packet Cable Standard

Standard based end-to-end solution

Operation and scalability are the keys

New business model

Standard based end-to-end solution

Operation and scalability are the keys

New business model

KEY DIFFERENCIATIONKEY DIFFERENCIATION

Managed

Network

“Carrier”

Network

Service Service ISP ISP ISP ISP

Customers Customers

Content Pipe

VOICEVOICE

Voice Isn’t What It Used To Be…Voice Isn’t What It Used To Be…

13.7

39.3 39.7

73.7

30.844.323.743.6

103

1994

$93 B 2002

$149 B 2007

$170 B

15% 15%

Residential

LD

Residential

local

Total

Cellular 50% 50% 60% 60%

Cellular has already captured 50% of the value in a decade

Cellular has blurred the traditional residential-business segmentation

The residential wireline business is under significant pressure

Cellular has already captured 50% of the value in a decade

Cellular has blurred the traditional residential-business segmentation

The residential wireline business is under significant pressure

REDEFINE VOICE SERVICEREDEFINE VOICE SERVICE

Access to voice

network (Local,

Toll, LD, etc)

Vertical Services

CallerID, VoiceMail,

Integration, etc.

Average Monthly Phone Bill: Constant

Time

$

Price competition Product Differentiation

Convenient

Lower cost

More service value

Convenient

Lower cost

More service value

Benefit to Consumer

Differentiation

Customer retention

Additional revenue

Differentiation

Customer retention

Additional revenue

Benefit to Cable

Low-cost bundled offering

Web based provisioning

Persistent voice

Low-cost bundled offering

Web based provisioning

Persistent voice

VoIP

VoIP REALITY

CMTS

HFC NIU

CM

HDT 5ESS

Router

SONET

Local IP

PSTN

Internet

Coexist NIU/HDT, CM/CMTSCoexist NIU/HDT, CM/CMTS

Existing 5EExisting 5E

Coexist NIU/HDT, CM/CMTSCoexist NIU/HDT, CM/CMTS

Existing 5EExisting 5E

Cost saving in accessCost saving in access Cost saving in accessCost saving in access Intelligent IP metro networksIntelligent IP metro networks

Classify Classify ---- PolicyPolicy

Accommodate legacyAccommodate legacy

Intelligent IP metro networksIntelligent IP metro networks

Classify Classify ---- PolicyPolicy

Accommodate legacyAccommodate legacy

Today’s ArchitectureToday’s Architecture

HFCHFC

Internet

Local IP

Network

Separate voice and data platforms sharing the same

HFC network

HE

CMTS

HDT

PSTN

SONET

5ESS

CM

NIU

Transition: IP Digital TerminalTransition: IP Digital Terminal

HFCHFC

PSTN

Internet

Local IP

Network

Integrated voice and data over HFC network

Utilize 5ESS platform for voice interconnect & features

HE SONET

5ESS

EMTAEMTA

IP

DT

Ro

ute

r

CM

TS

EndEnd--toto--End IP PlatformEnd IP Platform

HFCHFC

PSTN

Internet

IP

Network

PSTNPSTN

GatewayGateway

EMTAEMTA

Cost reduction through common IP infrastructure

New revenue with emerging IP-based services

Flexible user interfaces stimulate more creativities

Ro

ute

r

CM

TS

PH

Softswitch

VoIP Over Cable NetworkVoIP Over Cable Network

CMTS HFC Network

(DOCSIS)

Managed

IP Network

CM MTA CMS

MG

SG

HFC Network

(DOCSIS)

CM MTA

CMTS

MGC

PSTN

SS7

MS

OSS

Server

Farm

TGS

DHCP & DNS

TFTP or HTTP

RKS

Provisioning

CMS: Call Management server MGC: Media Gateway Controller

MS: Media Server MG: Media Gateway

SG: Signaling Gateway

CABLE TELEPHONY SUBSCRIBERCABLE TELEPHONY SUBSCRIBER

0

0.5

1

1.5

2

2.5

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Cablevision

Cox

AT&T

00 01

Millio

n

Source: UBS Warburg

TRIPLE PLAYTRIPLE PLAY

Create a customer destination Reduce churn

Create differentiation

Build a common platform for innovation

and gain economic scale

Increase ARPU

Offensively and defensively change the

services/products nature

OPERATION REALITYOPERATION REALITY

OPERATION CHALLENGESOPERATION CHALLENGES

Diversed

Business

Margin

Cash flow

Operation

structures

Assets based

ARPU driven

Scale

Balance sheet

Scale and efficiency

Re-train wall street

Scale and efficiency

Re-train wall street

OPERATION STRUCTUREOPERATION STRUCTURE

-- Industry exampleIndustry example

CTO COO

East West Engineering Technical

operation

System System System System System System HFC IP Service PM NOC

Execution Platform

Centralized strategic decision

Distributed daily execution

Centralized strategic decision

Distributed daily execution

OPERATION LOGICOPERATION LOGIC

Strategy

Engineering Operation

Vendors

Business case

Guidelines

Processes

Guidelines

Processes

Leverage/utilize Leverage/utilize Support Support Support Support

SUMMARY: SUMMARY: The Industry TrendThe Industry Trend

Change business dynamics

Leverage and grow core competence

Harmonize operation structures and

processes

Utilize industry resources

Improve and leverage economic scale