Confidential and proprietary material for authorized Verizon personnel only. Use, disclosure or distribution of this material is not permitted to any unauthorized persons or third parties except by written agreement.

What is the Right Model for the U. S.?

Link HoewingVice President

Verizon

Friday, March 27, 2009

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The Conventional View of Competition in Communications and Broadband Markets

Confidential and proprietary material for authorized Verizon personnel only. Use, disclosure or distribution of this material is not permitted to any unauthorized persons or third parties except by written agreement.

The Key Question With Any Regulatory Proposal – What Are We Trying to Fix?

• In the U. S., we have managed to use competition to encourage deployment of networks and provide choices

• In most parts of the country, there are choices, speeds have increased, prices are down and investment is occurring

• No market is perfect and we have several challenges remaining:

– Unserved areas of the country• Largely rural, about 9 million homes

– Lack of adoption • Broadband prices not the main barrier

• But these challenges are not “fixable” by the adoption of separation policies

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$300 Billion Investment has Remade Access Technologies

• Wireline broadband Internet access now is available to about 110 million households or well more than 90% of all U.S. homes and businesses.

• Broadband prices are down 25% since 2004.

• Speeds are up dramatically since 2004.• Wireless has transformed from narrow-

band voice-centric networks to broadband data-centric networks.

– Internet use is increasingly un-tethered– The U.S. has:

• 4 nationwide 3G wireless cell providers;

• Clearwire, a 5th company, is gearing for a nationwide launch of a 4G service using WiMax technology

• U.S. has 50,000 WiFi hotspots, the most in the world.

– In any given month, more than 1 in 3 users now report they’ve used wireless to reach the Internet, up from almost no one in 2004

• Dial-up:– 7 out 10 households used dial-

up for Internet access in 2004– Today only 1 in 10 use dial-up

• DSL: – Speeds have moved from 1.5

mbps to 7 mbps• Cable:

– Speeds have moved from 1.5 to 3 mbps to 8-16 mbps

• Fiber:– Didn’t exist in 2004. Today it’s

available to 14 million and delivers speeds of up to 50 mbps down / 20 mbps up

• WiFi:– Evolved to 4G WiMax, 15 mbps

• Cellar:– 2.5G to 3G and soon 4G

Today, Wireless Complements, Competes and Converges with Wireline Broadband in Ways Only Imagined in 2004

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Competition is a Major Force in the Network Industries Today

• Consider the example of Verizon and market share. Like any marketing organization that competes for capital, the company rightly points to its successes, like:

– How it has grown to be the country’s 7th largest cable company

– The growing popularity of its cutting edge FiOS offerings

– The popularity of its market-leading wireless services

• Nonetheless, in every line of service Verizon offers, its customers have alternatives . . . and many do opt for them.

• Not a sign of failure – but a sign that choice and competition are real.

Providers in High Fixed-Cost Industries like Communications are Very Motivated to Entice Folks to Connect with Them Rather than an Alternative

• Verizon offers:

– Wireline broadband to 24 million housholds. Only 1 in 3 takes the offer

– Fiber-based broadband to 10 million households. Only 1 in 4 subscribes.

– Video entertainment to 10 million households. Only 1 in 5 watches.

– Wireless to 290 million people. About 1 in 4 choose Verizon.

– Phone service to 30 million households. Only 2 in 3 use it, and that number is shrinking 8-10% a year.

– In some markets the number has shrunk to a take-rate of 4 in 10.

• Working to win customers drives pricing and innovation

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Investment is an Indication of Competitive Forces

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Verizon: the Broadband Leader

FiOS. FiOS, Verizon’s fiber to the home network, gives consumers up to 100 megabit speeds for data as well HD video services. 12 million homes now have access to FiOS services.

4G Wireless. By as early as 2010, we will deliver the nation’s first 4G network, with capability of tens of megabits of downstream and upstream. Verizon’s purchase of the 700 MHz spectrum will help us build on our unmatched network. The C block alone will give us 22 MHz of contiguous nationwide spectrum on a single frequency.

Open Development Wireless Network. Offering new platform for innovation and entrepreneurs in the wireless arena (“C” Block a key platform). Process is open, promotes entry by new players, with device to device wireless hardware an emerging and important trend. Process for connecting devices is short, network connectivity testing.

The Network. Today, Verizon’s backbone networks transmit data at speeds of 40 gigabits per second, and we just concluded a successful field trial that more than doubled that, to 100 gigabits per second.

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Rapid Increase in Uptake and Types of Broadband Suggests Market is Working

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Competition Has Been Spurred in All Market Segments – Voice, Video, Data

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Line Loss is a Clear Indicator of the Impacts of Competition

Source: Goldman Sachs Research Estimates, 2009

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Price Reductions for Broadband Also Demonstrate Competition is Working

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Higher Speeds Too Are a Reflection of Investment and Competition

YEAR ACCESS PLATFORM ACCESS SPEED EVENTS & APPLICATIONS2001 • Cable Modem (DOCIS 2.0) • 3 mbps/128 kbps

• Cable companies garner 2 of every 3 broadband subscribers in U.S.

2003• Cable Modem • DSL

• 3 mbps• 1.5-3 mbps/128 kbps

• 18 M U.S. households subscribe to broadband (12M with cable, 6 M with DSL).

2004

• Cable Modem• Fiber to Premises (BPON)• DSL• 3G wireless broadband • Wifi hot spots proliferate

• 3 mbps • 5-15-30 mbps/

2-5mbps• 3 mbps• 1-1.5 mbps • 1-1.5 mbps

• Public policy changed to encourage investment in fiber to homes. Speed competition between wireline platforms takes off. Demand for mobility and anywhere/anytime Internet access begins to emerge.

• MySpace and social networking explodes.• Google releases historic IPO.• Facebook is launched.

2006 • Cable Modem (DOCIS 3.0) • 8 – 16 mbps• Cable responds to speeds and capabilities of FTTP.• YouTube explodes into the marketplace.

2007

• Cable announces possibility for 100 mbps speeds

• Fiber to Premise (GPON) upgrades announced

• DSL • 4G wireless broadband plans

announced• WiMax standards finalized

• 100 mbps possible• 50 mbps &

20mbps/20/mbps real over fiber

• 7 mbps introduced• 10-20 mbps capability• 10 mbps capability

• U.S. broadband penetration grows more than 300% in 4 years, from 18M HHs to 58M HHs.

• Platform competition accelerates.• Demand for mobility accelerates.• Machine-to-machine connectivity envisioned as new

realm of application and use.• Major media like cable and broadcast networks begin

to use the Internet to distribute prime-time TV programs.

In less than ten years, Internet speeds have increased exponentially from 3 mbps in 2001 to 20 mbps and possibly even 100 mbps today for many U.S. homes.

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Wireless Networks Demonstrate the Value Consumers Are Getting and the Choices They Have

Topic Jun-08 Jun-05 Jun-00 Jun-95

Wireless Subscribers 262.7 million

194.4 million

97 million 28.1 million

Wireless Penetration % of total U.S. population 84% 66% 34% 11%

Wireless-Only Households % of U.S. Households 17.5% 7.7% N/A N/A

Annualized Minutes of Use 2.23 trillion 1.26 trillion 194.95 billion 31.5 billion

Monthly SMS Messages 75 billion 7.2 12.2 million N/A

Annualized Yearly SMS Messages 600.5 billion 57.2 billion N/A N/A

The wireless arena has transformed from voice-centric networks to broadband data-centric networks that complement, converge and compete with wireline broadband in ways no one imagined.

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The World Has Changed

Consumer in Charge

Old World

Cable Telco Broadcast

Convergence/IP

BroadbandProviders

ConsumerElectronics

Applications

CommercialContent

GovernmentServices

Consumer Content

Wireless

New World

Consumer

Government Sets the Rules

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Consider How You Spend Your Day

TIME ACTIVITY

7:00 AM Watch the morning news .

8:00 AM Check blackberry on the way to work.

9:00 AM Turn on desktop at work.

10:00 AM Video conference call with clients in London.

11:00 AM Pay bills online.

12:00 PM Order lunch on SeamlessWeb.com.

1:00 PM SKYPE with parents, who are on a cruise in Alaska.

2:00 PM Refill prescriptions online.

3:00 PM Receive a text message that Sam got home from school alright.

4:00 PM Email Mai to let her know you’ll be on time to pick her up from ballet.

5:00 PM IM Mark to pick up salad-fixings at the store.

6:00 PM Check blackberry on the Metro.

7:00 PM Download a movie to watch with the kids.

The average person spends 5.25 hours using some form of communications each day.

• Consumers use a wide variety of broadband technology every day, either at home, at the office or on the go.

• Broadband Internet access is now available to about 70 million households in America and well more than 90% of all U.S. homes and businesses.

• Think about your own day…

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Despite Competition and Investment Some Americans Have Not Signed Up or Cannot Get Access

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Summary of reasons dial-up and non-internet users cite for not having broadband at home

% of dial-up + non-online

users% of all

adults

Relevance(not interested in getting online + nothing could get me to switch + too busy + other unspecified reasons) 51% 16%

Price

(price must fall + too expensive + no computer) 18% 6%

Usability (difficult + waste of time + too old + physically unable) 17% 6%

Availability 14% 5%

But Price of Broadband Access Does Not Appear to Be the Main Reason People Are Not Adopting

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The U. S. Has a Broadband Model That is Successfully Achieving Many Key Metrics

• Competition, investment, better prices, choices, faster speeds are all in evidence in the U. S. communications/broadband sectors

• Our policies around relying substantially on platform competition to spur better networks and more choices is working

• We do have challenges and theyare largely around:• Lack of deployment in some areas - largely rural• Lack of adoption in some segments of society due to:

– Digital literacy– A perceived lack of compelling need– Alternative access via wireless broadband – Cost of PCs

Source: Lee Rainie, Pew Trust, 2007

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Stimulus Legislation Provides Chance to Improve on Our Record

• Stimulus legislation a chance to address a substantial portion of the deployment problem

– Need to focus on mapping– State input and guidance into the process critical– Focus like a laser on unserved– Strong transparency – web site “tickers”

• Demand side focus too– Drivers like Health IT and education– Libraries as public access and digital learning centers

• Support “middle mile” investments– Possibly use USF support to build out middle mile in rural areas– Reduce dramatically the cost of rural broadband

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A Policy Model for “Information Age” Markets

• A new framework that builds off of the Internet’s cooperative/competitive foundations.

• The four principles should remain the core of IP policy going forward.

• Companies could offer differentiated services subject to competition and consumer protection laws.

• There also should be some form of industry/advocates group to jointly monitor and discuss issues that arise under the principles.

• Oversight by a regulatory body with ex-post enforcement via petitions and fact finding.