Convergence and the FutureConvergence and the Future

a presentation toa presentation toThe Institute of Electrical and Electronic Engineers, Inc.The Institute of Electrical and Electronic Engineers, Inc.

Communications and Vehicular Technology SocietyCommunications and Vehicular Technology SocietyDallas ChapterDallas ChapterMarch 11, 2003March 11, 2003

William O. HuntChairman of the BoardInternet America, Inc.

AgendaAgenda

Business FundamentalsBusiness FundamentalsConvergence and Convergence DriversConvergence and Convergence DriversTelecommunications Inventions TimelineTelecommunications Inventions TimelineUMTS (Universal Mobile Telephone System) or 3UMTS (Universal Mobile Telephone System) or 3rdrd GenerationGenerationSubscriber GrowthSubscriber GrowthThe Promise of the FutureThe Promise of the FutureTechnological Substitutions VictimsTechnological Substitutions VictimsQuestion and Answer SessionQuestion and Answer Session

Run Your Business by Good FundamentalsRun Your Business by Good Fundamentals

Two Inviolate Business PrinciplesTwo Inviolate Business PrinciplesProvide maximum longProvide maximum long--term returns to shareholdersterm returns to shareholdersProvide an attractive work environment for Provide an attractive work environment for emloyeesemloyees

LongLong--term Goalsterm GoalsFinancialFinancial

Target annual rate of return on invested capitalTarget annual rate of return on invested capitalMaintain annual operating profit growth minimumMaintain annual operating profit growth minimumTarget minimum cash operating marginTarget minimum cash operating margin

Market PositionMarket PositionAchieve leadership in key market segmentsAchieve leadership in key market segments

Human ResourcesHuman ResourcesProvide a positive work environmentProvide a positive work environment

Ethical StandardsEthical StandardsConduct all business activity with the highest standardsConduct all business activity with the highest standards

Run Your Business by Good FundamentalsRun Your Business by Good Fundamentals

Leaders communicate their vision so others understand it and accLeaders communicate their vision so others understand it and accept it as ept it as their owntheir ownLeaders surround themselves with winnersLeaders surround themselves with winners

Honest Honest -- Competent Competent -- Inspiring Inspiring -- Intelligent Intelligent -- LoyalLoyalFair Fair -- Open Minded Open Minded -- Imaginative Imaginative -- Far SightedFar Sighted

Commandments of LeadershipCommandments of Leadership

Honesty, Integrity, Fairness, and Candor are all #1 in Leadership Commandments

Run Your Business by Good FundamentalsRun Your Business by Good Fundamentals

CASHCASHISIS

KINGKING

Run Your Business by Good FundamentalsRun Your Business by Good Fundamentals

CASH IS KINGCASH IS KING

$0.00$0.00<.85><.85>Free cash flow/owner’s earningsFree cash flow/owner’s earnings<.65><.65><1.50><1.50>Change in working capitalChange in working capital<.50><.50><.50><.50>Capital expendituresCapital expenditures

.15.15.15.15Depreciation, depletion, amortizationDepreciation, depletion, amortization$1.00$1.00$1.00$1.00Net IncomeNet Income

2211Free cash flow or “owner’s earnings” Free cash flow or “owner’s earnings” (1)(1)

(1) The Warren Buffet Way

Convergence DriversConvergence DriversSemiconductor

Technology Speed/Bandwidth

Wired

ApplicationsComputerTechnology

Internet

WirelessConvergence:Coming Together in Union

Convergence DriversConvergence DriversSemiconductor Technology EvolutionSemiconductor Technology Evolution

Early1960s

Mid1970s

Now2002

Source: Intel Advertising

Microprocessor Introduced

Wafer Transistors

Chip Transistors 2300

55 Million

13 Billion

1.25” diameter 12.0” diameter

The Power of Semiconductor TechnologyThe Power of Semiconductor Technology

The HandThe Hand--held Cell Phoneheld Cell Phone

1982 1992 2002

Motorola Dynatac$4,000

Typical Handset$200

26%

14%

Annual Compound Price Reduction

Convergence Drivers Convergence Drivers –– The InternetThe Internet

Internet Technology

Courtesy of Internet America, Inc.

URL(uniform resource locator)

Introduction of Telegraph Service (Morse) 1837Introduction of Telegraph Service (Morse) 1837

The Pony Express went out of business shortly after the completion of this telegraph line in 1860.

Courtesy of Western Union Telegraph Co.

Marconi First Demonstration of Wireless Telephony Marconi First Demonstration of Wireless Telephony -- 18961896

The earliest form of mobile radio.

Courtesy of The Marconi Company, Ltd.

The Sequence of Inventions in TelecommunicationsThe Sequence of Inventions in Telecommunications18

40

1830

1850

1860

1870

1880

1890

1990

1900

1910

1920

1930

1940

1950

1960

1970

1980

2000

Telegraph Service (Morse)

Personal Communications ServicePCS

Communication SatellitesStart of the Internet

GSM Cellular (Europe) Advanced Mobile TelephoneTelephone Service (AMPS)Microwave Systems (Digital)

Improved Mobile Telephone Service(IMTS)Arpnet (Early Internet)

Television (Color)Radio Common Carriers(paging, dispatch, wireless)

Microwave Systems (Analog)Television (Black & White)

First Computer (Eniac)

Radio Broadcasting

Wireless Telephony (Marconi)

Telephone Service (Bell)

Principal Differences Between GSM and UMTS ServicesPrincipal Differences Between GSM and UMTS Services

Less than Less than wirelinewireline qualityquality

Limited multimedia applicationsLimited multimedia applications

Some limitationsSome limitations

Limited opportunityLimited opportunity

9.6 9.6 KBpsKBps –– approx. 70 approx. 70 KBpsKBps

GSM 25MHz provider A 12.5MHzGSM 25MHz provider A 12.5MHzPCS 60MHz provider A 15.0MHzPCS 60MHz provider A 15.0MHz

GSM 900 MHzGSM 900 MHzPCS 1900MHzPCS 1900MHz

WirelineWireline speech qualityspeech quality

Robust multimedia applicationsRobust multimedia applications

SeamlessSeamless

New and broader applicationsNew and broader applications

144 144 KBpsKBps -- 384 384 KBpsKBps -- 2000 2000 KBpsKBps

UMTS 60MHz provider A 10MHzUMTS 60MHz provider A 10MHzWidebandCDMAModulated

UMTS 2100MHzUMTS 2100MHz

Speech QualitySpeech Quality

ApplicationsApplications

AccessAccess

Internet/IntranetsInternet/Intranets

SpeedSpeed

Reserved Spectrum BandwidthReserved Spectrum Bandwidth

Spectrum BandSpectrum Band

GSMGSM(Global System for Mobile)(Global System for Mobile)

UMTSUMTS(Universal Mobile Telecommunications System)(Universal Mobile Telecommunications System)

{

Wireless and Wired NetworksWireless and Wired NetworksSeamless Services Across IPSeamless Services Across IP--based Networksbased Networks

Service plane

IP/ATM Network

Service planeAAA

GK

SCP

IN Server 3rd party ApplicationsSignalling GW & Call feature Server

Optical

POTS/ISDNxDSL

Wireless

VLR

Mobility Server

HLR

Courtesy of Andrew Corporation

ContentProvider

Portal -Community

Provider

ServiceProvider

NetworkOperator

EndUser

100% 72%

23% 3% 2%

0%

20%

40%

60%

80%

100%

Traditional value chain split in the market

Advertisement revenues

100%

25% 25%12%

38%

0%

20%

40%

60%

80%

100%

Future value chain split in the market

Convergence Changes Market Value ChainConvergence Changes Market Value Chain

Courtesy of Arthur D. Little

Telecommunications Market WorldwideTelecommunications Market Worldwide

Mio. users on Public Network

Source: UMTS Forum

2

11

967

700524500478

FixedTeleph.

405

80

Mobiles

300Internet

5517

Fax67

2.51.5

1

10

100

1000

10000

1980 1985 1990 1995 2000 2005

The Promise of the FutureWhat Does Tomorrow Hold?

Who Wins?

The Promise of TomorrowThe Promise of Tomorrow

Technology advances in semiconductors, wired and wireless networTechnology advances in semiconductors, wired and wireless networks, and ks, and the Internet will continue to drive convergence at a very fast pthe Internet will continue to drive convergence at a very fast pace.ace.UMTS (3UMTS (3rdrd Generation) cellular, wireless mass market rollout in next 5Generation) cellular, wireless mass market rollout in next 5--10 10 years will accelerate convergence across the board.years will accelerate convergence across the board.Voice over the Internet (VOIP) will become a formidable competitVoice over the Internet (VOIP) will become a formidable competitor to or to wireless and wired carriers in next five years.wireless and wired carriers in next five years.Cable, fixed wireless, and VOIP will begin to cannibalize local Cable, fixed wireless, and VOIP will begin to cannibalize local exchange exchange providers (SBC) business in the next five years.providers (SBC) business in the next five years.The handThe hand--held computer, held computer, PDAsPDAs, and wireless phones will converge into one , and wireless phones will converge into one fullyfully--featured handfeatured hand--held device with docking capabilities in 5held device with docking capabilities in 5--10 years.10 years.All networks will become completely seamless to the end user.All networks will become completely seamless to the end user.

What does the future hold?What does the future hold?

The Promise of TomorrowThe Promise of Tomorrow

Productivity in the service sector will improve materially throuProductivity in the service sector will improve materially through the gh the utilization of radioutilization of radio--frequency identification (RFID), tags, bar code/scanning, frequency identification (RFID), tags, bar code/scanning, and smart cards.and smart cards.Multimedia services such as videophones and videoconferencing wiMultimedia services such as videophones and videoconferencing will become ll become commodity items in the next 5commodity items in the next 5--10 years.10 years.Home and office equipment will be Home and office equipment will be connctedconncted with wireless networks, such with wireless networks, such as 802.11 (as 802.11 (WiFiWiFi), Bluetooth, and infrared data.), Bluetooth, and infrared data.Businesses must be run with good fundamentals, maximum cash flowBusinesses must be run with good fundamentals, maximum cash flow, and a , and a continuous eye for technology/infrastructure changes.continuous eye for technology/infrastructure changes.Who wins? The end user, through lower prices, improved functionaWho wins? The end user, through lower prices, improved functionality, lity, broader applications, and realbroader applications, and real--time availability of data.time availability of data.

What does the future hold?What does the future hold?

Services/Videoconference/VideophoneServices/Videoconference/Videophone

UMTS NetworkUMTSterminal

with video

display

ISDN

Internet

Computer-basedvideoconference software

Fixed networkvideotelephone

UMTS terminal with interface to external video camera and display

RadioAccessNetwork

CoreNetwork

Courtesy of Andrew Corporation

UMTS Applications (Mobile Applications Ranking)UMTS Applications (Mobile Applications Ranking)

WML browsing

SMS Info services

Micropayment

IN service admin.

Synchr. Organizer

Text Chat

Loc. dep. Yellow Pages

Enhanced City Guide

Video Telephony

Video StreamingMultimedia Messaging

Games

19991999 20002000 20012001 20022002

Unified Messaging

City map download

CorporateDirectory

Organizer

eMailOn-line Banking

HLR service admin.

Courtesy of Andrew CorporationSource: Siemens Project Team Applications

PDAsPDAs, Docking, Smart Phones, Docking, Smart Phones

Class 1Handset

voice centric

Class 4Personal IntelligentCommunicator, PIC

Class 5PCMCIA-Card Phone

Class 3Videophone

multimedia

Class 2Smartphone

multimedia capability

Voice Activated DialingVoice Activated DialingDownload Speeds up to Download Speeds up to 153 153 KBpsKBpsAddress Book Address Book ––Microsoft OutlookMicrosoft OutlookUSB ConnectivityUSB ConnectivityHTML/WAP BrowsersHTML/WAP BrowsersInfrared PortInfrared PortTwoTwo--way Text Messagingway Text Messaging

ApplicationsApplicationsColor displayColor displayMP3 PlayerMP3 PlayerMedia PlayerMedia PlayerPDA SoftwarePDA SoftwareExpansion SlotsExpansion SlotsTrimodeTrimodeCaller IDCaller IDGPS LocaterGPS LocaterWireless Fax and ModemWireless Fax and Modem

Kyocera 7135

Service Sector Productivity Improvement ProductsService Sector Productivity Improvement Products

Smart TagsRadio Frequency Identification (RFID)

Bar Coding and Scanners Smart CardsSemiconductor Chip Embedded

Technological Substitution VictimTechnological Substitution Victim

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Sources: FCC, Strategis, DLJ

Pagi

ng S

ubsc

riber

s (M

)

Total

Public Companies

DLJ 99 Forecast

Paging “Beeper” ServicePaging “Beeper” Service

Subscriber Trends

Technological Substitution VictimTechnological Substitution VictimPayphonesPayphones

1992 20021997

32% Overall Reduction

2.2 MillionIn service

1.5 Millionin service

4% Annual Compound Reduction

Technological Substitution VictimTechnological Substitution VictimLong Distance Service Companies Stock Performance 1998 Long Distance Service Companies Stock Performance 1998 -- 20022002

AT&T (T),AT&T (T), WorldcomWorldcom (WCPOQ),(WCPOQ), VerizonVerizon (VZ),(VZ), and Sprint (FON)and Sprint (FON)

$75

$69

$65

$63

Cents Per Minute Rate$.12 / .15 $.08 / .12 $.05/.07

1998 1999 2000 2001 2002

SecurityVZTFONWCPOQ

Open37262422

High69637565

Current3717120.63

The Only Constant in Convergence Evolution is The Only Constant in Convergence Evolution is ChangeChangeChangeChange

Change

Change

Question and Answer SessionQuestion and Answer Session

The Power of Semiconductor TechnologyThe Power of Semiconductor Technology

Texas Instruments Electronic CalculatorTexas Instruments Electronic Calculator

1972 1992 20021982

T.I. DatamathFour-Function

$169.95

T.I. 1795Full-Feature and Memory

$6.95

27%

15%

10%

Annual Compound Price Reduction

Convergence DriversConvergence DriversEvolution of Data SpeedEvolution of Data Speed

ReferencesReferencesStandard net voice rate over GSM channelsStandard net voice rate over GSM channels 13 Kb/s13 Kb/sCommercial Modem over standard telephone linesCommercial Modem over standard telephone lines 56 Kb/s56 Kb/sVoice channel over standard fixed lineVoice channel over standard fixed line 64 Kb/s64 Kb/sISDN ModemISDN Modem 128 Kb/s128 Kb/s

Enhanced applications on GSMEnhanced applications on GSMCurrent GSM Current GSM --Global System for Mobile (Applications)Global System for Mobile (Applications) 9.6 Kb/s9.6 Kb/sWAPWAP-- Wireless Access Protocol (slow reading of Internet text only)Wireless Access Protocol (slow reading of Internet text only) 9.6 Kb/s9.6 Kb/sHSCSDHSCSD--High Speed Circuit Switched Data High Speed Circuit Switched Data 19.2 19.2 ÞÞ 28.8 Kb/s28.8 Kb/sGPRSGPRS--General Packet Radio ServiceGeneral Packet Radio Service 70 70 Þ Þ 115 Kb/s115 Kb/sEDGEEDGE--Enhanced Data Rates for GSM Evolution Enhanced Data Rates for GSM Evolution 96 96 ÞÞ 192 192 ÞÞ 384 Kb/s384 Kb/s

UMTSUMTS--Universal Mobile Telecommunications SystemUniversal Mobile Telecommunications SystemMobiles up to ~Mobiles up to ~ 250 Km/h 250 Km/h 144 Kb/s144 Kb/sSymmetric in Real Time (up to ~ 100 Km/h)Symmetric in Real Time (up to ~ 100 Km/h) 384 Kb/s384 Kb/sAsymmetric in nonAsymmetric in non--Real Time (low mobility, almost stationary)Real Time (low mobility, almost stationary) 2 Mb/s2 Mb/s

Convergence DriversConvergence DriversConverging Applications Speed Up UMTSConverging Applications Speed Up UMTS

Audio - Video - Data

ISDN servicesVideo telephonyWideband dataservices

Cost efficient Cost efficient communication withcommunication withseamlessseamless IT & T atIT & T atthe appropriate accessthe appropriate access

UMTS

ComputerInternet accessElectronic mailReal-time imagetransferMultimediadocument transferMobile computing

– Mobility– High speed

services

Video on demandInteractive video servicesTV/radio/data contribution

& distribution – Mobility– Personal

services

Telecommunication– Mobility– Wideband

services

GSM Data Services Pave the Way to UMTSGSM Data Services Pave the Way to UMTS

1997 1998 1999 2000 2001/2002

GSM massmarket

Support for

high-speed

circuit-switched

data (HSCSD)

Support for

Internet/intranet

services(GPRS)

Enhanced data

rates over GSM

up to 384 kbps(EDGE)

Introduction of

third-generationmultimedia services

UMTSEvolution GSM

Migration

GSM - UMTS

Courtesy of Andrew Corporation

Cell Cell StucturesStuctures for UMTSfor UMTS

Courtesy of Andrew Corporation

Range: 1148 ft up to 12 miles (outdoor)• suburban/rural• high mobility• approx. 144kbps

Range: some 33 ft• Office/Home enviromnent• Low mobility (<6 mph)• up to 2 Mbps

Macro Cell

'indoor' Pico Cell Micro Cell

Range: some 164-984 ft• hot spots• medium mobility(> 6 mph)

• up to 384 kbps