Local Market Dynamics

• Large, slow growth market

• Competition really just beginning

• Lots of M&A activity– SBC/Pac Bell/ SNET/ Ameritech– Bell Atlantic/ NYNEX/ GTE– WorldCom/MFS/Brooks– AT&T/ TCG/ TCI

Revenues for ILECs only, excludes non-telecom revenues

ILEC Local Market Revenues$98.6 Billion, 1997

Local Services51.9%

Access33.6%

Toll10.2%

Dir Revenue4.3%

Residential - 54%Business - 42%

ILEC Local Services Market$51.1 Billion, 1997

Local P/L3.3%

Termination/connections

13.3%

Dial tone70.1%

Pay phone3.9%other

0.2%

Features9.2%

What Defines the CLECs?• The Telecom Act of 1996 transformed CAPs into CLECs and

created the rise of an integrated carrier approach. It also sparked the entrance of other “new” competitive local exchange carriers- both start-ups and existing carriers.

• CLECs are among the fastest growing , and are clearly the first wave of Integrated Carriers because they were able to leverage existing infrastructure to offer a broader portfolio of services.

• CLECs are diverse; different target markets, service mixes and technology solutions.

• Competition is driving carriers to unprecedented levels of business, service and infrastructure complexity

LD/Toll15%

Data5%

Local Exchange

22%

Switched access

7%

Systems Integratio

n13%

Special & P/L38%

Domestic Revenues Only

1997- $3.1B

Data6%

Switched access

11%

LD/Toll23%

Systems Integration

7% Special & P/L24%

Local Exchange

29%

2000- $9B

CLEC Revenue Mix1997 & 2000

CLEC Profiles

Intermediate • East Coast emphasis with extended Frame Relay to the West Coast and Texas

• Nationwide Frame Relay servicethrough the UNISPAN consortium

• The target market for Intermedia isbusinesses with between 50 and 500lines that can ultimately be servedon-net.

• Also targeting larger accounts with its inter-city data services andinternet services

• 365 Intermedia sales peopleand a total of 617 salespeople when Shared Tech.,LDS, and national Tel areadded

• 102 Sales Offices located throughout the US

ICG • Regional carrier• Focuses on clusters in Ohio

Valley, Texas SouthernCalifornia; Colorado;North Carolina; Alabama;and Tennessee.

• New network in Atlanta for 1998 and no additionalnetworks planned

• Primarily focuses on Tier Iand Tier II.

• Sells to small and medium-sizedbusinesses of 5 to 100 lines with astrong emphasis on accounts with15 to 50 lines.

• Utility agreements will bring onMultiple-dwelling units as a target market

• ICG is trying to leverage its existing client relationships to sell bundledsolutions.

• Sales force is estimated at roughly 300+.

• Also leverages itsrelationship with utilities toexpand into residential andbusiness markets.

TCG • Nationwide footprint covering 28 of the 30 largest MSAs.

• BizTel footprint-206 areasincluding 96 of the top 100 MSAs.

• Focus on Tier I cities someemphasis on Tier II andTier III cities.

• New emphasis on regional corridors.

• Target larger businesses (550 linesor more) in certain verticals such asFinancial Services, Healthcare,Education, Gov’t and Mediacompanies.

• Other Key market is on-netsmall/medium businesses (500 linesor less.)

• Very limited residential play.

• Sales channels include bothdirect sales force (689+ salesrepresentatives) and agentsand resellers (approx. 2000.)

Geographic service area Key Customer Focus Sales Organization

CLEC Profiles

GST • Regional player-mostly West andSouthwest U.S. and Hawaii.

• Not looking to go national.• Mostly Tier II and Tier III cities.

• Target SMBs business-between2 to 200 access lines.

• Continue to serve wholesale and retail businesses.

• Sales force approx. 290• Focus on customer care and

“holding-the-hand” of the customer.

E-spire • Southeast and Southwest U.S.• Tier II and III cities.• Accelerating roll out in 98.

• Targeting small to mediumbusinesses spending.

• Targets firms in professional services,health care, gov’t, and financialservices.

• No interest in residential.

• Sales and Marketing staff grewfrom 56 people in 1996 to 277 people in 1997.

USN • Regional focus - Midwest, New England, and Mid Atlantic.

• All TRS based.

• Target businesses with 2-10 businesslines.

• Focus on providing full bundles andsuperior customer service.

• Direct Sales focus.• Sales force grew from 206

in 1996 to 426 in 1997.

Geographic service area Key Customer Focus Sales Organization

Key Market Trends and Influences Affecting the CLEC Market

• Wall Street • Deregulation• Mergers and Acquisitions • Alliances and Partnerships• Integrating the product portfolio • Network Build-out• Growth- Can they sustain their current growth and

will they be able to manage and survive their growth

Wall Street and Deregulation• Wall Street • Pressure to show profit- EBIDTA positive

• None of the CLECs EBIDTA positive except for TCG• Wall Street looking for a return on investments• Push towards deployment of success-based capital

• Deregulation• Telecom Reform Act of 1996

• Required the RBOCs to open the local markets via resale, UNE and facilities based

• Competition in the business market. Cherry-picking the profitable customers. Residential markets have seen very little to any competition.

Deregulation (Continued)• 8th Circuit court interconnection rulings

• Removed the ILECs burden of recombining UNEs and placed that burden on the competing carrier. Ruling now under consideration by the Supreme Court.

• Interconnection pricing in the hands of the state regulatory commissions. Leaves competition fragmented and makes a national TSR or UNE local entry strategy difficult.

• RBOCs into Long Distance• RBOCs need to meet 14 point checklist to gain entry into in-region Long

Distance,• FCC vs. SBC granted RBOCs the ability to immediately enter in-region.

Overturned on appeal.• RBOCS plannin ressive attack of the in-region long distance market.

Expecting to take most market share in the small and medium business market and the consumer market.

Mergers / Acquisitions and Alliances / Partnerships

• CLECs are positioning themselves both to be acquired or to acquire. Are the CLECs looking for an exit strategy?

• Acquisitions, alliances, and partnerships have allowed for quick, lower-cost entry into new markets

• Large IXCs continue to look to the “CAPs turned CLECs” as an access alternative to the ILECs

• Internet’s demand for dedicated access, the call for alternatives to the PSTN, and the lure of the ISP retail business have driven many CLECs to acquire ISPs

• ICG/Netcom, Intermedia/Digex, MFS/UUNET, TCG/Cerfnet, RCN/ UltraNEt and Erols

• Challenge is integrating acquisitions. Importance of a seamless entity to customers

Network Build-out: Expansion Today; Growth Tomorrow

• Still in the Build Out Stage for Most CLECs; • Many Are Expanding Into New Cities, Others Are Consolidating

their existing networks to Ensure Seamless Regional corridors

• Third Tier Cities Now the Focus of New CLEC Opportunities (i.e., Cities With 750,000 Population or Less); Tier 1 and many Tier 2 cities saturated

• Move into Switched Services & Long Distance helping to achieve profitability and positive cash flow while traditional CAP segment faces threat from IXC acquisitions

Network Build-out: Expansion Today; Growth Tomorrow (Continued)

• Yankee Group Forecasts More MFS-Style Exit Strategies for facilities-based CLECs. Network build-out is expensive and it is less expensive to buy the networks

• Move towards 3rd generation CLECs- dropping in switches and leasing the fiber between the switches. Allows for a faster turn-up time and generation of positive cash flow. CLECs to look for in this category include: US LEC; Allegiance; and Focal

Network Expansion: Growing CLEC Switch Deployment

100

210

320

410

520600

0

100

200

300

400

500

600

Nu

mb

er o

f S

wit

ches

1995 1996 1997 1998 1999 2000

Installed Base,Switches

Can the CLECs Survive Growth?• Managing Growth

• Customer Growth- can they meet customer expectations and demand• Market Growth- Are they going too fast too quickly? Do they have

the resources to maintain their current pace or are they trying to be everything to everyone? Example being US ONE which crashed and burned

• Ensuring Quality while Maintaining Growth• Leased Networks• Manage unbundled elements- need to own the customer

end-to-end and control the customer’s entire experience

• Talent: Finite number of talented people in the industry

CLEC revenues EXCLUDES MFS & MCImetro (MFS and MCImetro included in IXCs); revenues for dial tone ONLY,EULC, taxes, and toll are not included

Local Exchange Market - 2000$44 billion

CLECs3.6%

IXCs7.4%

ILECs88.9%

CLEC Market Dynamics 36 to 48 Months

• Multiple facilities-based CLECs in major Tier 1 and 2 cities– Tier 3 cities offer some growth

opportunity

• UNEs widely available• RBOCs have gained In-

region LD relief• Technology increases

bandwidth• Potential for oversupply of

inventory

• Bandwidth & Exchange prices fall

• CLECs Employing Exit Strategies

• Increased IXC / ILEC Partnerships

Long Distance Market

Business= 54%Residential= 46%

1997 Long Distance: The $86.7 Billion Market

Residential

46%

Data

4%

Other

1%

Carrier Services

5%

Wholesale

6%

VPN

4%

Private Line

10%

Outbound

9%

Inbound

15%

Grew approx. 10.9% from 1996

1997 Business Long Distance: $46.7 billion

Inbound

29%

Other

2%

Data

8%

Carrier

Services

9%

Wholesale

11%

VPN

7%

Private Line

18%

Outbound

16%

11.9

7.2 7.4

3.5

4.8

2.95

13.3

7.58.6

3.5

5.1

3.7

0

2

4

6

8

10

12

14

Inbound Outbound Private Line VPN Wholesale Data

$ in bn

1996 1997

Key Segment Growth (1996-97)

AT&T51.3%

MCI23.2%

Sprint11.4%

WorldCom10.2%

Others3.9%

The Big 2 = ~85%

Business Long-Distance Market Shares (1996)

AT&T: Consolidations and Acquisitions, in defense of the core business

• Divesting non- core assets and businesses– AT&T Universal Card to Citibank

– AT&T Solutions customer care to Cincinnati Bell

– Termination of Direct TV marketing agreement

• Acquires TCG and Defines Local Business Entry Strategy

• Paid $ 11.3 billion in stock

• Time to market a key factor in influencing the acquisition decision

• AT&T gains Cost efficiencies, Local network coverage, and Local market experience

• TCG gains scale, access to the AT&T brand, and easier access to capital and other resources

Sprint: Looking for Partners? • With MCIWorldCom merger, Sprint falls further behind

• Existing Local properties not all that attractive

• However, with its LD brand, Wireless assets, and local presence, it is well positioned to partner or merge with:

– LECs with national ambitions

– Foreign PTTs that are seeking a US presence

• WorldCom acquires MCI to become the leading integrated carrier

• MCI spurns GTE and leaves BT standing at the altar

• Overnight, MCIWorldCom becomes:

– the second largest LD carrier with 25% share

– the largest CLEC, with 56% share

– the leading global ISP

– Fourth largest international telco

WorldCom and MCI– A comparison

Long Distance • $7 Billion Annual revenue (1997)• former Wiltel wholesale LD

• $16.5 billion annual revenue (1996)• $7.06 billion in consumer revenue• 9.4 million households

Local • Estimated 1996 CLEC revenues of $1.9 bn• 52 MFS Metros• 34 Brooks Metros• 23 markets under development• 7500 on-net buildings (est)• 75 Class 5 switches• 25% of all competitive access lines

• CLEC (Metro) Revenue of $450 million• Presence in 36 cities• Local switched service in 32 cities• 30 Class 5 switches

Assets WorldCom MCI

WorldCom and MCI– A Comparison

Internet • UUNet, largest global ISP• 50,000 business customers (access and

hosting)• Compuserve Network Services• ANS ISP• Provides transport to America Online,

Earthlink, Microsoft Network• $500 million in Internet Revenue

• 400,000 dial-up customers• Private wholesale services to 25-35%

of all ISPs.• $200 million estimated revenue• Sold to C&W as part of EU approval

International • 60 settlement agreements globally• $470 million in revenues• Metro infrastructure in 12 cities• UUNet’s European backbone in 10 cities

• 200 settlement agreements globally• Licenses in UK, Germany• Top bid on Embratel

WorldCom MCI

Wireless • Choicecom• Few of its other LD or CLEC acquisitions

have major wireless play

• Holds on wireless licenses• Nationwide Cellular Services (a reseller)• Operates in 15-20 markets• 400,000 subscribers• Paging reseller (through PagNet),

over 600k subs.

RBOCs into Long Distance

Telecom Act of 1996New Competitive Telecom Services Market

• “An act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies”

– Ixcs, cable and caps allowed to enter local exchange

• Ixcs with more than 5% of the nations presubscribed lines is not able to joint market local and long distance services until rbocs are granted in-region relief

– Mandated LEC resale at fair and reasonable prices

– Rbocs enter out-of-region long distance immediately

– Rbocs open local markets in exchange for in-region long distance

• Pressure of new integrated telecom marketbeyond resale/bundling to service innovation

Leveraging Established Customer Relationshipsto Provide New Services

RBOC Entry into Long Distance

Ameritech • Announced it will begin offering long distance in Missouri;

• Marketing Alliance with Qwest (in-region)

Offering Services

Approved Services

WholesaleSupplier

• 45 States • WorldCom

In-regionLaunch

• 1999

Bell Atlantic /NYNEX

• 34 States • 34 States and plans to file in Minnesota and Oklahoma

• Sprint • 1998?

Bell South ----- • 39 states and applications pending in Vermont and Alaska

• AT&T • 1999

SBC / PacTel • 5 States • Sprint • 1999• 5 States

US WEST • NONE• Marketing Alliance

with Qwest (in-region)

• 34 States • FrontierCard

• Williams?• Qwest?

• 1999

Biggest Hurdle for the RBOCsOSS Access and Interconnection

• Required under the Act– ILEC must provide access to its OSSs on terms that are

just reasonable, and non discriminatory

• RBOCs have been frustrated in their 271 applications by OSS issues:– Not able to show flow through of orders and service

transactions from CLECs

• Push for National Gateway in some quarters, but who pays the bill?– Call for Standards by many parties (NARUC, ATIS, etc.)

Conclusions • Nice try but too early. Not likely to make first-round

approval based on Track A (of two tracks) benchmarks • Lack of ‘competing providers to residential and business

subscribers’ by companies that ‘offer services predominantly over their own telephone service facilities’– Competition and interconnect deals are with competitors that are

focused on business– AT&T, has stopped marketing to residential customers in the six

markets where it resells ILEC services to the residential market

Integrated Carrier Strategies

& Large Business Market Issues

source: YC100 1996

Do Large Biz Customers Care About Service Integration?

• If Given A Choice:– 70% of Businesses Say They Would Use One

Company for All Their Communication Needs– Key Reasons:

• Less Effort to Manage the Network 68%

• One Stop Shopping 62%

• Lower Costs 59%

Source: YG WSTA Survey 1996

How important to the purchasing decision are the following factors? 5= very important 1 = not important

…but Price isn’t Everything

4.8 4.7

4.2 4.2 4.1

1

2

3

4

5Service quality

Carrierresponsiveness

Pricing

Ease of doingbusiness

Service in majorlocations

AT&T MCI MFS Worldcom Sprint

One Rate/TrueValue BundlesAT&T.All

MCI OneFriends & Family

Worldcom Sprint Sense

TCG and TCIDigital LinkProject Angel?

MCI Local MFSBrooks Fiber

Sprint LocalIONBroadband MANs

WorldNet Internet MCI UUNET Sprint InternetPassport

AT&T WirelessCellular/PCS,Alpha/2-wayPaging

NationwideCellular, NextwavePCS, AlphaPaging

Choice Cellular Sprint SpectrumPCSAlpha Paging

800, Network ACD,SDN,500 True Conn.,Voice Messaging

800, Network ACDVNet, Vision,MCI One,Voice Messaging

800, VPN 800, Network IVR,VPN, Voice Act.Dialing, VoiceMessaging

TCIOther CableCos?

Primestar/NewsCorp??

? NA

Brand

Local

Internet

Wireless

Video

Enhanced Telephony

Long Distance Integrated Carriers

Wholesale Services

Wholesale

• All facilities based LD carriers, whether they are national or regional in nature wholesale LD services to each other, to smaller carriers and to resellers

• Over time, the four largest LD carriers have increased their revenue contribution from the wholesale channels

• Frontier’s agreement to sell capacity to Level 3 is an example of the renewed focus on wholesale by smaller LD carriers such as C&W and LCI

Wholesale (Continued)

• New entrants such as Qwest, IXC, Williams and Level 3 will expand the wholesale market but will also put significant price pressure on wholesale rates

• New services such as IP, and new entrants in local and LD market are expected to feed the demand for wholesale service

• We estimate the wholesale market to be around $ 8.3 billion

ELDP Diversification Strategies• IXC Communications– in addition to carrier’s carrier services, offering switched, freephone,

calling card and data services– Looking to acquire smaller retail players

• Qwest Communications– direct retail plays through VoIP, dial-around– acquisitions of LCI, SuperNet– looking to enter the large corporate market

• Williams Companies– leverage already large network integration business

• Level 3 Communications– purchased Data CLEC XCOM

Voice Over Whatever:Demand for Alternative

Voice Services

Considering26%

Deployed

31%

In Next 6

Months14%

Not Likely29%

Fax12%

Voice36%

Both52%

Fax14%

Voice20%

Both66%

Fax32%

Voice19%

Both49%

Key Issue: What is the current status of Voice Services Over Alternative Networks (TCP/IP, Frame

Relay and ATM)?

Key Context Issue: How much data is moving over TCP/IP, Frame Relay and

ATM today...

0% 20% 40% 60% 80%

1 to 10

11 to 25

26 to 50

>50

% t

raff

ic

% respondents

PL Intra/ Managed Internet FR ATM

0% 10% 20% 30% 40% 50% 60%

1 to 10

11 to 25

26 to 50

>50

% o

f tr

affi

c

% respondents

PL Intra/ Managed Internet FR ATM

Frame Relay takes over

Key Context Issue: How much data is moving over TCP/IP, Frame Relay and ATM

in 5 years...

0% 5% 10% 15%

1 to 10

11 to 25

26 to 50

>50

% o

f tr

affi

c

% respondents

PL Intra/ Managed Internet FR ATM

Slow migration of voice, for all services

Key Issue: How much voice traffic will migrate to VSANs over the next five years?

Fax keeps pace

0% 5% 10% 15% 20%

1 to 10

11 to 25

26 to 50

>50

% o

f tr

affi

c

% of respondents

PL Intra/ Managed Internet FR ATM

Key Issue: What are the reasons for choosing VSANs?

0% 20% 40% 60% 80% 100%

Improve Network Management

Support Multimedia

Better Bandwidth Utilization

Save Money

IP Telephony MOUs as a Percentage of Total Consumer MOUs (1998-2005)

0.4 0.81.9

3.5

79

12

15

02468

10121416

% of LD MOUs

1998 1999 2000 2001 2002 2003 2004 2005