WIRELESS TELECOMMUNICATIONS

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1 WIRELESS TELECOMMUNICATIONS MARKET INTELLIGENCE REPORT July 2009 Denali Group. All rights reserved page 1 / 41

2 Executive Summary... 3 Sourcing Opportunity Gauge... 3 Key Findings... 3 Scope & Context... 4 Scope... 4 Related Research... 4 NAICS Classification... 4 Background... 5 Overview... 5 Industry Profile... 7 Industry Highlights... 7 Supply Risk Low... 7 Market Size and Growth... 7 Market Characteristics... 7 Geographic Dispersal... 8 Segmentation... 9 Regulatory Landscape Industry Trends Competitive Landscape Porter s Five Forces Market Share and Industry Concentration Supplier Community Top Suppliers Market News Demand Factors Demand Highlights Demand Risk Low Primary Demand Drivers U.S. Economic Activity Global Economic Activity Emerging Demand Drivers Key Cost Drivers Cost Highlights Cost Risk Low Cost Breakdown Pricing Trends & Forecasts Pricing Highlights Price Risk Low wireless services Pricing Forecast Risk Outlook Category Risk Low Insights & Best Practices Best practices Highlights Methodology References Primary Resources Related Denali Intelligence Reports December 2009 Denali Group. All rights reserved page 2 / 41

3 EXECUTIVE SUMMARY SOURCING OPPORTUNITY GAUGE High Low Medium This buyers market is the time to re-evaluate contracts and reconsider current suppliers and technology. The sourcing opportunity is medium for wireless telecommunication services due to: Increasing customer preference for wireless supporting demand Decreasing labor wages Decreasing cost of service High competition KEY FINDINGS Industry Trends The U.S. wireless telecommunication services market size is expected to reach USD billion in 2009, a 1.6% decrease when compared to 2008 The industry is highly concentrated: Top five players command 90% market share As with most technology intensive services, the price of wireless telecommunication is decreasing due to industry competition and better, low-priced technology Customers prefer wireless and internet based communication services over wireline telecom services Wireless telecommunication is a growth market: revenue is expected to grow by 3.4% annually through 2013, reaching USD billion by then Demand Trends Wireless demand remains steady during the current economic slowdown Wireless phone services are highly popular, and vital for some users, constituting the main communication channels According to CTIA, there were 277 million wireless subscribers in the U.S. by June 2009, resulting in an 89% wireless penetration rate The subscriber base would grow at a compound annual rate of 5.2%, to 349 million by 2013 Cost Trends October 2009 average prices for wireless communication equipment remained stable, posting a marginal increase by under a percent when compared to October 2008 September 2009 labor wages for wireless telecommunications workers are down 23% when compared to September 2008, indicating recession s impact on the industry Pricing Trends During October 2009, average cellular carrier prices were down 3.5% compared to October 2008 In June 2009, the average monthly bill for cellular service increased by 2.1% year over year The average monthly bill for cellular service has fallen by 2.7% each year over a 20 year period Insights A comprehensive telecommunications cost management program reduces telecommunication cost December 2009 Denali Group. All rights reserved page 3 / 41

4 SCOPE & CONTEXT SCOPE The telecommunication industry is an established sector that encounters rapid changes through development of new technologies. This report focuses on domestic demand of wireless services primarily from the commercial customer point of view, although some individual plan discussion may ensue. VPNs and broadband are included in both wired and wireless telecommunication, but television program distribution is considered out of scope. RELATED RESEARCH Other Denali Intelligence Market Intelligence Reports that have related content and may be of further interest include: wired telecom infrastructure, wired telecom services, and the Corporate Services Index. NAICS CLASSIFICATION Wireless Telecommunications Carriers (except Satellite) This industry comprises establishments engaged in operating and maintaining switching and transmission facilities to provide communications via the airwaves. Establishments in this industry have spectrum licenses and provide services using that spectrum, such as cellular phone services, paging services, wireless Internet access, and wireless video services. December 2009 Denali Group. All rights reserved page 4 / 41

5 BACKGROUND OVERVIEW Wireless telecommunications systems have evolved over the past decade to become a critical business tool and part of everyday life. Wireless communication systems are only expected to grow further as great workforce flexibility continues. Mobile communications are increasingly replacing wired systems. Moreover, wireless operations permit services, such as long range communications, that are impractical to implement with the use of wires at some locations and situations. Major services provided include voice telephony (cell phone service), messaging (voice, text, image, and video), internet access, and media distribution. Voice communication accounts for the majority of industry revenue, with the remainder derived primarily from fee charged for value added services such as messaging, media content and value added service charges. How Do Wireless Communication Systems Work? Wireless communication systems utilize a variety of radio frequencies to transmit both voice and data. Wireless networks operate on a grid that divides cities or regions into smaller cells. Each type of device or service operates on a different radio frequency so that signals do not overlap and interfere with nearby transmissions from other devices. The power of these frequencies is controlled in order to limit the signal's geographic range. Because of this limit, the same frequencies can be re-used in nearby cells. In each cell, there is a base station consisting of a wireless antenna and other radio equipment. The wireless antenna in each cell links callers into the local telephone network, the internet, or another wireless network. Wireless antennas transmit signals just like the local radio station, however these radio signals can be obstructed by trees, tall buildings and even weather. Most wireless phones use digital technology which converts voice into the binary digits (0 and 1). These packets of data are relayed through wireless networks to the receiving phone. As the internet continues to merge with wireless communication systems, the internet services formerly available only to personal computers are becoming more common to handheld devices. December 2009 Denali Group. All rights reserved page 5 / 41

6 The following chart shows various telecom products and services: Source: Denali Intelligence December 2009 Denali Group. All rights reserved page 6 / 41

7 INDUSTRY PROFILE INDUSTRY HIGHLIGHTS The U.S. wireless telecommunication services market size is expected to reach USD billion in 2009, a 1.6% decrease when compared to 2008 The industry is highly concentrated: Top five players command 90% market share As with most technology intensive services, the price of wireless telecommunication is decreasing due to industry competition and better, low-priced technology Customers prefer wireless and internet based communication services over wireline telecom services Wireless telecommunication is a growth market: revenue is expected to grow by 3.4% annually through 2013, reaching USD billion by then SUPPLY RISK LOW Lower government regulations in the wireless segment in comparison to wired services Suppliers need capital and time tor adapting to new technology Increasing promotions by service providers and handset manufacturers Decreasing user hardware prices Weak demand and strong category competition High Medium Low MARKET SIZE AND GROWTH The U.S. wireless telecommunication services market size is expected to reach USD billion in 2009, a 1.6 percent decrease when compared to Though this is a growth category with high sector penetration, recessionary forces have weakened current demand. However, long term prospects remain intact. Wireless services are expected to grow to USD billion by 2013 at a CAGR of 3.4 percent. According to Datamonitor, in 2009 global wireless telecommunication services market size is predicted to be approximately USD billion. It will grow to USD billion by 2013 at a CAGR of 4.9 percent. 1 MARKET CHARACTERISTICS Competition continues to increase for telecommunications and information services. Technology advances have expanded the types and uses of services and products available. In addition, a reduced level of regulation of comparable alternatives (e.g., cable, wireless and VoIP) has lowered costs for communications service providers, resulting in steady market pressure on prices. The major wireless telecom suppliers are facilities-based and own & operate their wireless infrastructure. Other players or mobile virtual network operators (MVNOs) lease bandwidth and the required wireless infrastructure as they do not own the same. 1 Wireless telecommunication services in the U.S., Datamonitor July 2009; Global Wireless telecommunication services, Datamonitor July 2009 December 2009 Denali Group. All rights reserved page 7 / 41

8 Wireless telecom is gaining market share substituting wired telecom. Moreover, consumers are also switching to wireless and mobile technologies due to mobility and ease of use, which furthers category penetration. Technological innovation is continuously increasing in the wireless telecom services segment. Over the last five years, telecom infrastructure has experienced consolidation and today, there are fewer suppliers of wireless technology. Most equipment suppliers are large companies such as Ericsson, Samsung, Nokia and Siemens. Increase in the market share of service providers is highly dependent on their ability to innovate; one such innovation is the bundling of services, for example, wireless and wired services, and cellular prepaid services with handsets. These help in attracting new customers and existing customers to upgrade their services. Companies offer cellular handsets to customers free or at heavily subsidized prices in exchange for continuing to stay with the service provider for a fixed period, usually two years. Additionally, using a personal wireless phone a corporate buyer can register an employee s number for corporate billing (that is the financial liability of paying the corporate portion of the monthly bill vests with the corporate). Large wireless voice operators have introduced business plans to offer no roaming charges and uniform national call rates (with riders). AT&T presently has an offering for corporate users to share plan minutes under the Business Pooled Nation plan, balancing a user s available or fixed-billing minutes within the buyer organization. AT&T also offers discounts on total usage under business plans. National governments, in the form of regulatory authorities, are the sole suppliers of bandwidth and licenses are allocated through periodic auctions. GEOGRAPHIC DISPERSAL The U.S. generates 23.6 percent of the global wireless telecommunication services market value. Europe has highest share with 36.3 percent, and Asia represents the strongest growth opportunity. Wireless services are supplanting traditional public infrastructure investments for wired equipment in developing countries. Cellular and Other Wireless Communication Geographic Segmentation, 2008 United States 23.6% Rest of the World 8.2% Asia-Pacific 31.8% Europe 36.3% Source: Datamonitor, July 2009 December 2009 Denali Group. All rights reserved page 8 / 41

9 SEGMENTATION Product and service categories for wireless are: Cellular mobile phone services: This segment represents 75 percent of product share. Cell services can be thought of as three groups: communications (voice, SMS and MMS), computer ( , web access) and consumer-electronics (camera, games, music and radio). Broadband personal communication services (PCS): This segment represents 20 percent of product market share. Since the introduction of Wi-Fi, wireless networking has become more widespread in residences, offices, higher education institutions and corporations. This has resulted in an increase in Wireless Local Area Networks (WLAN), also known as 'hotspots'. These hotspots are becoming the norm in airports, hotels and other public gathering areas. Other services: This segment represents around 5 percent of the market and includes offshore, aviation, and maritime wireless services. Wireless Product Segmentation Cellular Mobile Phone Services 75.0% Broadband Personal Communication Services 20.0% Other Services 5.0% Source: Datamonitor, April 2009 December 2009 Denali Group. All rights reserved page 9 / 41

10 REGULATORY LANDSCAPE The main regulatory body governing the operations of the U.S. wireless telecommunications carriers industry is the Federal Communications Commission (FCC). The FCC regulates the use of radio frequencies. Players in the U.S. wireless industry are governed by a licensing system which is used to allocate the broadcast spectrum necessary to provide mobile services. In February 2009, the Obama administration proposed to additionally tax wireless carriers for the right to hold a spectrum license. This would be in addition to the fees carriers have already previously paid in spectrum auctions held by the FCC. The proposal before Congress would charge carriers USD 50 million in the year of implementation, and then rise in succeeding years. A new directive from the FCC for Enhanced 911 rules will require U.S. carriers to make their handsets GPS-capable, helping authorities locate users in emergency situations. The wireless industry has requested an Appeals Court to stay the new E911' location-accuracy rules, possibly because GPS-capable technology will require significant capital and time to develop. Under FCC rules, carriers are required to attempt to deliver location data to Public Safety Answering Points (PSAPs) when callers dial 911. Location data for this network-based solution must be accurate within 300 meters on 95 percent of all calls and within 100 meters on 67 percent of all calls. The current rules permit these percentages to be calculated based on all calls, network-wide, for purposes of measuring location accuracy. The E911 Order requires wireless carriers to achieve E911 location accuracy measured in each of the local areas served by the approximately 6,000 PSAPs across the country. Carriers have until September 2012 to achieve PSAP-level accuracy and demonstrate compliance with certain incremental location accuracy benchmarks in 2009 and A number of states have adopted legislation or issued clarifying opinions that will make it easier for telecommunications companies to offer video service. In September 2008, the California Public Utilities Commission (CPUC) adopted a decision, which permits but does not require, increases to basic rates of prescribed amounts over a two-year phase-in period beginning January 1, INDUSTRY TRENDS Given the current business environment, the wireless services market favors buyers. The pressure is on carriers to increase service offerings in support of commercial enterprise initiatives such as cloud computing and virtualization. Industry experts foresee greater subscriber management intelligence to be built into the network, causing a fundamental change in the economic relationships between carrier and consumer. A commercial buyer will increasingly look to carriers to provide innovative, cost-saving services, placing carriers in an ascendant role to drive the development of next-generation networks. By 2011 the number of mobile broadband users is expected to exceed fixed broadband users. Operators will favor equipment providers who can deliver end-to-end mobile and fixed solutions. Equipment Consolidation By putting more functionality around the telecom network, equipment consolidation is expected to help in minimizing hardware investments while maintaining highly scalable and flexible networks. For example, rather than purchasing and managing separate devices for edge routing, Ethernet aggregation, and subscriber management, carriers can opt for multi-service devices that integrate various functionality into a single routing platform. Industry observers expect that this trend may gain additional momentum into December 2009 Denali Group. All rights reserved page 10 / 41

11 Third and Fourth Generation (3G and 4G) Technology Wireless telecom service providers are continuously increasing coverage, capacity and technologies related to 3G technology. AT&T and Verizon wireless have been expanding their 3G networks in different regions of U.S. Research and development spending in 4G technology, that can deliver up to 100Mbps bandwidth with Quality of Service (QoS) and traffic prioritization, is expected to rise in 2010 and beyond. This technology would enhance mobile video conferencing. The International Telecommunication Union (ITU) expects to release the 4G international standard in October Fixed Mobile Convergence (FMC) Industry experts predict more deployments in the FMC space leading to a smooth transfer between Fixed and Mobile networks, with rich user experience delivered at lower costs. Thus, the gap between wire-line and wireless networks will become even more bridged. Tele-Presence This service is used in video-conferences to give an impression that the participants are all in the same room by using full screens and superior voice quality. On the network side this means that audio and video delivery using Service Level Agreements on performance guarantees are required. Security Security will continue to be emphasized as internet based attacks become more sophisticated and challenging. Merger and Acquisition Economic conditions are expected to encourage additional merger and acquisition activity, resulting in increasing industry consolidations. By acquiring Alltel, Verizon wireless has surpassed AT&T to become U.S. biggest wireless telecom service provider. Service Creation Environment (SCE) SCE is an enabling tool that reduces a communication service provider s (CSPs) time to market for new services on networks such as PSTN, wireless and IP. SCEs are usually graphical tools used by CSPs to modify and manage services such as the interactive voice response (IVR) menu accessed by a user calling a toll free service support number. User may opt to modify subscribed services, bill plans, know about new offerings such as new value added services and even be drawn to anything new on what the CSP has to offer. Therefore, SCE reduces marketing and related costs to inform customers of current offerings and is quick to take new services to market. SCEs may also be used for interactive voice and video response system (IVVR) systems. Mobile Value Added Services (MVAS) ARPU (average revenue per user) due to voice will decrease over time; therefore carriers will look for avenues to expand their MVAS portfolio. The new services will involve a convergence of voice, data and video. December 2009 Denali Group. All rights reserved page 11 / 41

12 Recycling of Mobile Handsets There are more than million cell phone users in the U.S. More than 140 million cell phones are discarded annually in the U.S., most of which are sent to landfills or waste incinerators. According to the Environmental Protection Agency, for every 1 million cell phones recycled, enough energy could be saved to provide electricity to more than 2,000 U.S. homes a year, and reduce greenhouse gas emissions by the equivalent of taking almost 1,400 cars off of the road. Increased attention to handset recycling will develop within the next three years. New Markets As the service providers space gets crowded, carriers will seek newer markets. In developing countries, such as India, the carriers will continue expansion with a focus towards the rural areas. Factors impacting wireless communication pricing include: 1) Growth opportunities concentrated through additional services and greater geographic reach. 2) Increased market penetration and substitution for land based communications. 3) Greater consumer and business demand for add-on services. December 2009 Denali Group. All rights reserved page 12 / 41

13 COMPETITIVE LANDSCAPE PORTER S FIVE FORCES Industry Competition Level: High price, service offered, product innovation, network reliability, transmission quality and marketing strategy-based competition, which do not differ much among players; large, mature players with technical prowess; low product differentiation New Entrant Barrier High Regulatory and licensing barriers High capital costs in building wireless telecommunications infrastructure Spectrum access may be leased versus building one Penetration rate is high New Entrants Buyer Bargaining Power High More than 150 providers Wide range of plans and services High price visibility and ease of comparison Commoditized service Suppliers Industry Competition Buyers Supplier Bargaining Power Balanced Lower for commoditized components Global competitive markets High rate of technology upgrade Substitutes Substitute Threat Medium No real substitute for wireless service, but new entrants offering alternative technologies Early exit penalties are common and represent switching cost MARKET SHARE AND INDUSTRY CONCENTRATION Cellular Telecommunications and Internet Association (CTIA) lists 180 facilities-based wireless services providers in the U.S. The largest five (in the order of subscribers) are Verizon Wireless, AT&T, Sprint Nextel, T-Mobile USA and Tracfone Wireless. These five companies command approximately 90 percent share in the U.S. wireless telecom market. TracFone Wireless is a subsidiary of América Móvil S.A.B. de C.V., the fourth largest cell phone company in the world and the largest in all of the Americas with more than 194 million cell phone subscribers, according to its website. TracFone has over 12 million subscribers. December 2009 Denali Group. All rights reserved page 13 / 41

14 U.S. Wireless Telecom Market T-Mobile USA 12.1% Other 14.8% AT&T Inc. 28.5% Verizon wireless and AT&T Mobility together account for more than 50% of the total U.S. wireless telecom market Sprint Nextel 17.9% Verizon Wireless 26.7% Source: Datamonitor, July 2009 December 2009 Denali Group. All rights reserved page 14 / 41

15 SUPPLIER COMMUNITY TOP SUPPLIERS The supplier list below was created using OneSource, Hoovers, and Datamonitor and company websites. Apart from those included below, companies providing wireless telecom services in the U.S. include U.S. Cellular, Cricket, Virgin Mobile, Boost Mobile, PowerNet Mobile. Some companies are diversified and revenue is for the group, not the product segment, and therefore not indicative of market share. Specific to Verizon Communications, 3Q2009 revenue from wireless increased year on year from USD 3.2 to 4.1 billion while total customers increased by 25.7 percent. Company Primary Focus HQ Location Employees AT&T Mobility Sprint Nextel 1 Wireless & wireline telecom solutions, Internet protocol (IP)-based business communications services, third generation (3G) network and wireless coverage worldwide, and Internet access and voice services. Wireless and wireline communications products Revenue Q (millions) Revenue Q (millions) %Change Atlanta, GA 288,660 30,855 31, % Overland Park, KS 56,000 8,141 9, % T-Mobile USA Wireless voice, messaging and data services Bellevue, WA 40,000 5,380 5, % Tracfone Wireless Verizon Communications 1: Financial data for Q2 is shown 2: Financial data for Q1 is shown Prepaid wireless telecommunications services Miami, FL 550 Private NA NA Wireless products and services include wireless voice, data services and other value-added services and equipment sales. Wireline communications services include voice, Internet access, broadband video and data, next generation Internet protocol (IP) network services, network access, long distance and other services. New York, NY 235,326 27,265 24, % December 2009 Denali Group. All rights reserved page 15 / 41

16 MARKET NEWS December 15, 2009: Smartphones will capture 37 percent of the worldwide cell phone market by 2014, a leap from 16 percent in 2009, predicts a new report from Pyramid Research. Source: news.cnet.com December 11, 2009: A U.S. appeals court upheld the Federal Communications Commission's decision to put a limit on subsidies paid to telecommunications companies that provide service in rural areas. Source: The Wall Street Journal December 02, 2009: Nokia, the world's biggest mobile handset maker, expects the cell phone market to recover faster next year than analysts are forecasting. Nokia said handset market volumes would grow about 10 percent in 2010, more than analysts' consensus forecast of 8.6 percent, while its market share would be unchanged. Source: BusinessWeek November 24, 2009: Sprint Nextel Corporation and Virgin Mobile USA, Inc. have completed their previously announced merger transaction. Source: Onesource November 17, 2009: AT&T has invested nearly USD 65 million from 2008 through the third quarter of 2009 to complete a substantial upgrade of its local 3G wireless network in the greater San Francisco Bay Area with the launch of additional wireless spectrum in the 850 MHz band. Source: AT&T Inc. November 17, 2009: AT&T has upgraded its 3G mobile broadband network in Seattle, Tacoma, Everett, Renton, Auburn, Pierce and King Counties with the deployment of additional wireless spectrum in the 850 MHz band. As a result of this upgrade, local customers should experience better 3G wireless connectivity, performance and enhanced in-building wireless coverage. The enhancement also increases network capacity, and is intended to support evergrowing demand for 3G mobile broadband service. Source: AT&T Inc. November 06, 2009: AT&T Inc. announced has completed its acquisition of Centennial Communications Corp. The acquisition enhances AT&T s network coverage across the Midwest and Southeast U.S. and in Puerto Rico and the U.S. Virgin Islands. The combination of the two companies wireless networks will allow AT&T to deliver broader wireless coverage, including to approximately 893,000 former Centennial wireless subscribers. Source: AT&T Inc. October 29, 2009: Frontier Communications Corp announced that its pending acquisition of Verizon Communications` local wireline operations has received approval from the Public Utilities Commission of Nevada. The transaction, includes Verizon`s local exchange businesses in 14 states, including parts of California, and certain customer relationships for long distance services, broadband Internet access and broadband video. Source: Onesource October 19, 2009: Sprint Nextel to acquire ipcs for approximately USD 831 million, including the assumption of USD 405 million of net debt. This transaction value represents 6.4x projected 2010 Adjusted Earnings before Income, Taxes, and Depreciation (Adjusted EBITDA). Under the terms of the agreement, Sprint Nextel will commence a cash tender offer to acquire all of ipcs` outstanding common shares for USD per share. Source: AT&T Inc. December 2009 Denali Group. All rights reserved page 16 / 41

17 October 01, 2009: AT&T Inc. announced the acquisition of VeriSign's global security consulting business. Terms of the deal were not disclosed. Source: AT&T Inc. October 01, 2009: Sprint Nextel Corporation (Sprint) and Big River Telephone Company (Big River) have settled their ongoing patent litigation. Sprint Nextel Corporation had sued Big River, along with three other telecommunications companies, in January 2008 alleging infringement of six patents owned by Sprint relating to Voice over Packet (VoP) communications systems. The financial terms of the Big River settlement are confidential. Under the terms of the settlement, Big River will compensate Sprint for a non-exclusive license to Sprint's VoP patent portfolio to allow Big River to provide services to predefined cable companies. Source: Onesource September 30, 2009: AT&T Inc. announced the acquisition of privately held Plusmo, Inc., a provider of cross-platform mobile application solutions. Plusmo will become a part of AT&T Interactive, and the Plusmo mobile application development platform is expected to be used by multiple AT&T subsidiaries, including AT&T Mobility. Terms of the deal were not disclosed. Source: AT&T Inc. September 30, 2009: The city of Chicago has signed a USD 12 million agreement with Sprint for five more years of wireless services. The contract calls for Sprint to provide wireless services to all government departments, including voice and data solutions. Renewing the wireless services contract will help the government entities work even more efficiently while cutting costs. Source: Onesource September 16, 2009: AT&T and Vlingo announced a licensing agreement and strategic alliance to incorporate AT&T s Watson technology into Vlingo s speech-enabled applications to provide mobile device users an easier and more natural way to control their applications. Source: AT&T Inc. September 14, 2009: Deutsche Telekom's corporate customers arm, T-Systems, and SAP AG have entered into an agreement by which T-Systems will acquire SAP's existing European external hosting customer base. As a result, hosting support for SAP software applications of nearly 90 SAP customers will be transferred to T-Systems. The transaction will not involve any transfer of staff or fixed assets. Terms of the transaction were not publicly disclosed. Source: Onesource August 12, 2009: Deutsche Telekom AG's business client unit, T-Systems, has reached an agreement with labor representatives to shed 3,000 jobs by next year in an effort to cut costs. Source: Reuters December 2009 Denali Group. All rights reserved page 17 / 41

18 DEMAND FACTORS DEMAND HIGHLIGHTS Wireless demand remains steady during the current economic slowdown Wireless phone services are highly popular, and vital for some users, constituting the main communication channels According to CTIA, there were 277 million wireless subscribers in the U.S. by June 2009, resulting in an 89% wireless penetration rate The subscriber base would grow at a compound annual rate of 5.2%, to 349 million by 2013 DEMAND RISK LOW Improved coverage, better pricing, new handsets and advancing technologies Due to increasing mobility, wireless technology is becoming a necessity Corporate are insisting on usage of mobile and other wireless technologies High Medium Low PRIMARY DEMAND DRIVERS According to Cellular Telecommunications & Internet Association (CTIA), the international association for the wireless industry, U.S. wireless use is increasing by more than 10 percent annually. The increase in usage of wireless communications is primarily due to the everincreasing option of receiving more service features for fewer dollars. Wireless demand remains steady primarily as a result of improved coverage, better pricing, new handsets and advancing technologies. The demand is predicted to increase as more consumers move from wired to wireless communication services. The large service providers who have wired as well as wireless capabilities are focusing more on wireless and Internet Protocol (IP) based technology. Cellular phone services are highly popular due to the advantage of constant touch the technology offers and is the main communication channel for some users. Due to its popularity, ease of use, mobility and new inventions such as 3G technologies, the demand for wireless services would increase continuously. Subscribers According to Datamonitor, the global wireless telecommunication services market would have a subscriber base of 2,685.3 million in This will grow to 3,582.3 million subscribers by 2013, representing a CAGR of 7 percent. According to CTIA, the U.S. wireless telecommunication services subscriber base is expected to grow to million subscribers by 2013 at a CAGR of 5.2 percent. 2 2 Wireless telecommunication services in U.S., Datamonitor July 2009; Global Wireless telecommunication services, Datamonitor July 2009 December 2009 Denali Group. All rights reserved page 18 / 41

19 Millions Wireless Telecommunications The mounting dependence of businesses on mobile systems for in-house activity has resulted in a growing need for offices to provide dependable wireless connections and call quality. To meet this demand, cellular carriers are setting up in-building wireless systems that provide network coverage throughout an office building. Service providers are increasing network coverage, performance, and call handling capacity by investing in network equipment deployment and upgrades. This has resulted in improvements in service quality such as better voice quality, higher call-completion rates, fewer dropped calls and dead-zones, additional calling features, more rapid data transmission, and data applications. These improvements ultimately result in attracting more subscribers. U.S. Wireless Subscribers U.S. reached million wireless subscribers in June Jun 1995 Jun 2000 Jun 2005 Jun 2009 Source: CTIA, November 2009 Value Added Services Value added services on telephonic technologies have increased customer and business demand as phones have become more sophisticated and personalized. These services include SMS texting services and MMS applications including photo messaging, and even television feeds. Competition in other industries has driven demand for services that can reduce costs and provide communications in any location at any time of day. New technologies such as text messaging reduce the demand for some existing products. For example, voice mail products reduce the length of many telephone conversations while it may increase the volume of calls. Text messaging helps reduce the number of calls made. December 2009 Denali Group. All rights reserved page 19 / 41

20 U.S. ECONOMIC ACTIVITY Gross Domestic Product As 2009 comes to an end, the domestic economy remains in a recessionary tunnel with a light on the other end visible now. GDP, the output of goods and services in the U.S. increased by 2.8 percent in Q quarter-on-quarter, according to Bureau of Economic Analysis (BEA) data. Q3 was driven by higher personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment that were partly offset by a negative contribution from nonresidential fixed investment. Q3 growth follows four successive quarters of GDP contraction. The Q slide of 6.4 percent was the worst decrease in 26 years. Q registered a fall of 0.7 percent. The Q and Q contraction for the U.S. economy remains the poorest performance in more than 60 years. Since 1947, the economy had never contracted by more than 4 percent in two consecutive quarters. According to the BEA, U.S. GDP decreased overall by 1.8 percent in The Economist Intelligence Unit (EIU) expects a GDP contraction of 2.4 percent in 2009 with an equal expansion in 2010 as the economy improves, business environment eases and consumer confidence returns. The Dow Jones Industrial average hovered around the psychological 10,000 mark for second consecutive month indicating growing investor appetite for risk and the belief that recovery might be in sight. 6% Quarter-to-Quarter Growth in Real GDP - U.S. U.S. Gross Domestic Product Q Q % -0.7% Source: Bureau of Labor Statistics U.S. Unemployment Rate November October % 10.2% Source: Bureau of Labor Statistics Dow Jones Industrial Average Recent Closing Values 12/2/ /5/ , , Source: Google Finance U.S. Consumer Price Index October 2009 September % 0.2% Source: Bureau of Labor Statistics 4% 2% 3.2% 3.6% 2.1% 1.5% 2.8% 0% -2% -4% -0.7% -2.7% -0.7% -6% -8% -5.4% -6.4% Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q Source: Bureau of Economic Analysis December 2009 Denali Group. All rights reserved page 20 / 41

21 Unemployment U.S. non-farm payroll job losses for November were the least since the recession began in December A Bloomberg survey of economists had expected a median job-loss in the 125,000 range against the 11,000 reported. In December 2007, the number of unemployed persons was 7.5 million at a 4.9 percent unemployment rate. In November, the unemployment rate in the U.S. decreased by 0.2 percent to reach 10 percent, this rate reached to a 26 year high at 10.2 percent in October The largest job losses recorded were in construction, manufacturing and information whereas temporary help services and health care. In the first half of 2009, unemployment crossed its highest rate since In November, non-farm payroll employers dropped only 11,000 jobs and the number of unemployed persons stood at 15.4 million. The average monthly job loss for September 2009 through November 2009 was 135,000, compared with losses averaging 357,000 per month from May 2009 to July Some analysts had rightly predicted unemployment to reach double digits by the end of the year. The Federal Reserve projects unemployment will remain elevated into 2011, and many economists say the job market may not get back to normal meaning a 5 percent unemployment rate until 2013 or beyond. 11% U.S. Unemployment Rate 9% 7% Forecast 5% 3% Source: Bureau of Labor Statistics Consumer Spending Consumer spending increased in the third quarter of 2009 by 3.4 percent compared to a decrease of 0.9 percent in the second. The price index for gross domestic purchases which measures prices paid by U.S. residents increased 1.6 percent in the third quarter; the index advanced by 0.5 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases rose by 0.5 percent in the third quarter. Published by the Bureau of Labor Statistics, The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-today living. The CPI rose 0.3 percent in October 2009, after rising 0.2 percent in September consumer prices are expected to increase 0.3 percent year-over-year. December 2009 Denali Group. All rights reserved page 21 / 41

22 5% Consumer Price Index 4% Forecast 3% 2% 1% 0% Source: Bureau of Labor Statistics / Financial Forecast Center Economic Stimulus U.S. Government economic policy is firmly focused on containing the financial crisis and the economic downturn. A USD 787 billion fiscal stimulus package was approved in February, with shovel-ready projects receiving preferred funding. The results of this economic aid have not been fully seen yet, though positive developments are expected in According to the December 3, 2009 data at Recovery.gov (www.recovery.gov), of the total funds announced to different federal agencies only about 28 percent of total stimulus funds have been paid out to date. Funding that has been announced accounts for 63 percent and funding that is available is 60 percent of the total funds. As funds continue to be released, additional economic strengthening is expected early to mid The previous financial crisis, coupled with the economic stimulus package, required the government to take on more private-sector debt and increased deficit spending. These conditions and the fallout from the economic downturn increase the likelihood of continued governmental borrowing. After an initial improvement, deficits will still remain substantial in subsequent years, which could pressure interest rates higher and slow economic growth. December 2009 Denali Group. All rights reserved page 22 / 41

23 USD Billions Wireless Telecommunications U.S. Total - Contracts, Grants, Loans and Entitlements Funds Announced Funds Available Funds Paid Out Source: Recovery.gov, December 2009 GLOBAL ECONOMIC ACTIVITY The world economy appears to be better now than in the past few quarters. Emerging economies in Asia are the forerunners in expanding economic activity. Various forecasts predict global economic expansion in However, unemployment remains a concern. With the U.S. economy alone contributing over 20 percent to the global GDP, any change in domestic economic conditions translates into an immediate, corresponding effect globally. The decline in European economic activity is expected to continue in response to trade spillovers, financial strains, and housing cycles. The European Commission s December forecast expects the European Union (EU) to emerge from recession in the last months of 2009 with a 4.2 percent decline in GDP for the year. GDP is forecast to grow 0.8 percent in 2010 and by 1.1 percent in Labor market conditions are expected to remain weak with an unemployment rate of 9.3 percent in October 2009 as compared to 9.2 percent in September 2009 in the EU. Public deficits were set to triple in 2009 to 6.4 percent of GDP and almost 7.0 percent in However, even today a clear indication of global recovery is absent. Experts are also beginning to question whether stimulus packages are inflating asset prices which should fundamentally remain low and whether this might cause another asset bubble in real estate and equity markets, especially in the Asian economies. The International Monetary Fund (IMF), in its report released October expected a deep, lingering global crisis as consumer and business confidence drop to levels not seen in decades. The IMF expects the world economy to decline by 2.4 percent this year a substantial cut from its June 2009 forecast of 0.5 percent growth. December 2009 Denali Group. All rights reserved page 23 / 41

24 Shares of Global GDP - Estimates 2009 France 3% Italy 3% Brazil 3% Other 38% United Kingdom 3% Russia 3% U.S. 20% China 12% Germany 4% Japan 6% India 5% Source: International Monetary Fund, World Economic Outlook 13% 10% 8% 5% 3% 0% -3% Global GDP Growth Forecasts -5% Projected World U.S. China India Source: Economist Intelligence Unit / IMF and LexisNexis China Economic Outlook China s real GDP growth was reported higher at 8.9 percent year on year for Q3 2009, experts had earlier projected that China may overshoot the government's aim of average growth of 8 percent for 2009 as a whole. As per latest EIU estimates China's economy is now expected to grow by 8.2 percent for the entire year, despite weak export growth. The expansion in GDP has been driven largely by infrastructure investment linked to the government's stimulus package and fiscal policy decisions. Government spending is expected to remain high in 2010 as the state looks to support economic growth; however, public expenditure is projected to slow in The government will allow a modest appreciation of the renminbi against the U.S. dollar in , after having kept the exchange rate virtually unchanged since mid Economic growth is projected to accelerate in 2010, when real GDP may grow by 8.9 percent, before it December 2009 Denali Group. All rights reserved page 24 / 41

25 slows slightly to 8.3 percent in forecast assumes moderate tightening of credit and fiscal policy. Issued December 2 by the China Federation of Logistics and Purchasing, the official PMI (Purchasing Managers Index) remained steady at 55.2 in November as compared to October, the ninth straight month above 50. The new export order component fell to 53.6 versus Although the Chinese job market has weakened, income growth has stayed relatively healthy, supporting in country consumer demand. China s government launched a number of fiscal incentives for consumer purchases demand might suffer if such incentives prove to have just advanced private consumption rather than stimulate demand. Strengthening house and car sales indicate rebounding consumer confidence, faster than most analysts had expected. This is generating employment and creating demand and could well support higher economic growth than projected. The Economist Intelligence Unit forecasts consumer prices to rise by 2.5 percent in 2010 and 3.2 percent in 2011, after falling by 0.8 percent in October 2009 export revenues fell by 13.8 percent after falling 15.2 percent in September; both figures were better than 20-percent odd year on year declines seen previously in the year. China s merchandise exports are expected to recover in 2011 but trade surplus will remain large due to relatively low imports. China s year-to-october exports are down 20.5 percent while imports are down 19 percent year on year. India Economic Outlook Following its victory in the general election in April-May 2009, the Indian National Congress-led United Progressive Alliance government is likely to serve out a full five-year term. A number of parties that are not formally part of the coalition have pledged their support, giving it a formidable majority in parliament. Congress' hold on power means that economic policy will remain broadly unchanged. There is scope for more progress on economic reform, although internal party dynamics mean that this is not guaranteed. Priority will continue to be given to boosting economic growth and to measures targeting the rural sector. The outlook for the budget deficit is gloomy: industry experts projected that the deficit in fiscal year is expected to be wider than the government expects, at 8.1 percent of GDP. As economic growth accelerates in 2010, the government will need to take tough decisions in terms of raising taxes and curbing spending. Real GDP growth is forecast to slow to 5.8 percent in ; however, GDP should recover to 6.8 percent in Consumer price inflation is forecast to remain high at 10.2 percent for 2009, 9 percent in 2010 and 5.7 percent in The bright spot in the economy is the industrial production growth which came in at 9.1 percent year on year for September The trade ministry forecasts foreign direct investment for the fiscal year would be USD 18 billion. This is a drop of 34 percent from the USD 27.3 billion figure for Imports are projected to decline in line with weaker demand for consumer goods and significantly slower investment growth. Although export growth may also slow sharply, net exports are expected to make a positive (albeit small) contribution to GDP growth in Merchandise exports and imports are expected to grow in Brazil Economic Outlook With the economic recovery gathering momentum in the run up to the October 2010 election, the ruling Partido dos Trabalhadores (PT) is expected to be better placed to gain a third term. The outcome is currently too close to call; however, broad policy continuity is likely. Dilma Rousseff (PT), the preferred successor of the president, Luiz Inacio Lula da Silva, may benefit December 2009 Denali Group. All rights reserved page 25 / 41

26 from the transfer of his popularity, however, Jose Serra, the likely Partido da Social Democracia Brasileira (PSDB) candidate, currently leads her in the polls by 32 percent, owing partly to his higher public recognition. Brazil s industrial production grew 2.2 percent in October as compared to September rising for the tenth consecutive month. GDP is expected to remain flat in 2009 and is projected to grow by 4.8 percent in 2010 and by 4.5 percent in 2011, as the economists now foresee a firmer domestic demand-led recovery. A cyclical decline in fiscal revenue and tax breaks may be partly offset by lower interest payments, which is expected to curb the overall fiscal deficit. Assuming the Real GDP is relatively stable, economists expect inflation to fall to 4.9 percent by year-end 2009, and decrease in owing to higher wage agreements that will contribute to keeping inflation from easing to OECD levels. Corporate Mobility In response to demographic changes in the workforce, companies are reviewing technological options to extend flexibility and enhance productivity. A key component of corporate strategy today is leveraging technology to increase productivity, enhance employee work life balance, and enable remote collaboration. Critical to this strategy is to enable employees to work virtually. According to IDC, the U.S. has the highest percentage of mobile workers at 70 percent. Increasing yearly, that number is expected to reach 73 percent by Only Japan is expected to top the U.S. in mobility, reaching 80 percent in the same time period. Though led by the U.S., increasing mobile workers is a global trend. In addition to enhanced employee work and life balances, greater IT portability offers increased worker collaboration and productivity potential. For example, a flexible workday means that employees work hours are spread throughout the day rather than a standard 9 to 5 schedule. This spread allows companies the potential to respond to customer questions and issues that arise during typical non-working hours that wouldn t normally be discovered until the following workday. EMERGING DEMAND DRIVERS Wireless telecommunications market is predicted to increase as technology and consumer preferences increasingly favor wireless. Broadband usage is increasing in rural areas due to the announcement of USD 7.2 billion by Obama government to expand access to and adoption of broadband services. Of that funding, NTIA will utilize USD 4.7 billion for grants to deploy broadband infrastructure in un-served and underserved areas in the U.S., expand public computer center capacity, and encourage sustainable adoption of broadband service, which RUS will use USD 2.5 billion in budget authority to support grants and loans to help broadband deployment in primarily rural communities. Inventions of new technologies like 3G, Bluetooth, etc. are continuously happening in wireless technologies. These technologies are increasing the penetration of wireless telecommunication services by attracting customers and increasing the ease of usage of wireless services. The handset manufacturers like Nokia, Motorola, and Siemens etc are striving to increase sales by increasing spending on advertising and promotions. Corporate emphasis on worker mobility is increasing. December 2009 Denali Group. All rights reserved page 26 / 41

27 Wireless telecommunication devices are adapting to newer technologies and valueadded features. Service providers are pricing products competitively, adding differentiated pricing plans, bundled packages and add-on services in order to create demand. Attractive discounts are also being offered on monthly data packages. The near term market demand for wireless telecommunications is said to be on a slow but increasing trend as weaker economic forces restrict businesses from spending on travel and travel related activities. Moreover, technology and other value-add features have made wireless telecommunication devices a necessity rather than a luxury. December 2009 Denali Group. All rights reserved page 27 / 41

28 KEY COST DRIVERS COST HIGHLIGHTS October 2009 average prices for wireless communication equipment remained stable, posting a marginal increase by under a percent when compared to October 2008 September 2009 labor wages for wireless telecommunications workers are down 23% when compared to September 2008, indicating recession s impact on the industry COST RISK LOW Decreasing labor rates due to increased unemployment expanding pool of workers Telecom infrastructure costs are flat, increasing only 0.4% in 2009 High Medium Low COST BREAKDOWN Technology and infrastructure are the major cost drivers of the industry. Average costs for wireless telecommunications services have come down drastically since the early years due to increasing market penetration. Business buyers have choice to select from a broad range of offerings in terms of service types, bundled plans, convergence of media-internet-phone, and improvements in technology. Wireless Communication Cost Drivers Labor 18% Other Operating Expenses 60% Purchased Services (Rental Payments, Promotional Services, etc.) 13% Materials, Parts and Supplies 9% Operating expenses account for more than 60% of total cost of wireless telecommunication services Source: U.S. Census Bureau December 2009 Denali Group. All rights reserved page 28 / 41

29 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Index 12\1996 = 100 Wireless Telecommunications The following are key cost drivers related to the provision of Wireless Telecommunication services: Primary Costs Infrastructure costs (Network, technology and licenses) Cost of Services (Labor) Secondary Costs Cost of Equipment (Handsets) Advertising and Selling Expenses Recycling costs of Handsets Infrastructure or Network Costs When setting up a new network or upgrading an existing one, companies have many technologies to choose from. The cost structure depends on and varies significantly from one technology and network type to another in terms of capital costs, variable cost, maintenance costs, and fixed costs. Major network costs include interconnect costs (largest component, almost 20 percent of total network/system costs), long-distance costs, maintenance/utility, rent expense, engineer salaries, roaming costs, and customer usage. At October 2009, the average prices for wireless communication equipment are almost stable with a marginal increase of about 0.4 percent compared to October Forecast calls for prices to decrease by 0 to 1 percent in Broadcast and Wireless Communications Equipment PPI Source: Bureau of Labor Statistics Labor The cost of services represents the one of the largest operating expenses for wireless telecommunication systems and accounted for 18 percent of industry revenue in In September 2009 (latest available data), the average weekly earnings for wireless telecommunications workers were down 23 percent compared to September The reason for this fall is the lay-offs that resulted due to recession wages are expected to be down by 20 to 23 percent. December 2009 Denali Group. All rights reserved page 29 / 41

30 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Wireless Telecommunications $1,350 $1,250 $1,150 $1,050 $950 $850 $750 $650 Wireless Telecommunications Carriers Average Weekly Earnings Source: Bureau of Labor Statistics Handset Costs Collectively, there are approximately 750 handsets available to consumers in the U.S., based on CTIA s review. According to a survey carried out by PWC, subsidies offered on handset upgrades can be a significant component of customer retention costs. Approximately 60 percent of the wireless companies in the PWC survey offered an average handset subsidy in the range of USD 65 to USD 150. Equipment subsidy amounted to approximately 30 percent of the total costs per gross addition. December 2009 Denali Group. All rights reserved page 30 / 41

31 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Index 12\1996 = 100 Wireless Telecommunications PRICING TRENDS & FORECASTS PRICING HIGHLIGHTS During October 2009, average cellular carrier prices were down 3.5% compared to October 2008 In June 2009, the average monthly bill for cellular service increased by 2.1% year over year The average monthly bill for cellular service has fallen by 2.7% each year over a 20 year period PRICE RISK LOW Greater competition and declining average cost of service per subscriber is decreasing the price of services Average costs for wireless telecommunications services have come down drastically due to increasing market penetration and the variety of choices offered by providers in terms of service types, bundled plans, convergence of media-internet-phone, convergence of fixed-wireless phones, and improvements in technology High Medium Low WIRELESS SERVICES PRICING Greater competition and declining costs of per individual service provisions have contributed to a fall in the price of services. The cost of equipment (e.g. handsets and paging devices) has also rapidly fallen. In October 2009, average cellular carrier prices were down 3.5 percent compared to October Forecasts call for prices to decrease by 3 to 5 percent in Cellular and Wireless Carriers PPI Source: Bureau of Labor Statistics December 2009 Denali Group. All rights reserved page 31 / 41

32 Prices To encourage subscribers to purchase more and lengthen contracts, providers offer a variety of discounts on monthly data packages. The continued rollout of differentiated pricing plans, bundled packages and add-on services represents a demand generator. All of the nationwide operators, and of the many smaller providers, offer some version of a national rate pricing plan in which customers can purchase a block of minutes to use on a nationwide or nearly nationwide network without incurring roaming or long-distance charges. In addition, there has been a drastic increase in the use of temporary cell phones, which allow consumers to purchase a cell phone with the block of minutes plan, and then terminate their plan shortly after purchase. The average monthly bill for cellular service has fallen by 2.7 percent each year over a 20 year period, but has risen and stabilized over the last decade. In June 2009, the average monthly bill for cellular service increased by 2.1 percent year over year. Wireless pricing involves multitiered plans that frequently change. For specific company pricing, please refer to the company Web sites listed in the provider section below. $95.0 Average Local Monthly Bill $85.0 $75.0 $65.0 $55.0 $45.0 The average monthly bill for cellular service has fallen by 2.7 percent each year over a 20 year period $35.0 Source: CTIA, November 2009 December 2009 Denali Group. All rights reserved page 32 / 41

33 FORECAST Key factors influencing the 5-year forecast include: Category Economic activity, both domestic and global Decreasing labor wages Increasing demand due to increase in penetration, introduction of new technologies and greater workforce mobility Decreasing cost of services due to new technologies and service bundles Demand Trend 2008 Price 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast 2013 Forecast Economic Growth 1 0.4% -2.4% 1.9% 1.1% 1.9% 2.3% Unemployment N/A Corporate Mobility N/A Labor 3% -20 to - 23% 2% 2% 1% 1% Equipment 2% 0 to -1% -2% -1% -1% -1% Wireless Telecom 1: Source- EIU -6% -3 to -5% -3% -2% 0% 1% Price forecasts above are based on our outlook period of five years, broken down into three ranges (short term, intermediate, and long term). Medium and long-term range projections are based on short-term forecasts, adjusted with greater consideration to overall economic trends. There are inherent limitations in price predictions - the further out in time the forecast is, the less accurate the estimate. Price trends and forecasts can be materially altered by supplier community changes, pricing volatility, economic uncertainties, monetary unpredictability and geopolitical concerns, among others. In today s marketplace, energy price volatility and financial market instability makes long term forecasts especially problematic. December 2009 Denali Group. All rights reserved page 33 / 41

34 RISK OUTLOOK In general, the wireless telecom market is expanding. The industry competition is high due to a growing market, increasing penetration rates, large market players and low product differentiation. The federal government is also increasing focus on the telecom sector. The overall wireless telecommunication market is increasing as more consumers switch from wired to wireless telecommunication services. Also government regulations are less in wireless segment then in wired segment of telecommunication services. Going forward, one concern in the industry could be slower growth since penetration rates are as high as 68 percent and are projected to increase to 73 percent over the next two years. CATEGORY RISK LOW High Medium Low The category risk for wireless telecommunication services is low due to: Decreasing prices Large players with technological knowhow Increasing customer preferences for wireless Supply Risk Low Lower government regulations in the wireless segment in comparison to wired services Suppliers need capital and time tor adapting to new technology Increasing promotions by service providers and handset manufacturers Decreasing user hardware prices Weak demand and strong category competition Demand Risk Low Improved coverage, better pricing, new handsets and advancing technologies Due to increasing mobility, wireless technology is becoming a necessity Corporate are insisting on usage of mobile and other wireless technologies Cost Risk Low Decreasing labor rates due to increased unemployment expanding pool of workers Telecom infrastructure costs are flat, increasing only 0.4% in 2009 Pricing Risk Low Greater competition and declining average cost of service per subscriber is decreasing the price of services Average costs for wireless telecommunications services have come down drastically due to increasing market penetration and the variety of choices offered by providers in terms of service types, bundled plans, convergence of mediainternet-phone, convergence of fixed-wireless phones, and improvements in technology December 2009 Denali Group. All rights reserved page 34 / 41

35 Country Risk Low Country risk increases with extensive trade. Wired telecom services are usually performed in a domestic market. Therefore, country risk is low by definition. December 2009 Denali Group. All rights reserved page 35 / 41

36 INSIGHTS & BEST PRACTICES BEST PRACTICES HIGHLIGHTS A comprehensive telecommunications cost management program reduces telecommunication cost In order to maintain a best-in-class telecommunications process, contract managers should develop a cost management strategy that focuses on process improvement, supplier inspection, and ongoing technical analysis of hardware and an increased knowledge of the major industry trends impacting business enterprise solutions. The development of this strategy should start with the analysis of the components that make up telecommunications spend in order to determine which categories can be leveraged into the ongoing business plan. This diagram below shows the typical components of a corporate telecommunications group. Conducting a competitive negotiation for local and long distance rates can potentially yield cost savings if companies are willing to switch service providers. If changing service providers is not a desired option, there are other effective ways to reduce telecommunication costs. A comprehensive telecommunications cost management program will not only target the service cost, it will also involve the asset inventory, specifications, internal costs, and strategic solution design. One of the primary opportunity areas for telecommunications cost management lies in auditing wire-line and wireless inventories and bills. Over time, companies tend to lose track of the number of wire-line and wireless devices, which often leads to paying for lines that are no longer used or paying for features that are unnecessary to their particular business. A physical audit of wire-line and wireless devices can be used to create a detailed inventory database, which allows the telecommunications group to decide if lines can be removed, if features can be reduced, and if the number of wireless devices and plans match up to the work force. The inventory also enables the telecommunications group to audit wire-line and wireless bills on an ongoing basis to ensure program and contract compliance. Strategy Opportunity Areas Outcome Perform an Audit of Telecom Assets Wireline Inventory - Validate physical inventory of dial tone circuits, analog and digital data circuits, and features against actual requirements Wireline Features Validate paid features such as voice mail, call waiting, call forwarding, threeway calling, etc. against actual requirements Wireless Inventory Validate inventory of wireless devices A complete and accurate circuit inventory Elimination of non-essential lines Elimination of non-essential features A complete and accurate inventory of active wireless devices Cancellation of service on unutilized wireless devices December 2009 Denali Group. All rights reserved page 36 / 41

37 Strategy Opportunity Areas Outcome Bills Audit of wireline and wireless bills to identify charges for unprocessed disconnects, misapplied surcharges and fees, unapplied contract discounts, etc. Traffic Engineering Review quantity and bandwidth of network facilities A billing database that accurately aligns charges with customer cost centers to facilitate ongoing billing management Elimination of billing errors Reduction of excess capacity Increasing capacity to improve response time on data circuits and eliminate busy signals on voice circuits Another cost reduction opportunity is to evaluate the benefits of outsourcing internal functions that are often performed inadequately by a broad set of non-dedicated resources with multiple, competing responsibilities. Functions that are non-strategic should be assessed to determine if there s potential for outsourcing to a third party. Strategy Opportunity Areas Outcome Engage a Third Party Telecom Expense Management Service Inventory Management Ordering and Provisioning Management Invoice Management Maintenance of a complete, real-time, scalable, flexible inventory of telecom assets Assets coded to department, location, and/or cost center Ordering and provisioning support in order to ensure the use of structured workflows and authorizations for the commissioning and deployment of telecom assets Helpdesk operations for ordering, provisioning and break/fix depot repair. Invoice receipt and reconciliation support Dispute management support to ensure the recovery of credits and managing short-pay and no-pay decisions Treasury services for payment processing Minimization of service disruptions due to late payments Although vendor relationships are fairly complex due to the large number of individual service components, the presence of regulated pricing or tariffs on certain service elements, and elaborate pricing schedules, there are several opportunities to manage costs. December 2009 Denali Group. All rights reserved page 37 / 41

38 Strategy Opportunity Areas Outcome Restructure Vendor Relationships Establishing a single pooled plan for wireless voice services with a primary provider Negotiating the appropriate mix of features for actual usage patterns Leveraging customer purchasing volumes to negotiate discounts Ensuring that contracts for wire line voice and data circuits do not lapse or that negotiated pricing continues after contract expiration Manage Minimum Annual Commitments (MACs) with actual projections considering potential migration to new technologies,., potential mergers or acquisitions, business downturns, etc. Take advantage of declining rates for long distance and Wide Area Networks in contract negotiations The following chart shows various telecom sourcing strategies: Addressing the paradox of paying overage fees while leaving unused paid minutes on the table Mitigate the amount of premium charges for use of non-negotiated features (i.e. Text messages, mobile to mobile, etc.) Achieving discount levels consistent with tier of spend Mitigate premium month-tomonth charges for circuits Avoid penalties for failing to achieve MACs while still leveraging spend volumes to achieve maximum discount levels Reduced long distance network service rates December 2009 Denali Group. All rights reserved page 38 / 41

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