The Quad Play. The First Wave of the Converged Services Evolution. Executive Summary

The Quad Play The First Wave of the Converged Services Evolution Executive Summary This white paper is aimed primarily at telecom carriers and cable operating companies. It provides a broad overview of the benefits of Converged Services as exemplified by offering a seamless Quad Play voice, video, broadband Internet, and wireless and focuses primarily on Fixed Mobile Convergence as the first step. About incode incode (incodewireless.com), a global wireless business and technology consulting firm, develops and implements high-impact strategies, solutions and products that increase profitability and performance of wireless networks. incode also guides enterprises in harnessing the power of wireless communications for productivity and competitive advantage. Further, incode operates an innovative Next-Generation Wireless Technology Lab. Founded in 1998 by wireless business veterans and technology pioneers, incode understands where the wireless world is going and how to get there first. incode is an ISO 9001 certified With the rapid advance of the Internet and digital technologies, the line between traditional industries is becoming increasingly blurred by the blizzard of new convergence models: Fixedmobile convergence (FMC), IT and Network Convergence, Voice and Data Convergence, and Communications and Entertainment convergence. These new models are setting the stage for a multi-industry competition for the global $1.1 trillion spend on communications and entertainment. As the environment becomes more competitive, companies are looking to grow by diversifying into each other s businesses. This is evidenced by the four US cable companies entering the $100 billion plus US wireless market through partnership with Sprint. The core driver of this competition is the convergence of wireline and wireless services - the foundation that will control the seamless customer experience. While a truly converged wireless/wireline experience will not be realized for several more years, the converged services offering will be a multi-step evolutionary process that is mainly driven by technology advances. The early phases will be shaped by bundling, and early attempts at a seamless offering of the Quad-Play. These will be followed by more advanced converged services as operators upgrade their networks to all IP. company. Headquartered in San Diego, incode has offices in Atlanta, Calgary, Toronto, Guatemala City and Sao Paulo in the Americas; London, Paris, Stockholm and Madrid in Europe; and Hong Kong and Beijing in Asia. 1 2006 incode Telecom Group, Inc. All rights reserved. incode, and all names and signatures are trademarks of incode Telecom Group, Inc. Printed in the USA. Literature No. 3GSMCONV0206V1

Contents Converged Services Developments... 2 Converged Services Benefits to Consumers and Service Providers... 4 Converged Services Strategic Approaches... 4 Case Study 1: Integrated Converged Service Providers in US... 5 Case 2: Telecom Multi-service IPTV in Europe... 6 Case Study 3: Joint Venture Converge Service Providers in US... 6 Case Study 4: Cable Operator Buys MVNO in Europe... 7 Converged Services Technology Approaches... 9 Conclusions...10 Companies are attracted by the near term benefits of increased lifetime customer value with the bundled service offerings, and by the long term strategic benefit of establishing a dominant position to capture the high value revenues. The partnership in the US between Sprint-Nextel and the four leading cable operators has proven the cable operators sense of urgency to develop their own converged service offerings, to counter the decision by Verizon, SBC and BellSouth to offer IPTV. Verizon, SBC, and Bellsouth had previously signed partnerships with satellite service providers, such as DirecTV and Dish Network, to provide Video services as part of a voice, video, broadband Internet, and wireless bundle that was neither technically integrated nor seamless. On the other side of the ocean, Europe has taken a different approach to converged services due to country specific regulations and market conditions. France Telecom, a wireline and wireless carrier, built its own Quad-Play capabilities by upgrading its xdsl network to provide video services, while NTL, a cable operator, acquired Virgin Mobile, a MVNO, to extend its capabilities to wireless. The incentives for a service provider to launch converged services largely depend on the unique provider business situation, overall market conditions, and country specific regulations. There are several different scenarios that could play out. In this paper, we observe some recent case studies of new operating models that could emerge from this early stage of the convergence evolution. We observe the strategic options from the point of view of three different facilitiesbased service providers wireless, wireline, and cable. It is still too early to predict which strategic approach and deployment option will be the dominant success story. There are many variables to be considered including technology advancements, market dynamics, and company specific business needs. What can be said is that the revolution has begun. Converged Services Developments As the line between communications and entertainment continues to be blurred by digital technology advances, service provider economics are becoming unstable as head-to-head competition heats up in this multi-industry contest. At stake globally is the $1.1 trillion in customers communication and entertainment spending 1. The US represents over $400 billion while Europe has $350 billion in revenues for fixed and mobile telephony, Internet 1 Datamonitor, Global Media Industry Profile, December 2005 2

access and other on-line services, as well as broadcast media (audio and video) subscription. Competing for the prize are telecom service providers, cable operators, entertainment and media corporations, and Internet service providers. As connectivity alone is rapidly becoming commoditized based on the declining margins for basic voice and data connectivity, traditional telecom companies are faced with the prospect of being left behind as undifferentiated infrastructure companies, much like utilities. Telecom companies could fade further into the background due to technology advances, as application intelligence can reside anywhere and is no longer dependent on their core connectivity layer. As the competitive environment continues to increase with market, technology and regulatory changes, companies are looking to grow by getting into each other s business. This is evidenced by the four US cable companies getting into the $100 billion plus US wireless market through partnership with Sprint. For cable companies, offering wireless services, along with their video, high-speed data, and voice, will constitute the Quad Play. incode defines Convergence as simply the ability to provide uniform and ubiquitous services or applications across multiple technologies and access devices. Converged Services, starting with a seamless Quad Play offering, represent the next wave of the communications evolution. Other types of convergence that will occur include device convergence combining multiple access technologies into a single device; and network convergence combining separate networks to create a common infrastructure. Some aspects of convergence will be obvious to the end user, for example Fixed - Mobile Convergence (FMC) as the ability to seamlessly roam between a wide-area wireless network, a wireless local area network, and a fixed broadband network. Other aspects will be more oriented towards carriers, to allow them to more efficiently design and manage their multi-purpose networks. These trends will contribute to new service offerings, better user experiences, and more economic pricing. FMC benefits a number of consumer and business segments, and can stretch wireless minutes of use, provide convenience of a single number service, and enhance quality of service. Meanwhile, the trend of Fixed Mobile Substitution has accelerated over the past few years, where fixed line telephony use has been supplanted by mobile use. Today approximately 80% of mobile calls are made within reach of a landline phone. Given the price erosion of fixed line services with near-free offerings from providers such as Vonage and Skype (and their availability over the ever-ubiquitous fixed broadband connection), it is becoming imperative for mobile providers to address in-home and in-office services by leveraging these broadband connections with a converged service. With technology advances such as the advent of IP Multimedia Subsystem (IMS) and Unlicensed Mobile Access (UMA), service providers are able to offer integrated services to their existing customer base. Traditionally, wireline voice service was provided by local exchange and long distance carriers, wireless service by wireless service providers and broadcast media by cable or broadcast television and radio service providers. However, with advances in digital technology, most cable providers today offer the Triple Play voice, broadband Internet, and video to their customers with substantially less investment in network Definitions Converged Services: uniform and ubiquitous services or applications across multiple access technologies and devices. Services convergence: Combining multiple services to create a single service offering. Device convergence: Combining devices into a single device that accesses multiple services across multiple access technologies. Network convergence: Combining separate networks (voice, data, video and others) to create a common networking infrastructure. Fixed to mobile Convergence (FMC) is the convergence between the mobile and fixed line networks. Quad Play is the first step in the converged wireless/wireline evolution. the four services that comprise the Quad Play are: Video/TV Voice High Speed Data or Broadband Internet Wireless services 3

infrastructure than was required with previous technologies. Furthermore, with increased bandwidth available on cellular networks, customers are expecting to extend such an integrated experience to a mobile environment, leading to increasing interest in the Quad Play. Converged Services Benefits to Consumers and Service Providers It is still too early to predict which strategic approach and deployment for wireless-wireline convergence will be the dominant success story but the benefits are definitive and clear. The end prize that the multi-industry players are competing for is a strong position from which to capture the high-value revenue derived from application and content, as connectivity continues to be commoditized. In the meantime, the competition will be for near-term benefits such as increased lifetime customer value through bundling services as with the Quad Play. Longer term strategic benefits Telecom, cable, media, and Internet infrastructure companies are competing head-to-head in this multi-industry contest to capture significant market share in the high value/high margin segment. To attain the market leader position, they will need a solid foundation for a seamless converged wireless/wireline customer experience in order to leverage a successful approach to product and service innovation. In the end, the high value revenues will go to providers that can create new applications and content fitting customers lifestyle and functional needs as well as providers that can service the increasingly complex devices and services. Near term benefits a Case Study incode assessed the market opportunity for a converged services partnership between a cable company and wireless carrier. The case study highlighted a clear upside to top-line revenue as a result of the effects of bundling. There are two main economic benefits that are realized through this converged offering: Increase in Lifetime Customer Value. The combined reduction in churn and increased share of customer wallet results in almost a five-fold increase in total lifetime customer value. As seen in Figure 1, a Pure Play cable TV-only offering provides total customer lifetime value of $788 whereas a Quad Play bundle would result in customer lifetime value of $3,783. The maximum incremental benefit is derived by adding wireless to the bundled service offering. From a consumer point-of-view, bundling provides advantages of a reduced price, a seamless user experience and single point of contact. Success of any converged service offerings will depend on the capability of service providers to satisfy these customer expectations. Increase Market share. The study demonstrated a potential for increase in market share for each provider as a result of the ability to offer better pricing to customers for bundled services and by leveraging the retail channels and marketing efforts of both providers. Source: incode Analysis, TWC reports (2005), TWC bundle pricing, Citgroup (2005), Yankee Group (2003), Probe Group LLC (April 2004), Bear Stearns (Oct 2004) Converged Services Strategic Approaches In both the US and Europe, the development of Converged Services is still at the stage where anyone can win, and there are both traditional and non-traditional players in the game. One scenario is that with continued consolidation, the diversified uber-telecom carriers dominate the market providing everything from connectivity to content. Another scenario is one in which the traditional telecom companies gradually fade into the background as a general infrastructure providers like other utilities, and are displaced from the direct-to consumer communication and entertainment market. Yet another scenario is that telecom carriers develop alternative entertainment delivery models and establish significant market share in the high-value segment. Currently, there are many different approaches to converged services. For example, in the US, non-service providers like Google and Apple are forming strategic alliances and making 4

investments to position themselves to participate in this evolution. Google is launching WiFi services in San Francisco that will put certain pressure on traditional wireless and wireline players, and Apple is offering converged features on its new ipods through teaming with Motorola to launch dual-function ipod phones. These players are betting that the facilities-based service providers lack the ability to meet all the emerging content needs. The incumbent service providers realize this threat and are making strategic investments in converged infrastructure and partnerships to ensure that they are not just bit pipe providers. Given the favorable economics for bundled services in US, both wireless and fixed-line service providers are investing in converged services through mergers and acquisitions, and joint ventures. In Europe, there are additional approaches to Converged Services. For example, in countries where the incumbent telecom companies have a strong established position in fixed-line telephony, wireless and broadband services, competition from cable companies has been limited as new entrant cable operators have been awarded only regional licenses. In many cases, the advanced digital services infrastructure is still being built. Additionally, the telecom companies have launched into the Quad Play with Internet protocol ( IP ) TV services that can provide nationwide video service. Another example is the development of Unlicensed Mobile Access (UMA) for realizing Converged Services in existing wireless networks over GSM, the single platform for the European market. The European market s differences with the US will drive a different Converged Services path. One main difference is the single technology platform (GSM/UMTS technology) adopted by all European mobile operators. This allows substantial economies of scale from both the infrastructure and the handset perspective. Secondly, Europe distinguishes itself with much better indoor coverage and voice quality, contributing to high fixed to mobile substitution rate. These differences have helped drive the higher wireless customer penetration and more advanced 3G build-out and adoption in Europe. For instance the penetration rate of cellular services in Finland is greater than 100%. The wireless market has reached saturation in most European countries and as a result operators have begun to focus more heavily on customer retention by targeting their current customer base with converged offers such as BT Fusion. Additionally, in some countries, the low penetration rate for cable TV provides telecom companies the opportunities for IPTV, particularly in urban areas. That opportunity is mitigated by the higher satellite penetration rate in non urban areas. The third main difference is that historically industry regulations have been defined at the country level, resulting in fragmented video distribution market in most Europe countries. Based on the regulatory environment in countries such as Germany, incumbent operators maintain leading positions in traditional telecom markets such as fixed telephony, wireless and broadband services. Framework for Case Studies of Converged Service Approaches In the rest of this section, four different approaches to converged services in the US and Europe are discussed. Based on these observations, a strategic options framework for offering Quad Play services is proposed. Converged Service Approaches for Wireline Service Operators Case Study 1: Integrated Converged Service Providers in US The larger local exchange service providers, including SBC and BellSouth, are favoring the integrated approach to converged services offering. These service providers are the former regional Bell operating companies (RBOCs). They own the telephony infrastructure in their respective operating areas as well as having significant ownership of wireless service providers, for example, SBC and Bell South jointly own Cingular. These providers are well positioned to provide integrated Triple Play - voice, broadband Internet (xdsl) and mobility services to consumers. To achieve Quad Play, these service providers have announced large investments in building new fiber infrastructure to provide video broadcast and video on-demand services. Despite the benefits of integrated service offerings, this approach has significant challenges in terms of return on infrastructure investments, regulatory authorization and content partnerships and ownership to deliver the promise of truly converged services. 5

Case Study 1: Integrated Converged Service Providers in US Players: SBC and BellSouth Quad Play Capabilities: Voice: Fixed-line telephony via existing RBOC infrastructure Broadband Internet: xdsl broadband internet via RBOC infrastructure Wireless mobility: Joint ownership of Cingular Video: Announced partnerships through satellite service providers (Dish Network and DirecTV). Announced investments in new FTTx (Fiber-to-the-premise/curb/node) infrastructure to deliver video broadcast services Benefits: Integrated control of user experience, network operations, and service offerings Integrated standardization of services and user experience deployed by one vertical organization Challenges: Significant investment in network infrastructure Organizational integration to provide consistent user experience Success of un-proven technologies like IPTV Inexperience in media services and distribution No content provider relationships Achieve desired scalability at regional markets Broadcast rights acquisition Source: Company annual reports; S&P Industry Survey 2005; incode Analysis Case Study 2: Telecom Multi-service IPTV in Europe France Telecom has expanded its services to position itself as Europe s leading Quad-Play operator. After maintaining a leadership position in fixed-line telephony, wireless and broadband services, France Telecom launched an IPTV service in 2004. Leveraging its xdsl and service distribution channels, France Telecom has introduced a Quad Play offer that provides a strong alternative to cable and satellite services. However, important investments are required to cover large geographical areas and to upgrade existing covered areas. France Telecom claims having 200,000 broadband TV customers in France and expects a million customers by 2008. Case Study 2: Telecom Multi-service IPTV in Europe Main Player: France Telecom with revenues of more than $47 billion in 2004 and 5.4 million broadband customers, 142,000 broadband TV customers and 56 million wireless customers Quad Play Capabilities: Voice: Fixed-line telephony via existing infrastructure Broadband Internet: xdsl broadband internet Wireless mobility: ownership of Orange the second largest European operator Video: IPTV through xdsl network Benefits: Leverage of current telecom infrastructure such as xdsl and wireless network Integrated standardization of services and user experience deployed by one vertical organization Alternative to cable and satellite services Challenges: Limited national broadband coverage Organizational integration to provide consistent user interface Dependence on un-proven technologies like IPTV Source: Company annual reports; incode Analysis Converged Services approaches for Cable Service Operators Case Study 3: Joint Venture Converged Service Providers in US In November 2005, Sprint-Nextel Inc third largest nationwide cellular service provider in the US and four cable companies (Comcast, Cox Communications, Time-Warner Inc. and Advance/Newhouse Communications) serving 75 million subscribers announced a partnership to sell co-branded wireless and cable services to their customer base. The alliance is in the early stages of formation and hence the exact details of each partner s responsibilities and payback are unknown. The success of such a partnership would largely depend on the complementary capabilities of each partner, their commensurate share of benefits and execution of the integrated user experience. Such a partnership approach to converged services offering does provide advantages of lower capital and operational 6

expenses and increased efficiency through complementary capabilities. However, the multiple organization structure may create execution issues for parties. The following chart provides an illustration of Case Study 3. Case Study 3: Joint Venture Converge Service Providers in US Main Players: Sprint-Nextel, Comcast, Cox Communications, Time-Warner, Advanced NewHouse Sprint-Nextel: Invest $100 Million in the joint venture. Re-sell media content and cable services to its subscribers Cable Companies: Invest combined $100 Million in the joint venture. Re-sell co-branded wireless services to their subscribers Quad Play Capabilities: Voice: Voice-over-IP (VoIP) over broadband internet by cable service providers Broadband Internet: Cable broadband by cable service provider Wireless mobility: Sprint-Nextel s nationwide CDMA and iden wireless network Video: Broadcast video through cable service provider Benefits: Shared infrastructure development costs among service providers Multiple service distribution channels Content service and distribution experience provided by cable service providers Wireless network operations experience provided by Sprint-Nextel Inc. Faster time-to-market through existing infrastructure No regulatory approval required for new services Challenges: Customer relationship and business processes integration across several organizations Consistent user experience definition by integrating user experience and product development across different organization Required close coordination between alliance partners to realize full benefits Prevent possible dilution of their individual brands Source: Company annual reports; S&P Industry survey 2005; incode Analysis Case Study 4: Cable Operator Buys MVNO in Europe The acquisition of Virgin Mobile by NTL at the beginning of this year provides Quad Play capabilities to NTL. While it already offers a Triple Play (video, high speed Internet, and voice), NTL extends its services offering with mobile voice. NTL faces challenges with the integration of two separate IT platforms as well as with the integration of two distinct company cultures. Success of the acquisition will largely depend on leveraging NTL and Virgin Mobile customer base. Case Study 4: Cable Operator Buys MVNO in Europe Cable UK operator Largest UK cable operator with a total of 3.2 million customers and 1.4 million broadband customers Revenues of 2 billion in 2004 Quad Play Capabilities: Voice: Voice-over-IP (VoIP) over broadband internet by the cable service provider Broadband Internet: Cable broadband by cable service provider Wireless mobility: MVNO acquisition of Virgin Mobile ( 920 million) Video: Broadcast video through the cable service provider Benefits: Leverage of customer base from NTL and Virgin Mobile Leverage of current cable infrastructure Content service and distribution experience provided by cable service providers Faster time-to-market through existing infrastructure Challenges: Financial burden with the acquisition Required large investment to roll-out digital services Cultural issue with re-branding the entire enterprise to Virgin Customer base fit between Virgin Mobile and NTL Source: Company annual reports; incode Analysis Framework to Fill Service Offering Gap Based on the above cases, we present a framework to consider various strategic options to fill the gap in the service offering for a service provider to become a Quad Play provider. As noted in cases above, cable and wireless service providers can provide Triple Play services with their existing or near-future networks. As a result, these service providers have only one component, wireless mobility and video/tv respectively, missing in their 7

Quad Play offering. As shown in the case studies above these service providers can fill their gap by partnership or MVNO-type arrangements. In the charts that follow, for each service provider type, it is assumed that they provide a set of services based on current or near-future network capability although specific deployment may not be realized today. The table provides strategic options with some important considerations that a service provider needs to Service Offering Gap consider when filling that particular service offering gap. Converged Services Technology Approaches Once the service provider chooses a strategic path to converged services, they need to make appropriate technology choices to ensure desired service delivery. IP Multimedia Subsystem (IMS) and Unlicensed Mobile Access (UMA) are the primary candidates for realizing converged services in existing wireless networks. Strategic Options and Key considerations to fill the Service Gap Service Provider Type Cable Current offering: Voice (Circuit and VoIP) Broadband Internet (Cable Modem) Video/TV Wireless Current offering: Voice Broadband Internet (UMTS/HSDPA/ EV-DO) Wireless Mobility Wireless Mobility Video/TV MVNO Ability to leverage their brand and marketing/sales Full control of business processes billing, customer care, marketing Partial control of customer experience and service offering as host network would control what devices is added onto network Need to create retail sales channel Example: NTL with Virgin Mobile Partnership/Co-Branding with a Video service provider Leverage partners content relationship Leverage partners market and operational capabilities Require closer integration of business processes between partners (IT investment) No clear increase in share of wallet for partners Example: Sprint-Nextel and Cable companies partnership in US Partnership/Co-Branding with a Wireless Service Provider Leverage partner s market and operational capabilities Require closer integration of business processes between partners for integrated customer experience (IT investment in multiple companies) No clear increase in share of wallet for partners Example: Sprint-Nextel and Cable companies partnership in US Integrated Ownership of a Video service provider Integrated control of customer experience and service offerings Significant financial investment in new or acquired network Build content relationships Example: None Video/ TV capabilities is more difficult to acquire than wireless capabilities and highly dependent on country specific regulations and market dynamics Source: incode Analysis The wireline telecom operators will need to consider wireless mobility and video/tv distribution as the service gaps as these require networks distinct from their current infrastructure. Based on incode analysis, the chart below provides insight into strategic options for wireline service providers to fill these gaps. 8

Service Offering Gap Strategic Options and Key considerations to fill the Service Gap Integrated Ownership of Video Service Provider Partnership/Co-Branding with an existing Video Service Provider Wireline Current offering: Video/TV Full integrated control of customer experience, service offerings and network operations Potential investment for network upgrade to provide video services Dependent on country specific regulations Example: France Telecom offering IPTV over DSL No additional network infrastructure investment required Limited control of customer experience and service offerings Example: Current SBC arrangement with Dish Network (satellite video service provider) in US Voice Broadband Internet (xdsl) Integrated Ownership of Wireless Service Provider MVNO Integrated control of customer experience and network operations Ability to leverage their brand and marketing/sales Wireless Mobility For new network build, significant financial investment in spectrum and network infrastructure Dependent on country specific regulations and market dynamics Example: BellSouth deploying WiMAX trials No network infrastructure or spectrum investment required Full control of business processes billing, customer care, marketing Partial control of customer experience and service offering as host network controls network coverage and devices Example: BT Fusion Source: incode Analysis According to many industry experts, IMS is considered as the long-term solution for converged services; however, incode believes UMA will play an important role in enabling service providers to launch fixed-mobile converged offerings sooner. IMS is an architecture based on IP that can help operators to reduce operating cost and additional revenue generating converged services. Even though the IMS standard is still in development, available versions do not support seamless handover of voice calls between mobile networks and WLAN, a primary feature of UMA. An improved handover capability, however, is being standardized by 3GPP under the name Voice Call Continuity (VCC) with leadership from major network infrastructure and service providers. IMS offers flexible, open and standardized service delivery architecture that supports numerous applications via common control plane across multiple access networks. UMA is the only standardized solution that enables Fixed- Mobile convergence by tunneling GSM and GPRS services over unlicensed spectrum technologies e.g. 802.11 and Bluetooth. UMA is the only currently available approach that provides seamless roaming between RAN and WAN. The main drivers for operators to launch UMA are: to improve in-home coverage while improving the economics of wireless minutes used in-building, to counteract the fixed-mobile substitution trend, and to reduce churn through bundling. Operators providing only fixed-line and broadband services can leverage their networks and increase revenues while decreasing the customer churn rate. On the other hand, combined fixed-mobile operators can adopt a defensive approach that mitigates the risks of VoIP providers. 9

Conclusion The convergence revolution has begun and the competition will be fierce. At stake is the global $1.1 trillion communications and entertainment market. The fight is for the control of the seamless customer experience, especially the applications and content that will fulfill the lifestyle and functional needs of the customer. The multi-industry contest draws competitors from many sources including traditional telecom (both wireline and wireless), cable, satellite, media, Internet portal, and many others. As digital technology advancements cleanly separate the application intelligence from the connectivity core and pure connectivity continues to become commoditized, this is one competition that anyone could win. Contact incode has in-depth knowledge of the wireless space. We continuously help operators, infrastructure vendors and the enterprise develop and enhance strategies in all areas of wireless. Please contact us at info@incodewireless.com if you want to find out more about this topic or about incode and the services we provide. Advantages, disadvantages and roadmaps for IMS and UMA IMS UMA Advantages Disadvantages SIP based IP media management and session control architecture, agnostic to access technology Future proof architecture with ability to easily add new advanced services without change to control network Operators doubt the revenue prospects of IMS and the cost savings are unproven Commercial handsets which support standardized seamless handoff not expected until 2007 Supports seamless handoff between GSM and 802.11/Bluetooth Least operational impact on existing GSM network infrastructure and reuses the existing IT interfaces May become obsolete in future due to lack of clear evolution path to UMTS Provides access to existing wireless application portfolio, cannot support the feature richness of existing SIP based VoIP applications Roadmap Voice Call Continuity expected to be standardized in June 2006 4Q7 Carrier certified IMS device 1Q06 Carrier certified UMA device Source: incode Analysis 10