Page 1

The Second Derivative:New Opportunities in Telecom

Roderick K. RandallSenior Managing Director

Vesbridge Partners

Stratus World 2006 – Las Vegas

Page 2

Why Start or Invest in a Telecom Company?

• Why do you rob banks, Willy?

“Cause that’s where the money is”

Willy Sutton

Bank Robber

Page 3

Where are the New Opportunities?

• Answer:

The Second Derivative

Page 4

Second Derivative Plays

• The Base

Internet infrastructure

Starting with narrowband and moving to broadband.

• The First Derivative opportunities

Internet based companies such as AOL, Amazon, Yahoo, Google, eBay, and others

• The Second Derivative Plays

Skype - $4 Billion!

Moogle, MeBay, Mamazon, Metc.

Mass Personalization and Citizen Media

MediaCos (not Telcos or CableCos, but Network TV without the Network)

Voogle – Video Search Based TV Ad Delivery

Page 5

A Network Carol

• The Ghost of Christmas Past

• The Ghost of Christmas Present

• The Ghost of Christmas Future

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The Ghost of Christmas Past

• Telecom was the most valuable and profitable industry in the world

When I joined AT&T Bell Labs in 1981 it was the worlds largest company and its most valuable

• We’ve since seen Divestiture and Trivestiture, (and now reassembly!) along with a tremendous growth in the competitive environments…

• Along with a dramatic surge in capacity and capability in the following 25 years..

• Spurring in turn a tremendous surge in innovations, not the least of which included the internet and the web

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LGNs: Last Generation Networks

• Voice and Connectivity

• Local and Long Distance

• Bandwidth in $/Minute, $/Mile,

Page 8

Worldwide Telecom Service Revenues$1.4 Trillion in 2005

Source: IDC

$1.0 Trillion

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The Ghost of Christmas Present

• Strong demand for higher and higher bandwidth

• Increasingly Pervasive “always on” Broadband

• Enabling the 1st derivative business models to enormously prosper such as those of Amazon, Yahoo, eBay, and Google

• Google is now worth over $100 Billion, which is more than any telecom operator in the world, except for Vodafone Group, which has grown by acquiring over 26 operators

• Skype was already acquired for $4 Billion by eBay

• P2P traffic from a small percentage of subscribers dominates the internet backbone

• All telcos are planning some form of IPTV in a triple play with 10s of Mbps of BB BW

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The Ghost of Christmas Future

• A number of potential futures

• One is where telcos ride the new wave of opportunity by radically transforming their business models to meet the new challenge

• Another where telcos are ridden by the new 2nd derivative players, some of which are the 1st derivative players who have evolved and are now gear-shifting into overdrive

• Let’s look at the second one first, because that’s what Dickens would do

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Key Catalysts

• Plentiful Consumer Broadband in capacities un-dreamed of 10 years ago…

• Driven by the MAD Winner-Take-All competitive threat of The Triple Play …

• Driven by the push to mix Entertainment Delivery with Telecom…

• Digitally using IP…

• At low costs…

• Even free…

• Or “apparently” free to the consumer…

• Using a new advertiser supported business model…

• Which is no longer broadcast based…

• And everything is stored on increasingly abundant cheap storage, and instantly retrievable by anyone anywhere

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What Do You Call 1,024 Petabytes?

• And the answer is…

An Exabyte• How many Petafiles could a woodchuck chuck, if a wood

chuck could chuck wood?

• Terabytes of Storage will become common place in the average broadband consumer home within 5 years

• As the tendency to keep rather than discard data increases, along with more sources

• What is a Googabyte?

1 with 100 Zeroes of bytes

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Magnetic Disk Storage Cost:Declining at a Rate of 45% Annually

Cost of 1G Byte of CapacityCost of 1G Byte of Capacity

1992 1994 1996 1998 2000 2002 2004 2006 2008

$1,000.00

$303.00

$92.00$28.00

$8.37 $2.53 $0.77 $0.23 $0.07

$1,000.00

$100.00

$10.00

$1.00

$0.10Source: Berghell Associates, 2001

Cost of 1GigaByteof Hard Disk Storage

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A New $1 Trillion Industry…

• It will be made up from the convergence and collision of three different industries

Entertainment: $72 Billion

$12 Billion Music

$60 Billion Movies

Advertising: $600 Billion

Telecom Services:$1.4 Trillion

• The Tail may be wagging the Dog

• Net Net: $2 Trillion $1 Trillion

• But, there will be a different set of winners and losers

• Key Catalysts: Read on…

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Enter Googlezon

• EPIC 2014, a short film by Matt Thompson and Robin Sloan

• Ads move from broadcast TV, newspapers, print, billboards, other, to Online

NY Times shuts down, unable to support its printing costs

• Mass personalization makes advertising much more compelling both to advertisers and potential customers

• Google buys Amazon to create Googlezon

• Everything that’s bought begins with a search

• With personalized, search driven, real-time inserted, online Ads…

People get ads that they actually want to watch,

Related to something they are interested in purchasing,

Rather than are annoyed by and seek to skip

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Which Becomes Googlezonage

• TV is offered for free, again, this time Pointcast over IP, not broadcast All supported by a real-time hyperlinked Mass Personalized Ad model NBC, ABC, CBS shut down, replaced by Bloggers MTV, Fox, and Craig’s List survive as the new Ad Aggregators (a la

Overture)

• Telephony rides for free on IP, leading to financial crisis in network operators

• All telcos learn to operate within bankruptcy like the airline industry

• Google buys SBC (out of bankruptcy) and Vonage to keep the broadband pipes flowing

• Wireless is the only surviving stand alone network business But its threatened by Googlezonage’s new Global WiFiMAX FreeNet Enter Googlezonage Mobile

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It’s a MAD MAD World

• M.A.D.: Mutually Assured Destruction for telcos and cable operators

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But, There’s An Alternative Future

• Telcos and Cablecos not only offer IPTV, but get involved in Internet TV

• They add intelligence in their networks to make sure they are paid for the value of connection in order to keep the pipes alive

• Nobody unsustainably gives valuable network connections away for free without someone paying the operators

• The new business models that are created involve a true payment methodology for QoS that reflects value, but that could be paid by sponsors such as advertisers

• New applications are spawned, which further institutionalize the network providers into the value chain, rather than Skype them out

• Connection will continue to be valued and paid for

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The Stupid Network is a Stupid Idea

• Stupid Networks lead to stupid and unsustainable Business Models

• Stupid Networks would ultimately only have price/bit as differentiation…

• Leading to rapid commoditization…

• Which drives profitability out of all competitors…

• Which makes the business un attractive…

• Which makes it un-finance-able…

• Which makes it un-staff-able with top talent

• Which leads to collapse

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Dimensions Of Network Intelligence

Signaling and Control Control

ManagementPSTN

ContentContent• Instant Messaging

• Multimedia messaging• Network Based Security• Parental Control• Spam Filtering• Intelligent Content Delivery & Management

• AIN Services•800/900, Caller ID/Name•Voice Mail, IVR

• Mobility• SMS• SIP• Fixed/Mobile Convergence

• DNHR• Self Healing Networks• Flow Through Provisioning• MPLS

Management

IP Enhanced3-D Intelligence

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IP

BSCRAN

SMSCHLR VLR Pre-Paid

U-AP

L-AP

M-AP

L-APPico Cellular

WiFi

Bluetooth

WiMax

WLAN GWY

IP

MF

W

WBSC

WiFi/SIPBSC

PSTN

SS7 HLRHLRHLRVLR

MG

SG

SS/MM

VLR

IMSHosted VoiceSvc Provider

SS

MS

MG

SG

A-Interface

GSMCDMA

WCDMA1x-RTT/EV-DO

HSDPAMSC MSC

Fixed-Mobile Convergence Architectural Environment

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IP

BSCRAN

SMSCHLR VLR Pre-Paid

U-AP

L-AP

M-AP

L-APPico Cellular

WiFi

Bluetooth

WiMax

WLAN GWY

IP

MF

W

WBSC

WiFi/SIPBSC

PSTN

SS7 HLRHLRHLRVLR

MG

SG

SS/MM

VLR

IMSHosted VoiceSvc Provider

SS

MS

MG

SG

A-Interface

GSMCDMA

WCDMA1x-RTT/EV-DO

HSDPAMSC MSC

SIP PBX

Fixed-Mobile Convergence Architectural Environment

MG

PBX

Residences

RemoteOffices

Broadband

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Fixed-Mobile ConvergenceFT Server Opportunities

SIP PBX

IP

BSCRAN

SMSCHLR VLR Pre-Paid

U-AP

L-AP

M-AP

L-APPico Cellular

WiFi

Bluetooth

WiMax

WLAN GWY

IP

MF

W

WBSC

WiFi/SIPBSC

PSTN

SS7 HLRHLRHLRVLR

MG

SG

SS/MM

VLR

IMSHosted VoiceSvc Provider

SS

MS

MG

SG

A-Interface

GSMCDMA

WCDMA1x-RTT/EV-DO

HSDPAMSC MSC

MG

PBX

Residences

RemoteOffices

Broadband

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Intelligent Content DistributionEvery Song, Artist, Video, or Film Ever Recorded… On Demand

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable Network EdgeNetwork Core

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Intelligent Content DistributionContent Replication and Pre-Caching

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable

Local DVRs

• Store most recent tv shows

• Favorites

Home Media Server

• Store all purchased and downloaded content

Movies

TV shows

Pictures

MP3s

Etc.

Network Edge DVR

• Store the most popular content:

Most downloaded movies

New releases

Most popular MP3s

Network Core DVR

• Store all content:

All movies available for download

All Music available for download

All Video...

Network EdgeNetwork Core

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Intelligent Content DistributionPolicy Control Servers Control Network Enforcement

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable

Local DVRs

• Store most recent tv shows

• Favorites

Home Media Server

• Store all purchased and downloaded content

Movies

TV shows

Pictures

MP3s

Etc.

Network Edge DVR

• Store the most popular content:

Most downloaded movies

New releases

Most popular MP3s

Network Core DVR

• Store all content:

All movies available for download

All Music available for download

All Video...

Network EdgeNetwork Core

Policy EnforcementPoint

Real Time Billing Policy Server

BW/QoSPolicy Server

PCS PCS

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Intelligent Content DistributionSearch Based Personalized Real Time Ad Insertion

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable

Local DVRs

• Store most recent tv shows

• Favorites

Home Media Server

• Store all purchased and downloaded content

Movies

TV shows

Pictures

MP3s

Etc.

Network Edge DVR

• Store the most popular content:

Most downloaded movies

New releases

Most popular MP3s

Network Core DVR

• Store all content:

All movies available for download

All Music available for download

All Video...

Network EdgeNetwork Core

Policy EnforcementPoint

PCS PCS

Entitlement & DRM

Search based Personalization

Real Time Ad Insertion

PCS PCS

P2P Swarm Controller

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Intelligent Content DistributionControlled Peer-To-Peer Swarmcasting

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable

Local DVRs

• Store most recent tv shows

• Favorites

Home Media Server

• Store all purchased and downloaded content

Movies

TV shows

Pictures

MP3s

Etc.

Network Edge DVR

• Store the most popular content:

Most downloaded movies

New releases

Most popular MP3s

Network Core DVR

• Store all content:

All movies available for download

All Music available for download

All Video...

Network EdgeNetwork Core

Policy EnforcementPoint

Entitlement & DRM

Search based Personalization

Real Time Ad Insertion

PCS PCS PCS PCS

P2P Swarm Controller

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Intelligent Content DistributionFT Server Opportunities

Home Media Server

Guest Room Master Bedroom

Home Theatre

DSL/CableModem

EthernetSwitch

DSL

Fiber

Cable

Local DVRs

• Store most recent tv shows

• Favorites

Home Media Server

• Store all purchased and downloaded content

Movies

TV shows

Pictures

MP3s

Etc.

Network Edge DVR

• Store the most popular content:

Most downloaded movies

New releases

Most popular MP3s

Network Core DVR

• Store all content:

All movies available for download

All Music available for download

All Video...

Network EdgeNetwork Core

Policy EnforcementPoint

Entitlement & DRM

Search based Personalization

Real Time Ad Insertion

PCS PCS PCS PCS

P2P Swarm Controller

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$1 Trillion Market Grows to $3 Trillion

• Oops, what’s that ringing sound?

• Was that the alarm clock waking me up from this dream, or is it a nightmare???

• You be the judge

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Thank You!

www.vesbridge.com