Industry Overview -tv Usa

T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Telecommunications Industry Overview

T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Telecommunications Industry Overview While the telecommunications industry is more than 100 years old, the industry today finds itself at the beginning of a new communications revolution as broadband and wireless technologies radically transform the industry. In the United States: • By 2004 the number of long-distance calls made over wireless networks exceeded those made over wireline networks. Wireless minutes of use exceeded 1 trillion in 2004 and have more than doubled, to 2.1 trillion, by 2007. Nationwide wireless networks and Internet-based communications have changed traditional distinctions between “local“ and “long-distance“ services. • The number of American wireless customers now exceeds 250 million, a penetration rate of more than 80 percent. One government survey reports that one out of every eight American homes had only wireless telephones during the first half of 2007. • One independent survey noted that in 2007, for the first time, more adult Americans would find it harder to give up their cell phone than their landline phone service. • Businesses in the wireless industry invested $24 billion in 2007 in infrastructure, employ 3.5 million Americans and produce an unparalleled pace of innovation in the high-tech industry. • Instant messages have outnumbered e-mails for several years, and are not only becoming the principal means of communication for young people, but also have evolved beyond text to voice and video. • According to the Federal Communications Commission (FCC), high-speed wireline Internet connections increased by more than 61 percent during the 12-month period through year-end 2006, to 82.5 million lines. • Half of all Americans now have wireline-based broadband service at home, according to the Pew Internet Project’s September 2007 survey, marking the first time that as many as 50 percent of respondents say they have high-speed internet connections at home. The mega-trends in telecommunications—the shifts from analog to digital technology, from wired to wireless platforms, and from narrowband to broadband services—have fundamentally changed the way people communicate. This is a social phenomenon that is already shaping the telecommunications industry of the future. Around the world, traditional telephone companies are evolving into providers of full-service communications networks that deliver high-speed, mobile connectivity to customers wherever they are. Global Markets Globally, telecommunications wireline and wireless revenues totaled an estimated $1.65 trillion in 2007, with industry projections of singledigit percentage growth over the next five years. Growth is expected to be dominated by wireless and broadband, which estimates suggest may total two-thirds of an estimated $2.27 trillion market by 2012. High-growth telecommunications markets outside of the U.S. include China and India, as well as Latin America and developing regions that have previously had an under-penetration of telecom services relative to other regions. Of note, regarding growth in broadband access services, the countries with the fastest-growing online populations in the world today are Brazil, Russia, India and China. China has already passed the U.S. in the number of Internet users. At current growth rates, in three years more than 40 percent of the Internet users in the world will reside in Asia.

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Global Wireline and Wireless Revenue (in trillions of dollars) 2007 Market Size

Projected 2012 Market Size

$1.65 trillion

$2.27 trillion

Dial-up 3%

Broadband 8%

Wireline 42%

Wireless 47%

Dial-up 2%

Broadband 11%

Wireline 31%

Wireless 56%

2007 - 2012 CAGR 6.6% Source: SD&P Internal Analysis

The U.S. Market The U.S. is, and will continue to be, the largest global telecommunications market in terms of revenues. In 2007, analysts estimated that the U.S. telecommunications market generated approximately $568 billion in revenues and that this will rise to approximately $710 billion by 2012. These revenues are generated from a variety of products and services: wireline and wireless voice and data services, plus other areas such as online advertising, video, and content. Segmented by markets, the overall U.S. revenue picture shows that more than half of telecommunications spending is still in the Consumer market segment, although the General Business and Enterprise (large-business and government) markets continue to grow. In the U.S., a number of incumbent and emerging competitors offer some or all of these products and services. Some of these labels no longer accurately describe the present-day companies they are applied to: • Incumbent Local Exchange Carriers (ILECs)—Verizon, AT&T, Qwest • Cable Operators (MSOs, or “multi-system operators“)—Comcast, Time Warner Cable, Cablevision, Cox • Wireless Carriers—Verizon Wireless (a joint venture of Verizon and Vodafone), AT&T Wireless, T-Mobile, Sprint Nextel • Competitive Local Exchange Carrier (CLEC) and VoIP (Voice over Internet Protocol) Provider—Vonage • Equipment Providers—Alcatel-Lucent, Nortel, QUALCOMM

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

U.S. Telecommunications Market (in billions of dollars) 2007 Market Size

Projected 2012 Market Size

$568 billion

$710 billion Wireline Voice 19%

Wireline Voice 13%

Online Advertising 4%

Online Advertising 6%

Video & Content 19%

Video & Content 22%

Professional Services 7%

Professional Services 7%

Wireline Data 17%

Wireline Data 19%

Business CPE 7%

Business CPE 6%

Wireless Data 4%

Wireless Data 7%

Wireless Voice 23%

Wireless Voice 20%

2007 - 2012 CAGR 4.6% Source: SD&P Internal Analysis

Case Study: Verizon The changes in the industry can be illustrated by a more detailed look at one of the largest U.S. telecommunications companies. Verizon, a full-service communications provider, generated 2007 revenues of $93.5 billion. A bellwether for the industry (added to the Dow Jones Industrial Average in 2004), Verizon has a nationwide presence in wireline and wireless markets, with an estimated 100 million or more Americans connecting to a Verizon network daily. Changing Revenue Mix A look at Verizon’s revenues demonstrates the change in demand for telecommunications services in the U.S. over the past several years. Wireless services are becoming a larger part of Verizon’s revenue mix, while traditional local wireline services are shrinking as a percentage of Verizon’s total revenue. Within the wireline market, however, Verizon has seen growth in revenues from data and broadband services (including DSL/Digital Subscriber Lines and new fiber-optic-based services marketed under the brand name FiOS). At year-end 2002, Verizon reported annual operating revenues of $67.6 billion—with wireline services generating $40.7 billion and wireless services generating $19.3 billion (directory publishing and international operations predominantly accounted for the remainder of revenues). Five years later, at year-end 2007, Verizon reported annual operating revenues of $93.5 billion—with wireline services generating $50.3 billion (including revenues for a new Verizon Business unit formed after the 2006 acquisition of MCI, Inc.) and wireless services generating $43.9 billion. Growth Markets The growth businesses for Verizon have evolved as the industry has evolved. More than five years ago, long-distance services provided revenue growth in wireline markets, even as some customers began migrating away from traditional landline phone services. Long-distance had been a mature market for traditional long-distance carriers (sometimes called Interexchange Carriers, or IXCs). Verizon and its peers (anachronistically called Regional Bell Operating Companies, or RBOCs) were prevented from offering long-distance services at the 1984 divestiture of AT&T.

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The Telecommunications Act of 1996 paved the way for RBOCs to begin offering long-distance services, and Verizon benefited from being an early insurgent in the market. It was the first of its peers to re-enter the long-distance market in January 2000. Verizon also benefited because in June 2000 its predecessor company, Bell Atlantic, merged with the nation’s largest independent telecommunications company, GTE, which was already offering long-distance services. After 2000, Verizon became one of the largest long-distance carriers in the nation. However, technology was beginning to have a dramatic impact on wireline markets at the beginning of the decade, and Internet access services provided the potential for greater future growth than traditional telephone services. For Verizon, these broadband wireline services include both DSL and FiOS services. The technologically more-mature DSL service is based on copper wire connections to customers’ homes. Newer FiOS broadband service, which is based on fiber-optic connections to customers’ homes, is growing at a more rapid pace in recent years. Verizon added more than 1.25 million wireline broadband connections in 2007, and this number included more than 850,000 new FiOS Internet connections. The greater capacity of fiber optics also gave Verizon the opportunity to offer FiOS TV in addition to FiOS Internet, and by early 2008 Verizon already had more than 1 million FiOS TV customers—a growth market that didn’t even exist for the company a little more than two years earlier. To further accelerate growth by focusing on core network assets, in 2006 and 2007 Verizon took several additional steps: • The spin-off of wireline businesses in three New England states, announced in 2007 and completed early in 2008. • The sale of non-strategic international assets in Latin America and the Caribbean, completed in 2007. • The spin-off of Verizon’s directories publishing business into a new, separate company called Idearc, which began operations in late 2006. • The completion of Verizon’s merger with the former MCI, which early in 2006 created Verizon Business, a leading provider of advanced communications and information technology (IT) solutions to large business and government customers worldwide. Verizon Wireless Verizon’s most dramatic growth in recent years has occurred in the wireless market. In general, U.S. wireless penetration has shown steady growth throughout the decade and is more than 80 percent today, with continued growth projected for the foreseeable future. For all wireless carriers, this growth is occurring in an evolving competitive landscape. In late 2003 under a program called Local Number Portability (LNP), wireless customers for the first time were able to change carriers and keep their existing wireless phone number. Also, wireless carriers are continuing to improve their spectrum positions through acquisitions, swaps and leasing. In the first quarter of 2008, the FCC completed the auction of more than 1,000 licenses in the 700 MHz band. “Auction 73“ raised a total of $19.1 billion in winning bids. Nowhere has wireless growth and market expansion been more evident than at Verizon Wireless. The company gained 7.7 million net new wireless customers in 2007. One reason for this market-share gain is that Verizon Wireless operates the most reliable wireless network in the country. The Verizon Wireless network has been ranked highest in network quality performance among the largest wireless providers by a national research organization over the past several years. In total, over the past 10 years through year-end 2007, the Verizon Wireless customer base has grown from about 6 million to almost 66 million.

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Verizon Wireless Subscribers (in millions)

80 70

65.7 59.1

60 51.3

50

43.8

40 30

37.5 29.4

32.5

20 10 0

2001 2002 2003 2004 2005 2006 2007

While the total number of customers for Verizon Wireless has grown, monthly service revenue per user (sometimes called ARPU, for “average revenue per user“) has also grown for Verizon Wireless—even as the retail price for voice wireless service has decreased over time. This is because the wireless industry is evolving rapidly from voice to data—and data use is having a significant positive impact on wireless revenues. During 2003 SMS (short messaging service) was the major non-voice contributor to revenues, but by 2004 downloads and picture messaging had begun to contribute a greater percentage. In the first quarter of 2008, Verizon Wireless reported that its customers alone sent more than 58 billion text messages and 1.1 billion picture and video messages. This compares with 2.1 billion text messages and 21 million picture messages (video messages weren’t available) in the first quarter of 2004. The deployment of broadband wireless network capabilities has accelerated the development and use of wireless data services. Verizon Wireless was the first carrier to build a national wireless broadband network. In 2003, Verizon Wireless launched BroadbandAccess, an ultra-high-speed wide-area broadband network and service, giving customers wireless access to the Internet, intranets, e-mail and other applications at broadband speeds. This was based on EV-DO (Evolution-Data Optimized) technology and was quickly deployed nationwide. In early 2007, Verizon Wireless launched its next-generation high-speed wireless broadband network, based on EV-DO Revision A (Rev. A) technology, giving customers the ability to upload files eight to nine times faster than before and giving them faster Internet and e-mail access. Rev. A technology has been made available throughout the entire EV-DO network and at year-end 2007 covered more than 240 million people.

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

BroadbandAccess customers in enhanced broadband wireless coverage areas can expect average download speeds of 600 kilobits per second (kbps) to 1.4 megabits and average upload speeds of 500-800 kbps. Verizon also offers V CAST services, based on EV-DO technology. V CAST is the nation’s first consumer wireless broadband multimedia service, bringing high-quality video, 3D games and music straight to cell phones. Verizon Wireless introduced of wireless video services in early 2005 and music services in early 2006.

Penetration to Connections

More than 400% M2M + Digital Lifestyle + Auto and Telemetry + ???????

84% Conventional Penetration

Conventional Penetration

Today

Future Opportunity 6

T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

In 2008, Verizon Wireless made two announcements that will enable its network to provide even more robust data capabilities. First, the company announced its Open Development Initiative, sometimes called the “any apps, any device“ initiative. The goal is to give customers the ability to use the wireless device, software and applications of their choice on the Verizon Wireless network. Subject only to meeting minimum technical standards, any device will work—and any application can be downloaded. Second, Verizon Wireless announced the roadmap to an even faster and more convenient wireless broadband experience. The company is embracing a technology called “LTE“ (Long-Term Evolution) for its next-generation wireless network. The goal is for LTE to achieve more than 100mbps upstream and more than 50mbps downstream, and both Verizon and its overseas partner, Vodafone, have chosen to develop applications on this common platform.

Global Standard • Technology of choice

Significant Throughput Increase

• Supported by the largest wireless carriers in the world

• Low-latency, IP-based service platform • Media-rich capabilities

Global Partnerships

Scale Economies

• Leverage relationship with Vodafone

• Device and infrastructure efficiencies

• Global roaming

• Simplified architecture

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Network Evolution On the wireline side, several factors involving the evolution of Verizon’s core networks have positioned the company well in growth markets: ubiquity and reliability, commitment to investment, and advanced technology deployment. 1. Ubiquity and Reliability. Verizon’s network plays a key role in the convergence of all telecom networks. Verizon and its peers own and maintain their networks, provide a full range of services and, perhaps most importantly, provide last-mile access to customers. In 2007 alone, Verizon Wireline operated wholesale businesses generating $11.4 billion in annual revenue, as other telecommunications companies used the Verizon network to connect to customers’ homes and businesses. As of year-end 2007—before the spin-off of New England access lines—Verizon’s network included 41.4 million wireline access lines. Access lines are connections from a customer’s premises to the Verizon network. Even after the recent spin-off, Verizon provides wireline access lines in 25 states in virtually all areas of the country. Over 1.2 billion phone calls and trillions of bits of data are carried over this nationwide network on an average business day, with a reliability factor of over 99.99 percent. Verizon’s U.S. wireline network also includes millions of miles of local, inter-city and long-distance fiber-optic systems to help carry calls and data for customers around the country. That’s enough to circle the Earth more than 500 times. Meanwhile, Verizon’s wireless network operates in nearly all top U.S. markets (49 states) and reaches more than 260 million Americans. Verizon’s wireless network is 100 percent digital, with more than 175 switching facilities nationwide. Like the company’s wireline network, the wireless network is built for reliability in emergencies, with industry-leading redundancy and maintenance measures. 2. Commitment to Investment. Over the five-year period from 2003-2007, Verizon has invested more than $74 billion—more than any other telecom or cable company in America—to maintain, upgrade and expand its technology infrastructure. This includes nearly $30 billion on the Verizon Wireless network alone. Buoyed by these significant network investments, Verizon Wireless has become the nation’s leading wireless provider according to many important industry measures—customer satisfaction, innovation, network reliability and cash flow generation. In response to a general industry decline in the early part of the decade, most other telecommunications companies sharply reduced capital spending on network infrastructure. During this time, Verizon emphasized overall expense control as newer technologies made networks and operations more efficient. Verizon also sold non-strategic assets, both domestically and internationally, and the company maintained strong, consistent cash flows from operating activities ($26.3 billion in 2007). This has enabled the company, unlike its peers, to maintain a healthy level of network spending in growth areas—investing more in wireless and broadband than anyone else in the industry. Earlier in the decade, Verizon, like other peer companies, also used much of its cash flow to reduce corporate debt levels—although at a greater rate. In Verizon s case, the company reduced corporate debt by nearly $20 billion, or by nearly a third, over a two-year period ending in 2004.

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3. Advanced Technology Deployment. Verizon has used its infrastructure investments to transform its wireless and wireline networks around new technologies and new markets. In addition to the investment in wireless broadband mentioned earlier, Verizon in May 2004 began an even more ambitious project: the first-ever large-scale deployment of fiber-optic technology to individual homes and businesses, replacing the copper wires that connect customers to the Verizon network. Called fiber to the premises, or FTTP, the new technology delivers unprecedented speed and a new broadband experience. It provides the bandwidth and speed to make available an array of new FiOS services: super-fast, high-speed Internet access; crystal-clear voice, and a full suite of video services that are superior to cable TV offerings. By the fall of 2006, Verizon reported that: • FiOS Internet services was gaining market share in a growing broadband market. • Early FiOS TV successes indicated a strong customer preference for choice among video providers. • Innovative services were differentiating FiOS from competitive services and driving new market opportunities. • The company’s fiber deployment was already reducing network costs and positioning significant, ongoing savings in operating expenses.

Conclusions Verizon’s plan, then, is to invest in superior, high-tech networks to provide customers with services that will differentiate the company in a competitive, high-stakes marketplace: • Verizon Wireless operates the most reliable wireless network and the most widely available wireless broadband network in the country. • Verizon Telecom’s fiber-to-the-premises network, which takes fiber all the way to customers’ homes and businesses, is the most advanced broadband network being deployed in America today. • Verizon Business has the industry’s most advanced global network, the most expansive Internet backbone and deep expertise in providing Internet Protocol (IP) services. In a larger context, this advanced technology deployment also promises benefits in terms of product innovation, economic growth and job creation. In testimony to the U.S. Senate Committee on Commerce, Science and Transportation in 2004 (the year Verizon began its FiOS deployment), Verizon’s Chairman and CEO Ivan Seidenberg said that delivering 100 megabits of capacity to people wherever they are—at home, at work, on the go—should be the long-term goal for the communications and high-tech industries. These kinds of networks will create a platform for new applications, services and communications technologies, giving Americans even more choices in the electronic communications marketplace. More recently, a 2008 study by Connected Nation found that a 7 percent increase in broadband adoption in the U.S. would create 2.4 million jobs and $134 billion in economic growth.

U.S. Industry Developments and Trends While revenues and access lines in the traditional, narrowband wireline telephone business are declining, other communications markets are expanding, providing Americans with many networks and many services from which to choose. The emerging broadband industry is made up of super-fast, multi-megabit networks that can deliver video, data and voice in entirely new ways. First-generation broadband connections—whether DSL or cable modems—were just the initial step. Truly high-speed, multimegabit networks go beyond faster downloads or cheaper phone calls to enable multi-media capabilities that have begun to revolutionize communications in general, and hold the promise for interactive services that can revolutionize commerce, education and health care.

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Consumer Markets With widespread adoption of broadband and wireless services, the following trends are emerging in U.S. consumer markets: • Social networking, Internet video and user-generated content playing a more important role in the communications experience, especially among younger age groups. • Online and mobile content accelerating growth, resulting in increasing demand for network operators to provide more bandwidth and higher speeds. • Portals, content providers and equipment device makers competing with network operators to allow users more direct access to content and services. • Open networks and devices changing the role of traditional network providers. Business Markets The U.S. Enterprise market, serving large-business and government customers, has consolidated in recent years, resulting in the emergence of two major players—AT&T and Verizon—as well as other smaller CLEC players. Two large mergers first announced in 2005—SBC’s purchase of AT&T, and Verizon’s purchase of MCI—are responsible for most of the consolidation in the U.S. SBC revived the AT&T brand after its purchase was complete. In the case of Verizon/MCI, the merger—completed in early 2006—added new strength to the telecommunications services both companies provided. It ensured that consumers and businesses had a supplier with the financial strength to maintain and improve MCI’s Internet backbone network. The transaction also enhanced Verizon’s ability to compete for and serve large-business and government customers with a complete range of services, including wireless and the most sophisticated IP-based services. The Enterprise market includes traditional voice and data services and customer premises equipment (CPE). Hosting, storage and professional services are growth areas for providers. Legacy services such as wireline voice will continue to decrease as an increasing number of enterprises migrate to VoIP. Virtual private networks (VPNs) will gradually gain share from legacy data products, such as ATM (Asynchronous Transfer Mode) and frame relay, but this will likely be a multi-year transition. Major trends emerging in the Enterprise sector include: • Greater convergence of business communications services and IT/computing services driven by an acceleration and greater migration to IP network platforms. • Increased system complexity requiring a greater need for managed networks, security, hosting and storage solutions leading to more outsourcing by Enterprise customers. • Growth of online media used by enterprises expected to support continuing demand for more content and applications delivery network services. • More wireless mobility utilized by Enterprise customers driven by the need to manage remote workforce requirements with new devices and applications. In the small- and medium-business (SMB) market, a number of key trends are developing: • Cable MSOs will aggressively target the SMB market over the next few years. • A new generation of CLECs have emerged, offering SMBs a full range of IP products and services in select geographical markets. • New technologies and services similar to those used by Enterprise customers will be increasingly adopted by SMBs.

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T e l e c o m m u n i c at i o n s I n d u s t r y O v e r v i e w

Summary The communications industry covers a wide spectrum of services, ranging from wireline and wireless voice communications and data access, to video and content delivery. Worldwide demand for these services generated an estimated $1.65 trillion in revenues in 2007, with more than one-third of this in the U.S. market. While the industry experienced turbulence earlier in the decade, key players such as Verizon have maintained focus on pursuing new growth opportunities to transform their businesses. Industry growth will be driven in particular by demand for broadband data, wireless and Enterprise services. In the U.S., this growth is dependent on developments in several areas: increased customer demand, successful industry consolidation and continued improved regulation. The pace of demand will play a large role in telecommunications growth. Rapid advances in technology, including the deployment of IP, FTTP and wireless broadband, continue to transform the nature of the industry and add functionality for customers. Verizon, with its robust wireline and wireless asset base, is well positioned to retain its status as a global leader in communications services.

About this Document: This document was prepared by Verizon Communications as an industry perspective for investors, potential investors and researchers. May 20, 2008

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