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E-Business in Telecommunications: The Impact of the Internet on the Communications Industry April 13, 2000

E-Business in Telecommunications: The Impact of the Internet on the Communications Industry April 13, 2000. Contents. Introduction - impact of the Internet on the communications industry Household Market Corporate Market . Introduction.

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E-Business in Telecommunications: The Impact of the Internet on the Communications Industry April 13, 2000

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  1. E-Business in Telecommunications:The Impact of the Internet on the Communications IndustryApril 13, 2000

  2. Contents • Introduction - impact of the Internet on the communications industry • Household Market • Corporate Market

  3. Introduction Despite playing a leading role in providing services for the Internet, the telecom industry lags other segments in generating revenues through E-Business initiatives E-Business Revenues by Industry - 2003 Projections - Source: Business Week Percent of Total Industry Revenues Computing & Electronics Financial Services Travel Energy Retail Telecomms E-Business Market Size $410B $67B $170B $80B $108B $15B

  4. 4-Box Model PwC uses a 4-box model to explore the implications of the Internet within the telecom industry PwC’s 4-Box Model Restructuring the value chain to create ‘many-to-many’ relationships, new value propositions & new business models • Box 4: • Convergence Transformer • Box 3: • IndustryTransformation Companies entering new industry sectors and competing outside of their core business areas Degree of change to business model Connections with trading partners and process changes across the value chain S E C Box 2: Value Chain Integration Enabler Enhancing current channels and adding new channels to market S E C Box 1: Channel Enhancement Enabler Transformer Role of E-Business

  5. E-Business as an enabler Our recent survey of telecom companies in the US and Europe revealed that E-Business investments are focused almost entirely on channel enhancement and value chain integration activities • Box 1: • Channel Enhancement • Box 2: • Value ChainIntegration • Bill presentment, review, payment • Self-service inquiries • Individual product sales • Order entry and status • Employee enrolment • Performance monitoring • Online account management • E-procurement • E-HR (salary/ benefits admin) • Financial and sales management and reporting Current Activities • Electronic catalogues • Account profiles • Account access • Web-based CRM • Integrated order provisioning • Real-time cross-selling • Virtual reps • Product info/training • Real-time inventory and transactions • Network performance • Integrated purchaser/ vendor • Network activation • Capacity provisioning Planned Activities Source: PwC Survey of Telecom E-Business Plans

  6. E-Business as a transformer We anticipate significantly more Box 3 and Box 4 activities as the industry transforms through the adoption of current and future E-Business applications • Box 3: • IndustryTransformation • Box 4: • Convergence • Personalization and recommendations across broad service set (wholesale and retail) • Price buyer services • Personal router management • Traffic geolocation mapping • Network E-products • Multi-provider tracking • Billing aggregator • Total network inventory analysis and marketplace (public, competitor, corporate) • 3G wireless infocom applications • Home network services provision • Household services management • Integrated infocom services provision • Personal infocom services management • Applications and coms service hosting and provision Sources: PwC Survey of Telecom E-Business Plans, PwC Telecommunications Industry Visioning, internal review of E-Business activities across industries

  7. Mass Market Corporate Impact by market segment The impact of the Internet should be analyzed by market segment, given fundamental and increasing differences among the household, corporate and mobile segments Today we will focus on the Mass Market and Corporate Market • The skills and products needed to serve business customers are now very different from those needed to effectively serve the mass market • The introduction of new services (advanced data services in business markets, mobility, Internet access, etc) in both markets has resulted in differing end-user requirements for both groups • The geographic focus of the market segments differ - mass markets are more local, corporations are more global • In addition, the operational demands associated with effectively serving customers with complex product requirements are very different Mobile Skills Geographic Scope Products Processes Competitors Network Key Success Factors Value Chains Branding / Bundling Valuation Metrics

  8. Tomorrow’s Business Focus Today’s Business Focus We will explore three areas related to the impact of the Internet on the communications industry The Internet as a ... source of demand for telecom products/services enabler transformer of business models Buyers Sellers • Services • Access • Applications Exchanges S E C Mass Market Supplier Enterprise Customer Auctions Aggregators Customer segments • Telecom services • Professional services • Backbone capacity S E C Corporate Supplier Enterprise Customer

  9. The Internet as a ... source of demand for telecom products/services enabler transformer of business models • Services • Access • Applications Mass Market Customer segments Corporate

  10. Consumer spending Consumers have over the past 10 years increased their spending on telecommunications services as a percent of total household spending from 2.76% to 3.57%, belying the notion that telecommunications is a utility category • Consumer spending on core telecommunications products has outstripped underlying economic growth by a factor of two, three and sometimes four • Since 1978, spending on multi-channel television services has grown more than 14% per year, with cable penetration standing at over 66% in 2000 • Internet usage has increased from 20% of households in 1997 to 30% of households in 1999. This number is expected to double over the next 5 years, reaching over 60% by 2003 Monthly Spending per US Household on Telecom Services (1940-1998) 1996 Real $ Sources: Census Bureau, Department of Commerce, FCC Industry Analysis Division, Paul Kagan Associates, CTIA, Simba, AOL Annual Reports, Lehman Brothers

  11. Change in Components of Spend In the future, traditional telecom services will become a smaller portion of overall service value; new services will be offered and could include retail transactions, entertainment, equipment leasing and billing • Since 1970, household spending on telecommunications as a percent of discretionary spending has tripled. New communications services will perpetuate this trend • The total pool of value available to telecom service providers is not fixed, but expanding rapidly • In the not-so-distant future, one-stop shops will supply all basic and advanced telecommunications, entertainment and online purchasing needs -- with one bill and one point of customer contact • Conservative assumptions regarding the proportion of consumer spending moving to Web-enabled channels over the next five years generates the monthly bill to the left. This will double the growth rate of the traditional telecommunications industry, adding $50 billion annually to the new industry value chain in the U.S. alone Intermediary Plus A Communications Solutions Provider Bill Summary Network Connections (flat rate) On-Net Purchasing High Speed Access $70.00 Victoria’s Secret $59.95 Mobility $65.00 1-800 Flowers.com $49.99 Unified Messaging $12.00 On-Line Mall $275.00 Digital Television Services Equipment Leasing/Financing DBS Package $60.00 HAN w/HCC $15.00 VOD Mobile Web Surfers (2) $10.00 Hong Kong Gangsters (Movie) $2.95 Miss Internet Pageant (Event) $3.95 Total - All Services $797.79 European Cup Final (Sports) $7.95 Monthly Internet Services Daily Customized News Service $5.00 Where local and long Appliance Monitoring $6.00 distance calling is free !! Remote Security $15.00 Publix Grocery Delivery Services $120.00 Amazon.com Book of the Month $20.00

  12. Digital Terrestrial TV Telephone return path Satellite to TV Telephone return path TV Home Area Network A variety of needs in the household market are increasing demand for bandwidth and driving the development of new applications that support the emergence of the home area network (HAN) Home Area Network • Needs • Sharing of: • Peripherals: printers, scanners, cameras • Internet access • Files and application • Multimedia and games • High bandwidth for voice and video applications • High speed access for telecommuting • Automation of home devices such as environmental controls and security systems Smart Device Terrestrial Wireless (Narrow & Broadband) HCC Cable Company Local Exchange Local Server Telco Fiber & Copper Fiber & Coax Broadband Wireless. Mobile

  13. Broadband technologies Increased demand for local bandwidth and exponential growth in Internet traffic is generating the development of multiple forms of broadband access and an increase in backbone capacity • xDSL and cable modems are predicted to be the dominant forms of local broadband access • xDSL is being driven largely by telco’s who can build on their existing networks to provide broadband service • Cable modem’s are being deployed by cable operators over existing cable TV lines already deployed in millions of US households • Satellite technology is less developed than xDSL and cable modems, and will therefore take longer to be deployed • Satellite systems are well suited to provide service to developing regions because there is no need to deploy last mile infrastructure Forecast of North American Residential Broadband Access CAGR xDSL 328% Cable Modem 83% Broadband Satellite 260% Broadband Wireless 113% Source: 1999 Communications Industry Researchers, Inc

  14. Broadband Satellite Home Area Network Applications New applications and household devices that will increase the convenience and comfort of the home user will result from the emergence of the Home Area Network and deployment of broadband access New Applications • Voice and video applications • Digital video networking • Video-on-demand • Interactive programming • Internet telephony • Videoconferencing • Internet radio • Distance learning High-speed Access Terrestrial Wireless (Narrow & Broadband) • Services • Monitoring / Home Automation • Security • Electricity • Heating xDSL Cable Modems HCC Local Exchange Local Server Fiber-to-the-home E-Commerce/Home shopping • New Generation CPE • Control center for home communications

  15. ILLUSTRATIVE Home Area Network Applications An intelligent interface will develop, combining content and transport A Vision Of The Future Intelligent Interface Facility (Home And/Or Office) Intelligent Interface Communications Entertainment • COMMUNICATIONS • Visual • Voice • Data ENTERTAINMENT Voice Visual Data Office Facilities Management Applets Electricity Heating Security FACITILITIES MANAGEMENT OFFICE Electricity Heating Security • Key Characteristics • Voice activated • Intelligent search Source: Forrester Research, Telephony, PwC analysis

  16. Access network providers Capture content spending Capture on-net spending Enable new applications Support the HAN Establish net currency There are a number of key value imperatives in the new household communications industry Key Value Imperatives

  17. The Internet as a ... source of demand for telecom products/services transformer of business models enabler Mass Market Customer segments • Telecom services • Professional services • Backbone capacity Corporate

  18. The Internetworking Revolution The internetworking revolution is transforming the corporation and creating new opportunities for telecom providers to service their emerging needs • Growth of enterprise-wide applications • ERP (eg SAP, Oracle) • Knowledge Management (Lotus Notes) • E-mail (MS Mail) • Video Conferencing • Interoperability around Internet Technologies • TCP/IP • HTTP • HTML,XML, Java Internetworking Revolution • Global Competition • Privatisation and liberalisation • Free trade (WTO, Single market, NAFTA) • Emerging markets competition • Global manufacturing, servicing and marketing trend • Electronic channels to market • “Death of distance” • Optical fibre physical medium • Transmission technologies (SDH/Sonet) • Packet switching (frame relay ATM, IP) • Telecom sector liberalisation (CLECs, infrastructure) Telco opportunities • “The Global LAN” • Growth of E-business • Unbundling of the Corporation

  19. The Global LAN The global area network constitutes the virtual private network of the global enterprise, provided either end to end across owned facilities or through local service level agreements “The Global LAN” Global Network Desktop (LAN/WAN Integration) WAN Desktop (LAN/WAN Integration)

  20. Advanced Data ATM Frame Relay SMDS X.25 Corporate Internet Access Advanced Voice 800/900 Services VPN Dedicated Access The Global LAN The creation of the global area network creates new opportunities for telecom providers in providing new services such as managed network services and network integration for advanced voice and data products US Managed Network Services Revenues: 1998 - 2002 Total CAGR: 22% Advanced Data Advanced Voice • In market research undertaken by PwC in 1999; 40% of corporate customers had already established a global buying function for communications products, revealing the expectations of corporations to receive true global solutions, and not piece-meal national solutions

  21. Growth in US E-commerce Transactions (Billions U$S) E-Commerce growth The growth in E-Business will generate increased bandwidth demand and will provide new outsourcing opportunities in IT and communications services • Both Business-to-Consumer and Business-to-Business commerce, will drive bandwidth demand • the creation of vertical marketplaces and increased supply chain integration require infrastructure and will be a major driver of demand • The economics of the global economy will drive corporations to use the Internet to improve efficiencies and focus on their core competencies • will lead to increased outsourcing of non-strategic IT and communications activities (infrastructure, applications, network management, operations and IT support) Total CAGR:82% Source: Forrester Research

  22. IT/(E)-Business Consulting Systems Integration Sales Marketing Applications Hosting Web Hosting Tomorrow’s Business Focus Network Management Network Design and Integration Today’s Business Focus Product Development Capacity Provisioning Service Activation Service Assurance Billing Customer Care Customer Relationship Management Unbundling of the corporation As corporations increasingly outsource core IT, communications and operational activities to focus on their own core competencies, the internetworking providers will have to fundamentally change their business model from a network-centric focus, to a customer and solutions-centric focus

  23. On-Net (Corporate) Customer ownership Customer ownership in the corporate market will shift from communications service providers to application and information service providers Business Customers Application and Professional Services Provider End-to-End Communications Service Providers Billing and (Customer Management) Product and Content Providers

  24. Market success Customer and solution-centric companies are showing signs of success in the market when compared to network-centric service providers • Customer-centric companies, like Level 3, were able to increase their stock price by 271% over the past two years • Integrated telecom companies like Bell Atlantic and AT&T have only increased their stock by 29% and 16% respectively over the past two years Level 3 Bell Atlantic AT&T • Application service focused companies like Exodus Communications were rewarded by the market with an increase in stock price of 3,216% since March 1998

  25. The issue for operators is to decide where to play in the value chain IT Services Communications Services Corporate Network Integration IS/IT Consulting Systems Integration Corporate Network Management Managed Network Services Basic Access and Transport Services Network Infrastructure Provision • IT/IS Consulting • Application Development • Systems Integration • Software Integration and Support • Hardware Integration and Support • IT Training and Education • Network Consulting and Integration • IS Outsourcing • Desktop Management Services • Network Management • Application Outsourcing Services • Business Process Outsourcing • Process Services • Managed Voice Services • Managed Data Service • Local Service • LD Service • Dedicated Access • Wireless • Private Circuits • Dark Fibre • “Right of Way” • Private Circuits • IRUs

  26. EQUANT A number of players are currently addressing this opportunity ... IS/IT Consulting Systems Integration Corporate Network Integration Corporate and Network Management Managed Network Services Basic Access and Transport Services Network Infrastructure Provision Non core Mid Core Core Core Core Non core Core Non core Non core Non core Non core Core Core Non core Mid Core Core Core Core Mid Core Core Mid Mid Non core Non core Non core Core Mid Non core Non core Non core Core Mid Non core Mid Core

  27. Value Imperatives Key Value Imperatives • Enter the human capital business • End-to-end 100% ownership • Own the desktop • Be global • Build Wholesale Business

  28. The Internet as a ... source of demand for telecom products/services transformer of business models enabler S E C Mass Market Supplier Enterprise Customer Customer segments S E C Corporate Supplier Enterprise Customer

  29. E-Business Initiatives Telco’s are pursuing a variety of E-Business initiatives in eMarketing, eSales and eCare to more effectively interact with the customers Selected Customer Touchpoints Develop Products/ Services Service Activation & Assurance Perform Marketing Customer Care Sales Billing eMarketing eSales eCare • Collect order information, and generate service order • Provide on-line credit validation • Reduce product delivery costs • Enable customers of low value commodity products self activation of service • Enable account management from sales through implementation among equipment, network facilities, suppliers and customers • Collaborative management of network services and inventory management • Communicate test and turn-up of service/service activation • Reduce cost of sales through electronic transactions • Provide real time inventory of product availability • Establish one touch and done customer product inquiry - order • Synchronize demand forecasts with inventory • Provide high value customers with tailored services • Promote real time cross-selling and up-selling • Enable the timely and accurate distribution of sales leads • Create and manage price, terms, conditions, service level agreements and contracts • Automatically update resource loads, service and provisioning schedules, force management and provide updates to customer order tracking files • Provide intelligent virtual service representative • Allow widespread monitoring and management of customer • Provide information and internet-based training on new products/services • Improve timeliness and quality of service • Monitor and track performance vs. SLAs • Electronic billing, review and inquiry • Electronic bill payment • Develop customized products • Integrate various products and services offerings • Improve new product take rates, and bring products to market more quickly • Simulate and rapidly test new product ideas through online research or direct customer inquiry • Differentiate product offers • Establish key customer focus groups to collaborate in product packaging • Quickly test and deploy alternative pricing, terms, or product strategies in days rather than months • Use agents to develop pricing or promotion response • Customer segmentation capability • Widespread access to real time service/product availability • Push product information and tailored promotions to customers • Extend brand • Provide rapid alerts to changes in inventory, pricing and promotions • Identify customers at risk of churn E-Business Capabilities

  30. Efficiency eMarketing • Decreased customer churn • Improved profitability comparisons for different prospect types • Accurate profitability comparisons for orders from different channels • eSales • Decrease lead turnaround time • Increase margin contribution • Decrease sales cycle • Decrease promotion cost/discounts per order • Decrease training time • Decrease average time per sale eCare • Increased speed and accuracy of resolution • Increased outbound call capacity • Decreased cost per service customer The Case for eCare By focusing on the customer rather than on the enterprise, the web provides a more efficient and effective medium for the delivery of telecom services Effectiveness • eMarketing • Improved customer loyalty (win-back) • Increased analysis of marketing program effectiveness • Improved visibility to win-rate comparisons for different prospect types • Extending the life of customer eSales • Increase cross/up selling • Increase margin contribution • Increase average order size • Increase win/loss information • eCare • Increased customer satisfaction • Increased lead conversion rates • Additional sales channels through live contacts and teleweb +

  31. Customer Markets The distinct character and needs of the each market suggests that the household market should focus on marketing and sales activities, whereas the corporate market should focus on customer care Degree of Loyalty • ePriorities Customer Base/Needs Product/Service Offering Market Economics Care Needs Household • Over 15 million customers • Bundling emphasis • Standard service offerings • Voice and simple data • Very high volumes • TBR < $100/ month • Fixed pricing • Lower margin services • Routine interactions • Simple inquiries • Service availability • Low • Customers price sensitive • eMarketing and eSales • Routine and complex interactions • Service availability and SLA reporting • Billing analysis • Customized service offerings • Voice & data • Hosting (web/applications) • Network management • Negotiated pricing • Contracts, SLAs master service agreements • Very high volumes • TBR < $100/ month • Higher margin services • Long-term relationships • Less than 1 million customers • Solutions emphasis Corporate • eCare

  32. Tomorrow’s Business Focus Today’s Business Focus The Internet as a ... source of demand for telecom products/services transformer of business models enabler Buyers Sellers Exchanges Mass Market Auctions Aggregators Customer segments Corporate

  33. Introduction to Web-based business models New business models are already beginning to impact the way telecom services are packaged and marketed Web-based Competitive Segmentation eRetailers Aggregators Auctions Supply Exchanges Beyond LD LD Traditional Reverse Demand directory reseller Exchanges provide a market mechanism for trading commodity assets online. They work effectively when there are multiple buyers and sellers, the asset is a defined and uniform good and there is market liquidity. Supply aggregators - consolidate telecom and/or other services on a portal or other platform. • eRetailers are facilities based service providers that use the Internet as a sales and delivery channel • V-o-IP LD providers • Unified Messaging • Free ISP’s Traditional auctions are seller driven online auction for wide variety of products and quantities Reverse auctions are buyer driven online auctions where there is one buyer and many suppliers Demand aggregators consolidate the needs of fragmented markets to gain purchasing power with suppliers Definition Resellers usually capture retail revenues, complete the entire transactions on their web site, and many times provide billing and customer care to the end-users Directories act as “neutral navigators” allowing buyers to comparison shop, customize, evaluate and purchase products/services on the Web Household Wireless Small Business Household Wireless Small Business Household Wireless Small Business Household Wireless Small Business Large Business Wholesale Large Business Wholesale Small Business Large Business Markets Advertising. Retail revenues Volume/ wholesale discounts Transaction commissions Advertising. Commerce revenue. Licensing fees Advertising Transactions commissions Subscription fees Advertising Bounties/ commissions paid by service providers Advertising Transactions commissions Advertising Transactions commissions Subscription fees Revenue Model

  34. Web-based players Most new telecom eMarketplace players fall in the Supply Aggregator category Communications Industry Web-based Business Models Aggregators Auctions Supply Exchanges eRetailers Demand Traditional Reverse directory reseller • Bandwidth.com • Band-X • FreeMarkets • imandi.com • Killerbiz.com • Priceline.com • 1stUp.com • Dialpad.com • Deltathree.com • eVoice • Fax Sav (Mail.com) • Juno • Linx Comm. • Net2Phone.com • NetZero • OneBox.com • Phone.free.com • RocketTalk • Talk.com • ThinkLink • U-Reach.com • Z-Tel • BuyTelco.com • CollegeClub. com • Essential. com • Extant • MVX.com • ServiSense • Telegea.com • Telstreet.com • Universal Access • Utility.com • BandX • CommerceOne • BizBuyer • BuyersZone • DealTime.com • Decide.com • Lowermybills.com • MyRatePlan.com • MySimon.com • OfficeClick.com • Onvia.com • Point.com • Reasonware.com • ShopNow.com • Simplexity.com • LetsTalk.com • Totally Wireless (ePhones.com) • Demandline. com • Accompany. com • Mercata.com • Arbinet • Band-X • Enron • RateChange

  35. Summary of impact Emerging web-based business models will have varying impact on different sectors of the communications industry Communications Industry Web-based Business Models Aggregators Auctions eRetailers Supply Exchanges Demand Traditional Reverse directory reseller • Local • LD • Wireless • Internet Access • Vertical Services • BellSouth.com LD coming Consumer * • Local • LD • Wireless • Internet Access • Vertical Services • BellSouth.com Non-complex Businesses • Local • LD • Wireless • Internet Access • Wholesale • BellSouth.com Complex Businesses * Note: Harvey ball refers to Entertainment services, not Vertical services

  36. Summary of strategic alternatives Telco’s should aggressively manage those business models that represent the most opportunity for growth and the largest threat of disintermediation such as supply aggregators, both resellers and directories Summary of Strategic Direction Buy Stake/ Acquire Support Fight Ignore Join Create High Business Impact Low

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