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BRU_CKT008_20031119_Practice Olympics

Stagg NewmanMcKinsey & Company

Business Implications of VoIPCITI WorkshopMay 25, 2004

VoIP over WirelessParasitic Disruption orGeeky Market Niche?

VoIP over WirelessParasitic Disruption orGeeky Market Niche?

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BRU_CKT008_20031119_Practice OlympicsTHE VISIONVoIP + Broadband Wireless = DisruptionTHE VISIONVoIP + Broadband Wireless = Disruption

Wireless WANS(e.g. WiMax)

WiFi offering

• Broadscale coverage

• IP Friendly

• Limited Mobility

• Hype will out in front of market reality

• High bandwidth (up to 5.5 Mbps real-life)

• IP Friendly

• Low coverage due to limited range

Best of all worlds

• Broad coverage

• High band-width

• Single billing relationship

VoIP over Broadband

Is there is a Pony in there somewhere!

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BRU_CKT008_20031119_Practice Olympics

So why is Broadband Voice (aka VoIP) spreading now in the telecom industry ?So why is Broadband Voice (aka VoIP) spreading now in the telecom industry ?

1. IP telephony quality is improving and is getting cheap

2. Adjacent technology adoption (PC, Broadband, P2P, WLAN)

3. Low prices, based on lean business model and arbitrages

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BRU_CKT008_20031119_Practice Olympics

300 1300

5200

8600

11900

15400

18800

BB Voice is thriving in Japan …BB Voice is thriving in Japan …

Source: NTT; Yahoo Research Institute;Team analysis

Domestic call pricesYen, 3 min calls

8.5

80

8

Localcall

Nationalcall

BB VoIP off-net call (with Yahoo

Broadband)

- 90 %

01 02 03F 04F 05F

IP Phone lines developmentThousands

The Japanese regulator has created a new area code 050 for

the BB VoIP

On-net calls are for free

06F 07F

• 45% of BB households

• 11% of all households

Incumbent

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BRU_CKT008_20031119_Practice Olympics

… because its CHEAP !!! and easy to use… because its CHEAP !!! and easy to use

Source: NTT Communications (February 2003)

Reasons for using IP telephony serviceMultiple answer

92.4

67.4

21.5

20.0

11.4

10.0

1.8

2.5

Cheap calls

Free calls to IP users

Quality is good

050 numbers

Is reliable

Is easy to use

Good after service

Others

53.628.0

3.76.77.9

As good as fixed phone

Better than fixed phone

Between fixed and cellular phone

As good as cellular

Worse than cellular

Voice quality of IP telephony

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BRU_CKT008_20031119_Practice Olympics

The next wave of parasite model innovation will be to attack wireless $$s with VoIP over wireless technology

* Japan example** other office, friends place, restaurant, hotel , shop, etc.

Source: Fortune; InStat/MDR; Nomura; McKinsey

WLAN

Threat to mobile as well as fixed line revenues

So what has to happen for WoIPover wireless to be • cheap and • easy to use?

VoIP

IP

2343

14 218

Breakdown of mobile voice calls* Percent Other

Office

Home

Other indoor locations**

Car84% of mobile calls are made from a area potentially covered by WiFi

84% of mobile calls are made from a area potentially covered by WiFi

VoWiFi handsets sold today, dual handsets (VoWiFi and GSM) are recently available

VoWiFi handsets sold today, dual handsets (VoWiFi and GSM) are recently available

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BRU_CKT008_20031119_Practice Olympics

VoWLAN - KEY QUESTIONS AND INTIAL HYPOTHESIS VoWLAN - KEY QUESTIONS AND INTIAL HYPOTHESIS

What is the value proposition of VoWLAN?

What market segments can take advantage of VoWLAN value proposition?

Which players may lead the VoWLAN roll-out?

What are the major barriers to making VoWLAN a reality?

Initial hypothesis

• Users of VoWLAN will be able to reduce their mobile telephony expenses by 23-38%

• Additional benefits include higher new multimedia services that take advantage of higher throughput

• Enterprise sponsored users that make a significant portion of their calls from their own offices will be the first segment to capture savings

• High spend tech savvy residential users, particular corporate employed users will migrate to dual mode.

• Enterprises will reduce their mobile telephone bills• Fixed line operators, mobile operators without significant 3G

investments and mobile operators from other geographies will attack cellular revenues or defend wireline revenues

• Equipment manufacturers (PDA, wireless networking gear, chipsets) will little will see this as a growth opportunity

• Preliminary findings suggest dual mode phone technology is or will be ready within the year

• Traditional handset manufacturers will be reluctant to roll-

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2

3

4

Key questions

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BRU_CKT008_20031119_Practice Olympics

WHAT IS THE VALUE PROPOSITION OF VoWLAN?WHAT IS THE VALUE PROPOSITION OF VoWLAN?

Source: ART; Team Analysis

6-1223-29

35

VoWLANcall savings

Monthly bill with dual mode phone

Mobile telephony cost analysisEUR/month

23

21

14

12

30

Other indoor

Other locations

Home

Work

Car

Call breakdown by origination locationPercent; 100% = 119 MOU/month

Calls taken over WiFi• 100% of at work calls• 50% of at other

indoor calls

-23-38%

Monthly bill with traditional phone

FRANCE EXAMPLE

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BRU_CKT008_20031119_Practice Olympics

WHAT MARKET SEGMENTS WILL BE ABLE TO TAKE ADVANTAGE OF VoWLAN VALUE PROPOSITION?WHAT MARKET SEGMENTS WILL BE ABLE TO TAKE ADVANTAGE OF VoWLAN VALUE PROPOSITION?Percent of total MOU; 100% = 51 billion MOU

Source: Percentages from Japanese data; Team analysis

Where does the mobile call originate?Total

45Who pays the mobile bill?

Enterprise

Residential

Location example

• Profession-al hotspots

• Malls• Restaurants• Transporta-

tion networks

• Stadiums • Petrol

stations

• Single family

• Apart-ment

• Dorm

Own office

Someone else’s office

Indoor (other)

At home

Corporate wireless LAN

Total 23 30 21

In car and other

26

• Car• Free-

waysCentral business district networksBusiness parks

100

User examples

• Corporate billed mobile phones

• Corporate users with individual contracts that bill to firm

10

13 16

14

12

9 12

14 55

Primary

Secondary

FRANCE EXAMPLE

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BRU_CKT008_20031119_Practice Olympics

WHICH PLAYERS WILL LEAD THE VoWLAN ROLL-OUT?WHICH PLAYERS WILL LEAD THE VoWLAN ROLL-OUT?

Operators

Hotspot and WISPs

Handset manufacturers

Network infrastructure providers

Enterprises

Likely proponents

• Second and third tier players and players from other geographies

• Fixed line players with no mobile offering or with threatened wireline revenues

• Players will little 3G investments at stake

• High traffic hotspot owners • Stand-alone broadband operators that want to compliment their

current BB offering

• PDA manufacturers - Manufacturers looking for an entry point into the mobile handset market

• Second tier manufactures with low market share in concerned geographies

• Players with large WiFi equipment sales (eg access points, billing and roaming software providers, etc.)

• Players with little incumbent sales in concerned geographies

• Enterprises with high mobile voice expenditures occurring in few locations

• Enterprises that will be building out WiFi networks regardless of voice applications

Who has nothing to lose?

• Will not cannibalize investments in current technology (eg 3G)

• Will can leverage unused network capacity (eg excess backbone to be used for back-haul)

• Will build a WiFi network for other applications in addition to voice

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BRU_CKT008_20031119_Practice Olympics

What are the major barriers to making VoIP over wireless a reality?What are the major barriers to making VoIP over wireless a reality?

Barriers to entry

Ability to overcome barrier

• Availability of handsets (dual mode WiFi/GSM) with battery life, high QOS, robust to noise.

• Ability of handsets to do AAA without browser I/F

• Willingness to jeopardize current relationships (voice MOUS, handset distributors, SIMs)

• Roaming and billing software not yet developed• Standards for roaming and interconnect – Who

will be the players connecting all of the WLAN networks?

• High QOS on WLANs

• Ability to allow “foreign” users in your network without jeopardizing security (ie how to allow a guest in your office to utilize your WiFi network for voice only)

• Ability to operate unlicensed spectrum (i.e., how to deal with overlapping networks)

Easy

Medium Hard

Technology

Network management

Security

Initial hypothesis

• Technology is maturing

• Working standards not available

• Willingness to distribute and support is questionable

• Development of centralized clearinghouse or significant bilateral agreements missing

• Consolidation required to gain network scale

• WiFi network quality lacking today

• Security issues likely to be resolved

• Consolidation required to increase network reliability

Coverage• Limited and unpredictable coverage of WiFi• Lack of high performance, low latency, low jitter,

low error rate Wireless Wide Area Networks• Inability to handoff between cellular and WiFi

network which causes dropped calls

• WiFi is spreading well

• Cellular networks will deploy slowly and WiMax several years away

• CPE and customer will solve

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BRU_CKT008_20031119_Practice OlympicsTHE VISION VoIP + Broadband Wireless = DisruptionThe Pony Needs Endurance!THE VISION VoIP + Broadband Wireless = DisruptionThe Pony Needs Endurance!

Wireless WANS(e.g. WiMax)

WiFi offering

• Broadscale coverage

• IP Friendly

• Limited Mobility

• Hype will out in front of market reality

• High bandwidth (up to 5.5 Mbps real-life)

• IP Friendly

• Low coverage due to limited range

Best of all worlds

• Broad coverage

• High band-width

• Single billing relationship

VoIP over Broadband

Is there is a Pony in there somewhere!