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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
Global Telecom Outlook Day
Morgan Stanley does and seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision.
Customers of Morgan Stanley in the U.S. can receive independent, third-party
research on the company covered in this report, at no cost to them, where such
research is available. Customers can access this independent research at
www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a
copy of this research.
The information and opinions in this report were prepared by Morgan Stanley & Co.
Incorporated and its affiliates (collectively, "Morgan Stanley").
Please see analyst certification and other important disclosures starting on page
247.
From Great to Good to…
Mark Shuper, Global Telecoms
Mark.Shuper@morganstanley.com
Simon Flannery, US Telecoms
Simon.Flannery@morganstanley.com
Henry McVey, US Strategist
Henry.McVey@morganstanley.com
Hani Abuali, Asia Telecoms
Hani.Abuali@morganstanley.com
Richard Bilotti, US Cable
Richard.BIlotti@morganstanley.com
Mary Meeker, Global Internet
Mary.Meeker@morganstanley.com
Nick Delfas, European Telecoms
Nick.Delfas@morganstanley.com
Vera Rossi, Latin America Telecoms
Vera.Rossi@morganstanley.com
Vance Edelson, US Telecoms
Vance.Edelson@morganstanley.com
Conrad Werner, European Telecoms
Conrad.Werner@morganstanley.com
Scott Coleman, Comm. Equipment
Scott.Coleman@morganstanley.com
John Marchetti, Comm. Equipment
John.Marchetti@morganstanley.com
2
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Morgan Stanley Telecom Team
EUROPE
Nick Delfas
Luis Prota
Nick Lyall
Conrad Werner
Juan Jimenez
Frederic Boulan
Chris Fremantle
Saroop Purewal
Emerging Markets
Sean Gardiner
Alex Vassiouk
Telecom Equipment
Adnaan Ahmad
Peter Dionisio
Rupert Lion
NORTH
AMERICA
Simon Flannery
Vance Edelson
Raina Smyth
Jessica Yau
Sean Ittel
Communications
Equipment
Scott Coleman
John Marchetti
LATIN
AMERICA
Wireless Services
Vera Rossi
Daniel Gaviria
Wireline Services
Mario Epelbaum
Nicolai Sebrell
ASIA/PACIFIC
Hani Abuali
Mark Shuper
Andrew Hines
Vinay Jaising
Mitchell Kim
Lina Choi
Navin Killa
Franklin Fu
Sachin Gupta
Seyon Park
JAPAN
Hironori Tanaka
Nami Okayasu
3
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Executive Summary
– Mark Shuper, Managing Director, Global Telecom Research
– Henry McVey, Managing Director, Chief US Investment Strategist
4
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
If Only Telecoms Were This Easy
5
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Global Telco Performance – Weak 2005 Relative to Home Markets, After a Strong 2004
Despite strong absolute performances by telco stocks in certain markets (GEMS, Japan),
telcos in every region globally have actually underperformed their local indices YTD.
Within this weak relative context, on a sector basis we continue to favor many emerging
market telcos, as well as the European carriers compared to their US counterparts.
MSCI Regional Telecom Absolute Performance, January 1, 2005 to Date
Source: FactSet Prices as of Oct 7, 2005
85
90
95
100
105
110
115
120
125
130
135
12/31/2004
1/14/2005
1/28/2005
2/11/2005
2/25/2005
3/11/2005
3/25/2005
4/8/2005
4/22/2005
5/6/2005
5/20/2005
6/3/2005
6/17/2005
7/1/2005
7/15/2005
7/29/2005
8/12/2005
8/26/2005
9/9/2005
9/23/2005
10/7/2005
Europe 3%
LatAm 13%
EMEA +29%
US -11%
Japan 17%
NJA 7%
Relative to
Local Index
-3%
-8%
-6%
-6%
-11%
-11%
6
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
2005: From Great to Good to…
2002: The Year of the CFO – fix the balance sheet (reduce Debt/EBITDA!)
2003: The Year of the COO – optimize your assets (grow RoIC!)
2004: The Year of the CEO – Growth vs. Returns
2005: From Great to Good to…
• FCF payouts from telecom sector still have room to rise, providing a
measure of stock support in the near term; M&A is not yet a disruption.
• Within the sector, we continue to support telcos exhibiting:
• Upside to revenue and/or dividend growth
• Relatively benign competitive and regulatory environments
• “Special situations” (optionality on regulation, capital returns, M&A, etc.)
• Growing threat of VoIP will start putting more telcos’ “revenue at risk”
7
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
US Strategy – Key Themes
ROE is Still King, But Margins Have Peaked; 2006 Will Be About Asset Turns and Financial Leverage
– Return on equity remains the #1 factor return in the S&P 500 this year. However, margin improvement stories can no longer carry the day. As
a result, we have shifted our attention towards improving asset turns and/or financial leverage stories.
– Capital management alone, however, is not enough to get us interested. Rather, we are interested in companies with strong underlying
fundamentals that are using buybacks, dividends, and acquisitions to aggressively bolster returns.
Stocks: PRU, BAX, KMI, PEP, WMB
A Brave New World Means A Heightened Focus On Stocks With Yield and Growth
– We recommend buying stocks delivering rising payout ratios amid strong earnings growth. The lion’s share of these stocks currently reside in
the capital goods, pharmaceuticals, and financial sectors.
– Central to our thesis is that there is a major demographic shift that is being under-estimated by Wall Street, corporations, and fund managers.
All told, we expect net inflows to IRAs of $150-200 billion annually over the next five years, driven by retiree rollovers. Importantly, both
growth and yield will be required to deliver out-performance.
Stocks: MO, GSL, GE, KMI, WB, EIX
A Premium For Growth
– With earnings growth decelerating, the market will place a significant premium on steady, proven growth names. 84% of this bull market’s
return, which we think started in 2Q03, has come from earnings growth, not multiple expansion. This trend is highly anomalous, but it supports
our view that growth is where the value is.
– An earnings slowdown is why we like healthcare equipment, which is now our largest overweight, and why we don’t like materials, which is
now our largest underweight. We screened the S&P 500 for overweight rated names with EPS growth greater than 15%, revenue growth greater
than 8% and free cash flow growth greater than 10% for 2004-2007.
Stocks: GILD, HSIC, BAX, TGT, GD, SLB
8
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Current vs. Median Statistic for the S&P 500 ex-Financials
-9%
-6%
23%
8%
Asset-to-Equity Sales-to-Assets Net Margin ROE
Margins Can No Longer Drive ROE Higher From
Current Levels
…So It is Time For Change
Little room for margin improvement.
The next leg up must come from asset
turns and/or financial leverage.
*S&P 500 ex-Financials including Financial subsidiaries of GE, GM and F.
Source: Co. reports, Compustat, Federal Reserve, Morgan Stanley Research.
…But Margins Can No Longer Carry The Day
Source: Compustat, Morgan Stanley Research.
The Next Leg In ROE Must Come From
Balance Sheet Efficiency
Source: Compustat, Morgan Stanley Research
Think mean
reversion
Source: Morgan Stanley Research.
ROE Drives Valuations
1994 2001 Avg Since '85 2Q05
Asset-to-Equity 3.20 2.74 2.86 2.60
Sales-to-Assets 0.94 0.81 0.93 0.89
Net Margin* 5.5% 1.6% 5.0% 6.7%
Return on Equity 16.6% 3.6% 13.3% 15.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
4Q85
4Q86
4Q87
4Q88
4Q89
4Q90
4Q91
4Q92
4Q93
4Q94
4Q95
4Q96
4Q97
4Q98
4Q99
4Q00
4Q01
4Q02
4Q03
4Q04
25%
26%
27%
28%
29%
30%
31%
32%
33%
Net Margin
Gross Margins (RA)
Net margins at a peak
Gross
Margins
rolling
over
S&P 500 ex-Financials
Median Price-to-Book for ROE Quintiles
0
1
2
3
4
5
6
7
8
9
10
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Highest ROE
Quintile 2
Quintile 3
Quintile 4
Lowest ROE
9
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
A Brave New World: The Yearn For Yield
Is A Sign Of The Times
IRA Flows Dwarf Defined-Contribution Flows
Note: All numbers are estimates by Morgan Stanley Research. Source: Dept of Labor
— Private Pension Plan Bulletin No. 12, Federal Reserve, ICI, IRS, Cerulli, Joint
Committee on Taxation, Center for Retirement Research, Morgan Stanley Research.
Source: Internal Revenue Service, Center for Data Analysis,
Morgan Stanley Research.
Components of Investment Income: Pre-Retirees vs. Post-
Retirees (1998)
Dividends,
12.2%
Dividends,
21.5%
Interest, 19.1%
Interest, 30.4%
Capital Gains,
68.7%
Capital Gains,
48.1%
Pre-Retirement Post-Retirement
Post Retirement, Capital Gains Become a
Much Smaller Portion of the Investment Pie
Post-retirement,
capital gains a
significantly
smaller portion
of the
investment
pie.
Private Retirement Flows ($Bn), 2003 to 2010
111 115 121 128
148
169
193
218
-3
3
5
15
12
11
12
16
-50
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008 2009 2010
Individual Retirement Accounts Defined Contribution Plans
The Yearn For Yield
Source: Morgan Stanley Research estimates, derived from 1998 Survey of
Consumer Finances data and Center for Data Analysis calculations based on the
1998 IRS public-use microdata file.
Projected US Population Growth, by Age Cohort
Compound Annual Growth Rate, 2005-2010
0.4%0.2%
0.8%
1.6%
0.4%
-0.7%
-1.6%
0.2%
2.1%2.4%
5.1%
3.8%
1.4%
-0.5%
2.0%
0.9%
Under 15
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
Total
Outsized Growth of 60-69 Demographic Over
Coming Five Years
Source: US Census Bureau ‘Middle Series’ Projections, Morgan Stanley
Research.
Average Taxable Dividend Yield of Us Individual Equity Holdings
Segmented by Age of Owner (1998)
2.6%
0.8%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Over 65 Under 65 Total
Think GSL,
KMI, HET,
MO
10
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
We Are Bullish On Organic Growth
Growth
Beginning to
Trump Value
Still the
Enemy
Rotation
towards
Stable
Growth?
0% 5% 10% 15% 20% 25% 30% 35%
Autos & Components
Materials
Media
Telecom Services
Hotels Rest'rnts & Leisure
Tech Hardware & Equip
Transportation
Commer'cl Services &
Energy
Capital Goods
S&P 500
Cons Durables & Apparel
Utilities
Insurance
Banks
Hhold & Pers Pdcts
Retailing
Divers Financials
Food & Drug Retailing
Software & Services
Food Bev & Tobacco
Health Care Equip &
Pharma & Biotech
Average Annual Industry Group Performance
When Earnings Growth is Decelerating
Growth Factors Beginning to Outperform Within S&P
Through July - September 2005. Source: Morgan Stanley Quantitative Research. Source: Thomson Financial, Morgan Stanley Quantitative Research.
Factor Return Past Three Months
-10.0
%
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
CapExp / Sales
Estimated LTG
R&D / Asset
1Mo EarnRevisions
CapExp / TotAssets
InventoryTurnover
Book / Price
Historical LTG
E / P Trailing
E / P Est FY1
Sales / Price
Debt-Equity Ratio
ROE
Operating Margin
Dividend Payout
Dividend Yield
Size (MktCap)
11
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Risks To Our Call
Is Sentiment Too Pessimistic? Will Multiple Contraction Reverse Course
S&P 500 Current Minus Start of Year Forward P/E
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Utilities
ConsStaples
Health Care
Financials
Materials
S&P 500
Energy
ConsDiscret
TelecomSvcs
Info Tech
Industrials
Z-score is the number of standard deviations from the mean. Notes: *Current Bull
Market = 3/11/2003 through 7/22/2005. Bull markets defined here as 10%
reversals in the S&P 500. Source: Robert Schiller, S&P, Ned Davis Research,
Haver, Factset, Morgan Stanley Research.
S&P 500 Current vs Start of Year
Short Interest % Shares Outstanding
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Telecom Services
Energy
Cons Staples
Financials
S&P 500
Cons Discret
Info Tech
Health Care
Materials
Industrials
Utilities
Short Interest Ratio = Short Interest divided by Average Daily Volume.
Source: NASDAQ, Factset, Morgan Stanley Research.
12
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
What Telecom Names Are We Using in the US Portfolio?
AMX: AMX continues to capitalize on a unique opportunity in the global wireless environment: strong subscriber
growth in a non-competitive environment. AMX management execution has also been surprising investors, given the
weak performance of its main competitor in the region, Telefónica Móviles. We expect AMX’s growth between 2005
and 2007 still to be well above its major global peers.
CZN: We are pleased with the return of cash to shareholders via share buybacks. Citizens continues to be one of the
top picks in the telecom universe and now yields 7.6% (the best in the S&P 500). The stock currently offers a 24% 12
month total return to our $15.50 ex-dividend target price including a $1 dividend. The ex-dividend price target of
$15.50 (ex-dividend) is derived using the mid-point of our expected dividend yield based trading range of 6-7%,
which works out to a 6.5% yield.
AMT: The tower industry continues to represent one of the most appealing segments within telecom, with powerful
growth potential and an attractive economic model. Recent outperformance by the group has been driven by continued
strong fundamentals, wireless carrier results that support the tower investment thesis, broader investor interest spurred
by the American Tower / SpectraSite merger, and attractive valuations based on 2006 trading multiples, in our view.
American Tower’s acquisition of SpectraSite makes tremendous sense in our view and should prove to be a long-term
positive. The company is in the enviable position of being the largest tower operator in an industry that has strong
underlying growth drivers. Management can focus on leasing up its existing portfolio and avoid paying cash taxes for
several years. A share buyback program could further increase shareholder returns.
GSL: We believe that GSL’s strong stock performance should help further draw attention to the yield and valuation
potential of other players in the space with similarly strong cash flows. The combined effect of more subscribers and
more talk time per subscriber should be a sharp increase in the total number of minutes traveling over the system,
which have grown ten-fold since 1999. We believe this trend directly benefits the tower operators. Even while
unprecedented demands related to usage are being placed on wireless networks, the carriers have numerous initiatives
under way that should further benefit the towers.
13
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
European Strategy: Overweight Telecoms – Dividends and “Equity Carry”
September 2005: Sector Valuations Based on Relative
DY Compared to its 10-Year Moving Average (Z-Score)
Source: MSCI, Morgan Stanley Research
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Retailing
Software & Services
Telecommunication Services
Household & Personal Products
Technology Hardware & Equipment
Banks
Commercial Services & Supplies
Insurance
Pharmaceuticals & Biotechnology
Media
Hotels Restaurants & Leisure
Diversified Financials
Automobiles & Components
Food & Drug Retailing
Consumer Durables & Apparel
Food Beverage & Tobacco
Transportation
Health Care Equipment & Services
Utilities
Materials
Energy
Real Estate
Capital Goods
Valuation More Attractive Than Usual Valuation Less Attractive Than Usual
Telcos Generate Significant Excess Cash
Note: ModelWare estimates for FCF yield and DY. Share-buyback yield based on announced
buybacks in 2004 from Bloomberg.
Source: ModelWare, Bloomberg, Morgan Stanley Research
FCF Yield 2006 % (Post Capex)
Note: FCF post total capex.
Source: Morgan Stanley Research Estimates
0 1 2 3 4 5 6 7 8 9
Health Care Equipment & Services
Retailing
Consumer Durables & Apparel
Semiconductors & Semiconductor Equipment
Utilities
Software & Services
Consumer Services
Energy
Household & Personal Products
Transportation
Commercial Services & Supplies
Pharmaceuticals & Biotechnology
Technology Hardware & Equipment
Market Ex-Financials
Food Beverage & Tobacco
Food & Staples Retailing
Capital Goods
Materials
Media
Automobiles & Components
Telecommunication Services
-2
0
2
4
6
8
10
Telecoms Utilities Market
ShareBuyback Yield
DY 2006e
Surplus FCF Yield 2006e
14
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
European Strategy: Telecoms for Dividends, Releverage/“Equity Carry”
KPN – On FCFE, on FCF
– Dividend/buybacks
– sotp for asset plays like Telenor
Operational Momentum
– Earnings momentum
– Key in a cheap sector
– KPN on past quarter should be included
Cheap Valuation
02
TKA
VOD
FT
Telenor
Strategic Value
Key Drivers:
– Mobile footprint
– In Market M&A
Source: Based on monthly Russell Mellon Cap data. Data since May 1999. DJ Stoxx sectors
Sectors: Valuations & Ownership Compared to the Historical Norm
Capital Goods
Telecom
Insurance
Food & Beverage
Technology
Pharmaceuticals
Materials
Auto
Media Retail
Utilities
Banks
Energy
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Relative DY compared to 10-year moving average (Z-score) - the higher the cheaper
Consensus Sector weightings (Z-score) - the lower
the more UW
CHEAP AND UNDEROWNED
EXPENSIVE AND OVEROWNED CHEAP AND OVEROWNED
EXPENSIVE AND UNDEROWNED
• European strategists (Teun Draaisma and Ben
Funnell) include France Telecom, OTE, Telecom
Italia, Telefonica, Telenor, Vodafone Group in their
model portfolio (italics = “equity carry” strategy,
underline = “true growth”)
• They recommend a 2pp overweight position
• In line with European telecoms research sector
view
• European telecoms research stock selection differs
slightly (above)
• Note that measured on consensus stock weightings
however the European telecom sector is overowned
European Telecoms Research Stock Selection
15
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Global Telecom Outlook – Key Investment Conclusions
• Globally, we remain focused on telco stocks outside the US and Japan.
Future competitive / FCF risk remains less severe in other markets.
• We see VoIP impacting wireline carriers before wireless, and therefore see
room for wireless to outperform – especially in markets such as Europe
where fixed-to-mobile migration is not yet “complete”.
• Barring a major upheaval in long-term interest rates globally, we also
continue to like the emerging market telecom stocks given attractive
revenue and payout growth.
Key Overweights: VOD, AMX, SingTel, PLDT, Bharti, Telus, Rogers, Tel Austria,
TNE, TPSA, AMT
Key Underweights / Cautious Industry Views: Telstra, RBOCs, DT, BT, KT
16
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Agenda
• Wireline Primer & Outlook 17
– Substitution & Line Loss: How High Can It Go? 21
– VoIP & Cable Telephony, Part 1: Understanding the Threat 33
– VoIP & Cable Telephony, Part 2: Judging “Revenue-at-Risk” 46
– Next-Gen Networks: What’s Happening…and What Will? 56
– IPTV: Is There a Future for Telcos? 71
• Wireless Primer & Outlook 89
– Voice: Mature or Untapped? 93
– The Mobile Internet: Deflation, or the Next Growth Driver? 104
– MVNOs: Does the Business Model Work? 116
– WiFi / WiMax: The Bull & Bear Cases 132
– The Latest Gizmos: Device Trends 143
• FCF Deployment: Capex, Dividends & M&A 159
– FTTH & 3G Build-Out Economics: What Does Next-Gen Actually Cost? 163
– Finding the Untapped Dividend Wells 178
– Does M&A Get in the Way? 189
• What Are Internet Players Up to in Communications? 197
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
17
Wireline Primer & Outlook
– Chair: Simon Flannery, Managing Director, US Telecom Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
18
Global Telecom Outlook – Wireline Panel: Key Issues
• What is the long-term outlook for the wireline business?
The “Revenue-at-Risk” model
• How bad is it, how bad will it get? A look at drivers of line loss
• The VoIP threat in detail: The role of the cable companies
• How do things differ around the world?
• What can they do? Next-Gen Networks, IPTV
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
19
Global Telecom Outlook – Wireline Panel: Key Conclusions
• The Wireline business is under attack as never before
But:
• How much is already discounted by the markets, particularly near term?
• Exposure varies widely around the world
• There is significant potential for cost cutting and capital efficiency
• Next-Gen Networks and IPTV offer hope, but the jury is out
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
20
Global Telecom Outlook – Wireline Panel Agenda
Substitution & Line Loss: How High Can It Go?
VoIP & Cable Telephony, Part 1: Understanding the Threat
VoIP & Cable Telephony, Part 2: Judging “Revenue-at-Risk”
Next-Gen Networks: What’s Happening…and What Will?
IPTV: Is There a Future for Telcos?
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
21
Substitution & Line Loss: How High Can It Go?
– Simon Flannery, Managing Director, US Telecom Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
22
Sources of Line Loss
#1 Wireless Substitution
#2 Broadband Substitution (second line particularly)
#3 VoIP (Cable, Vonage, Skype, Google Talk, etc.)
#4 Other Competition (UNEs/ULL, CLECs, Resellers)
Morgan Stanley & Co. Limited ("Morgan Stanley") is currently acting as financial advisor to Skype Technologies SA ("Skype")
with respect to its announced proposed acquisition by eBay Inc. ("eBay").
Skype has agreed to pay fees to Morgan Stanley for its financial services, including transaction fees that are subject to the
consummation of the proposed transaction.
Please refer to the notes at the end of this report.
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
23
Line Loss Is Mostly Residential, But Business VoIP Is Growing
Source: Company Data, and Morgan Stanley Research
SBC Retail Line Loss Year To 6/30/05
Lines Lost % Decline % of Retail Lines % of Retail Loss
Residential Primary Lines 362,000 1.5% 52% 32%
Residential Additional Lines 473,000 10.3% 9% 42%
Business Lines 281,000 1.6% 39% 25%
Total Retail 1,116,000 2.4% 100% 100%
Wholesale+Coin 1,442,000 18.4%
Total 2,558,000 4.8%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
24
Better Line Mix: Business Line Loss Improves with Employment Growth
Source: Company Data, and Morgan Stanley Research
Note: SBC line trends.
Y/Y Residential Line
Loss
Y/Y Business Line
Loss
Y/Y Switched
Access Line Loss
-7%
-6%
-5%
-4%
-3%
-2%
Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
25
Drivers of Substitution
• Price
• Quality of Service
• Promotion/Distribution
• Ease of Use/Convenience
• Bundles
• Contracts
• Barriers to Switching (Number Portability)
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
26
VoIP Grew in Q2, But Big Line Loss Impact Still Ahead
Source: Company Data, and Morgan Stanley Research
Note. Data shown for VZ, SBC, BLS, and Q.
Incremental Switched Access Lines Lost
(433)
(1,142)
(1,707) (1,503) (1,381) (1,262)
(1,911)
(119) (125) (204) (275) (347)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Cable Telephony Net Adds Others
(1,261)
(1,832)
(1,707) (1,656) (1,609)
(2,344)
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
27
US Cable Telephony Subscriber Forecasts (in millions)
By 2010
• 100 million Telephony ready homes
• 20% Penetration of Telephony Homes Passes
• 51% Penetration of Cable Modems
17.5
20.2
3.1
5.1
7.8
11.1
14.4
0
5
10
15
20
25
2004 2005E 2006E 2007E 2008E 2009E 2010E
E = Morgan Stanley Research estimates Source: Company Data, and Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
28
Wireless Minutes Are Surging
450
500
550
600
650
700
750
800
850
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Average MOU
$0.06
$0.07
$0.08
$0.09
$0.10
$0.11
Average Price per Minute
Average
MOU
Average Price
per Minute
Source: Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
29
Wireline Minute Loss Accelerates – Latin American Example
Local Traffic per line year over year
(8%)
(7%)
(8%)
(10%)
(9%)
(7%)
-12%
-10%
-8%
-6%
-4%
-2%
0%
TSP BRP TMX CTC VNT TEO
Source: Company Data, and Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
30
Wireless Substitution Drivers
• Price per Min vs. Wireline
• Bucket Pricing
• Family Plans (Add a line $9.99)
•Free Mobile to Mobile Calling
• Demographics / Culture
• In-Building Coverage / Quality
• Regulation / Interconnect Rates
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
31
European Line Loss Picks Up, But Little Wireless Loss So Far
(1.4%)
(3.4%) (3.4%)
(1.8%)
-4%
-3%
-2%
-1%
0%
2003 2004 2005E 2006E
E = Morgan Stanley Research estimates Source: Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
32
Verizon Line Loss Accelerates toward Double Digits in New York
Source: Company Data, and Morgan Stanley Research
VZ Line Loss YoY
-5.1% -5.2% -5.7% -6.1%
-7.1%
-8.8% -8.5% -8.2%
-10.1% -10.4%
-11.6% -12.2%
-4.3% -4.3% -4.4% -4.6% -5.1% -5.5%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
New York Rhode Island Total
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
33
VoIP & Cable Telephony: Part 1 –
Understanding the Threat
– Simon Flannery, Managing Director, US Telecom Research
– Richard Bilotti, Managing Director, US Cable Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
34
Flavors of VoIP
• Cable Telephony
• Peer-to-Peer: Skype, Gizmo Project/SIP Phone, Yahoo, Google Talk,
Microsoft?
• CPE-Based VoIP: Vonage, Packet8, AT&T CallVantage
• Line-Powered VoIP: EarthLink, BCE
•Business vs. Residential
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
35
• PC Penetration
• Internet Households
• Broadband Penetration
• PTO / LEC Share of Broadband Market
• VoIP Adoption
Key Drivers
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
36
Source: FCC Data as of June 2004
Broadband Penetration Greater for Cable than Telcos, except in CA and GA
17%
8%
13%
14%
7%
9%
6%
16%
9%
11%
8%
10%
14%
21%
16%
18%
12%
15% 16% 17%
12%
27%
29%
17% 17%
12%
0%
5%
10%
15%
20%
25%
30%
35%
CA NY TX FL IL PA OH MI GA NJ MA Other Total
Substantial Variations Between Cable vs. Broadband Penetration
DSL Penetration
Cable Modem Penetration
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
37
Exposure to Cable Competition Varies Widely
Source: Advanced Television, Morgan Stanley Research, 2003 data
Country TV HH (‘000)
Homes
passed (‘000)
Homes
passed % TV
HH
Basic Subs
(‘000)
Basic subs
% TV HH
Basic subs
% homes
passed
Belgium 4,491 4,365 97 3,920 87 90
Netherlands 7,317 6,776 93 6,214 85 92
Switzerland 3,449 3,252 94 2,761 80 85
Sweden 3,920 2,897 74 2,500 64 86
US 108,400 109,182 101 64,336 59 59
Germany 37,735 30,150 80 21,000 56 70
Denmark 2,295 1,726 75 1,188 52 69
Finland 2,217 1,441 65 1,099 50 76
Norway 1,951 1,284 66 858 44 67
Ireland 1,158 631 55 433 37 69
Austria 3,220 1,613 50 1,088 34 67
Portugal 4,733 3,488 74 1,334 28 38
France 22,674 8,843 39 3,529 16 40
UK 24,970 13,359 54 3,305 13 25
Spain 12,892 5,982 46 981 8 16
Italy 21,739 1,500 7 75 0 5
Total 263,161 196,489 75 114,621 44 58
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
38
Cablevision Telephony Already Greater than 1/3 of Broadband Subs
Source: Company Data, and Morgan Stanley Research
Cablevision
4.5%
1.8% 2.8%
0.9%
8.4%
6.3%
10.9%
7.2%
3.8%
10.6%
15.8%
20.9%
25.9%
32.0%
0%
5%
10%
15%
20%
25%
30%
35%
4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Telephony subs % of homes passed Telephony subs % of HSD subs
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
39
Time Warner Telephony Penetration Accelerated in 2Q05
Source: Company Data, and Morgan Stanley Research
Time Warner
0.3% 0.6%
3.1%
1.1%
1.9%
14.0%
8.7%
5.4%
3.0%
0.1% 1.5%
0.5%
0%
3%
6%
9%
12%
15%
4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Telephony subs % of homes passed Telephony subs % of HSD subs
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
40
Skype Momentum Builds
44
57
33
20
12
4 7
0
10
20
30
40
50
60
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05E
3.9
0.3
0.5
0.9
2
3.3
0
1
2
3
4
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Registered Users (in millions) Minutes Served (in billions)
E = Morgan Stanley Research estimate Source: Company Data
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
41
Business VoIP Gaining Traction
Current Usage More Skewed Towards Large
Businesses
20% Anticipate Adopting VoIP Within the Next
12 Months
Source: Morgan Stanley Research
56%
24%
20%
0% 10% 20% 30% 40% 50% 60%
No
Don't Know
Currently using VoIP Total Yes
(n=300)
Medium
Business
Large
Business
Yes 23% 18% 44%
No 74% 80% 50%
Don't Know 3% 2% 6%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
42
VoIP Impact
• Lost Market Share
• Lower Pricing
• Higher SG&A
• Higher Capex?
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
43
Dramatic Margin Impact Likely
Source: Morgan Stanley Research
Assumed 20% Revenue Loss @ 80% Margin
Before After
$ $
Revenue 100 80 ��20%
Cash costs 60 56
EBITDA 40 24 ��40%
Depreciation 15 15
Operating Profit 25 9 ��64%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
44
Bell Capex on the Rise Again
Source: Company Data, and Morgan Stanley Research
Note: SBC and BLS capex numbers include proportionate share of Cingular capex and are not normalized for the acquisition of AT&T Wireless.
SBC, BLS & VZ 4 Qtr. Trailing Capex (millions)
20,000
25,000
30,000
35,000
40,000
45,000
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
45
Verizon: Wireline Cash Flows Decline
Source: Company Data, and Morgan Stanley Research
Note: Data above calculated using EBITDA and capex numbers for Verizon’s Domestic Telecom segment only. Verizon’s dividend requires about $1 billion in cash per year. Verizon
Wireless is no longer distributing cash to Verizon and Vodafone via dividends.
1,762
1,239
1,925
2,447
2,157
3,132
2,506
1,833
1,277
1,549
-36%
-22%
-6%
-20%
-9%
3%
-23%
-15%
-28%
-37%
-
1,000
2,000
3,000
4,000
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
-50%
-40%
-30%
-20%
-10%
0%
EBITDA-capex y/y growth 10%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
46
VoIP & Cable Telephony: Part 2 –
Judging “Revenue-at-Risk”
– Mark Shuper, Managing Director, Global Telecom Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
47
VoIP Revisited: Judging “Revenue at Risk”
• A telco’s risk of VoIP substitution depends heavily on several criteria:
• Regulatory stance on mandatory broadband unbundling
• Relative pricing of (a) voice usage; (b) broadband; (c) termination
• Positioning vs. cable operators / alternative carriers within the broadband market
• Composition of existing revenue base – especially proportion from PSTN
• KPN and the RBOCs represent case studies of severe competitive challenges
• Heavy cable competition and/or amenable regulators have sliced away large
shares of these carriers’ voice businesses
• “If you can’t beat ’em, join ’em” – KPN’s VoIP launch may prove to be the precursor
• Where individual companies rank in our “revenue at risk” analysis:
• BT, PCCW, KPN, Telstra and DT fare poorly – loss of retail broadband share,
often combined with high proportion of revenue mix coming from domestic
fixed, suggests highest downside to our existing forecasts
• SingTel & Telenor among the more “protected” – better diversified revenues
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
48
Revenue-at-Risk: The Morgan Stanley Scenario
TODAY IN THE FUTURE
Monthly fixed-line subscription fee
Monthly broadband subscription fee
Voice usage (local & L-D)
- Circuit-switched, time-based
- Packet-switched, “bucket”-based
Revenue Streams Earned by the
Telco from a Given Subscriber
New
“bucket” fee
likely to be
< existing
voice ARPU
Critical for
the telco to
control the
retail
broadband
relationship
Source: Company Data, and Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
49
Broadband – How Are Incumbents Placed?
Source: Morgan Stanley Research, Company Reports.
US Incumbent refers to Sum of SBC, VZ and BellSouth
UK
Germany
Ireland
France
Netherlands
Denmark
Austria Sweden
Italy
Hong Kong
Korea
Taiwan
Thailand
Singapore
New Zealand
US
Portugal
Australia
Norway
China
Malaysia
Spain
Switzerland
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Incumbent's Retail Share of Broadband
Broadband Penetration of Households
Rivals Can
Yet Steal the
Advantage
Rivals Have the
Upper Hand
Incumbent
Telcos in a
Stronger
Position
Incumbents Have
an Early Lead…
but Need to
Leverage It
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
50
Revenue-at-Risk Case Study: Telstra’s Prospects
Year Ended June 2005E 2006E 2007E 2008E 2009E 2010E
Broadband Subscribers - Retail ('000) 856 1,108 1,332 1,543 1,758 1,926
Access Revenue Rate-Retail (per user per month) 60.15 54.13 50.34 47.32 45.90 45.90
Broadband Subscribers - Wholesale/Resold lines ('000) 888 1,154 1,502 1,811 2,064 2,260
Access Revenue Rate-Wholesale (per user per month) 34.33 31.59 30.01 28.81 28.23 28.23
Monthly Fee per User - VOIP Calls (monthly) 30.00 30.00 30.00 30.00 30.00 30.00
Subscribers of Competing Broadband Facilities (000s) 476 840 1,162 1,512 1,889 2,262
Revenues (Millions of Local Currency)
Fixed Revenue (Non-Broadband users) 6,517 5,331 4,399 3,565 2,792 2,112
Broadband Revenue - Retail 463 638 737 816 909 1,015
Broadband Revenue - Wholesale 261 387 478 573 656 732
VoIP Bundle Fees 231 354 439 517 594 663
Total Mobiles 4,141 4,281 4,423 4,558 4,708 4,870
Specialised data 966 907 846 773 706 646
Advertising & Directories 1,585 1,710 1,827 1,916 2,002 2,086
Intercarrier services 1,146 1,112 1,078 1,046 1,067 1,088
Inbound calling products 449 436 422 410 418 426
Solutions management 931 987 1,045 1,108 1,174 1,244
Hong Kong CSL 734 741 749 756 764 771
TelstraClear 625 644 663 683 703 725
Offshore Revenue 252 271 280 288 297 303
Bundled Pay TV 263 329 395 454 476 488
Customer premises equipment 229 227 225 223 226 230
Payphones 121 114 107 101 94 89
Other sales and services 743 762 781 800 820 841
Other revenue (excl interest) 496 207 207 207 207 207
Total Revenue - As calculated above 20,153 19,436 19,102 18,795 18,615 18,535
Revenue as Projected (Recurring) 22,657 22,467 22,563 22,747 23,036 23,411
% Difference -11% -13% -15% -17% -19% -21%
E = Morgan Stanley Research estimates
Source: Morgan Stanley Research
Key changes
occur here
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
51
Measuring the Downside to Our Revenue Forecasts
Scenario – All broadband users cut off their
phones and move to VoIP bundles immediately.
Observations –
1. Worst-hit are companies whose markets have
(a) high broadband penetration, but where (b) the
telco has lost the greatest share of the retail
broadband market.
2. Europe has some “problem-children” – BT’s
large PSTN exposure puts it at risk; KPN’s weak
rank could be why the company is so focused on
regaining retail share with its DSL / VoIP bundle;
DT has also lost substantial retail broadband
share.
3. The RBOCs are mid-pack, but mainly because
we have already assumed such heavy line losses.
4. SingTel, Telenor and Telekom Malaysia fare
relatively well, mainly because of substantial
diversification into overseas wireless businesses.
Source: Morgan Stanley Research
2006-07 2008-09 2010
BT -25% -33% -36%
PCCW -15% -23% -26%
KPN -21% -22% -21%
Telstra -14% -18% -21%
DT -16% -18% -20%
TI -14% -19% -20%
KT -16% -16% -17%
Telefonica -15% -15% NA
Belgacom -13% -14% -14%
BLS -10% -13% -14%
SBC -7% -11% -13%
Verizon -9% -11% -13%
Swisscom -10% -11% -13%
Chunghwa -10% -11% -12%
CT -12% -12% -11%
TCNZ -10% -11% -11%
Telekom Austria -10% -11% -11%
CNC -9% -10% -10%
TeliaSonera -9% -10% -10%
FT -9% -9% -10%
Tel Malaysia -6% -7% -7%
Telenor -4% -5% -5%
Singtel -2% -3% -3%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
52
Revenue-at-Risk: KPN Case Study
KPN launched consumer VoIP in 2Q05. Why?
1. Highest broadband penetration in western Europe
2. Low retail broadband market share (approx. 40%)
3. Faces four other DSL networks and strong cable competition
KPN’s Consumer VoIP Package
Internet Package
Euro 800kb 1600kb(1) 3200kb 8000kb
Free in the weekend 34.95 34.95 59.95 79.95
Free in the evening
Always Free
Tariff for non free calls
Fixed Line numbers 2.5 cents per min w/set up tariff 5 cents
Mobile numbers 19 cents per min w/set up tariff 5 cents
International 4 cents per min w/set up tariff 10 cents
Calls to
fixed
network
NL
2.5
10
Source: KPN
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
53
Revenue-at-Risk: Progress by Time Warner Cable
In the US in 2Q05:
The RBOCs posted YoY
line loss of 5%; in NY
state, Verizon’s line loss
was 8%.
BellSouth lost 2% of its
lines in 2Q alone.
Time Warner Cable – a
competitor – posted a 59%
sequential increase in
telephony sub additions.
Comcast – the largest US
cable provider – reaffirmed
its commitment to deploy
telephony across its entire
footprint by year-end 2006.
RBOC Line Loss Accelerates on Cable Competition
Sequential line loss
-0.5%
-0.6%
-1.0% -1.0% -1.1% -1.1% -1.1% -1.1%
-1.4%
-1.6% -1.6% -1.6% -1.6%
-2.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
TDS
CTCO
AT
CZN
TU
CTL
IWA
BCE
FON
CBB
SBC
VZ
Q
BLS
Source: Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
54
Revenue-at-Risk: Is There Any Margin for Error?
VoIP migration �� Revenue-at-risk
(Revenue-at-risk + cost base that’s more fixed than variable) �� Larger profit-at-risk
We forecast the majority of telcos in our survey to grow revenue < 10% up to 2009!
Cumulative Revenue Change, 2005-09E
-30%
-20%
-10%
0%
10%
20%
30%
CNC
Alltel
CT
Singtel
FT
Telefonica
Telenor
BCE
Telus
Telekom
TM
Verizon
BLS
BT
SBC
DT
TCNZ
TI
KPN
Telstra
KT
Belgacom
Chunghwa
TeliaSonera
Swisscom
PCCW
E = Morgan Stanley Research estimate
Source: Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
55
Revenue-at-Risk: Next Steps
• Although our doomsday scenario won’t happen “everywhere, tomorrow”, we
believe it is critical to understand the potential risk facing the industry over the
medium term, and especially its variance from one market to another.
• Next issues to consider:
1. “Profit-at-Risk” – Many large incumbents appear to face difficulties in cutting
costs, especially labor…suggesting that revenue losses will be magnified
substantially at the bottom line.
2. The move to “all IP” – does it actually (or ever) save money? Telcos hold
this out as the holy grail of cost management, yet for a sustained period it will
most likely mean running two networks in parallel. How many incumbent telcos
still run their telex networks, for example?
3. Mobile VoIP – Based on our discussions with several operators and vendors,
this possibility is still at least two years from meaningful commercial viability
but its effect will require much more serious study.
4. Defending their turf – if you can’t beat ’em, join ’em? Will other telcos
succumb to competitive pressure and pursue consumer VoIP as a core strategy as
quickly as KPN did?
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
56
Next-Gen Networks:
What’s Happening…and What Will?
– Nick Delfas, Executive Director, European Telecom Research
– Scott Coleman, Communications Equipment
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
57
Global Fixed Network – Two Upgrades
• Two Major Potential Upgrades to Global Fixed Networks
• 1. Core all-IP network – BT and TNZ
– Mainly cost saving measure
– But requires scope to reform labour
– Simplification of networks – 70% cut to switches/boxes
– Cash costs expected to fall by 10%
• 2. Supercharging the Access Network
– Preparing the telco for triple play, prompted by cable
threat
– Few savings for FTTN, some for FTTP
– But large capital spending required
–$375/HH for DT VDSL, to $825/HH for VZ FTTP
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
58
1. All-IP Core – Current BT Network
IP
ATM
PSTN
DSL
KStream
PSTN DPCN
PDH
Fibre
Copper
DWSS
ASDH
End
User
~5k
nodes
~2k
nodes
~400
nodes
~100
nodes
~15
nodes
MSH -SDH
~1k
nodes
Mesh -SDH
Inter-node
transmission
provided by
SDH/PDH platforms
CWSS
Source: Reproduced with kind permission of BT
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
59
…and Moves to Single IP Architecture
IP-MPLS-WDM
DSL
Fibre &
Copper
Copper
Agg Box
End
User
~5k
nodes
~100
nodes
Class 5
Call Server
Content
WWW
ISP
PSTN Migration Converged Core
Source: Reproduced with kind permission of BT
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
60
Timescale…Starts 2006, Ends 2009
2004
2005
2006
2007
2008
Broadband available to 99.6%
Strategic vendors announced
Broadband growth on MSAN/combo cards
First new service launches based on re-usable capabilities
Mass PSTN migration begins
17 new product launches/enhancements based on re-usable capabilities
New operations & service management capability in place
Broadband dialtone
available to
most customers
Large scale non PSTN service migration begins
2009
Mass PSTN migration reaches more
than 50% of customers
PSTN transformation trial
Deep fibre trial
Converged network
Service creation
Experience development centre
Source: Reproduced with kind permission of BT
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
61
Is BT Ahead of the Curve?
TEF - 2003
Big 5 Average - 2003
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2.70 2.90 3.10 3.30 3.50 3.70 3.90 4.10
Network Progress
Relative Cost and Fundamental Efficiency
(margins, lines/employee, salaries/employee, controllable
costs/line, other cost/line, Ability to Cut Headcount)
Lagging Network Advanced Network
Average 2006
BT - 2003
BT - 2006
DT - 2006
DT - 2003
TI - 2003
TI - 2006
FT - 2003
FT - 2006
TEF - 2006
Source: Morgan Stanley Research, Company data
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
62
…All-IP Core - 10% Cut to Cash Costs
• Total cost of £8bn ($14.4bn) for 60m UK population
• Reduces number of switches and simplifies network:
– Current network - Over 100,000 switches/equipment
– 100,000 remote concentrators and DSLAMs
– 1,000 – 2,000 voice/data switches, 150 Core switches
– Falls to 30,000 nodes under the new infrastructure
– 30,000 Multi-service access nodes (MSANs)
– 100 Metro routers and 10 Core routers
• Reduces Staff and Non-Staff costs, capex by up to 10%
– BT suggests £1bn cash savings by 2009 (c10% of cash
costs)
– TI also suggests 5% of group opex, 10% of group capex
• Risks:
– Regulation, Dual network and reskilling costs, labour reform
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
63
2. Supercharging the Access Network
Phase I
High Speed Internet
1995-2002
Phase II
Multiservice
2000-2010
Phase III
Triple Play and Beyond
2005 - ??
Data,
eServices
IP Telephony,
Multimedia, Data,
eServices
IP TV, HDTV,
VoIP, Data,
Multimedia
• Build Central Office-based ADSL
footprint
• Network used mainly for data
transport
• Asynchronous Transfer Mode
(ATM) aggregates all the data
access
• Central office DSLAMs evolve
from ADSL to ADSL2 and
beyond
• Residential Multimedia in big
cities with
• some broadcast TV
• Limited Video-on-demand
• Move the DSLAM closer to the
subscriber or put in fiber
• Upgrade network to ADSL2+
or VDSL or use PON
• Transition network aggregation
to Ethernet from ATM
Where
we are
today
Source: Light Reading, Morgan Stanley
BANDWIDTH
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
64
Adding Video to the Telco Portfolio
• How much bandwidth is required to include video?
– US telcos want to deliver 3-4 simultaneous video streams, including
hi-def.
– Operators must offer at least 5 Mbps of data to keep up with cable
operators.
– Total bandwidth requirements are 25-35 Mbps
• Today’s DSL networks max out at 3-6 Mbps
– Loop lengths too long in US (12-18K feet), Europe shorter.
– Most equipment based on the ADSL/ADSL2 standard.
– MPEG2 requires 3 Mbps for Standard Def, 15 Mbps High Def.
• What is required to offer video?
– Change the access architecture: Shorten copper loop to 4-5K feet,
move DSLAM closer to the customer, or deploy fiber all the way.
– Change the equipment: upgrade to ADSL2+ or VDSL (if using DSL) or
deploy PON (Passive Optical Network) equipment using fiber.
– Change the encoding standard: Move to MPEG4-AVC/H.264 video
encoding that requires 2 Mbps for Standard Definition and 10 for High
Def.
Key Question: Enhance the copper network or rebuild with fiber?
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
65
Bandwidth Requirement & Capabilities
ADSL2+ 24 Mbps 1-3 Mbps
VDSL2 50-100 Mbps 5-100 Mbps
ADSL2 12 Mbps 1-3 Mbps
ADSL 8 Mbps 680 kbps
Upstream rate
(max)
Downstream rate
(max)
FTTN/DSL
1244 Mbps
(77 per sub)
2488 Mbps
(77 Mbps per sub)
GPON – Ethernet /
ATM
1244 Mbps
(39 per sub)
1244 Mbps
(39 Mbps per sub)
GPON – Ethernet /
GEM (SONET
protocol)
1250 Mbps
(39 per sub)
1250 Mbps
(39 Mbps per sub)
EPON – Ethernet
155 Mbps
(5 per sub)
622 Mbps
(19 Mbps per sub)
BPON – ATM
FTTP Downstream rate Upstream rate
High Definition 15Mps <10Mbps
Standard Definition 3.2Mbps 2Mbps
MPEG-
4/H.264
Video Bandwidth MPEG-2
Requirements
-MPEG-4 rates expected to improve over time
SD Steam #1 SD Steam #1
SD Steam #2
SD Steam #2
HD Steam #1
HD Steam #1
HD Steam #2
HD Steam #2
Interent
Interent
0
5
10
15
20
25
30
35
40
MPEG-2 MPEG-4
Bandwidth (Mbps)
-Speeds vary inversely to distance from the DSLAM.
Source: ADTRAN, Scientific Atlanta, DSL Prime, Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
66
What Access Upgrades are Available
Source: Light Reading, Morgan Stanley Research
Remote
Copper Terminal
Central Office
DSLAM
Voice/PSTN Internet
Voice
Switch
New infrastructure
Existing infrastructure
Copper
Voice/PSTN Internet Video
Central Office
DSLAM Video
Head end
Voice
Switch
Fiber
Remote
Terminal
IP DSLAM
Old Network New Network
Ethernet
Switcher
Service
Router
WiFi LAN
STB
STB
STB
STB STB STB
1. Enhance the Copper Network:
Fibre to the Node (FTTN)
(VDSL, with or without WiFi LAN)
So far, the European approach
2. Replace the Copper Network:
Fibre to the Premise (FTTP)
Selective in US and Asia
Remote
Copper Terminal
Central Office
DSLAM
Voice/PSTN Internet
Voice
Switch
New infrastructure
Existing infrastructure
Remote
Terminal
Voice/PSTN Internet Video
Central Office
OLT
Fiber
PON Splitter
ONT ONT ONT
Old Network New Network
STB STB STB STB STB STB
Remote
Copper Terminal
Central Office
DSLAM
Voice/PSTN Internet
Voice
Switch
New infrastructure
Existing infrastructure
Copper
Voice/PSTN Internet Video
Central Office
DSLAM Video
Head end
Voice
Switch
Fiber
Remote
Terminal
IP DSLAM
Old Network New Network
Ethernet
Switcher
Service
Router
STB
STB
STB
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
67
Broadband vs. Switched for Video
Analog or Digital Digital Digital
Source: Light Reading
FTTP FTTN Both
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
68
Comparing FTTN to FTTP
Replace all copper with fiber
Replace any DSL equipment with Passive Optical
Networking (PON equipment)
Add video network
Replace fiber to the node where necessary and
use existing copper the rest of the way
Move the DSLAM closer to the customer and
add routing and switching capacity
Add video network
Network Architecture
Video Architecture IP-TV using switched digital Traditional cable broadcast TV
70% of FTTP
SBC estimates $300m in annual savings by 2007
Less outside plant maintenance than in the
copper world
Opex Savings
High cost ($1000-1300 per sub)
Time to market
Cost and delay from in-house fiber deployment
Potentially undifferentiated video product
Technology risk with IPTV
Incremental approach may not future proof the
network.
Risk
25 Mbps downstream
2-10 Mbps upstream 2
75 Mbps downstream
20 Mbps upstream 1
Bandwidth
Higher broadband speed
Video will work from day 1
Lower cost ($250-300 per sub)
Time to market for network build
Advantages
FTTN FTTP
1 Assuming GPON split among 32 users. Unshared rates are 2.4Gbps downstream/1.2 upstream,
2 Based on early VDSL trials
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
69
Who’s Doing What: North America
Source: Ovum, Company Data, Morgan Stanley Research
Approximately 5.3 Alcatel, Tellabs
million miles of
fiber within its
network
Approximately 1.1
million homes
BellSouth FTTC No details given
Alcatel, Motorola,
Scientific-Atlanta
18m households
(50% of footprint)
Download speed of
25 Mbps
$4 billion for
infrastructure
$1 billion for CPE
SBC FTTN
Target 25,000 Around 1.4m subs. Lucent
homes
$125m for 300k
apartments units
and $1b for 4
million homes
BCE FTTN
ADC, Ciena,
Corning, Juniper,
Motorola, Scientific-
Atlanta, Tellabs
3m passed by end
of 2005
Launched video in
Keller, TX
12m households in
5 years
Verizon FTTP $8-10 billion
Deployment Status Equipment Vendors
Target
Carrier Architecture Capex
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
70
Who’s Doing What: Europe
3 year project to
complete
2006/2007e
Belgacom FTTN (VDSL) €300m ($360m) 46% of pops
Issues on IPTV to
be solved in 2006
1.5m, no coverage
statistics given
Swisscom FTTN (VDSL) No details given
Start 2008, take 3-4
years
€1.0-2.0bn in Phase None given
2 of restructuring if
ROIC justified
KPN FTTN (VDSL)
First 3m
households by
mid-2006
10-11m households
2007
Up to 50 Mbps
DT FTTN (VDSL) €3bn ($3.6bn)
Alcatel, Cisco,
Ericsson, Fujitsu,
Huawei, Lucent,
Siemens
Current trials in
Wales, yet to roll
out
2H06, majority in
2008
BT All-IP Core £8bn ($14bn)
Deployment Status Equipment Vendors
Target
Carrier Architecture Capex
NB - We assume that all European carriers will move to ADSL 2+ over time
Source: Ovum, Company Data, Morgan Stanley Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
71
IPTV:
Is There a Future for Telcos?
– Hani Abuali, Managing Director, Asia Telecom Research
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
72
IPTV: Is There a Future for Telcos?
Agenda
• Putting it in perspective
• Hong Kong – PCCW’s NOW TV
• Japan – Softbank’s BBTV
• Belgium – Belgacom TV
• US – Verizon and SBC
• Conclusions
The economics may not be compelling, but it is a strategic
imperative
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
73
While the prospect for telcos to gain share in video revenue sounds attractive, the
“cross-over industry potential” is much larger for cable network operators.
Outside the US, 2005E telco industry revenues are 10-20x larger than those of
subscription TV. Even in the US, the multiple is 5x.
0
100
200
300
400
500
600
US Europe Japan NJA
2005E Revs US$ Bn
-
5.0
10.0
15.0
20.0
25.0
Telecom
Pay-TV
Tel/TV
Telecom vs. Pay-TV Industry Revenue by Region, 2005E
E = Morgan Stanley Research estimates
Sources: Morgan Stanley Research, Zenith Optimedia
Cable “Cross-Over” Revenue Exceeds That of Telcos
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
74
Companies Cumulative IPTV Spending Plans
VZ $1.6-2bn per year - 2 million homes p/yr
SBC $4-5bn through 2008 for 18 million homes
DT $3.6bn for 10 million homes with VDSL
FT $400m for ADSL 2+ upgrade
Belgacom $360m between 2004-2006 to cover 46%
PCCW US$150m, 2-3% of annual revenues
Source: Companies, Morgan Stanley Research
What Are the Telcos Paying For?
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
75
PCCW – Differentiated IPTV Platform
PCCW delayed EBITDA break-even from YE05 to ‘06
• Launched in 2003, now has 441,000 residential subscribers
• PCCW runs IPTV on its own proprietary software
• Notable topography allows for penetration at:
1.5 Mbps to 97% of households
6 Mbps to 93% of households
8 Mbps to 50% of households
• 85 channels today rising to 100 by ’06
• Flexible ‘a la carte’ pricing structure
• Full broadcast network, now testing VOD
• Does not own content, largely a distribution network
• Revenue split with content providers is approx 60%/40%
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
76
PCCW’s NOW TV – “A la Carte” Menu
Source: PCCW
US$1-3/Month/Channel(1)
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
77
NOW TV – Driving the Next Phase of Growth?
Source: PCCW Source: PCCW
NOW TV is Driving Broadband Growth
PCCW expects NOW TV’s EBITDA margin to break even in 2006.
• ARPU up from US$7.3 in 2H03 to US$14.1 in 1H05:
• Broadband monthly churn reduced by half to 1% since the launch of the program
• 93% of new broadband subscribers are also NOW TV paying subscribers
• “Mini-packages” lower the entry point and account for almost 63% of channel subscriptions
28%
48%
53%
59%
660
715
558
517
450
0
100
200
300
400
500
600
700
800
1H03 2H03 1H04 2H04 1H05
Subscribers (000s)
NOW TV subscribers Broadband Subscribers +28% YoY
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
78
Softbank – Triple Play Strategy
Basic Channel Pack
40 channels available*
US$18/month
Basic Video Pack
1,000 videos available
US$18/month
Special Pack
US$27/month
Source: Softbank
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
79
Softbank – Competitive Offerings
US$18
(40ch)
US$18
(1000 videos)
US$27
(US$9 discount)
US$22
(25ch)
US$6
(100 titles)
Sky Perfect
Basic Pack
US$27
(about 34-36 ch)
Source: Softbank
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
80
US Telcos – Fighting Cable Competition
Consumer TV services are being launched in response to: 1. Falling revenues and 2. Cable competition
• Verizon rolled out in selected states in Sept 05.
• SBC has delayed its commercial TV service launch by six months, citing set-top box supply.
• Competition has escalated – Verizon’s June ’04 launch of fiber optic high speed internet in Keller,
TX, prompted a 50% price cut by Charter (for new customers)
• IPTV will compete with cable on price –it appears that capacity will be built… regardless of cost
(1) Includes set-top box rental
Source: Company Data
Offerings in Keller, Texas
Company Number of Channels Price
Verizon
Standard Offer(1) 130-150 $ 36.90
Preimum Offer (1) 175-195 $ 4 3.90
Charter Commnuications
Standard Offer 86 $ 4 6.99
Digital Offer(1) 250 $ 6 8.99
EchoStar Communciations
Standard Offer over 60 $ 3 1.99
Preimum Offer 180 $ 5 2.99
DirecTV
Standard Offer over 135 $ 4 1.99
Preimum Offer over 215 $ 9 3.99
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
81
Verizon and SBC Reactions to Cable
Fiber optics high speed internet network that provides individual download
bandwidth for up to 30 Mbps. Add’l wireless connections are also available
Pricing Plans:
• Up to 5 Mbps -- $34.95 - $39.95
• Up to 15 Mbps -- $44.95 - $49.95
• Up to 30 Mbps -- $179.95 - $199.95
Expects to launch in the next 6 months, trial by y/e
SBC is not building a new fiber-optics network – the company is estimated
to spend US$4-5 billion to replace only some of the copper with fiber in its
network.
IP’s compression capability will allow SBC to deliver the content over the
remaining distance to the household.
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
82
European IPTV Landscape
Source: Company data, Morgan Stanley Research
Company IP TV
Launched?
Date to launch /
launched
Comments Pricing where launched Content available
EUROPE - Incumbents
Belgacom Y 06/05
Classic package and two football packages, requires
Belgacom ADSL. No subs figures released yet.
€9.95 pm classic, +€6.0 pm settop
box rental
60 channels with Classic package + VoD, Belgian football €15,
Italian football €15, All football €25, VoD 2 to €6 per film.
Football is EXCLUSIVE, though Belgacom has some
partnership to sell on one match per weekend.
BT N late 06
Plans remain very sketchy - speed versus cable
remains an issue.
- Content not yet defined.
DT N 11/05
Combined multimedia DSL, VoD, voice over DSL box to
be launched in Nov. VoD on TV already available via TVision
but #s not significant - requires STB but no
monthly rental.
€49.95 incl internet access Content not yet defined.
Eircom N n/a
No current plans. CATV companies will be upgrading
shortly which could create need to enter TV market.
- -
FT Y Spring 04
MaLigne TV allows TV access and VoD without a DSL
connection, can subscribe to content provider (TPS,
CanalSat). 627K Livebox subs in France 30/6/05, 89K
outside France. 116K MaLigne TV subs in France as of
June 05.
€16 pm + provider fees All premium content available through third party providers.
MaLigne TV provides only VoD - fees 1 to €5 per film.
KPN N
dig. terrestrial TV
18/10/2004, full
IPTV 2006
70K subs as of June 05. €13.95 pm or €7.95 pm if
telephony or DSL client, plus cost
of STB (€40-€70)
24 channels (no premium content or VoD), VoD and 50 to 100
channels under future IPTV product
OTE N n/a No plans currently, no cable competition. - -
PT N n/a
Owns main cable infrastructure, no need to offer on
copper.
- -
Swisscom N Late 05?
Trialling but delayed due to (1) MSFT software needs to
develop to provide 2 streams simultaneously; (2) set top
box (hard disk) from Thomson being refined; (3) need to
invest further in VDSL. Some TV over cable since 3/05
- -
TDC N End 05
To be launched, but has >1m CATV subs however out
of 2.2m Danish households. Announced in May 2005
- -
TKA N End 05
in 2003 launched ‘Aon.tv’, an interactive TV service
watched on the PC. In June 2003, the company
launched this interactive TV service after conducting a
one-year field trial with 2,000 users. AonDigitalTV, full
IPTV launch with settop box and EPG planned for later
this year.
- approximately 40 TV channels and video on demand.
TI N Autumn 05
Trials currently in 4 cities; 21 cities in autumn. 100 VoD
films initially, then 600. Email & Surfing from the TV.
WiFi modem to which 5 PCs can connect. Uses
MSFT/Alcatel/Pirelli.
Not yet released Live Serie A and Serie B; VoD. Football is not exclusive - also
available on Sky (satellite), Mediaset/TI Media (DTT) and
Fastweb IPTV, though Fastweb & Sky offer whole package
only not PPV, others offer both.
TEF Y Late 04
Imagenio subs 57.5K June 05, 71K end August, targets
200K year-end. Basically a VoD product with some live
football PPV.
€19 pm without DSL, €12 pm with
DSL
61 free channels, Videoclub €3-€4.5 per movie, VoD €2-€3,
Live football €8 per match (subcontracted from Sogecable)
Telenor N 2006
Launching at some time in 2006 in Norway. However
have a successful satellite/CATV business in the
region. Offering TV as a challenger in Sweden.
Not yet released Likely to leverage Telenor Broadcast content.
TeliaSonera N Jan 05
In 15 major cities in Sweden (>50k inhabitants).
Buildout to 92% of DSL coverage by end 2005
three TV packages starting at €13
per month. 29Kr per video on
demand
Includes premium sport
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
83
Belgacom: IPTV Case Study
Belgacom TV launched June 2005 (4,000 customers now), target is 50% market share
• US$12 for 58 channel Classic+ package; activation charge of US$71 is waived if users sign up
before Aug 31, 05.
• Video on demand ranges from US$3 to US$9 per movie; Soccer packages: US$10 to US$30
• Belgacom TV should be available to 60% of Belgium's population by the end of 2005.
Source: Beglacom Source: Beglacom
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
84
IPTV: Conclusions
By 2010, close to 40% of US households will be able to get TV from telcos
1. The economics may not be compelling…
a) PCCW will only be EBITDA +ve in 2006, 3 years after launch
b) Further consolidation??
2. … but IPTV is a strategic imperative:
a) Helps manage churn down
b) Introduces a new revenue stream
c) Leverages the network (partly) and the customer relationship
3. Lower cost of STBs and flat screen prices will drive penetration growth
4. Telcos can differentiate with superior delivery platforms rather than through
content
It is not about profit growth but churn management and network preservation
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
85
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
86
Global Telecom Outlook —
Wireline Panel: Key Conclusions
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
87
Global Telecom Outlook – Wireline Panel: Key Conclusions
• The Wireline business is under attack as never before
But:
• How much is already discounted by the markets, particularly near term?
• Exposure varies widely around the world
• There is significant potential for cost cutting and capital efficiency
• Next gen networks and IPTV offer hope, but the jury is out.
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
88
89
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Wireless Primer & Outlook
– Chair: Mark Shuper, Managing Director, Global Telecom Research
90
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Global Telecom Outlook – Wireless Panel: Key Issues
• Wireless revenue growth slowing from double-digits into the singles as:
– developed-market penetration begins to saturate
– emerging-market subscriptions come at ever-lower ARPUs
• “Non-voice” shows periodic signs of success; what happens next?
– Korea leading the charge in terms of video sales
– as content sales grow, however, the best play may be through non-telcos
• Growing questions over the impact of IP telephony on wireless
– wireless prices are still high in many markets, often well above wireline rates
– does 3G provide the bandwidth necessary to facilitate wireless IP calling?
– even if not, do WiFi and/or WiMax serve this purpose as well / instead?
• All else said, even wireless carriers are getting into the capital return game
– rising dividends/share buybacks from many large operators including VOD, DoCoMo
91
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Global Telecom Outlook – Wireless Panel: Key Conclusions
1. Voice market not yet tapped out, especially in Europe and parts of Asia
where MoUs are less than half US levels.
2. Wireless Internet still in its early stages; telcos in a position to capture a
share of the growth, but face a challenge from content providers.
3. MVNOs are likely to appear more widely, but to remain niche providers in
most cases.
4. WiFi / WiMax are critical to watch from a wireless VoIP perspective,
though price-performance has not yet been proven. Nextel looked at
Flarion, but decided instead to merge with Sprint, for example.
92
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Global Telecom Outlook – Wireless Panel Agenda
Voice: Mature or Untapped?
The Mobile Internet: Deflation, or the Next Growth Driver?
MVNOs: Does the Business Model Work?
WiFi / WiMax: The Bull & Bear Cases
The Latest Gizmos: Device Trends
93
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Voice: Mature or Untapped?
– Conrad Werner, Vice President, European Telecom Research
94
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Fixed Substitution Will Continue
• US breaking through the 50% barrier, but saturation is approaching
• Japan is deceptive: substitution reflects strong wireline usage declines
• Europe still lags (Germany a culprit here) but bundling initiatives could
accelerate wireless adoption – operators see this as an opportunity
Source: National Regulators, Company Data, Morgan Stanley Research
Wireless Share of Outgoing Minutes (%)
0
10
20
30
40
50
60
70
80
1998 1999 2000 2001 2002 2003 2004 2005e 2006e 2007e 2008e
(%)
Japan Korea
Europe US
e = Morgan Stanley Research estimates
95
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Drivers: Price Levels (Often) Matter…
• Low price levels in US have fostered adoption
• High prices in Japan leading to falling MOUs; data substitution
• European pricing varies by market – Germany stands out as high and
usage is lowest of the big 5 markets
Source: National Regulators, Company Data, Morgan Stanley Research
2004 Price per Minute (€)
0.25
0.17
0.06
0.24
0.19
0.16 0.16 0.16
-
0.05
0.10
0.15
0.20
0.25
0.30
Japan Europe
Average
US Germany France Spain Italy UK
96
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
… As Does Relative Pricing
• In Europe, German pricing stands out as expensive
• US differential very low: usage growth has been very high
• Japanese pricing differential low, but overall price levels are high in both fixed and wireless
Source: Company Data, National Regulator Data, Morgan Stanley Research
0.0
1.0
2.0
3.0
4.0
5.0
Australia
New Zealand
Singapore
Germany
Korea
Mexico
Philippines
Spain
India
France
Indonesia
Italy
UK
US
Taiwan
Japan
Hong Kong
China
Wireless/Wireline ARPM
Relative Prices in Europe: Mobile per minute price / Fixed line per minute price
97
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Price Trends Vary Globally
• European operators have historically demonstrated price discipline
• Sharp contrast with the US (see below)
• Japanese price declines accelerated under 3G initially, now slowing
Note: USA in constant currency Source: National Regulators, Company Data, Morgan Stanley Research
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
0.24
2000 2001 2002 2003 2004
Euro Per Minute
-8% CAGR for European 'Big 5' (2000-2004)
-26% CAGR for USA (2000-2004)
Europe vs. US Mobile Price Trends (2000-2004)
98
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
The Hunt for Elasticity
• Elasticity is a localized phenomenon:
– US very high historical elasticity, although falling now as saturation levels are reached
– Europe historically below 1, but pockets of growth are emerging via bundles
– Japanese elasticity has been low, despite low per capita usage
Source: Morgan Stanley Research
0
50
100
150
200
250
Germany Japan Spain UK Italy France Korea US
Outg. MOU per capita
0
20
40
60
80
100
120
Penetration (%)
Outg. MOU per Capita Penetration (%)
Elasticity: An opportunity in Europe and parts of Asia; US saturating.
99
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Opportunities: Bundles, Flat Rates, Roaming
• European operators are stepping up their efforts on voice:
– Vodafone Stop the clock: pay for 3 minutes; speak for an hour
– Large incumbents leveraging scale through M2M promotions
– Passport: reduced roaming in Vodafone territories
– Discount SIM-only operators driving down prepaid prices
– Family Plans
• But the focus remains on positive elasticity opportunities
– Vodafone German bundles generating 4% ARPU uplifts on 30% more
usage
100
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Homezone
• European mobile operators introducing new fixed line replacement products
• Germany is the test bed: Vodafone (Zu Hause) and O2 (Genion) targeting DT
– Attacking a 233 billion minute opportunity (compared to 37 billion on mobile)
– …Fixed line revenues of €23.0 billion on a par with mobile at €22.1 billion
• Vodafone looking to extend the concept to other markets in 2006/2007
– 10-20% of current German contract gross adds taking Vodafone’s Zu Hause
101
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
3G: Evolution or Revolution
• Vodafone claims 3G can increase voice capacity by 2.7x
– Morgan Stanley Telecom Equipment team sees 2-3x, depending on network density
• Move to 3G already led to profit warnings in Japan
– Early build-out of deep FOMA network generated excess capacity
– ARPU declines now decelerating, though new entrants add risk in 2007-08
• In Europe, price declines should accelerate, but we think operators can be selective,
focusing on real elasticity opportunities
– Build-out centred on congested urban areas
– Initial focus is on laptop cards
– Vodafone stresses “rational” approach to the market
– Vodafone’s 3G contracts offer unlimited peak calling
– Hutch initially led UK prices sharply lower. Level of price cutting slowed sharply
following coverage build-out and introduction of better handsets. These fundamental
service improvements also led to better subscriber take-up.
• US will be most reliant on the 3G data story
– Falling elasticity levels limit the headroom on voice
102
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Risks: Will Mobile Be ‘Skyped’?
• Skype already positioning itself as a leading telecoms operator
• Vodafone has said it will not block VoIP
• Current laptop card pricing looks prohibitive
• However, there could be ways of circumventing this issue…
103
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Conclusions
• Wireless substitution can continue on a global basis, though magnitude will vary
by region
• Europe still has good opportunities on voice
– Voice grew 6% over last 2 years (outgoing by +8%; incoming by -0.5%)
– We expect 4% growth CAGR over next 5 years as substitution continues at
steady pace and incoming revenues become less important in the mix
• US reaching saturation point for voice
– Low per minute prices already will increase dependence on data growth story
• Japanese operators focused on price discipline given low elasticity
– Proactive introduction of F2M products could re-accelerate usage growth, but
ARPU deflation risk must be monitored
• Non-Japan Asia should see continued minute migration in most markets
– Only Singapore and HK averaging > 350 MoUs per month
104
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
The Mobile Internet:
Deflation, or the Next Growth Driver?
– Mark Shuper, Managing Director, Global Telecom Research
– David Weiden
105
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
US Europe Korea Japan Asia
2G
2.5 G
3G
TDMA
iDen
CDMA
GSM
CDMA 1X;
GPRS/EDGE
W-CDMA;
CDMA 1x
EV-DO
GSM
GPRS/EDGE
W-CDMA
CDMA
CDMA 1X
PDC
CDMA
CDMA 1x
(KDDI)
W-CDMA;
CDMA 1x
EV-DO
GSM
CDMA
GPRS;
CDMA 1X
W-CDMA,
CDMA 1x
EV-DO
CDMA 1x
EV-DO and
W-CDMA
The Status of 3G Globally
106
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
2005-06: 3G Networks Becoming More Widespread
In 2006, a W-CDMA handset owner will be able to make phone calls in virtually any
developed market globally.
- Breadth of coverage will vary by country, but dual-mode handsets should allow basic
communication at a minimum.
To date, the 3G “experience” has shown few changes vs. 2G data usage.
- Ring-tones; “ring-back tones”; SMS; e-mail still the standard applications
- Korea represents the main exception, where music & video more visible on 3G
Key lessons:
- Handset price & performance is critical to 3G take-up
- Collaboration between carriers, vendors & content providers also vital
- Global take-up of WCDMA will begin to level the playing field against EV-DO
- Data bucket plans can help #2 carriers capture share from leaders (i.e. KDDI)…
- …though scale advantages can preserve market leadership if used properly (i.e. SKT)
Winners: Vodafone, SK Tel. In the US, depends on the outcome of the capex arms race.
107
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Mobile
Phone to
Internet
Country User Ratio
Mobile
Phones
(MM)
Internet
Users
(MM)
Installed
PCs
(MM)
China
US
Japan
Germany
UK
Italy
S. Korea
334
180
94
68
54
54
34
94
201
68
42
30
26
30
3.6 : 1
0.9 : 1
1.4 : 1
1.6 : 1
1.8 : 1
2.1 : 1
1.1 : 1
42
204
54
40
26
15
27
Euromonitor, CNNIC, World Bank, Morgan Stanley Research – 2004 year-end data
Wireless vs. the PC: Global Data Tells of the Wireless Opportunity
108
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Mobile Internet Data
CQ2 Annualized - $28B
Source: Top four revenue generators for broadband Internet and mobile data. Left Chart - Morgan Stanley Research Estimates, Right Chart - Company Filings.
Google,
$5.5
Yahoo!,
$5.0
eBay, $4.3
Yahoo!
Japan, $1.5
“Wired” Internet
CQ2 Annualized - $16B
NTT
DoCoMo,
$9.4
China
Mobile, $5.6
KDDI, $3.8
Vodafone,
$9.1
(Figures in US$ Billions) (Figures in US$ Billions)
“Wired” Internet vs. Mobile Internet Revenue
109
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Source: Left Chart - Morgan Stanley Research estimates: includes revenue from Google, eBay, Yahoo!, Yahoo! Japan, Amazon.com, T-Online,
InterActive, Time Warner (AOL only), Microsoft (MSN only), and Rakuten. Right Chart – Morgan Stanley Research estimates, Global Data. Informa
(5/05), Ovum (5/05).
Commerce
43%
Advertising
27%
Payments
3%
Access
27%
Top 10 Internet Companies - Revenue Composition
CQ2 Annualized - $38B
SMS / MMS
71%
Search /
Advertising
4%
Enterprise
Services
3%
Other Data
Access
3%
Revenue Composition - Mobile Internet
C2005E - $74B
Entertainment, 19%
“Wired” Internet vs. Mobile Internet Revenue Composition
110
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Japan Wireless Data Revenue Trends
Blended ARPU
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
1Q/01
2Q
3Q
4Q
1Q/02
2Q
3Q
4Q
1Q/03
2Q
3Q
4Q
1Q/04
2Q
3Q
4Q
1Q/05
NTT DoCoMo
au
Vodafone
(Yn)
FOMA
au: 1x
VOD:
GlobalStandard
au: EV-DO
Data ARPU
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
1Q/01
2Q
3Q
4Q
1Q/02
2Q
3Q
4Q
1Q/03
2Q
3Q
4Q
1Q/04
2Q
3Q
4Q
1Q/05
NTT DoCoMo
au
Vodafone
(Yn)
FOMA
au: 1x
VOD:
GlobalStandard
au: EVDO
Japan: Blended ARPU Japan: Data ARPU
Source: Company Data, Morgan Stanley Research
• Overall Japanese wireless ARPU has tended to decline over the last few years,
despite continued increases in data ARPU since the launch of 3G
• KDDI’s launch of flat-rate data has been particularly successful in capturing
higher-end users away from NTT DoCoMo
111
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Korea Wireless Data Revenue Trends
Korea: Blended ARPU Korea: Data ARPU
Source: Company Data, Morgan Stanley Research
Monthly Total ARPU Trends (excl. Activation and Interconnect)
22,000
26,000
30,000
34,000
38,000
42,000
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05
(KRW)
SKT KTF LGT Weighted Average
SKT's Launch of 3G
(1xEVDO) Service
Monthly Data ARPU Trends
-
2,000
4,000
6,000
8,000
10,000
12,000
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05
(KRW)
SKT KTF LGT Weighted Average
SKT's Launch of 3G (1xEVDO) Service
SKT's Launch of June
Multimedia Service
• In Korea, blended ARPU has been more stable than in Japan since the launch
of CDMA 1x EV-DO by SK Telecom and KT Freetel in 2002
• Data ARPU has risen strongly, particularly on the back of varied non-SMS
services such as music & video downloads; news; etc.
112
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Korea vs. Japan: Explaining Differences in Wireless Data Growth
Japan/Korea: Divergent Broadband Profiles
Source: Company Data, Morgan Stanley Research
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2000 2001 2002 2003 2004
Broadband HH Penetration (%)
Japan Korea
• Key differences between Japan & Korea:
1. High voice tariffs in Japan left more room for price deflation as VoIP arrived
2. Korean gov’t enforcement of CDMA as a common standard created positive
pressure on carriers, vendors and content providers to co-operate on “sellable
applications and handsets”
113
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
The Latest on 3G from Europe
• 3G rollout progressing at a measured pace, but acceleration in 2006 likely
• 10 months after launch, 2% of Vodafone’s European subs on 3G…
• …but 10 new handsets available for Xmas, including low-end introductory phones
• 30% lower price, 30% higher battery life, and 25% size reduction
• 11-16% ARPU uplifts being observed from 2.5G and 2G
• Laptop cards a more exciting early opportunity �� 25% of Vodafone’s German service
revenue growth in the latest quarter; 59% higher ARPU than 2.5G cards
• “3” accounts for 5% of subs in markets of presence (2% of total European subs)
• Like for like ARPUs not meaningfully ahead of incumbents…
• …but dual SIMs could overstate 3’s ‘true penetration’, and impacts 3’s voice ARPUs
• HSDPA set for commercial launch in mid-2006
• Increases download speed 2-3x
• DVB-H to enable streaming TV
114
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
The Latest on 3G from the US
…But here comes 3G
• Verizon off to a head start with deployment
• T-Mobile has at last decided to move forward
• Carriers expect $1B per year in deployment costs
In the pre-3G world, Sprint is the data leader…
• All carriers showing rapid data growth from a low base
• Still a small portion of revenues relative to Europe, Asia
• Data growth not enough to offset voice ARPU declines
$3.10
$3.46
$4.16
$4.43
$6.50
4.7%
7.0%
8.2% 8.2%
10.5%
$2
$3
$4
$5
$6
$7
$8
Sprint PCS T-Mobile Cingular VZW NXTL
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Data ARPU % of Total ARPU
Few subscribers thus far
• Mainly PC cards at this point
• Will carrier economics work?
It depends on demand, and the jury is out
3G Percent of Pops Covered
Technology 2005E 2006E
VZW EV-DO 50% 80%
Sprint EV-DO 40% 80%
Cingular WCDMA, HSDPA 20% 60%
T-Mobile WCDMA, HSDPA 0% 40%
3G Paying Subscribers (millions)
2004 2005E 2006E 2007E 2008E 2009E
Verizon Wireless 0 .2 0 .7 1 .7 4 .0 7 .5 1 1.0
Sprint Nextel 0 .3 0 .8 2 .5 5 .5 1 0.0
Cingular 0 .2 1 .0 3 .5 8 .0 1 2.0
T-Mobile ____ ____ _ 0_ ._2_ _ 1_ ._3_ _ 3_ ._0_ _ 5_ ._5_
Total 0 .2 1.2 3.7 11.3 24.0 3 8.5
Sequential Growth 700% 208% 205% 112% 60%
115
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
The entire telecom / technology / media ecosystem is affected. As in past cycles, some current
leaders will falter and new leaders will emerge.
• Carriers need to reinvent themselves as transport revenue growth slows
– Wireless industry revenue decelerating to single-digits over next few years
– “Walled garden” approach to content shows risk of cracking as more content goes “off-deck”
– Hybrid WiFi / cellphones may further disrupt the market �� pricing and performance will be key
• Advanced mobile devices could also disrupt PC ecosystem
– Phones are available with 3 Gigabytes of storage, 400Kpbs 3G speeds…Phone more and
more like a computer - connect via bluetooth / UWB to any keyboard and monitor
– Be ready for mass-consumer devices that are “mobile” but aren’t “phones” (wireless iPod…)
• A new media channel: who will be the Yahoo! / Google of Mobile?
– Could be Yahoo! or Google, though today combined they have <1% of mobile internet market
– Today’s leaders are new fast-movers: VeriSign Jamba at $600MM annual revenue run-rate
– Some media incumbents moving aggressively: MTV China expects to generate more revenue
from mobile phones than from pay TV in several years; ESPN & Disney launching MVNOs;
News Corp creates a new studio Fox Mobile Entertainment
3G / Wireless Internet Summary
116
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
MVNOs: Does the Business Model Work?
– Vera Rossi, Executive Director, Latin America Telecom Research
117
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
MVNOs / Wholesale Access
- Very little regulatory support for non-infrastructurebased
wireless operators;
- MVNOs need to negotiate cost of access without
regulatory support;
- Price sensitive margin structure;
- Low capital investment.
118
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Key Strengths
• Capital-light model without sacrificing control of the customer;
• Lower fixed costs allow MVNOs to target specific segments with a
more tailored offering;
• Ability to source capacity from the lowest cost provider and/or the
highest network quality �� practical option of switching network
providers in the event that it is dissatisfied with the quality or cost;
• Management focus on key areas of the value chain �� owns all key
aspects of the relationship with its users.
119
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Key Weaknesses
• High degree of sensitivity to decline in retail prices → potential for
margin squeeze in price war;
• Dependence on capacity from suppliers → dependence on thirdparty
performance;
• Potential disruption if switching network providers.
120
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Why Do Network Operators Accept MVNOs?
Network providers will only sign MVNO agreements:
- Increases net additions, in market segments not focused by the
network provider;
- If they believe this is preferable to seeing the MVNO launch on a
competitor network;
- Leverage fixed investments with wholesale revenues;
- Gain an equity stake that has prospective value.
121
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
TracFone Case Study
– Vera Rossi, Executive Director, Latin America Telecom Research
122
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
TracFone is engaged in the sale and distribution of prepaid wireless services and phones in
the United States, Puerto Rico, and the U.S. Virgin Islands.
TracFone does not own any wireless telecommunication facilities or hold any licenses.
Instead, it purchases airtime through agreements with the wireless service providers and
resells airtime to customers.
TracFone is the largest independent provider of prepaid wireless communications in the
United States.
TracFone at a Glance
Prepaid Subscribers in the US
0
1,000
2,000
3,000
4,000
5,000
6,000
TracFone Sprint * Cingular T-Mobile Nextel Verizon
Rank Company 4Q04 1Q05 2Q05 CAGR 4Q04 1Q05 2Q05
#1 TracFone 4,394 4,851 4,934 6.0%
#2 Sprint * 3,675 4,296 4,383 9.2%
#3 Cingular 4,050 3,963 3,917 -1.7%
#4 T-Mobile 2,629 2,629 2,943 5.8%
#5 Nextel 1,160 1,474 1,687 20.6%
#6 Verizon 1,534 1,546 1,517 -0.6%
Prepaid Subscribers
Source: Company data, Morgan Stanley Research
* Note: Sprint Resale results include Virgin Mobile among other resellers
•Note: Sprint Resale results include Virgin Mobile among other resellers
Source: Company data, Morgan Stanley Research
123
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Some Key Differentiators
• 100% focus on prepaid wireless in the US
- Most carriers have a small staff managing their prepaid business
- Unlike the carriers, TracFone does not have any issues with cannibalization of higher spending
postpaid customers
- TracFone can make money serving lower spending customers (under $20 a month) due to lower
than average subscriber acquisition costs (SAC)
• TracFone’s virtual network
- Covers every wireless market in the US with over 294 million served POP’s
- Allows TracFone to keep its advertising cost per gross add low
• TracFone’s prepaid technology
- Minutes stored in the phone and due date displayed which is critical in managing churn
- TracFone has no added cost unlike most carriers that outsource their prepaid technology
124
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Operational Description Flow
TracFone purchases airtime from carriers Motorola and Nokia include TracFone’s software in handsets they produce
Customers
TracFone sells handsets through a
variety of US retail stores.
125
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
Current Target Markets + New Product “Net 10”
• Demographics
- Primarily Female
- Adults 34 +
- Low Income: income less than $25,000
- Heavy skew to ethnic – African American & Hispanic
• Wireless Use
- Primary: non-wireless adults
- Secondary: postpaid light users
• Usage
- Infrequent usage
- Primarily used for personal, safety and emergencies
- Spending is less than $30 per month
• What is Net 10?
• Prepaid Wireless for high usage customers
• 10 cent per minute anytime nationwide
• Local, long distance and roaming included
• 5 cent next messaging
• Nationwide GSM prepaid service
• Target Markets
- Demographics
• Male and Female
• Adults 18 to 34
• Low-mid Income (under $50K per annum)
- Wireless Use
• Primary: prepaid users, excluding TracFone
customers
• Secondary: postpaid light users
- Usage
• Primary use is personal
• 200 – 450 minutes per month
• Monthly spending is greater than $30
126
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
October 17, 2005
Global Telecom Outlook Day
Telecom Services
TracFone Financials at a Glance
2000A 2001A 2002A 2003A 2004A 2005E
Total Revenues
in US$ mm 204 455 413 547 787 1,004
% change 122.6% -9.3% 32.6% 43.9% 27.6%
EBITDA (US$ mm) (163) (127) (9) 33 47 147
% change NM NM NM NM 40.7% 213.6%
EBITDA margin - service revenues -112.2% -32.8% -2.6% 7.6% 7.2% 17.1%
EBITDA margin - total revenues -79.6% -28.0% -2.2% 6.1% 6.0% 14.7%
ARPU (in US$) 16 21 15