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Lighting The Last Mile A Free Market Opportunity To Help Renew America’S Excellence And Prosperity


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High level Sector, policy and technical assessment of the current state of last mile fiber and the potential for being a free market recovery driver

High level Sector, policy and technical assessment of the current state of last mile fiber and the potential for being a free market recovery driver

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  • 1. Lighting The Last Mile A free market opportunity to help renew America’s excellence and prosperity Market, sector and policy overview of high speed fiber local access with associated enabling and monetization technologies There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea are we now afloat, And we must take the current when it serves Or lose our ventures. W. Shakespeare CrossCreek West © 2006 - 2009 CrossCreek West, LLC – Possession/Dissemination is protected by NDA. Any duplication or distribution of this document, in whole or part without permission is prohibited. Rev 3.9.14 Westminster, CO - 303-438-2111
  • 2. Confidential Contents Preface Scope 4 Purpose Preface 5 1.0 Fiber To The Premises 1.1 – Definitions, Architectures And Acronyms 8 2.0 Historical Narrative 2.1 – Technical Revolution I 9 2.2 – Technical Revolution II? 10 3.0 Trends and Drivers 3.1 – Are We There Yet? Predictive Analysis Modeling 11 3.2 – Residential 12 3.3 – Global - Berkman Center / Harvard University FCC Review 14 3.4 – Commercial 15 4.0 Market Analysis 4.1 – Cable 16 4.1.1 – Video 17 4.1.3 – Edge Customer Premise Equipment (CPE) 18 4.1.3 – Content 19 4.2 Telcom (ILEC/RBOC) 4.2.1 – Voice 20 4.2.2 – Global 20 4.2.3 – US Telcom 21 4.3 Government: The Kiss of Mediocrity 4.3.1 – Regulatory Impact 22 4.3.2 – Open Access and Net Neutrality 22 4.3.3 – Taxes/Fees and Funds (BSA/USF/RUS) 24 4.3.4 – Taxes and Economic Policy 25 4.3.5 – Local MuniNets and States 26 4.4 Private Sector 4.4.1 – The Opportunity 27 4.4.2 – Leading Edge Development 27 5.0 Markets And Revenue Streams 5.1 – Residential and Commercial Sub Sectors 28 5.2 – Sample Case Deployments 31 5.3 – Sample Services Menu 36 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -2-
  • 3. Confidential Tables / Figures Table 1 Download Time v Downstream Speeds 18 2 ComScore Index for Online Video 19 3 Additional Documents, Information and Services 39 Figure 1 Passive Optical Network 9 2 Active Ethernet 10 3 Residential Mixed Use Development Sample 14 4 Evolution of Cable 19 5 Commercial Campus Sample 33 6 Data Center Cloud Based Commercial 34 7 LAN / Office Commercial 35 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -3-
  • 4. Confidential Scope This report is a thorough high level overview summarizing the current fiber based high speed data access environment. It also includes the associated process and delivery factors that are both driving and leveraging higher access speeds. This report contains fact, opinion and forward looking information on technologies, markets, policy/regulation and trends. Detailed technical and financial aspects required for this subject are myriad and complex and are covered in available prospectus, proforma and case analyses. Purpose The purpose of this document is threefold; 1. Offer a sector focused solution that can substantially and sensibly aid the currently languishing economic and employment conditions. 2. Present a viable market based alternative to nationalized broadband policies being promoted by certain special interests and the current tone of legislative and executive policymakers. 3. Provide a wide angle analysis that satisfies due diligence, preliminary feasibility assessment and decision support for public (BSA/State BTOP grant funding) or private sector (mid/high Cap investment/development) high speed local access, distribution mechanics, associated data center infrastructure and Rev Gen applications. Preface Our journey to this point, and our hope to help educate, justify and drive a market based, rather than a government based increase in last mile fiber, is obviously less important than where are now. But background and a framing of our positions, are contextually relevant to both our reasoning and response to the growing push for nationalized broadband policies and Open Access (OA) / Net Neutrality (NN) regulations. On-Point: Relevant Background Beginning with a disclaimer of sorts – CrossCreek was not intended to be, nor is it now, a policy advocacy group. We are a technical sales group that focuses on business analysis, business development, economics and Business Information Technology Alignment (BITA). We are not anti government, pro business or pro big business – we are pro market. Our opinions are based on factual data compiled and analyzed on the past/current performance of government versus private funding and delivery of data services. The results of which are overwhelmingly supportive of private free market solutions. Although government programs and regulatory actions are generally proposed with good intentions, they have historically proven to be less than successful or sustainable. Simply put, in our opinion, they generally do not reflect thoughtful social policy or prudent economic policy. We have consulted on, executed and delivered successful fiber/wireless access and associated data center infrastructure projects in the private and hybrid Muni Bond sector. We have, in our respective careers, helped build hundreds of local, national and transnational networks and application delivery infrastructure. Therefore we understand the requirements for technical © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -4-
  • 5. Confidential feasibility, market/social need and fiscal yield metrics on which both public grant funding is awarded and private high cap investment is merited, raised, applied and rewarded. CrossCreek began fiber, cloud, cluster, application/content delivery network (ADN/CDN) consulting in 2006. After initial consulting positions we were asked to speak or participate in various FTTP, ADN/CDN networking sessions and trade shows. At the end of 2007 and through mid 2008 there seemed to be a growing attendance of “councils”, non profits and “coalitions” at select shows and working groups. After a presentation or during/after a panel discussion, the typical questions of a business or technical nature were increasingly supplemented by negative but polite OA or NN questions; Comments regarding the inequality or inadequacy of access; The injustice of carrier “monopolies” (sic); Or comments lamenting the greatness of Euro-Asia access. Though we consider ourselves to be politically astute, we were not there to debate policy or politics, we were there to educate, sell and earn business. Further, in our view at the time, this all seemed moot as the current administration/FCC did not consider this an area for government intervention. In 2008, when residential and commercial real estate stalled, we began working more directly on state broadband planning and mapping issues. Due to a 2007 FTTP project we had done and a market based Biz Dev paper submitted to the National Governors Association, we received an invitation to be part of an informal congressional panel discussion on internet policy. Though that might sound grand and illustrious, and we appreciated the invitation, this was not a terribly influential meeting. It was attended by a few commerce committee and FCC aids, and some lobby, carrier, content and public policy representatives. We were there to offer practical, real world insight, not because we wielded any sort of power or influence. Nonetheless, this was a very eye opening meeting. The tenor and mindset was extremely skewed toward regulatory action, rather than real solutions and reform. It was about how to control rather than enable or facilitate. It’s the typical pavlovian response that permeates such environments and is similar to having a boss or corporate culture that seeks to control and restrain its employees, rather than teach, motivate and inspire them to be their absolute best. The difference is – companies who seek results in the former manner, eventually suffer a loss of productivity by rigidity or poor moral, or they collapse under their own structural weight. Governments suffer acutely and systemically from all the above, and arguably more, yet continue to grow by nothing more than the momentum of their monopolistic critical mass. This meeting was the “throw down moment” for us – that moment on the first tee box when your buddies each pull out a $50 bill – it’s time to put up or shut up. In 2009, with the approval of BSA funding initiatives under the reinvestment act, the pot was raised to $7.2 billion and the ante was minimal. Those seeking public funding and regulatory intervention stormed the congressional country club with all the zeal of Rodney Dangerfield a la Caddyshack. These special interest groups and federal agencies/commissions vary in stated purpose from simple consumer advocacy for greater choice in service providers to outright calls for a federated internet agency. Accordingly, their proposals vary from; Creating a national broadband “utility“, using a metered “bit or byte tax”; Making permanent, The Broadband Stimulus Act (BSA); To having federal regulatory controlling interest of the internet. To us at least, this is as much of a runaway threat as nationalized healthcare. Due to the BSA and obviously, circumstances manifested by the 2008 economic crisis, the momentum of these various advocacy groups has grown further. They are increasingly well funded, organized and now have the ability to leverage various K Street firms. Though we certainly believe in the right to lobby for a cause or belief within the confines dictated by prudent © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -5-
  • 6. Confidential ethics, we question any effort of federal action that seeks increased physical, financial or intellectual control of the internet. This becomes even more troubling when the execution of said effort is based on bias or political preference in contract awards. [(ITTW) EO: 135021]. Some of these groups echo points found in the Berkman Center/Harvard University study referenced herein. Though these groups often do present valid points, in our opinion most offer financials which reflect a lack of understanding as to what the last mile is, or what costs and infrastructure, beyond laying a piece of fiber, is required. Therefore they understate the investment that FTTx or wireless local access can require, while overstating the profit potential. Additionally, they will not go anywhere near a Pareto, Fault Tree or Failure Mode and Effects (FME) analysis and therefore summarily ignore or dismiss the lengthy record of failure for publicly funded municipal fiber networks - preferring instead to focus on utopian policy evangelism and the social value of high speed/fiber access for all. While we certainly endorse a productive baseline level of access for all, we seek to do so with technical awareness and best practices that enable and produce free market economic gain and socio-economic benefit through willing partnerships that have a proven history of success - not a proven history of deficiency. Off-Point: Our humble opinions and the bigger picture We are all entitled to our opinions, our ideologies and our beliefs. That’s what makes this country great. Following, are our opinions and reasoning in arguing against excessive regulation and for the founding principles and free market solutions. We all know that many have sought to benefit from the current political and economic conditions by advocating steroid induced mutations of Keynesian economic theory. This differs only from the past ten years or arguably more, in the level and rate of the Keynesian trend, with no lessening of economic up/down cycles. In difficult times or good times for that matter, the only solution to any economic (or social) issue, be it real, imagined or manufactured, seems to be the centralized collective push of, or increased control by, the federal government – which tends to meld Keynesianism into economic Marxism or the move from capitalism to statism to socialism and communism. We’re mixing a lot of macro/micro economic and social “ism’s” here and we’re likely treading on PC thin ice, but when you consider all that has happened from 2008 to 2010, there are valid ties to all of the above. Especially if you’re of the opinion that “ownership” by state or collective does not have to be monetary or require an equity stake – in theory, ownership is control. These are ideological theorems with tenants that are varied and conflicting, but the definitions are technically factual – as are the historical ramifications. This does not render any specific ideological solution to our economic issues moot. But when a given ideology is completely void of any factual, real world proof of performance that is applicable to a reasoned solution, and has in fact an indisputable record of net loss, it just rings hallow. Therefore, this trend of ideologies and those who apply them are devoid of any practical knowledge of cause-effect, or historical precedence on fiscal, commercial or societal success and failure. No matter how well thought out America’s foundational experiment was, the supposedly reasoned and serious among us keep lurching backward in some vain attempt to defy all laws of human nature and economics. We do not consider it overdramatic or hyper reactionary to state that some groups and many in DC wax indignantly dismissive of the very same principles laid down by our founders that were indeed greatly focused on the success and failure evident in historical precedence. Those principles, in concert with thoughtful prescient wisdom, set the foundation for a visionary 1 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -6-
  • 7. Confidential framework. That framework, which has benefited us to this day, has to varying degrees throughout our relatively short history, been amended to include reasoned acts required of the ages. However, not since “the new deal”, has that framework and the underlying belief in free markets been so frequently brushed aside with such hubris and ignorance as in the last fifteen and increasingly, the last two years. And we argue it’s that very same hubris and ignorance that have caused strife and failure of economies and complete civilizations to not only occur, but do so repeatedly throughout history (Greece circa 21st century?) The “free” market and most private companies see issues and problems as opportunities for wealth creation, growth, competition, economic liberty, employment and socio-economic progress, so long as the rules of the game, as it were, are followed. As opposed to many politicians, advocates, pundits, mainstream media elites and “academics”, who increasingly view issues or problems, at minimum as a need for regulatory action or economic stimulus, and more ideally as a default collective social obligation for fiat ownership by central control. The fact that 90% of these evangelists have never run a small, medium or large company, sat in on a “C” level corporate compliance meeting, built a business, sweated making payroll, or hitting quarterly quota, speaks volumes as to why we have ideology rather than reasoned business and economic analysis steering policy decisions. There are no clearer current and pending examples of this than the 2007/2008 economic collapse and the healthcare “reform” debacle respectively. The result of the former and threat of the latter has caused a seemingly endless circular paradox of debt, lack of consumer and business confidence and unemployment levels that are no longer driven purely by economic fundamentals. It is driven as well by an uneasy concern, a fear of, and lack of confidence in government and it’s a crisis of confidence not seen for decades. This unease is well understood and articulated by many, and for still more, it’s simply a gut feeling. This has produced movements such as the Tea Parties and other populist ideology of American and individual greatness at odds with a liberal (present day label) ideology steeped in control and collective mediocrity. The truly sad, yet hysterically funny aspect of this is watching the political punditry and mainstream media reaction to the Tea Party movement. They began with the routine and repetitive dismissal of these groups as simply boorish, racist, ignorant rednecks incapable of formulating nuanced, intellectual reason. When that didn’t work they morphed into the conclusion that it’s just a temporary populist virus that will be cured with a few enlightened lectures from our given leaders. Which also fell flat, leaving us with their latest reaction of either a full on hyperventilating, hate induced rage or the condescending cosmetic spin of “We understand your concerns and we hear you, we really do. But this is complicated and we know what’s best for you”… followed by a curt, “You can leave now” dismissal. So where do the facts and analysis step in to moderate this debate? Let’s examine the economic collapse. The post-mortem of this collapse has been myopically argued by pundits, politicians and economists ad nauseam. With finger pointing to the “evil” mortgage companies; deregulatory actions; the congressional social engineering of the housing market and the corruption, mismanagement and collapse of Freddie Mac and Fannie Mae; The incomprehensible, disconnected and conflicting commerce, finance and banking regulatory nightmare heaped into endless cavernous federal registries; To Wall Street, GLB, the bankers and their cabal with DC; Failure of the Fed, the Quants, the derivatives, and the hedge tool of credit default swaps. As with most large busts, we feel the answer is to varying degrees, that choice we all want to see on final exams; E:) “Most of the above” © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -7-
  • 8. Confidential We would not be so pretentious as to state that we’ve analyzed this collapse in detail or that we even have the knowledge to do so. However, the single commonality present in all ad-hoc failure analyses of this collapse, at least that we’ve seen, is multiple branches to governmental market intervention. Be it as thin, scrub-like and seemingly harmless as accounting rules legislation; or as thick, oak-like and glaringly obvious as the backfire of competitive intervention by legislative mandate; the total elimination of market forces on risk/reward/consequences via state socialism/crony capitalism or the even more costly government backed entities with implicit federal (taxpayer) guarantees. Every contributing or so called primary factor put forth by pundits on either side of this argument, leads directly or indirectly back to intervention by ignorance of our founding framework or ideology which skipped directly past our founders and straight to Marx/Engels. Those who argue that the cause for the economic collapse was inaction by the Fed or some prior deregulatory action are at face value, just as correct as those advocating the cause as congressional housing intervention. That’s the point. It’s the hubris and ignorance of trying to control the uncontrollable. It’s an arms race of sorts between the utopian desire to regulate and control and the fiduciary responsibility of profit; rigid bureaucracies attempting to control fluid markets. The result of which is a slow tortuous death inflicted by a thousand good intentions spawning a million unintended consequences. This truth rarely makes the light of day because those arguing that the cause was CDSs, or “insert other”, conveniently stop their analysis when the cause-effect branch for that action leads to prior unintended consequences caused by other regulatory action that removed or buried risk via off sheet accounting or self market correction or brought changes that deflected risk due to political favors or national and global market dynamics. This then leads to another regulatory issue, and another. Before you know it, the branches are so tangled and complex that each department of a given regulatory commission or agency may know the problems that occurred within their “limb” or department but have no clue of contributing cause-effect. They do not know what happened outside their rigid concrete silos of regulation, let alone what transpired in that volatile universe of money and human nature. Those in “charge” may concede that they could have done x, y or z, but in the end, this is only adding to the complexity which caused the problem. A free and transparent market would have never allowed this debacle to happen. Some people get that, some don’t. Our founders did, current “leadership” doesn’t. With healthcare, there are very real problems with the number of uninsured or uninsurable as well as the overall cost of medical care and insurance. But cost of care (service delivery) and insurance (consumer payment/finance mechanics and costs) can be analyzed and solved within the autonomous and interconnected drivers. We find it a bit disingenuous to simply vilify the insurance companies to justify a trillion dollar plus social program. When did a product or service ever increase in price due to higher costs of financing by the consumer? Paying $50 for a plastic water pitcher or $1000 for an EKG is the insurance companies’ fault? When did this ever apply to any market? There are real, verifiable and analyzable factors that affect the cost of delivery and the cost of doing business for hospitals, medical clinics and physicians. There are separate real, verifiable and analyzable factors that affect the cost of medical insurance. But one common driver is the cost of regulatory compliance. Hospitals face socio-economic, litigious and regulatory issues that are literally putting them out of business. Insurers pay huge amounts of overhead in layer upon layer of expertise needed just to tailor and get a product to market in a given state. The consumer, on top of that pays for additional layers needed to legally market and administer those policies in a given state. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -8-
  • 9. Confidential Do we accept the challenge of analyzing the cause effect dynamics and however difficult, apply reasoned cost effective, results driven policy? No, we’re forced to watch a propaganda campaign driven by emotion and ideology for political expediency. So we pile on thousands of additional pages of confusing, special interest driven legislation. We do the ideological equivalent of insanity – repeating the same mistakes and expecting a different outcome. Depending on your beliefs or viewpoint, Moses came down the mountain with Ten Commandments – Ten rules applicable to the conduct all of mankind. Yet ideological segments of our society can’t seem to learn the lesson that the more complex the environment, the simpler and firmer the rules (and consequences for breaking them) need to be. Anything else, we humbly submit, is both “beyond the government’s pay grade” and “a fool’s errand”. Our founders understood this simple reality as well. Apparently, given that the size of the healthcare reform package dwarfs the Bible, our Bill of Rights and the Constitution combined, our current leadership believes that nothing is “above their pay grade” and they are still feverishly “on that errand” with all the grace and fortitude of the Ice Age mammal chasing the acorn. There was a sign posted in a finance class in college that said: “Messing with free markets is like messing with Mother Nature. Nothing good can come from it.” This does not suggest anarchy or mean that you can’t apply common sense rules and penalties on business and business leaders, or apply Reagan’s “trust but verify” doctrine to commerce, but whatever is done, K.I.S.S. Corporate Complicity Central regulatory power is now at a level that forces companies to make decisions of wealth and survival over freedom. But it is a choice. For Market Cap leaders, especially those headed by left leaning individuals who now “have theirs”, state socialism via crony capitalism offers a half- measure that can actually bolster their profits, market share and ensure a taxpayer bailout should things go sideways. These companies, rather than rally behind principled free market solutions, scatter like mice to their respective holes, exiting only when the cheese on the legislative “plate” is sufficient for capitulation and the quid pro quo endorsement. As a result, we are increasingly watching even free market believers echo the Eeyore-esque “you can’t fight city hall” aphorism which then plays out on a federal level with exponential economic impact. This causes, or offers an excuse for larger or well positioned companies to abandon free market principles and either lobby for a more favorable outcome or pay to play. Smaller companies generally have to try to adapt and overcome, play a niche field or fade away. We regrettably witnessed the result of this when the aforementioned long brewing DC/Wall Street cabal became one of the prime drivers in our current economic crisis. With respect to healthcare “reform”, the various industries, (AMA, pharmaceutical, medical equipment) and respective companies, (GE, AARP, etc.) abandoned principle (and their customers) for captive profit and market share. While most of the larger insurers have endured public floggings by politicians, most are still trying to ensure that the reform does not leave a duopolistic or monopolistic system. Other, smaller but growing insurers such as Imerica who had good health plans, a good rating and good prices, but couldn’t keep its reserve rate because investors were naturally abandoning all but the larger companies that might endure this takeover, have recently had to close all but administrative operations. This is as far from our founders’ vision as we can likely get without going over the edge. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 -9-
  • 10. Confidential In the end everyone knows it’s the wealthy that directly pay for, and the middle class taxpayers and consumers who end up with the depilatory effects and suffer the economic ramifications. This is not a validation of Marx/Engel philosophy or the failing of free market capitalism. It’s a failure of wisdom, leadership and courage – on the part of our elected officials, mainstream media and unprincipled commerce leaders. Perhaps Samuel Adams said it best, in a time and place not completely unrelated to today: “If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen.” We respect the opinions and rights of, and welcome the input and feedback from, all councils, groups and organizations in an effort to reach intelligent solutions. But we do not accept the cowardice or slothful tendency of deferment to government for all things short of a rising and setting sun. CrossCreek West maintains a free market economic stance based on the unapologetic pursuit of economic liberty, excellence, profit, growth, opportunity, and the value and exhilaration of free market competition. These endeavors do not in any way conflict with or marginalize our honor, ethics, charity or servant attitude. Most Respectfully, Kirk L. Irby Principle © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 10 -
  • 11. Confidential 1.0 – FIBER TO THE PREMISES The catch-all description given to this technical sector is Fiber To The Premises (FTTP). As with many such phrases and acronyms, there are numerous variants such as FTTHome, FTTNode, FTTBuilding, FTTCurb, etc. The variants typically denote either what the fiber is being deployed to or where the demarcation point of fiber occurs to a different physical medium, generally copper or coax. 1.1 – Definitions and Acronyms There are some industry groups that have self defined the “what” and “where” of fiber for the different acronyms. These ad-hoc definitions have gained general sector acceptance but are not official standards. For example, FTTH is generally considered Passive Optical Network (PON) architecture as shown in Figure 1, with 100% fiber to the home and copper or fiber inside the house. FTTH is best associated with Verizon’s GPON/RFoG/Overlay based FIOS service. FTTN is associated with ILECs such as Qwest who currently only pull fiber to the Node, with copper in the remaining architecture. AT&T’s U-Verse service is generally either FTTN or FTTC. FTTB (Figure 2) is generally considered a GigE Metro Ethernet or Point to Point (PtP) architecture to a Multi Dwelling Unit (MDU)/Apartment Complex or commercial campus. With FTTB, economies of scale and higher Revenue Per Unit (RPU) offset the higher cost of the fiber rich architecture. There are numerous distribution architectures and protocols. Each has advantages and disadvantages with respect to CapEx, OpEx, throughput, reliability, ease of failure isolation, upgrade costs, open access, etc. Therefore, this subject is covered in subsequent reports and for purposes herein, unless otherwise noted, this market sector is simply referred to as FTTx. Figure 1 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 11 -
  • 12. Confidential Figure 2 ACTIVE ETHERNET 1G/100M Connections GigE Ring CO / OLT Professional Building Commercial Campus N A P Building 2 Hospital To GigE Switch in 1 Gig Campus Switched Fiber Each Building or Central Campus Switch Building 2 MDU/Apartment Complex © 2007 CrossCreek West 2.0 Historical Narrative 2.1 – Technical Revolution I In the mid to late 1990’s we had the so called “tech-boom”, several years of hyper growth in all things technical, both consumer and business. The general public perception of this boom was that it was a web or dot-com boom – the internet. That is only partially true. Companies were racing to leverage all forms of IT to increase productivity and profitability in new and expanding ways. ILECs, long haul and global carriers were laying fiber at a dizzying pace, increasing the affordability of both local and wide area services and further driving the business tech boom. Business districts of large metro areas were being wired and “lit” because of the economies of scale and strength of the business case for high speed services engendered by the IT and Internet explosion. As such, the business side of this ramp was reasoned, semi- sustainable and rational. th This “boom” that ushered out the 20 century, set the foundation for most of the rapid consumer st and business technology advances we’ve seen in the first decade of the 21 century. Fiber rollouts, routing, network peering, HTML, DNS, load balancing, caching, et al, enabled what we have today. Be it wireless backhaul, contextual peering, cloud/cluster computation, CDNs, IT consolidation, improved online shopping or social networking - much is owed to the boom that th was the last years of the 20 century. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 12 -
  • 13. Confidential The bust or downside of this “boom” was born out of the natural evolution of the trend from business to the mass market consumer. Enter the infamous business plan on a bar napkin, the speculative ad revenue and the overvalued IPO’s. Yet, as questionable as some of these companies were, they still had something marketable. The problem was that secondary and tertiary areas such as suburban professional campuses, retail strip/pads, residential areas and high density residential complexes didn’t see a local access boom. The mass market didn’t have efficient or convenient access to what the consumer side of this boom was offering. It was the proverbial, “cart before the horse”. 2.2 – Technical Revolution II? We are hence ten years and the second Save for some areas, last mile access revolution is at the gates. Fiber (and speeds continue to be an issue. Most residential, small business or retail is wireless) advances are now well still relegated to mixed fiber/copper (xDSL) and hybrid fiber coaxial (HFC). positioned to increase local access speeds past the sedentary pace of recent rollouts. Just as in the late ‘90’s, commercial access speeds are in very good shape. From an overall market perspective, the And the available applications are changing and developing at a pace bottom line is that fiber has reached the faster than ever. Unfortunately, also as in the late ‘90’s, residential/SMB access affordability rate which previously rendered speeds have increased just at or below demand side requirements. With cost benefit, ROI, TTV and business case general availability (GA) of ~1.5M/768K studies mute. Fiber cost reductions downstream/upstream in the early to mid 2000s, to GA of ~8M-20M down and combined with demand drivers, distribution 2 768K-1.5M up speeds in 2009. economics, and backend services make Application and service providers will not make the same “cart before the this a prime growth market sector. This horse” mistake of marketing apps to those who don’t have the access offers staggering economic, bandwidth to properly run them. Yes, we environmental, educational, health and can now watch TV shows, short videos and have a decent video conference social benefits – including the most with clients or corporate from our home office. We can research the important, but seemingly forgotten benefit epistemology of America’s founding fathers or shop for a new flat-screen. of jobs. And it does so without the need But, this is the technical equivalent of circa 1960’s TV. for subsidies or another ineffectual, debt inducing “stimulus”. But, this revolution is We are hence ten years and the second revolution is at the gates. Fiber (and currently timid and in a bit of disarray. It wireless) advances are now well positioned to increase local access refuses to fully organize and storm the speeds past the sedentary pace of recent rollouts. From an overall market gates because there are too many perspective, the bottom line is that fiber has reached the affordability rate which economic and regulatory concerns. 2 With recent electronics, VDSL2 is capable of 50Mb/s down, but GA numbers not available © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 13 -
  • 14. Confidential previously rendered cost benefit, ROI, TTV and business case studies mute. Fiber cost reductions combined with demand drivers, distribution economics, and backend services make this a prime growth market sector. This offers staggering economic, environmental, educational, health and social benefits – including the most important, but seemingly forgotten benefit of jobs. And it does so without the need for subsidies or another ineffectual, debt inducing “stimulus”. But, this revolution is currently timid and in a bit of disarray. It refuses to fully organize and storm the gates because there are too many economic and regulatory concerns. History proves that the edge, Going further back in history, just as in the 1930’s, when government seeks to exert undue power in the defined in this context as the private sector, capital takes defensive measures, closes ranks and retreats to more strategic ground. consumer/business, will always High speed access has to a certain extent, defied these cautionary tales and seems to have sufficient seek and therefore providers will drivers that have kept it going – though at a rate reflective of current risk. The last thing we need is always develop new and promising economic sectors such as fiber and high innovative applications for speed access hindered to a limping pace inflicted by the regulatory albatross. whatever capacity is there. We A great deal of hype and money is being thrown at are now at that tipping point. repairing “infrastructure”. The very same government built highway infrastructure that is now in disrepair despite taxes, fees and funding for its maintenance. Do we really want – using a throwback phrase – the information superhighway to be in any way dictated, controlled or funded by government? We can not predict a Galt-like self determination or economic liberty reaction – but historically, especially in America, that is sometimes the result. If so, we submit the second technical boom will occur sooner, larger, faster and be more productive. And the revolution will indeed be televised – on computer monitors, 3/4G smart phones, online interactive Votech or degree programs, WiFi pads and web cams in telemedicine clinics and hospitals, video blogs, medical consult collaboration, grid/cluster computation for complex scientific analyses, improved quality for elderly care facilities and of course, IP enabled TVs. History proves that the edge, defined in this context as the consumer/business, will always seek and therefore the providers will always develop new and innovative applications for whatever capacity is there. We are now at that tipping point. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 14 -
  • 15. Confidential 3.0 TRENDS AND DRIVERS The next obvious question is – Dense business centers in major metro areas notwithstanding, “Why aren’t the cable companies or the Telco’s (ILECs) putting in high speed access/fiber?” The short answer is, some are. The complete answer is more complex. The last mile seems a simple and self evident objective, and in reality, it is - particularly in new development applications. Existing development delivery is more complex and often requires different physical transport mediums. Though the endgame is quite easily achievable, the micro/macro market, corporate players and government (local, state and federal) regulatory issues (ie; Telcom Deregulation, Net Neutrality and the Broadband Stimulus Act) each add multiple levels of complexity, uncertainty and risk to the game plan. 3.1 – Are We There Yet? Predictive Analysis Modeling Predictive analysis modeling looks at such variants as feature innovation vs process and/or delivery innovation. Process and delivery drive larger innovation and features follow. Feature innovation adds value only until there is process or delivery innovation. In the IT world, one example of this is the client server model that was the de-facto network architecture in HQ and branch/remote offices from 1994 to roughly 2006. During this period, features, processes and delivery innovation all contributed to this evolution. However, beginning with branch/remote offices, this model eventually lost the best practices battle to process and delivery innovation that allowed higher cost savings, better service delivery and better management via HQ or centralized services. The features being added to client server networks were overtaken by process changes such as virtualization, storage efficiency/affordability, etc. And delivery innovations such as; WAN/TCP and application specific protocol optimization; Better edge caching; Data de-duplication; And migration This is analogous to FTTP in that from expensive private transport, to more economical virtual or private IP space on public the value of feature innovation in transport. Centralizing processes via remote delivery changed the model. this market is now secondary to Another, though perhaps more nuanced example the level and value of process and can be illustrated by Microsoft and Oracle, with delivery innovation. their centralized, vertical, stacked multi-million dollar IT systems vs Google’s model or the potential of SaaS or cloud based systems. MS and Oracle continue to add features to their massive existing systems with consensus modeling based on a single data set and single process/delivery application. Yet analysis shows that the features being added to these systems, no longer carry much value, either as a usable construct within the application, or because they are effectively holding data captive via an often proprietary process. In this case the processing and delivery of “data” are changing. One measure of a “system” is the extent to which that system facilitates the process and delivery of data relative to maximum potential. Open, yet centralized portal data processes (acquisition, format, storage) and delivery (cross-functional, intra-functional access and utilization) that provide value to the manufacturing and finance group yet also benefit the chief compliance officer and the web market strategies group, are changing data process and delivery models. One need look no further than Microsoft’s complete 180° change in tack from its 2 001 declaration that Linux and GPL are viral cancers, to being a major GPL player in drivers and applications such as MySql. Or the now infamous Oracle claims of SaaS/Cloud being a fad, not a technical evolution. This is analogous to FTTP in that the value of feature innovation in this market is now secondary to the level and value of process and delivery innovation. With respect to SMB commercial © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 15 -
  • 16. Confidential access networks, the providers seem content to add features such as “business class voice” or “free email addresses” or “a static IP address” without innovation on delivery, BPO or service process innovation. On residential deployments, adding features such as “30 extra channels” or more HD channels or a proprietary DVR, no longer stand significant in the bigger picture. These features, running on old platforms and delivery methodology are becoming less and less valuable. The value is now in the process (applications) and delivery innovation. If the service provider (process/applications) and access provider (delivery) are one in the same, but Non business residential online stagnation in process or delivery occurs, this is not only a problem, it’s an opportunity. Private capital time from 2006-2008 has can step in to separate and leverage access and/or service (delivery and process) or combine them doubled for the average under new paradigms. These options and regulatory mitigation are discussed in the Market household to 4 hours per day. Analysis / Government section 4.3 on page 24. That is now equal to TV viewing. Given current data, minimal and 3.2 – Residential optimal access demand speeds This market can no longer be categorized simply as home, leisure or family use. Increased mobile will increase by a factor of 2 (for workforces have turned the family home into the home and office or Virtual Office (VO). Remote/VO advertised rates) or 4 (for actual requirements include Corporate VPN Access, IP Phone Access, Web/Video Conferencing, Virtual rates) in the next 2 years. White-Boarding, Corp Email, and Application and Desktop Streaming. See Figure 3. Reliable data on home office/VO and mobile access growth is difficult to come by as studies vary widely by industry and how a study defines parameters of “mobile”. However, data that we found to be statistically sound include: • 86% of US companies now offer some form of a Telework option. This included VO and corporate office flex time and mobile access or full time VO. In 1998, only 18% of US companies offered any form of remote/VO option. • Several 2008/09 studies estimate that by 2011, ~75% of the US workforce will be mobile 3 in some manner . This is the highest workforce mobility rate in the world. • A 2008 study indicated that the number of people who work 75% to 100% from home is increasing annually at about 17%. With respect to traditional home, leisure and family bandwidth needs, access demand requirements are being primarily driven by individualized video (internet/WebTV, IPTV) – as opposed to packaged video (channel bundles) from cable, satellite and ILECs. Services in addition to Voice, such as On-line Gaming and Video Chat are increasing demand as well. Non business residential online time from 2006-2008 has doubled for the average household to 4 hours per day. That is now equal to TV viewing. Given current data, minimal and optimal access demand speeds will increase by a factor of 2 (for advertised rates) or 4 (for actual rates) in the next 2 years. The distinction between actual and advertised rates from a residential perspective, as well as some commercial, is relevant because the two should either be declared by the access provider 3 We excluded data that considered usage of corporate mobile phone email as a qualifying factor for “mobile worker”. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 16 -
  • 17. Confidential or increased/decreased to reflect reality. If a 10Mbs connection is requested but that rate is a best case scenario that will likely never happen, or the connection is not asynchronous, then the required bandwidth increase will be much higher. 10Mbs down/2Mbs up advertised vs 5Mbs down/1Mbs up actual will need to be 20Mbs up/down, advertised and actual. Globally, late 2007 forecasts reached a consensus that FTTH (not simply FTTx) availability, stated as “homes passed” would be approximately 34.6 million by 2009. Mid 2009 reports on actual homes passed, indicate that number to now be over 50 million or 15 million more than forecasted. And from 2009 to 2015 the trend-line gets much steeper, especially in the US. Applicable or not, global policy reports have impacts on the U.S. and the residential report by the Berkman Center that follows is the most extensive global policy examination. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 17 -
  • 18. Confidential Figure 3 IP ©2007 CrossCreek West © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 18 -
  • 19. Confidential 3.3 – Berkman/Harvard FCC Review A Harvard analysis done for FCC National Broadband and to a lesser extent, Open Access/Net Neutrality (OA/NN) policy covers the global picture extensively. Study is available here. It should be noted that national broadband policies, Open Access and Net Neutrality are all technically different, albeit interrelated issues. National broadband policies seek to create some level of equality to baseline access, generally via public funding. Open Access seeks to increase consumer choice of service provider and in theory, competitiveness by making the last mile, service provider agnostic. Net Neutrality seeks to set rules on how carriers handle/manage different traffic (competitive, P2P, etc.) on their networks. In the end, these are really residential consumer issues because on the commercial side, savvy IT professionals generally negotiate SLAs and peering agreements or pay for added services such as BGP/MPLS. As such, the Berkman/Harvard study reads more like a sociology paper than a business, economic or technical paper. We have listened, debated and commented The Berkman/Harvard report is an examination of trends, methods and on these and other technical policy issues levels of success for various global broadband policies and the possible from panel discussions in Vegas, to application of some of those policies to the US. It is a thorough report of the congressional conference rooms in DC – global broadband picture but it is an and it can seem complicated. This is academic study that, although applies accepted research and analytics to because having a national broadband the subject matter, excludes consideration of important corollary “utility” or plan, leads to Open Access data. regulation, which in turn leads to Net It is quantitative rather than qualitative in focus as it attempts to define Neutrality regulation. The historical success by simple ubiquity, speed and harbingers of caution on these actions users’ cost of access, without consideration for quality, technical should, to any reasonable person, appear soundness or subsidized costs beyond monthly access fees. numerous and glaring. The report presupposes that regulation/public funding of some sort is required for broadband access and examines global policies for success and failure on that supposition. Rather than determining best practices from both a public policy and a free market perspective. Nor does it consider the general economic models and demographics of the respective countries. For example, countries that have collective production or a heavier mix of socialistic/statist tendencies with favorable demographics are weighted the same as more capitalistic countries having complex demographics. It therefore frames the success of, and by extension, the application of foreign broadband policy to US markets without consideration for the acute business and economic differences between said markets. Finally, the study admits that public funding will trump private investment, but hints there is sufficient success in foreign markets to have the US government step in to regulate or fund access. This conclusion reflects cognitive bias and logical fallacy – it seeks to associate subjective, inapplicable policy to objective outcomes. We have listened, debated and commented on these and other technical policy issues from panel discussions in Vegas, to congressional conference rooms in DC – and it can seem complicated. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 19 -
  • 20. Confidential This is because having a national broadband “utility” or plan, leads to Open Access regulations, which in turn leads to Net Neutrality regulations. The historical harbingers of caution on these actions should, to any reasonable person, appear numerous and glaring. 3.3 – Commercial Although SaaS is typically defined to On the business front, access demand is primarily IT driven. Office productivity, include only web based applications, financial analysis/management, general management, CRM/Sales operations, ERP, we include non web applications in regulatory compliance and discovery this description as well. applications are the drivers. Enhancements in thin client, Web based business applications once reserved for only the largest of companies TCP/protocol specific optimization are now feasibly leveraged by companies of all sizes. This is due to the emergence of and application delivery controllers Software as a Service (SaaS), whereby the development, infrastructure, licensing and allow applications that were not support costs of a given application are developed to specifically run on shared across numerous subscribing users/companies. http/WAN based protocols, to be Although SaaS is typically defined to include delivered at business class speeds only web based applications, we include non web applications in this description as well. across a wide area network, enabling Enhancements in thin client, TCP/protocol specific optimization and application delivery the same multi-user modeling and controllers allow applications that were not economies of scale as Web-SaaS. developed to specifically run on http/WAN based protocols, to be delivered at business class speeds across a wide area network, enabling the same multi-user modeling and economies of scale as Web-SaaS. Also, the “browser” as universal client has not in our opinion reached the core functional and interoperability levels that were originally the declared objective – though this is more the fault of the host web developers as opposed to browser developers. These trends are driving remote office consolidation - centralizing the IT infrastructure, operations and compliance responsibilities. Additional service offerings made more affordable by the reduced cost of data storage and unit server performance gains via virtualization are also key drivers. The resulting increased usage of data centers and network based services such as remote storage/backup, Cloud computing applications, site load balancing and business continuity via transparent failover, all increase bandwidth requirements. See figures 5, 6 and 7. Beyond commercial access IT drivers, the obvious pull down effect of faster access speeds on the consumer side is also significant for business to consumer companies. FTTH will definitely spur investment in richer content and infrastructure by companies marketing to consumers. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 20 -
  • 21. Confidential 4.0 MARKET ANALYSIS There are numerous financial, technical, socio-economic and demographic trends, as well as four primary entities that influence the cost, quality, availability, adoption rate, choice and innovation of high speed fiber access. Each has their own SWOT and each has a different history. Herein the larger trends are examined under the four respective entities/players divided as Cable, Telco or Incumbent Local Exchange Carrier (ILEC), Government and Private. 4.1 - Cable Cable companies have been very comfortable in their Geo-franchise monopolies and until recently have faced little if any competition from ILECs/Telco’s on their core Rev stream, video. On the whole, cable has done a respectable job on the triple play front, offering video, voice and data reasonably well. However they don’t necessarily have the infrastructure required to execute a high speed fiber offer - cable’s legacy is TV/Video via RF - they are not particularly IP and data savvy. Cable has the technology to greatly increase their bandwidth speed via a technology called DOCSIS. But there are a number of technical and architectural (network design) issues with DOCSIS that create doubt in its cost, feasibility, and long term value. DOCSIS is beginning to be implemented however. Cable companies also have a questionable reputation on customer service/integrity with a history of raising rates or cutting/changing services. One such contentious change came after bandwidth ® speed upgrades when Comcast announced, to much consumer outcry, metering or penalizing ® Internet subscribers who were using what Comcast deemed to be, too much bandwidth – even though the bandwidth was within the subscribed rate. This was purported to be aimed at peer-to- peer users, (music sharing, etc) who, to be honest, do eat up excessive bandwidth via “IP broadcasting”. However, it’s not a stretch to believe the increasingly common subscribers who ® download (Stream or Record) movies via the internet for video on demand (VoD) or watch Hulu , ® ® AppleTV or NetFlix on their PCs or TVs, are the next likely targets of this usage “fee”. 4.1.1 - Video The impact of video content and delivery methods is significant for both Cable and Telcos, but at this point, because of core service revenue and legacy delivery architectures, the impact is more significant for cable. Therefore we will cover video content in this section. 4 As illustrated in figure 4, in the Cable world, and to a lesser extent the Telco world, pure access capabilities offered by high speed FTTx are turning out to be as much threat as opportunity. Similar to Telco’s losing legacy landline and long distance revenue to cell phones and VoIP, Cable is losing some legacy Video/TV revenue to faster available bandwidth. This increased bandwidth drives internet content/services as well as the availability of enabling appliances rd such as residential gateways and 3 party open access or after market Set Top Boxes (STB). The transition of consumer access to rd voice and video from single provider billed services to self enabled or 3 party providers, is occurring at different rates, with voice leading heavily on adoption and spend. But both are significant from an overall market perspective. 4 Correlation to the USF and the 2006 tax increase © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 21 -
  • 22. Confidential In these lean times, Cable customers spending $60-$100 a month on the TV bill alone, with added fees for HD and a DVR, are beginning to realize that for the cost of one or two months of their cable bill, they can buy a third party STB that essentially connects their TV to the internet, and in some models, web enables their TV. With increased bandwidth as shown in Table 1 below, delivery mechanics change dramatically. Consider the impact of the following increase in bandwidth speed to traditional TV subscriptions: Table 1 Time Required To: 10Meg Downstream 60Meg 5 DSL/cable Downstream FTTP Download a 6.5 Gbyte DVD movie 1.45 Hours 10 Minutes Download a 25 Gbyte HD movie 5.5 Hours 42 Minutes Stream a 60 minute HDTV show - Not viable or highly Immediate viewing the times vary due to host, delivery architecture and problematic 6 encoding 5 Due to architectural differences of DSL and Cable, predicated on local access load, time required is potentially higher with 10Meg downstream cable. 6 10Meg is technically sufficient to stream/buffer a 1 hour TV show in HD, with a few minutes wait time to view. However, the demand requirement vs the real (best effort) throughput of 10Mb/s in most source and delivery architectures is precarious. Viewing glitches and slower performance of other services on the feed can result. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 22 -
  • 23. Confidential Figure 3 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 23 -
  • 24. Confidential 4.1.2 – Edge Customer Premises Equipment (CPE) The key to consumer access, as well as commercial office deployments for video in general, will likely be STBs and gateways. In the supply chain for content, from acquisition, to regional then local CDNs, to service level access control and local ad feeds, the open STB/gateway is the end user CPE, increasingly replacing the proprietary devices now leased to end users by the providers. STBs and gateways are technically different and perform different functions, but with the inevitable technical convergence, those differences are blurring and features are melding to create the newest standard edge appliance. ® One such appliance is Cisco’s IPTV Series Multi-Stream DVR Gateway (by way of Cisco’s acquisition of Scientific Atlanta). This and other STBs include features such as: support for three independent channel streams to multiple televisions throughout the home; integrated DVR to record multiple video streams simultaneously with xxxGB of storage; IP compatibility using 100BaseT Ethernet and IP-over-coax using HPNA 3.0 interfaces for IP video and data content; video codecs for standard and high-definition content (MPEG-2, MPEG-4, Part 10/H.264, and VC-1); recording of HD broadcast programming to analog VCRs, with automatic standard- definition conversion for VHS tape format; and digital interfaces with applicable copy protection standards including High-Definition Multimedia Interface (HDMI) with High-Bandwidth Digital Copy Protection (HDCP). This is essentially a video recorder unit that hooks their TV to their “service”. Some new appliances are being released that not only interface with proprietary service STBs but provide internet access (Web) – with or without a Cable, Satellite or Teclo TV subscription. This allows an IP enabled TV to serve as monitor for email, browsing, TV and phone. ® Other choices include the AppleTV STB as shown, which also allows a direct HDMI connection ® to a TV and to the home network. Amazon .com has also entered the video market with the ® Unbox . ® In early 2009, LG released an Ethernet ® capable HDTV with embedded Netflix streaming software in the television. By mid 2009, all TV manufacturers offered models with IP termination and access ports, some with WiFi access as well. While it is evolutionary that these new broadband HDTVs will stream growing libraries of movies, TV episodes and HD ® ® content instantly from Netflix , Amazon , ® Apple and other content distributors via an Ethernet connection, the STB will likely remain the key for versatility and the ability to empower users to view different sources of content on their schedule – i.e.; users can set the DVR from their office or cell phone to record what ever they want to view that night – again, with or without a TV subscription. This enables video to be menu or al a carte driven rather than buffet style. Consumers pay for the content they want, when they want it. Not for the content they don’t want and not for the licenses, infrastructure and transport of 100’s of channels of unwanted content – Most consumers no longer care about having (and paying for) 400 channels when they only watch 10%-15% of those channels. Nor do they want to pay a monthly fee for HD, plus a monthly fee for a proprietary hard drive/video recorder. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 24 -
  • 25. Confidential 4.1.3 - Content One can somewhat argue that the content creators, al a Hollywood, broadcast/cable networks, TV/Film/Sports studios and the respective corporate holding companies - rather than cable, satellite or telcos are the cost villains in consumer video bills. The content delivery industry pays $6 to $8 billion a year to buy premium content from networks, studios et al. But increasingly, due to raw viewer share numbers, content creators have no choice but to not only turn to, but own 7 internet/web content delivery assets such as Hulu® . ® Individually, IP/online video from sites such as FanCast , Hulu® or YouTube® is not necessarily a game changer. What is a game changer, however are cumulative market share numbers and growth rates that would make any respectable CMO or CEO take notice. As shown in Table 2, YouTube® is the king, with nearly 100 billion monthly unique visits/viewers and growing. But YouTube® has a global presence and If you majored in business, you likely offers mostly low-end, user generated content - although they are adding remember the Standard Oil, and more content from a few broadcast channels. Hulu®, on the other hand is recently Cisco case studies. Their currently a US offering only, providing professional content from major tv/film overriding strategy, was/is not to simply own studios and other content providers. the manufacturing, but the supply chain and ® As of Q1 2009, Hulu had 110 distribution channel as well. broadcast and cable networks, along with a library of more than 1,000 television shows and 400 movies. Hulu’s 08/09 year over year growth was 410% with monthly growth in the 40% range. The target demographic here is not confined to teens, but general consumers with spending power, which equates to ad revenue, which equates to even more content. Hulu is expected to generate revenue of about $180 million FY 2009, roughly equal to that of YouTube. Comcast’s FanCast, combined with their offer to GE for 51% (w/ future options) of NBC also signal changes in the content and distribution world. If you majored in business, you likely remember the Standard Oil, and more recently Cisco case studies. Their overriding strategy, was not to simply own the manufacturing, but the supply chain and distribution channel as well. At a time when print and broadcast TV share are declining, advertisers are looking to these IP Video delivery mechanics as prime space. Not included in Table 2 are the pay per view or ® ® subscription content delivery models such as Netflix and AppleTV , which when considered, cumulatively puts the overall IP Video market firmly in new paradigm or game changer status. The rate at which this change is occurring is increasing its pace, but the jury is still out on whether this truly takes off, with the likes of Boxee, Roku, Sezmi, etc., each trying different delivery and content angles. For consumers, the near term result of this shift in content delivery is the option to have a TV subscription that lets them choose 40 channels from a list of 400 for $20/Mo., and get the rest of their content from other sources. As compared to the current model of paying ~$80/Mo for basic TV plus some specialty (not premium) channels, or closer to $150/Mo for the premium TV packages. The longer term hypothetical is that no one will have a cable or Telco “TV subscription”. The content from networks and cable channels will simply be distributed directly to CDNs rather than through multi layer channels. The distribution and delivery will be via public internet or private IP space to consumer access devices. The technology currently exists to offer this type of service to consumers. 7 Hulu is owned jointly by NBC (GE), News Corp. (NWS) and Disney (DIS). © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 25 -
  • 26. Confidential Table 28 8 Source: © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 26 -
  • 27. Confidential 4.2 Telcom On the Telco front, the situation is similar to cable in the larger market perspective. But on a more finite scale, involves regulatory/open access requirements creating higher risk on investments. Telco’s have also had a distinct disadvantage in that video (Cable’s strong point) is the most difficult service to deliver on IP. So, on the whole, without FTTP, Telco’s have not been able to deliver packaged triple play services offering Voice, Video and Data as well as Cable. That is ending and as discussed, the Telco’s seemingly are now in a stronger position with respect to pure access. 4.2.1 – Voice As its primary legacy revenue, we need to examine market trends for voice under Telco. Telcos are losing core voice (land line and long distance) revenue for the same reasons that cable is losing video. That said, for the major carriers having cell assets at least, mobile phone usage and associated “voice” revenue, has mitigated some revenue loss. VoIP or digital voice is more mature than IPTV or IP Video. Voice is a service only, dial-tone and call completion are the only real products, it is therefore easier to package, deliver and bill than video. Video has to deal with content as the primary product and access/delivery as the secondary service. Therefore, simply due to factors of feasibility and market entry, voice has a more competitive environment. Among the players in this vertical are; PC based MagicJack®; rd Self enabled Gizmo® and Free Skype®9; And 3 party Voice over Internet Protocol (VoIP) providers such as Vonage , Skype , Digium/Asterisk® and NuFone®. Additionally, VoIP or web- ® ® calling is coming to mobile phones with suitors such as Google®, Skype® and perhaps Vonage®. While this doesn’t necessarily cut into carriers’ “usage minutes” revenue, Mobile VoIP does cut 10 into premium long distance revenue on mobile phones. 4.2.2 - Global Telcom If you find socio-economics a compelling topic, the international picture is an interesting one that is seemingly the mirror or opposite of, say the US and Britain. Internationally, some countries such as Denmark and Sweden have achieved widespread and plentiful access fiber. Though they are smaller countries with favorable demographics and a bias towards encouraging government controlled, subsidized or utilities based solutions. The mirror aspect here is that although they have last mile fiber as a centralized mandate, they don’t necessarily have the infrastructure to leverage that asset other than simply internet access and being a bit-pipe. They have high speed access, but not the ability to fully leverage it. America has far less high speed access fiber but has a greater ability to leverage or monetize it. 4.2.3 - US Telcom As stated, the U.S. and the U.K. have less access fiber than many if not most developed countries. Again, at least in the US, this is due partially to a deeper free market attitude that is demand driven, not centrally mandated. However, lack of high speed access is also due to higher degrees of risk aversion on the part of private capital. Investment is increasingly tempered or even strangled by regulation. The attitude and mentality of risk v reward become skewed when at any time, regulation can strangle reward, and that can make the risk too high. 9 Skype® is owned by Ebay®. In Q2/09 Ebay® sold partial but controlling interest in Skype® to an investor group. 10 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 27 -
  • 28. Confidential Even attempts at deregulation have left regulatory nightmares. The idea to require ILECs to lease parts of their network to competitive local exchange carriers (CLECs) to compete against the ILECs was reasonable in that it allowed the ILEC to get a return and allowed time for asset build by the CLEC to create head on competition. But the regulatory framework was never given a sunset date – thus there was no incentive for the ILEC to install fiber in any area that didn’t meet extremely stringent revenue metrics. How can you justify spending extra money that has no rate or recovery timeline? The CLECs had no incentive to pull fiber as they could simply ride the coat-tales of the ILECs and focus on the “utilities” or basic, rudimentary services until there was a “go-away” buyout offer. Had the ILECs been reasonably assured of a sunset date and released from the utility regulatory burdens, they would have had incentives. Similarly, the CLECs would have known it was a build or die scenario and would have had completely different entry/exit strategies. And, we submit, fiber would be much more ubiquitous than it is today. The result is we are almost back to a Verizon® and AT&T® duopoly coming full circle to Ma-Bell. All that said, the 2 ½ remaining ILECs are beginning to roll out fiber and some variants of FTTx. Verizon’s FiOS is the big gorilla in this jungle. Verizon is pulling full GPON FTTP, providing the standard triple play services. The TV content (channel bundles) are delivered via RF Overlay and Video on Demand (VoD) is delivered on pure IP. As of Q2/08, Verizon stated that they Verizon hasn’t deployed the delivery passed 11 million premises for FiOS Internet and 9.6 million for FiOS TV differentiators that are possible with FTTP. service. Available (lit) subscribers were stated to be 8.4 Million and 7 This is because in the video world, it is million, respectively. They expect to continue passing 3 million new easier and cheaper to build and more premises annually through 2010 at importantly manage, four or five “packages” which point they estimate 18 million homes passed at a CapEx of ~$23 than CDNs and an al a carte offering. billion, but with ~$1 billion in estimated OpEX savings over other mixed architectures. Verizon’s take rate target is by the end of 2010, to have at least 4 million FiOS TV customers (25% market share) and 7 million internet customers (38% market share). Verizon® is touting its video as a key differentiator, offering 400 digital video and music channels, more than 10,000 VoD titles a month, interactive media guide and all available HD channels. But for many subscribers, this seems to have drawn a big yawn. Verizon’s market model is still buffet style – pay for licensing and delivery of hundreds of channels, regardless of whether you want them or not. This can explain customers’ higher take rate for Verizon’s Internet access than their TV service and strategically that may be Verizon’s end objective. Verizon hasn’t deployed the delivery differentiators that are possible with FTTP. This is because in the video world, it is easier and cheaper to build and more importantly, manage, four or five “packages” than CDNs and an al a carte offering. Having a silver, gold, platinum and premium “package” is simpler and cheaper to deliver because it’s really just a push broadcast service, not an interactive service such as VoD or PPV which require added infrastructure and systems. But with virtually unlimited bandwidth at their disposal, they can “turn up the volume” and deliver access speeds that may supplant any TV only subscription. They are in a relatively strong position, but they also have the most exposure with respect to Open Access legislation. AT&T® (and prior as SBC) offers a mainly FTTN all IP triple play service called U-Verse. The first commercial rollout was in 2006 in San Antonio. As FTTN denotes, U-Verse is not 100% fiber, copper is used to the Prem. The maximum bandwidth of FTTN with DSL Copper drop is 25Mbs at a maximum distance of 3,000 feet. With new electronics, VDSL 2 has the ability to increase that throughput to 50Mbs, but AT&T does not have stats on what DSL version is where. As a © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 28 -
  • 29. Confidential result U-Verse is not getting the subscription or retention rate that Verizon’s FIOS is. AT&T has stated that they will begin FTTP greenfield (new development) installations in late 2009 or 2010. In the west, Qwest® (the ½ ILEC) also pulls FTTN, but again relies on copper to the Prem. Qwest does not offer a triple play service (TV/Video is through partnership with DirecTV) and they were late to the game with respect to digital voice. Qwest has not announced any plans to begin widespread FTTP deployments, citing cost as the primary barrier. In fairness to Qwest, as stated earlier, ILECs pulling fiber into an average residential development, have no exclusivity investment protection which can result in a very long, flat ROI. Qwest, unfortunately is not positioned well enough to carry that load. There are pockets of private carriers, CLECs, and network operators offering FTTP to new developments in several states, but none that are nationwide. 4.3 – Government: The Kiss of Mediocrity Unfortunately, in the course of full disclosure and due diligence, the regulatory and corresponding fiscal, competitive and operational compliance issues have to be discussed. In the following section we attempt to deal with only the facts, yet provide the very real competitive and financial implications of federal, state and municipal issues. 4.3.1 – Regulatory Impact Though the US is currently if tepidly in the “No” camp with respect to requiring open access on private (non-ILEC) network investments, the current administration and the legislative branches seem increasingly intent on stricter regulations and oversight on private enterprise, while at the same time, going so far as to create government backed competition in seemingly all areas of American business. An overstatement? Let’s review; retail banks, institutional investment firms, retail mortgage companies, GBE (Freddie/Fannie), real estate appraisals (HVCC), car companies, college loans, the hereto exclusion of the executive branch in census activities (this means billions of dollars tied to demographic data), health care, private networks (Cybersecurity 11 Act of 2009) and now, internet access (BSA/NN). These are simply the facts – they exist regardless of one’s political leanings. One can certainly debate the causal relationship between government regulatory actions/inactions and corporate malfeasance on the 2008 housing/economic calamity. But the government responses to the downturn stand on their own inarguable definition of collective interventionism on a scale unmatched in US history. 4.3.2 – Net Neutrality, Open Access and National Broadband Policy In addition to the threat of government/taxpayer subsidized competition, Net Neutrality is the other looming regulatory unknown. In mid 2009, The FCC announced that it is favoring Net Neutrality and subsequently renewed hearings on it. As we indicated earlier in this report, Open Access and Net Neutrality are primarily residential or consumer issues. 11 Cybersecuity Act of 2009 / Introduced by Senators John Rockefeller (D-W. Va.) and Olympia Snowe (R-Maine). A bill to establish the Office of the National Cybersecurity Advisor—an arm of the executive branch. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 29 -
  • 30. Confidential Still, there is general market spillover for NN. NN epitomizes the passive This example is important because in this layer v active layer battle – pitting fire and brimstone argument, no one seems access providers such as Verizon, Cox, Comcast, Time Warner Cable, to be considering or pointing out the size, TW, Qwest, AT&T, etc. against content and service players such as complexity and organic nature of the subject Google, Microsoft, Vonage, Yahoo, et al. -Or- Those who invest money to matter – the internet. Changes in data traffic provide the local and long haul access metrics indicate that local access and long and expect to get a return, vs those who leverage and monetize that haul are changing in ways that a access by paying only for access to the Internet at large, target the very government or bureaucracy could never same customers and move huge amounts of data across networks. hope to manage, keep pace with or control. This leads to fears that access providers may delay or reduce priority for competitive traffic, or even deny access of competitive traffic to certain destination IPs. Beyond these simple arguments, the minutia gets deep, complicated and almost philosophical. This battle is evident with; Advanced web services such as Cloud Services, Grid Computing and Application Streaming; With SaaS, and other Apps such as GoogleApps; With video through IPTV, WebTV, the increasingly popular Video Chat with Skype client; And with Voice via VoIP. OA/NN is also raised under the pretense of being a local access or last mile issue without any implications to the economy, internet or application development at large. Historically, this has been proven false. Regulatory framework or public funding slows, stifles and complicates development. As the saying goes; “The devil is in the details” and in Washington DC, that saying is both literally and figuratively applicable to the incomprehensible legislation and unfortunately, the failings of a few reflecting on the body politic at large. If a company developed a new protocol that reduces packet overhead by 30% for MPEG4 traffic but struck a deal with only one provider –OR– a new must have “killer app” is out, but it requires a minimum of 35Mbs of local bandwidth to run. How would a neutrality doctrine apply to the former regarding patent and intellectual property laws? How would “fairness” be applied to the latter for those who have only 20Mbs not 35Mbs of access capacity? How many regulatory hurdles, lawsuits, delays to market and millions of dollars will this add to the RDM cycle? Hence the devil is in the details, thousands of pages of details – and insider influence with millions of dollars on the table. This example is important because in this fire and brimstone argument, no one seems to be considering or pointing out the size, complexity and organic nature of the subject matter – the internet. Changes in data traffic metrics indicate that local access and long haul are changing in ways that a government or bureaucracy could never hope to manage, keep pace with or control. A 2009 study by internet traffic analysts such as Aruba, shows that increasingly, traffic is moving from the long haul, hot potato, cold potato peering of the early 2000’s to short hops between content or contextual subnets. As advanced CDNs increase and data replication and distribution change with advanced replication and computational power increases, the financial and technical feasibility of multiple localized data (content) become a reality. This reality mitigates many of the arguments for government subsidized access because access does not necessarily become more commoditized by ubiquity, but priced at market value. As access increases, the value associated with it, by way of applications and utilization increases, with perhaps less consideration of long haul traffic. Admittedly, Neither cable nor Telco’s have done anything revolutionary in terms of services or delivery. The past prohibitively high cost to deploy fiber access is certainly partially to blame. And © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 30 -
  • 31. Confidential The Telcoms and big equipment vendors have done an excellent job of providing core, long haul bandwidth and technologies such as MPLS that enhance QoS, reliability, service delivery and fault tolerance – in that sense they deserve equal credit for the evolution of data communications and the internet. However, the Cable Companies and Telcos have not, for the most part, delivered anything revolutionary with respect to services and applications other than on the core network. And the cost/ROI trend of fiber has for the last few years, become stronger and now fully feasible. Yet there’s still little development here. If the cable companies and carriers can’t adapt and build a better triple play delivery model or embrace new applications, then it’s time for new ideas and innovation. Entrepreneurs and private network operators can build better delivery offerings because they are not encumbered with legacy architectures, merger/acquisition related, over-scaled OSS and archaic content delivery mechanics. Those who invest to provide the last mile should obviously be able to offer their services on their access or wholesale that access. But the question then becomes one of competitiveness. How can a smaller, private network operator, even with a better process and delivery model, compete with a global carrier? And how can we ensure that no throttling of competitive traffic, beyond traffic type, is allowed? Other than another government takeover with the creation of a federal neutrality bureaucracy, this leads to only two reasonable solutions: 1) Return this sector to market friendly territory. This is the least complex and most preferable option. Rescind most of the remaining Telcom regulation and cable franchise statutes (state’s rights notwithstanding) and all public funding fees (e-Rate, USF, RUS, BSA). Allow a single, simple state based fee for unserved/underserved areas (not entities). Do not hold ransom or stagnate development by threat of congressional or executive order. With proper financing mechanics applied, the economic drivers, stronger ROI curves and a seemingly endless list of applications, preclude the need for the government to give it the kiss of mediocrity. Ease CapEx sales tax and depreciation rules. Increase 2 year OpEx write downs and eliminate Cap gains credits for private funding of high speed fiber/wireless in an open access wholesale model, separate from dual role (delivery and process) carriers and cable companies. As previously stated, we are pro market, not pro business or pro big business. If the incumbents want to play, that’s fine – but without open access regulations and the remaining litany of legislative mandates, they will have to do so with differing tax credits. 2) The less favorable option would be to functionally or legally separate cable and Telcom local facilities/head ends from their content acquisition and long haul or backbone operations. Let public/private bonds, local developers, I/CLECs and investors (i.e.; the open 20% of REITs) fund/provide access on equal footing. Establish general technical, interoperability and upfront “buy-in” standards, pull a fiber bundle or WiMax variant with 11n Access Points (AP) and let whoever wants to tap or light a strand or AP, do so. 4.3.3 - Taxes/Fees and Funds (The RUS, USF and BSA) The 2009 Broadband Stimulus Act (BSA) was carved out of the Obama Administration’s nearly $800 billion federal bailout package — officially called the American Recovery and Reinvestment Act. The BSA is a $7.2 Billion taxpayer funded project to provide high-speed broadband (in non defined form) to rural or underserved markets. The agencies in charge of the programs — the National Telecommunications and Information Administration and the U.S. Department of Agriculture’s Rural Utilities Service — have until September 2010 to disperse all the funds. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 31 -
  • 32. Confidential The overriding consideration here is that consumers already pay not one, but two fee structures/taxes that were originally intended to fund what the BSA is now supposed to fund – The Universal Service Fee/Fund (USF) and the slightly less intrusive, Rural Utilities Service (RUS) fee. The 1997, Clinton era Universal Service Fee/Fund (USF) is administered by the Universal Service Administration Company (USAC). It is governed by congress and executes rulings from the FCC. The USF via the USAC, collects fees from carriers who then pass those costs to consumers in the form of tax rate indexes of ~10.5% on long distance and other taxes on dizzyingly complex service descriptions. In 2006, because of increasing administration costs of the USAC and USF and declining 4 revenues from carriers due to factors cited previously in this report , the tax applicability was broadened to include wireless and VoIP services. th On June 15 , 2009 the FCC announced that The Universal Service Fund fee will increase for the second quarter in a row. Consumers will pay an additional 12.9% on top of the cost of interstate and international voice services to support the fund in the third quarter of 2009. It's the highest the fee has been in at least six years. The “contribution” factor fluctuates quarterly based on the demand and expenses for programs supported by the USF. The other tax is the Rural Utilities Service (RUS) fee, which is focused more on rural access improvements as opposed to the more widely applied USF. The point, again, is that neither tax apparently has been successful, so we now have a third liability, the BSA, to provide funds – funds that most cable/telco’s don’t seem to want. The BSA is different from the USF and RUS in that there are rules/regulations and strings attached not necessarily on who gets funding, but how recipient companies can operate. The rules are constrictive - so much so that many large and small cable/telco’s don’t want any part of this funding. At the “Independent Show”, an annual conference of small American cable operators, held in July 2009, 50% of the companies said they would not apply for the money, citing government strings as the primary reason. Of the companies who said they would apply, 28% admitted they were doing so only as a competitive measure and would not take the money if it were granted. Comments from show participants included; “I’ve put a great deal of my own and other people’s private capital into building rural and underserved broadband, now I’m supposed to either accept money with too many strings attached, or watch as the government funds questionable companies to compete against me?” -And- “We called our primary banker and explained the terms attached to taking the money. She laughed. That’s not a good sign.” Likewise, thus far, none of the major ILECs or Cable companies are seeking these funds. Which begs the question - who is? An initial read on who is considering seeking, or have begun the grant process does include some very suspect companies with no experience in fiber, wireless or IP network builds, and in some instances, no technical background whatsoever. And there seems to be a very large number of bids for “community access computer centers”, which seem to be very disconnected from the legislative intent. It is too early to assess this program however, and applications can be monitored and challenged via © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 32 -
  • 33. Confidential Many industry insiders say that although “professional grant writers” and special interest, non- profit groups trying to get government money is a definite problem, the primary concern is under the table congressional deals which don’t see the light of day. Indeed, in 2002, a $7 Billion congressional dispensation from the RUS fund, left many cable and telco companies screaming as hundreds of millions of dollars of the funding went to unknown (by us at least) entities for work in “deserving urban high density areas”. These areas were specifically excluded from this funding because they were not defined as rural. As is the case with many government programs, the fraud, waste and unintended consequences of the USF and RUS are legend and too lengthy for this report. Has it done some good in rural and underserved areas that are cost prohibitive from a market feasibility perspective? Absolutely. Has it done good things for schools and libraries? Yes, but we’re talking about entities that already have access to billions in taxpayer dollars. Are the results accountable and reflect anything close to the improved access that over $130 Billion in spending should have garnered? Absolutely not. Is there a better way that won’t take thousands of dollars a year from American consumers? We would assert, absolutely. As with most things political, the goals are objective, while the means or method is subjective – therefore, draw your own conclusions regarding the BSA’s implications and likelihood of success. 4.3.4 - Economic Policy Due to mounting deficits, outlays and dropping tax receipts, increased taxation and fees are now being levied, with more certainly coming. Taxing the internet (online purchases, etc.) has been verboten, but state by state, taxes are being implemented for online purchases. Additionally, bandwidth usage tariffs/taxes (in addition to the USF/RUS and BSA) are now under consideration similar to highway usage. Obviously, these won’t be direct consumer taxes, but stealth taxes on fees, supply chains, distribution channels and corporate revenue, etc. The bigger cable, telcos and incumbents are making a lot of the industry noise and have the most leverage with regulatory issues, but ultimately they don’t have the most to lose – they’ll just pass on costs to consumers. With all that is currently being done in the name of recovery, change, control, fairness, etc., the public spending and taxation currently being undertaken, is seemingly beginning to wear thin, with growing and more vocal opposition. Historically, the spending sprees seen in past economic down turns (1930’s an exception) tend to burn out relatively quickly – that said, this spending spree is unprecedented in size, scope and duration. Inflation and the CPI haven’t even begun to ramp, and economics 101 and history tell us they always do after a large treasury print run – and $1 Trillion is a serious print run. Fed policy to re-absorb that money may mitigate some mid to longer term damage, but wiser consumers are beginning to buck any and all known government taxes and spending. Additionally, economic results to public spending are following the historical patterns (including the 1930’s) of lacking any positive economic influence, further driving down public opinion. 4.3.5 - Local MuniNets and States Municipal broadband (aka MuniNet) initiatives have been tried in numerous cities. Well intentioned city/municipal governments have attempted to build their own municipal fiber networks to either gain economic advantage, or for politically correct universal access reasons. The failure rate on these networks is over 95%. The financials just aren’t there, the cities don’t understand the associated economics, wholesaling issues, or the available applications - and taxpayers aren’t willing to bear the burden while the cities figure this out. These networks are invariably sold at a loss to independent network operators, CLECs, or FTTx providers that already have a presence in that area. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 33 -
  • 34. Confidential 4.4 - The Private Sector The above regulatory issues, though a cautionary tale, are not likely to derail the momentum of a speeding train that offers upside on both economic and geopolitical fronts. Which brings us to the saving grace in this problem, which is as its always been - private companies and the ingenuity of American business, as well as, in this case, gravity and its cousin, momentum. 4.4.1 The Opportunity As gravity pulls, momentum pushes. The simple truth in all this carnage is that the critical mass for FTTx is here – and it’s irrevocable, either by market conditions or government. Current economic conditions are proving that even in a tight market, high speed access and the associated applications remain strong and some even gain strength. Following are just a few examples of increased capabilities with faster local access speeds. - Reducing or tailoring the “TV” bill via IP fueled video that is recordable/viewable at the consumer’s convenience - Reducing the telephone/long distance bill with VoIP - Leveraging economies of scale to reduce the cost of office operations (SaaS / Cloud) data backup, discovery and other compliance issues - Utilizing Online meetings/presentations and video conferencing rather than paying the time and expense of a business trip - Tele-medicine applications that increase rural, underserved and senior center access to and efficiency of delivering preliminary health care and follow-up. - Online white-boarding in lieu of monthly R&D or engineering meetings - Leverage home/virtual office usage to reduce corporate operational costs and increase employee productivity - Companies allowing morning home/VO usage gains of just .5% of a major market city can reduce prime time drive environmental impact significantly - A connection that can actually stream a video news report without glitches, while also checking stocks and the latest headlines. Cable companies and the Telcoms are indeed making progress with FTTP but as discussed, they have to weigh and balance investment costs to services of and to both local facilities and long haul infrastructure. Smaller players not so entrenched in legacy architectures, billing systems and delivery mechanics are stepping in to provide the cutting edge services. Though they currently may seem to be bringing nothing more than “Me Too” in the service delivery choices, the foundation is there for the next step. 4.4.2 - Leading Edge Developments Starting in 2007, there were several high end custom communities being developed in the western US complete with a community data center, networked kitchen appliance options and full © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 34 -
  • 35. Confidential remotely viewable IP security cameras/systems. Other Tech features included wired RJ45 jacks and wireless access points throughout the house, in counter LCD screens, centralized community servers providing office applications, email, professional video editing software, storage, etc. In these developments CapEx is mitigated by an x% increase in home pricing. Typically this is around $4000 per house increase in purchase price. This covers fiber and termination, interior Cat 6 wire, wireless access points and user gateway. OpEx is partially offset by HOA fees, plus the service fees charged for Video, Voice, Data and optional access to community data center. In early 2009, two of these developments began offering a free 42” IP enabled HDTV and an open, aftermarket STB/DVR. Though this was likely a reaction to the real estate downturn, it was also a smart marketing tool. Sales data from these developments revealed a very limited awareness on the part of consumers regarding what exactly high speed access offered. When the capabilities and benefits provided by FTTP were made clear to potential buyers, of those who ultimately purchased a home, over 30% cited FTTP as a strong decision factor, with 52% giving FTTP a moderate decision factor. To put this in context, these ratings were higher than a three car garage and the choice of upstairs or main level laundry rooms. This data seems to enforce the contention that demand is not yet at full pull down levels due to lack of knowledge and exposure. Additionally we are seeing public/private developments such as UTOPIA in Utah which utilizes wholesale public fiber infrastructure (local loop) with a house/business connect fee. If you want fiber pulled to the premises, it’s $3000 with the option to spread that amount over 10-20 years. The city simply holds a “note” or lien on the property for the amount. This reduces the public investment liability and leaves the homeowner, investor or developer free to choose whether they want high speed fiber, or not. The data center benefits of a development centric fiber network aren’t necessarily there, but it does offer pure high speed access, albeit, high speed isn’t really defined for this project yet. Still it’s an interesting compromise on the subject of public v private funding. 5.0 MARKETS AND REVENUE STREAMS Moving to real estate, let’s use an analogy based on old but proven principles, let’s compare Fiber to Land. Land is the ultimate passive layer. It has value beyond simple equity because the drivers for said asset are so numerous. Growth in any of a hundred markets (applications) can increase the value. We are not comparing or confusing land with what some in real estate call passive income from, for example, rental property. This type of passive investment only gains by relative equity. With land, if you own and work 500 acres as farm or ranch, it is both passive and active. If you decide to move to the city or retire you can still keep the land and rent it out as a passive layer for someone else to work as active layer. However, if you want to sell it, then it’s not just the land or the accrued equity, it’s the potential revenue, separate from known relative equity, of the active layer that one is buying. With virtually unlimited bandwidth and associated applications, fiber is the passive layer that offers both revenue streams. Currently, the majority of commercial and residential real estate projects in all phases sit idle, waiting for economic recovery and direction. This could be the time to reassess property revenue opportunities with high speed fiber access as either an active or passive layer. It doesn’t always make sense, but case analysis results are increasingly trending go v no-go. 5.1 - Residential and Commercial Sub Sectors In real estate terms, predicated on demographics, the profitability, TTV and ROI of fiber scale from low to high in the following manner; detached single family residential; high density urban residential; retail strip/pads; apartment complexes/MDU; low-rise light indy; commercial campus/professional center; and high density commercial riser. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 35 -
  • 36. Confidential • Single Family Detached Residential: As discussed earlier, the US regulatory environment allows private companies who pull fiber into a development, the exclusive rights to serve that development – they do not have to allow the cable franchise or the ILEC into that development. States however have different access mandates and many require ILEC dial-tone to be available. Still, this provides a high take rate and if the SLA’s are met, the ROI on a typical residential development can be acceptable. The density is low therefore, unit CapEx is higher. Total market may be only 200 units with several miles of fiber pulled. This is just one reason why most Municipal networks have failed. However, the profitability profile has improved with VO growth, recent video advances of IP enabled TVs, STBs and proliferation of professional broadcast content on the web. With private label SIP Trunking and wholesale access, the ROI has improved greatly with steeper and shorter recovery and higher ARPU. • High End Residential Developments: Moving up the economic scale for single family detached are higher end developments with larger custom homes. These deployments typically have a higher ARPU because of obvious discretionary spend numbers which drive networked appliances, multiple points of access in the home (Den, Kitchen, Home Theater, Game Room, Security, etc), stronger VO requirements and greater perceived value of high bandwidth services. • High Density Urban: Similar to single family detached with a lower CapEx. • Retail Strip/Pad sites: On the low side of commercial, retail generally requires voice and access but video is not prevalent. The bandwidth needs of retail have until recently been small, with batch end of day processing for PoS systems only. However, the trend here is that many banks, medical pad sites such as urgent care facilities and other retail are moving to centralized, network based PoS/Management systems. This is another upward trend for FTTx. Vertical Video is also becoming a driver in retail with Corp/HQ marketing feeds. • Low-Rise Light Industrial: This market sector is difficult to define or offer any general assessment on. It can be similar to retail but is really a case analysis. • Apartment/Condo/Townhome MDU: This is potentially the highest return rate for residential deployments and seemingly the best residential/mixed use application of FTTP. Obviously density is high and predicated on demographics, the ROI can be strong. However, TTV can be strained due to unique issues such as resident turnover and the associated extra support burden, as well as the need to offer residents a choice of providers. Therefore, developers and investors in this area retain the general belief that data access is outside their core focus or core revenue asset - the property. Little consideration is given to FTTP as a property financial metric. MDU’s factor in a large clubhouse or pool as soft asset amenities or marketability drivers, yet for stated reasons, are slow to consider pulling fiber as a similar asset. As it stands, MDU developers build and the cable and ILECs pull their respective HFC and DSL plants. Post build, tenants choose between the wireline choices or opt for installing an individual satellite for TV. That said, given the rate of change in consumer behavior and content delivery mechanics, nothing offers choice quite like 50Mbps of access speed. Yet even as a passive layer CapEx, issues persist in this market, and the “who pays” question looms. • Commercial High Rise: This is the highest ROI market for fiber. This is also the “been there, done that” market. These are the buildings that received fiber during the 1990’s tech-boom. They are also the buildings that were targeted by numerous ISPs, wanting to © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 36 -
  • 37. Confidential be the building’s default ISP or “Communications Portal Provider” that was seen to be the holy grail of that period. These buildings are typically lit by numerous Tier 1 providers, Tier 2 CLECs, and every other here and gone provider from 1996-2002. As with any market however, there are always opportunities. We’ve seen the most success in these scenarios by Application Service Providers or in the latest acronymic version, Software as a Service (SaaS) providers. The access is there, with more than enough fiber, what’s not there are coherent service packages (Applications) that can add value, save money and increase productivity for the tenants – as well as value to the building owner(s). After the fall of most of the building portal ISPs, many tenants in these buildings reverted back to individual, ad-hoc telephony, access and other data services. Also, larger multi-national corporations who don’t have a regional campus, tend to be occupants in these buildings. They typically have GPA contracts with at least one carrier and will likely not fit a services profile or package. However, the client base is still there to package services under a single umbrella, as described below - which brings us to the final market. • Mid-Rise Professional Campus. Arguably the strongest upside for investors, CLECs and developers exists in this market. ILEC Premises fiber pulls are spotty at best, especially in suburban areas where these campuses tend to focus. However, GigE metro loops (Metro Ethernet) are typically nearby and accessible. ILECs will often work with developers pulling their own fiber and are willing to take the wholesale loop or in some cases offer additional network services. Cable is always there knocking at the door, ready with HFC physical plants. Some with assurances on gate fees, etc. However, they generally lack execution and business class capabilities and will undercut any private network operator with the infamous limited time offers or “6 months free business class voice”, etc. They will not likely sign video (TV) only agreements, so this is a decision that will need to be weighed by project owners. Beyond the triple play, Data Center/Network Applications are numerous and therefore ARPU, TTV and ROI are very strong. This market tends to drive more revenue beyond data, voice and video because of the client profile. Medical, Financial, Energy and Legal dominate this clientele and inherently require advanced IT services. 5.2 - Sample/Case Deployments © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 37 -
  • 38. Confidential A recently deployed 4 building commercial (4 x 38,000sf) campus is illustrated in Figures 5, 6 and 7, with sample services menu following. Figure 4 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 38 -
  • 39. Confidential Figure 6 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 39 -
  • 40. Confidential Figure 7 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 40 -
  • 41. Confidential 5.3 Sample Services Menu Metro Loop GigE Ring 802.3/802.1q/802.1p Premises Demarcation/Termination (Fiber demarc at Campus switch, GigE on prem with open conduit. Intra-campus fiber) Switching/Routing (1 ea bldg, 1 failover chassis) UPS User/Office Gateway Interface Unit/Set Top Box Services/Applications Access o 50, 75, 100, 150 Meg Switched Async Bandwidth o Net/VPN/WAN Voice o SIP Trunking o CPE SoftSwitch or Network Based Enhanced IP Office Comm Systems Video o Feed Via IPTV switches o Satellite Rooftop o Gateway/STB Services Security o Managed Firewall, ACL, NAT o Managed VPN o Anti-Virus, Anti-Spam Data Center/Network Based Office Operations o Application Streaming/Thin App/Client/Remote Desktop/Virtual Desktop o Office Software and Communications via thin client/browser* MS Office 07 w/ Outlook EM client Open Office w/ Thunderbird EM client Google Apps w/ Gmail, Browser/other EM Client. (Postini is included with GMail, but regulatory issues may preclude use of Google Apps or Gmail) Mail Servers/Systems: Cisco PostPath / Kerio Mail w/ Outlook or other client Exchange* *We offer the option of porting your Exchange based mail to one of our alternate email systems - PostPath (now Cisco) or Kerio Mail. These systems have proven to be more efficient network based systems, (Exchange still runs on the 15 year old proprietary Jet database). Additionally, PostPath and Kerio offer better archive and discovery capabilities than Exchange. Contact an account executive for a full analysis and feature comparison. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 41 -
  • 42. Confidential o Vertical Applications CRM/Copper PTM, Sugar or SFDC Portal (web) Practice Management (web or thin client) Financials/Forecasting/NetSuite (web/thin client) Energy Drill/Site Management (thin client) Billing (web or thin client) Customizable Options 200, 500, 800 Gig Storage (FF Docs/db Data, Non App) SaaS Applications (Web or Protocol Dependant) Alternate Media Backup HIPAA, SOX and other regulatory/discovery compliance software (Postini is included with GMail, but regulatory issues may preclude use of Google Apps or Gmail). Remote Backup to Alternate Site Active/Active Zero Redundancy (60/40) site load balancing BC/Site recovery or failover Ancillary Records Retention/Discovery Systems with Meta tagged storage. Medical Practice Management and Billing Applications Premises Scanners / Portal Egress for E-document compliance Energy Futures (Buy/Sell/Hold) Well Production Analytics Management and Forecasting Applications NOC/Data Center Services Virtualization Servers SAN Remote Backup Application Delivery Systems/Networks Discovery/Compliance/Regulatory Some companies will find it difficult or not feasible to switch Office Applications, especially power users or those who rely on Excel macros. However, if your company has not yet gone through the Office 2007 transition, we can provide automated migration services that can retain MS Office use, but help reduce the need for Excel macros. For those who require on-site Servers/Apps, we operate a 2000 sf data center in Bldg 4 offering Prem Colo/Hosting options. © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 42 -
  • 43. Confidential Additional CrossCreek Documents, Information and Services Available 401 FTTP Rate Sheet 402 CDNs, Application Delivery and Data Center Infrastructure 405 IPTV – Old School v New School: The Encoding Network Providers and relegation of content as secondary 412 Ancillary Technical Requirements: (Ingress/Egress, Virtualization, Replication, De-Dupe, Public/Private/Virtual Clouds and Caching Storage Systems) 650 BSA Grant Funding Criteria 651 State Planning, Mapping and Grant Funding Criteria 422 New Development Prospectus 423 Existing Development Prospectus 427 Technical Architecture Options and Respective Proforma 634 Analysis of Federal Broadband Funding vs Private Cap 430 Lighting the Last Mile – A free market solution to help renew America’s excellence and prosperity CrossCreek West Westminster, CO - 303-438-2111 © 2006 - 2009 CrossCreek West, LLC – Rev 3.9.14 - 43 -