The document discusses challenges facing rural local exchange carriers (RLECs) due to technological changes and increased competition. It presents several ownership strategies for RLECs, including exiting the business through a current or structured sale, harvesting assets to maximize benefits, pursuing horizontal or vertical growth through acquisitions, and organic growth. However, it notes that the default strategy for many RLECs of inaction or denial is not viable. The document advocates for RLECs to take control of their future through active strategic planning to address an increasingly uncertain regulatory and competitive landscape.

1. RLEC Ownership Strategies IP Possibilities April 12 - 14, 2011 Kansas City, Missouri Bill King JSI Capital Advisors, LLC bking@jsicapital.com

2. Change fueled by technological advances is changing the RLEC business model Competition brought by rapidly advancing technology is eroding market share Emerging regulatory change will make it worse Regulatory support is being challenged The future business model will not support the current number of small RLECs The old model encouraged, sustained and protected small RLECs RLECs can only change what they can control “The folks sitting in this room don’t drive the ecosystem” RLEC Mergers and Sales Change is Coming….Do You have a Plan?

3. True, Oh So True Predictions are hard to make…especially about the future. Yogi Berra Modern Day Soothsayer

4. OWNERSHIP STRATEGIESSix Ownership Strategies….and One Default Harvest Mode Horizontal Growth Current Exit ? Ownership Strategies Vertical Growth Smart Sale Organic Growth

5. Current Exit OWNERSHIP STRATEGIESEXIT STRATEGIES: Current Exit The benefits of a current sale outweigh the benefits of continued ownership Family members no longer active in the company Concern about declining equity values Realignment to achieve scale benefits Bank or equity “motivated” sales Preservation of wealth and security Caution! A sale process can take nine months to a year (or longer) There may not be a qualified or motivated buyer for your property You may not be happy with the answer Exit Maintain Growth

6. Smart Sale OWNERSHIP STRATEGIESEXIT STRATEGIES: Smart Sale Exit Typically involves using tax-advantaged techniques to maximize the after-tax proceeds (as opposed to before-tax proceeds) realized from the sale of a business Lifetime gifting/valuation discounts S corporation conversions Employee stock ownership plans Reverse Morris Trust The goal of maximizing sale proceeds is often subordinate to the ability to structure the transition of ownership to a target group (e.g., the next generation) Usually unfold over longer periods of time and are engineered by professionals Caution! Complex, costly and require significant advanced planning Are values declining too quickly? Who gets left holding the bag? Maintain Growth

7. Smart Sale OWNERSHIP STRATEGIESEXIT STRATEGIES: Smucker Structure - 1 Alltel S/Hs Valor S/Hs

8. Smart Sale OWNERSHIP STRATEGIESEXIT STRATEGIES: Smucker Structure - 2

9. Harvest Mode OWNERSHIP STRATEGIESMAINTENANCE STRATEGIES:Harvest Mode Exit The goal of the Harvest Mode is to maximize benefits realized by shareholders and owners of the company Is sometimes the default strategy in cases where a current sale is not an alternative Benefits are not limited to financial gain Can include sustaining a family legacy Employing friends and family members Honoring real or perceived commitments to communities But typically manifests in the form of enhanced salaries, dividends, benefits or perquisites Properly executed, the strategy can extend the viability Caution! An emotionally draining process in a declining business Can be viewed with suspicion or outright contempt, particularly by employees and regulators Maintain Growth

10. Horizontal Growth OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth Grow by acquiring additional ILEC properties But with values declining, why are groups aggressively pursuing horizontal acquisitions that, if recent history is an indication, will likely be worth less tomorrow than today? Capitalize on real or perceived synergies with existing operations Realize the scale necessary to realize operational efficiencies Capitalize on vertical and organic growth opportunities Attract capital and management talent Mask the decline of existing operations I can do anything you can do better, I can do anything better than you Caution! The strategy can work, but frequently fails to enhance value Success is contingent on the ability to buy right and execute well Doesn’t the strategy simply create a bigger melting ice cube? Exit Maintain Growth

11. OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth Exit Maintain Growth

12. OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth Exit Maintain Growth

13. Vertical Growth OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth Involves expanding into complimentary vertical services, typically via acquisition Can be an effective strategy for those that lack internal capabilities necessary to penetrate a new market, or lack the time necessary to gain an adequate foothold Service Cross Pollination Horizontal growth enables the provision of legacy services to new customers while vertical growth allows for the provision of legacy and new services to legacy and new customers Properly executed, vertical growth can enrich customer relationships and protect against churn Caution! Execution risks and risks that expected synergies and cross selling opportunities do not materialize New, unfamiliar business line and dependence on acquired management Exit Maintain Growth

14. OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth Windstream’s growth strategy looks very different from the approach taken by Frontier of CenturyLink. Nuvox Kentucky Data Link Norlight Hosted Solutions Even the Windstream’s RLEC acquisitions had vertical growth attributes Iowa Telecom D&E Communications Lexcom Exit Maintain Growth

15. OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth Strategies: Facilities based Retail and wholesale Multiple products Disciplined Capex Leverage brand Leverage common costs Wholesale wireless revenues of $133m (primarily Sprint) Repositioning wireline as high-speed data provider Acquiring FiberNet for $170m Exit Maintain Growth

16. Organic Growth Exit OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth Maintain Typically realized by either increasing the number of customers served (other than by acquisition) and/or increasing the number of products and services sold to any given customer Caution! The most difficult growth strategy to execute Growth

17. Exit OWNERSHIP STRATEGIESGROWTH STRATEGIES: Hybrid Strategies Nuvox – Acquired 2/10 D&E Communications – Acquired 11/09 Maintain Lexcom – Acquired 12/09 Iowa Telecom – Acquired 6/10 Growth 2/3rds of SHAL came with IWA deal. Remaining purchased from New Ulm

18. Hybrid Growth Strategies Exit OWNERSHIP STRATEGIESGROWTH STRATEGIES: Hybrid Strategies Maintain 8.3% Growth 7.7% 9.0% 8.4%

19. The Default Strategy OWNERSHIP STRATEGIESTHE DEFAULT STRATEGY Melting ice cube, poached frog, deer in the head lights….call it what you want! Arguably the strategy currently followed by most RLECs Exit Maintain Technology Competition Regulation RLECs Growth

20. The Default Strategy Exit OWNERSHIP STRATEGIESTHE DEFAULT STRATEGY Maintain Denial, ineffectiveness and/or inaction are not strategies Remember – the deer rarely survives impact Growth Technology Competition Regulation

21. WHO WILL BE MAXIMUS?Choose Your Weapons Carefully Aggressively pursue growth opportunities Target a current or smart exit Harvest the maximum benefits

22. So, Where are We Heading? The only thing we know about the future is that it will be different. Peter Drucker Management Guru

23. Bill Had it Right!Can You Say Over-The-Top “Television shows will continue to be broadcast as they are today for synchronous consumption. After they air, these shows – as well as thousands of movies and virtually all other kinds of video – will be available whenever you want to view them.” Use an HDTV set to view photos, play music and watch video from the Internet or a local network 2G Launched Sept. 2010 A joint venture of NBC Universal, Fox Entertainment and ABC (Walt Disney) with funding by Providence Equity Started in 2007 Publicly traded (Nasdaq:NFLX) had 17m subs at the end of 3Q10 (up 2m during the quarter) and generated $1.6b of 3Q revenues. Stock currently trading at P/E of 64.3x Started in 1997 Jointly developed by Google, Intel, Sony and Logitech Announced in May 2010

24. Bill Had it Right!Storm Clouds on the Horizon “Movies, television programs, and all sorts of other digital information will be stored on ‘servers,’ which are computers with capacious disks. Servers will provide information for use anywhere on the network. If you ask to see a particular movie, check a fact, or retrieve your electronic mail, your request will be routed by switches to the server or servers storing that information. You won’t know whether the material that arrives at your house is stored on a server down the road or on the other side of the country, nor will it matter.”

25. Bill Had it Right!Living Life On-Line “If other people are visiting the same [location], you will be able to choose to see them and interact with them or not, as you please. Your visits needn’t be solitary experiences. Some locations will be used purely for cyberspace socialization; in others no one will be visible. Some will force you to appear to some degree as you are; others won’t. The way you look to others will depend on your choices and the rules of the particular location.”

26. Bill Had it Right!The Digital Wallet “You’ll be able to keep all these and more in another information appliance we call the wallet PC. It will be about the same size as a wallet, which means you’ll be able to carry it in your pocket or purse. It will display messages and schedules and also let you read and send electronic mail and faxes, monitor weather and stock reports, and play both simple and sophisticated games. At a meeting you might take notes, check your appointments, browse information is you are bored, or choose from among thousands of easy-to-call-up photos of your kids…..Rather than holding paper currency, the new wallet will store unforgeable digital money.”

27. The FCC…Not So Much!Little in the Way of Consumer Benefits It is evident that the Telecommunications Act of 1996 has failed to produce the consumer benefits policy makers promised because competition has failed to take hold across the communications industry. The Act's failure is not because, as some have suggested, the Federal Communications Commission was overly regulatory in seeking to create conditions ripe for competition. The fundamental problem is that the huge companies that dominate the telephone and cable TV industries prefer mergers and acquisitions to competition. They have refused to open their markets by dragging their feet in allowing competitors to interconnect, refusing to negotiate in good faith, litigating every nook and cranny of the law, and avoiding head-to-head competition like the plague. Consumers Union Lessons From 1996 Telecommunications Act: Deregulation Before Meaningful Competition Spells Consumer Disaster

28. The FCC…Not So Much!Regulation-Motivated Competition Underwhelming In general, while the universal service sections of the Act remain under threat, they have been the most successful provisions of the Telecommunications Act. The provisions to encourage competition have failed. President Clinton's promise of protection against monopolies in promotion of diversity would be laughable if the consequences were not so tragically opposite. Mark Lloyd The Leadership Conference: Successes and Failures of the 1996 Telecommunications Act

29. Ivan, Why are You Smiling? Google and Verizon reached an agreement in which they both opposed complete network neutrality. The agreement details that ISPs should be "prohibited from preventing users of its broadband Internet access service from (1) sending and receiving lawful content of their choice; (2) running lawful applications and using lawful services of their choice; and (3) connecting their choice of legal devices that do not harm the network or service, facilitate theft of service, or harm other users of the service." They went on to say that wireless ISP's, such as cellphone companies should not be required to provide neutral networks for their customers. The rationale for this statement was that wireless networks are still being developed. Ivan Seidenberg recently told the Wall Street Journal that companies such as Sprint Nextel Corp. and T-Mobile USA, along with other smaller wireless operators, should join forces. “There are too many players in the industry. I think it would be healthy if there’s more consolidation.” Everyone has a hidden agenda, except me! Michael Crichton

30. So, Who are You Betting On? Cool Guys The Rich Nerds The Regulators OR Only one man in a thousand is a leader of men – the other 999 follow women Groucho Marx

31. Do You See What I See? AT&T estimates that embedded devices will drive U.S. wireless penetration from 90% today to 300% by 2013 Verizon Wireless expects to have nationwide LTE coverage by 2013 JSI Capital Advisors estimates 71.9m access lines in service as of the end of 2013, down from 115.2m as of the end of 2009 Cisco predicts: Annual global IP traffic will exceed three-quarters of a zettabyte (767 exabytes) in four years (up from 176 exabytes in 2009) Global IP traffic will quadruple between 2009 and 2014 It would take 72 million years to watch the amount of video that will cross the global IP networks in 2014 Video will represent 91% of all consumer Internet traffic in 2014 2013 I have seen the future, brother; it is murder! Leonard Cohen

32. Typical Bandwidth Usage Source: Vern Dosch of NISC (and The iPad Guide)

33. Typical Bandwidth Usage In Kbps Source: Vern Dosch of NISC (and The iPad Guide)

34. Future Frontiers? How will network owners be compensated for their network? Is the “linear” video gatekeeper model doomed? Are Over-the-Top video providers a friend or foe? How will 4G (5G and 6G?) wireless impact communications? Is the “Smart Grid” a dumb idea? What will Steve Jobs come out with next? And, yes, what about future regulatory change? Take hold of the future, or the future will take hold of you! Patrick Dixon

35. Questions to Ponder How are rural telcos repositioning themselves in light of regulatory, technological and competitive uncertainty? What’s working? Is it enough to cover what we’re losing? What role will small, rural telcos play in the future? Is the business case sustainable? If so, how? Are the industry’s advocacy efforts on target? Was Ivan right - consolidation is not only inevitable but a good thing? Our job is not to make up anybody's mind, but to open minds and to make the agony of the decision-making so intense you can escape only by thinking Some Unknown Guy

36. Who (What) Will You Be? Might you be a “poached frog”? Take hold of the future, or the future will take hold of you! Patrick Dixon

38. Who (What) Will You Be? Might you be a “poached frog”? Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)? Take hold of the future, or the future will take hold of you! Patrick Dixon

39. Who (What) Will You Be? Might you be a “poached frog”? Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)? Do you fancy yourself a “fast follower” (a/k/a a “second mover”)? Take hold of the future, or the future will take hold of you! Patrick Dixon

40. Who (What) Will You Be? Might you be a “poached frog”? Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)? Do you fancy yourself a “fast follower” (a/k/a a “second mover”)? Or, are you “Ensign Ricky” (a/k/a a “Red Shirt”)? Take hold of the future, or the future will take hold of you! Patrick Dixon

41. The future will soon be a thing of the past. George Carlin Legendary Visionary

42. and Women Let’s Get Mad, Men

43. Efficiency through savings and scale Save until you can grow Despite all our efforts, will it be enough? In the absence of regulatory support, is the business model viable/sustainable? Considerations for consolidation and combination Can consolidation sustain or revitalize small RLECs? RLEC Mergers and Sales Change is Coming….Do You have a Plan?

44. What Will the Future Hold? Change Over the Next Few Years will be Dizzying Customers continue to cut the cord CDC says 24.5% have cut the cord as of June 30, 2010 (another 20+/- leaning wireless) JSI Capital Advisors estimates 71.9m access lines by the end of 2013 AT&T estimates that embedded devices will drive U.S. wireless penetration from 90% today to 300% by 2013 4G wireless is just getting started Clearwire has been providing service since January 2009 (Portland was the first market) Verizon Wireless expects to have nationwide LTE coverage by 2013 (110m by YE 2011) MetroPCS and T-Mobile on board as well AT&T is coming Internet traffic is exploding Cisco says global IP traffic will quadruple between 2009 and 2014 Annual global IP traffic will exceed three-quarters of a zettabyte (767 exabytes) in four years (up from 176 exabytes in 2009)

45. What Will the Future Hold? Change Over the Next Few Years will be Dizzying Traditionalists and Baby Boomers are fading fast into the sunset 76m Baby Boomers start retiring in 2011 (11,500 per day, 8 every second) 11,000 new births in the U.S each day Boomers control 80% of financial assets/more than 50% of discretionary spending power Moore’s Law is still chugging along Moore expected the trend to last “at least through 1965 Now expected to continue through 2105 And Apple is still making really cool stuff Life is what happens to you while you are busy making other plans John Lennon

46. What Will the Future Hold? The Past Ten Years Has Not Been Kind to the Access Line

47. What Will the Future Hold? The Industry is Heading in the Wrong Direction Small ILECs served approx. 3% of all voice connections Small ILECs will serve < 1% of all voice connections

48. What Will the Future Hold? 52m access lines in Service by 2019?

50. 3.39m square miles served by RBOCs

51. 1.87m square miles served by the “Mini BOCs”

52. 2.54m square miles served by all other telephone companies

53. RBOCs served 94.1m access lines at the end of 2009

55. 3.39m square miles served by RBOCs

56. 1.87m square miles served by the “Mini BOCs”

57. 2.54m square miles served by all other telephone companies

58. Mini BOCs served 13.7m access lines at the end of 2009

60. 3.39m square miles served by RBOCs

61. 1.87m square miles served by the “Mini BOCs”

62. 2.54m square miles served by all other telephone companies

63. The “741” telcos served 5.8m access lines at the end of 2009

65. It’s a Small, Small WorldFixed Broadband Growth Showing Signs of Fatigue “Fixed” broadband growth is slowing down “Mobile” broadband is taking off!

66. A Changing Business ModelRLECs and their Stakeholders must Reassess their Risk Profile Changes to traditional regulated revenue streams are eroding the regulatory guarantees that have for so long defined the industry Existing and emerging competition from wireless and cable providers is eroding customer bases and reducing market share Projected increases in Internet traffic are forcing telcos to invest heavily to prepare their networks for the future and keep up with competition, without the regulatory recovery guarantees of the past Debt and equity providers are reassessing the industry’s investment and value propositions in light of a changing risk profile

67. Can we expect regulatory support to remain forever? Can we lessen competition? Can we slow down technological change? Can we really influence the buying wants of our customers? Can we adapt our operating structure to deal with current risk profile? A Changing Business ModelHow can RLECs Influence their Risk Profile?

68. Cooperative MergersHancock Telecom and Central Indiana Power

69. Cooperative MergersSynergy Technology Partners and Telcom Management Services

70. RLEC MergersWhere Do We Go From Here? Technology and competition are increasingly impacting the RLEC business model Regulatory change will make things worse The business model no longer supports as many small RLECs It is not a question of whether or not consolidation will happen or makes sense because circumstances will force sales, mergers, consolidations, etc. The industry needs leaders who will stand up and start this process because it is logical and it is time Who will that be?

71. Don’t be an Ensign Ricky

72. Discussion Bill King bking@jsicapital.com 603-622-0379