1. High-Potential Data Services David J. Waks System Dynamics Inc. High-Speed Data Delivery Strategies for the Cable Industry April 25, 1996 Copyright © 1996 System Dynamics Inc.

2. Slide 2 Copyright © 1996 System Dynamics Inc. Outline Data applications have high potential for cable operators –Internet and the Web –SOHO (Small Office, Home Office) –CD-ROM and Multimedia Data services business very different from video services Customer expectations hard to meet Profitability will be a challenge Recommendations

3. Slide 3 Copyright © 1996 System Dynamics Inc. Near-Term Opportunities l Residential Data Services –Access to Internet and online services –Personal Web content hosting –Telecommuting l Business Data Services –Access to Internet and online services –Business Web content hosting

4. Slide 4 Copyright © 1996 System Dynamics Inc. Internet and On-line Services l WorldWide Web Growing Rapidly –50 to 100 new sites per day –Standards emerging èFew proprietary obstacles èEntrepreneurial ferment –Low barriers to on-line entry èWeb browsers distributed widely èWeb development tools built into applications èWeb servers readily available l Internet displacing OLS for mass-market content owners –Owner controls content and presentation –Better business terms and evolution

5. Slide 5 Copyright © 1996 System Dynamics Inc. SOHO is Important Revenue Source l Residential PC Penetration –40% have PCs now --> 60% by 2000 –Of these è ~ 1/3 work at home full-time è ~ 1/3 work at home part-time è ~ 1/3 dont work at home l Small Business PC Penetration –Very small business (< 10 employees): ~2 PCs –Small business (10 to 99): ~8 PCs Small Office Home Office

6. Slide 6 Copyright © 1996 System Dynamics Inc. High Near-Term Revenue Potential Business data services Residential data services Subscription video services Illustrates cable system with 25,000 homes passed, average industry statistics

7. Slide 7 Copyright © 1996 System Dynamics Inc. CD-ROM and Multimedia Situation l Plenty of multimedia platforms –Vast majority of home PCs sold with multimedia: CD-ROM, sound card, speakers, microphone l Plenty of CD-ROM titles –More than 5000 today l Shelf space limits CD-ROM availability –Average store has 100 titles, big store maybe 250 –Hit oriented –Few big publishers control shelf space l Hard for CD-ROM producers to make money –Cost of production - $350K and up –Revenue per title sold - $1-3 –6% of titles (total of 200) generated profit in 1994 Sources: Simba, IMA

8. Slide 8 Copyright © 1996 System Dynamics Inc. CD-ROM and Multimedia Revenue Opportunities l Near term –Combine CD-ROM with access to OLS and Web èCD-ROM provides static multimedia content èOn-line provides dynamic update –OLS starting to incorporate CD-ROM l Longer term –On-line multimedia content for CD-ROM and Web applications –CD-ROM product demonstration and sales –Multimedia pay-per-play èExisting CD-ROM content èNew multimedia content without CD-ROM limitations

9. Slide 9 Copyright © 1996 System Dynamics Inc. Many Promising Broadband Data Applications l Near-term –High-speed access to Internet and on-line services –Web content hosting –Telecommuting –Local community content l Longer-term –CD-ROM ordering, pay-per-play –Video enhancements to Internet and on-line services –Videoconferencing and video telephony –Multi-player games –Advertising –Home shopping –Direct marketing –Distance learning –Software distribution –Government information and transactions

10. Slide 10 Copyright © 1996 System Dynamics Inc. Outline Data applications have high potential for cable operators Data services business very different from video services –Different user expectations –Both content- and communications-centered applications –Different business model Customer expectations hard to meet Profitability will be a challenge Recommendations

11. Slide 11 Copyright © 1996 System Dynamics Inc. Two Different Businesses

12. Slide 12 Copyright © 1996 System Dynamics Inc. Two Kinds of Applications

13. Slide 13 Copyright © 1996 System Dynamics Inc. Continuum of Electronic Applications Content Communications Telecommuting Broadcast radio and TV Software distribution Video telephony and teleconferencing Information on products and services Transactions and support Electronic Commerce WorldWide Web Electronic mail Internet Telephony Subscription video services Interactive games Download Play CD-ROM pay per play Commercial online services (AOL, Compuserve, Prodigy) Proprietary content Email, chat, forums

14. Slide 14 Copyright © 1996 System Dynamics Inc. Value Chain - Content-centered Applications Content Creator Aggregator / Packager Application Host Inter- network Transport Provider Local Access Provider End User MSOs LECs Internet Access Providers IXCs On-line Services Web Sites On-line Services Internet Malls Media Companies Print Publishers Advertising Agencies

15. Slide 15 Copyright © 1996 System Dynamics Inc. Value Chain - Communications-centered Applications Application Host Inter- network Transport Provider Local Access Provider 1 End User 1 End User 2 Local Access Provider 2 Internet Access Providers IXCs Email hosts Video Teleconferencing Bridge services MSOs LECs

16. Slide 16 Copyright © 1996 System Dynamics Inc. Outline Data applications have high potential for cable operators Data services business very different from video services Customer expectations hard to meet Profitability will be a challenge Recommendations

17. Slide 17 Copyright © 1996 System Dynamics Inc. Customer Needs and Expectations... l I get it when I want it –I dont have to wait for my modem to dial –I dont have to wait for the screen to paint l I get it when I need it –I dont have to keep looking for something Im waiting for l I can depend on it –It connects every time –It doesnt cut me off l Someone will hold my hand if I run into problems

18. Slide 18 Copyright © 1996 System Dynamics Inc....Implications: l Cable data delivery should satisfy expectations of initial customers –Early adopters –Fast connect time (seconds, not minutes) –High data rates (megabits per second, not kilobits) –Little contention for available bandwidth l May be hard to keep customers satisfied –Internet neither fast nor reliable today –Performance likely to degrade over time with more users and higher bandwidth needs –Ongoing reliability requires network management infrastructure –Later subscribers require informed and attentive customer support

19. Slide 19 Copyright © 1996 System Dynamics Inc. Outline Data applications have high potential for cable operators Data services business very different from video services Customer expectations hard to meet Profitability will be a challenge Recommendations

20. Slide 20 Copyright © 1996 System Dynamics Inc. Profit is Harder than Revenue l Pressure for flat-rate pricing –Strong customer preference –Much simpler recordkeeping, billing l Data services cost structure very different from subscription video –Video has known margin, independent of usage –Data services margin depends on many factors èNumber of users èSimultaneous use èApplication mix èBandwidth per user èUser tolerance for performance variations with load è...

21. Slide 21 Copyright © 1996 System Dynamics Inc. Decreasing Margins Will Force Repricing l Online services have been prone to run- away applications –Prodigy examples l Data services will quickly absorb valuable cable bandwidth –More users –More simultaneous use –Increasing bandwidth as applications include multimedia elements l Operators will need to balance pricing against costs –Higher flat rate –Usage-based pricing

22. Slide 22 Copyright © 1996 System Dynamics Inc. Outline Data applications have high potential for cable operators Data services business very different from video services Customer expectations hard to meet Profitability will be a challenge Recommendations

23. Slide 23 Copyright © 1996 System Dynamics Inc. Recommendations for Cable Operators l Consider tomorrows applications when choosing todays technologies l Install supporting infrastructure along with modems –Network management for reliability –Traffic management to understand usage patterns l Pay attention to SOHO potential –High penetration and willingness to pay l Avoid promising long-term flat-rate pricing –Run-away applications will force change l Assume youll have to fulfill customer expectations to succeed –Reliability –Customer support

24. For More Information: 18 Beaver Ridge Road, Morris Plains, NJ 07950-1901 (201) 644-4739 Fax (201) 538-6003 Dave Waks: waks@system-dynamics.com Sandy Teger: sandy @system-dynamics.com http://www.gti.net/davewaks (after 9/1/96: http://www.system-dynamics.com) System Dynamics Inc.