1. VoIP, WiFi and the Local Exchange Carrier A regulatory update and financial analysis Charles Curtis November 13, 2003 Confidential & Proprietary

2. DISCUSSION OUTLINE New Technologies and Enhanced ServicesNew Technologies and Enhanced Services –VoIP –WiFi Square Peg/Round Hole - Enhanced Services versus Regulated ServicesSquare Peg/Round Hole - Enhanced Services versus Regulated Services What is the defensive strategy?What is the defensive strategy? What is the offensive strategy?What is the offensive strategy? Regulatory ConsiderationsRegulatory Considerations ConclusionConclusion QuestionsQuestions Confidential & Proprietary

3. VoIP – Voice over Internet Protocol Provides internet service that emulates basic local and long distance service.Provides internet service that emulates basic local and long distance service. Provisioned over broadband internet connectionProvisioned over broadband internet connection –Cable Modem –DSL –Other Hi-Cap (wireless LAN or WiFi) Prices are relatively affordable for both subscriber and providerPrices are relatively affordable for both subscriber and provider Trade-off between QoS with traditional servicesTrade-off between QoS with traditional services –Customers seem willing to accept trade-off Confidential & Proprietary

4. VoIP - Continued Cisco ATA 186 – List price between $110-150 Can handle a primary and secondary line Also provides dial tone to normal phones Plugs into either Cable Modem or DSL Modem via Ethernet Confidential & Proprietary

5. VoIP to PSTN Call Cisco ATA Modem Customer Premises Internet Gateway switch POTS Line Confidential & Proprietary

6. VoIP Providers VonageVonage –Mainly parasitic offering over incumbent ISP provider $34.99 Unlimited Local and LD$34.99 Unlimited Local and LD $24.99 Unlimited Local and Intrastate LD$24.99 Unlimited Local and Intrastate LD Competitive International LD and free Vertical ServicesCompetitive International LD and free Vertical Services Issue new number, port existing numberIssue new number, port existing number –Depends on availability of NPA-NXXs in the region –Geography is transparent - $4.99 for virtual phone number Terms and conditions – Do not refer to service as telephone service.Terms and conditions – Do not refer to service as telephone service. Confidential & Proprietary

7. VoIP Providers - Continued City of Coldwater, MI, DeltaThree, 8x8 (Wisconsin case)City of Coldwater, MI, DeltaThree, 8x8 (Wisconsin case) Upstarts practically everydayUpstarts practically everyday –First cost is substantially lower than equivalent traditional voice network Parasitically offered over existing broadbandParasitically offered over existing broadband Rich IP interactive billing and account platforms that are basic part of serviceRich IP interactive billing and account platforms that are basic part of service Substitute for traditional phone serviceSubstitute for traditional phone service –Loss of access lines –Loss of minutes –If using landline broadband, keep DSL or Hi-Cap lines purchased by ISP, affiliate or deregulated operation Confidential & Proprietary

8. VoIP Numbers VoIP will account for 75% of international telecommunications by 2007 (Frost & Sullivan)VoIP will account for 75% of international telecommunications by 2007 (Frost & Sullivan) $16.5 Billion market by 2006 (Allied Business Intelligence)$16.5 Billion market by 2006 (Allied Business Intelligence) Retail VoIP MOU exceeded 15 billion in 2001 (Frost & Sullivan)Retail VoIP MOU exceeded 15 billion in 2001 (Frost & Sullivan) Confidential & Proprietary

9. WiFi Stands for Wireless FidelityStands for Wireless Fidelity –Unlicensed spectrum in the 2.4GHz range Large array of radio, antenna and software platform providersLarge array of radio, antenna and software platform providers Types of servicesTypes of services –Hotspot Starbucks, Airports, HotelsStarbucks, Airports, Hotels –Transport Line of site for either backhaul traffic or loop connectivityLine of site for either backhaul traffic or loop connectivity –Corporate WAN/LAN Confidential & Proprietary

10. WiFi - Continued WiFi is growing at remarkable rateWiFi is growing at remarkable rate Potential for total bypass, combined with VoIPPotential for total bypass, combined with VoIP –Offer voice and data with: Hotspot proprietorsHotspot proprietors Residential and business subscribersResidential and business subscribers –Incumbent would loose even the DSL or Hi-Cap line Replace special access for backhaul functionsReplace special access for backhaul functions Confidential & Proprietary

11. VoIP to PSTN Call utilizing WiFi Cisco ATA Modem Customer Premises Internet Gateway switch POTS Line Replace loop Replace backhaul Confidential & Proprietary

12. Square Peg – Round Hole ISP is considered an enhanced service, as defined in Part 64ISP is considered an enhanced service, as defined in Part 64 –…shall refer to services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscribers transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information. Enhanced services are not regulated under Title II of the Act. Part 64.702(a) Confidential & Proprietary

13. Square Peg – Round Hole Vonage vs. Minnesota PUCVonage vs. Minnesota PUC –Told Vonage they were telecommunications provider, not information service provider Regulated under Title II of the ActRegulated under Title II of the Act Get ETC status from PUCGet ETC status from PUC Pay E-911 and other regulatory feesPay E-911 and other regulatory fees –Multi-State Tax Commission complaints –Duck theory –Reversed by Minnesota Federal District Court Injunction against MPUC: information serviceInjunction against MPUC: information service Confidential & Proprietary

14. Square Peg – Round Hole Wisconsin PSC Letter to Vonage, 8x8 and DeltaThree:Wisconsin PSC Letter to Vonage, 8x8 and DeltaThree: –What are you guys selling? DeltaThree: No subs in WisconsinDeltaThree: No subs in Wisconsin Vonage: We dont sell telecom serviceVonage: We dont sell telecom service 8x8: TBD8x8: TBD –RBOCS plead with FCC to do something Powell commits to addressing VoIP this fallPowell commits to addressing VoIP this fall Confidential & Proprietary

15. Square Peg – Round Hole What is VoIP?What is VoIP? –It is an enhanced service or information service, as defined in Part 64. It resides as a port identity over the ISPs network, at least until it hits the PSTN gateway. –It is a telecommunications service. It emulates basic and long distance service and can substitute itself for traditional phone service –Its both an enhanced service and a telecommunications service Is it regulated under Title II (common carrier service)?Is it regulated under Title II (common carrier service)? –ETC Status, FUSC, E-911, TRS, Reg. Fee –Contributes to funds Is it deregulated from Title II (enhanced service)?Is it deregulated from Title II (enhanced service)? –No licensing, fees or contributions. –Drains funds Confidential & Proprietary

16. Defensive Strategies Is broadband ISP services available in your study area?Is broadband ISP services available in your study area? –Your own DSL? –An affiliate or non-affiliated CATV entity? –Wireless? If yes, look at:If yes, look at: –Re-address vertical service pricing –Bundle LD with local and broadband data –If ISP, look at Acceptable Use Policy Could restrict other providers from selling ISP style services over your own ISP network, as reselling ISP service limitation.Could restrict other providers from selling ISP style services over your own ISP network, as reselling ISP service limitation. –Restrictions on data only DSL without Basic Local Exchange Service Confidential & Proprietary

17. Defensive Strategies What to watch:What to watch: –Decrease in local revenue and access lines –Decrease in state access revenue and minutes –Decrease in interstate access revenue/minutes Increase in NECA TS SettlementIncrease in NECA TS Settlement –Increase in USF and ICLS Confidential & Proprietary

18. Offensive Strategies Offer it within my study area?Offer it within my study area? –Offer over DSL, trade access, local and USF HCL revenue for VoIP bundled revenue Still retain DSL revenue and settlements if offered as regulatedStill retain DSL revenue and settlements if offered as regulated Trade off may not be attractive with MLB services (defensive strategy)Trade off may not be attractive with MLB services (defensive strategy) –Offer it as merely local loop transport alternative Internet is always IP but IP isnt always internetInternet is always IP but IP isnt always internet –Savings in electronic costs –Careful about account interaction over the web. Remember Part 64 definition of enhanced services. Regulations are fickle with this new technology. Confidential & Proprietary

19. Regulatory Considerations If VoIP remains an information serviceIf VoIP remains an information service –USF distribution requirement will rapidly increase as users convert over to VoIP –USF contributions will decrease for the same reason –Access rates should start to increase as demand goes down and costs remain embedded –Funding for E911, TRS, e-rate, etc., will all feel negative impact as contributions decrease from VoIP conversions –As the above continues, adds more competitive pressure causing more rapid VoIP conversions –Telecom Public Policy becomes a wasteland Confidential & Proprietary

20. Regulatory Considerations If VoIP is reclassified as a telecommunications serviceIf VoIP is reclassified as a telecommunications service –Regulatory contributions sustainable but could still decrease Competitive pressure VoIP has on EUCL and interstate LD revenue may be reflected in lower revenue baseCompetitive pressure VoIP has on EUCL and interstate LD revenue may be reflected in lower revenue base –Fund distributions reflect embedded costs Contribution factors may continue to climb, if revenue base decreasesContribution factors may continue to climb, if revenue base decreases Confidential & Proprietary

21. Regulatory Considerations If VoIP is reclassified as a telecommunications serviceIf VoIP is reclassified as a telecommunications service –Access minutes measured RADIUS, SQL database records, converted to EMIRADIUS, SQL database records, converted to EMI MOU audit complex and difficult due to nature of ISP trafficMOU audit complex and difficult due to nature of ISP traffic –Identify by incoming and outgoing IP port number? AMA/Billing standards for IP voice trafficAMA/Billing standards for IP voice traffic –CALEA Packet based CALEA standard and implementation. FBI presented plan to FCC in JulyPacket based CALEA standard and implementation. FBI presented plan to FCC in July No ISP-based CALEA surveillance hubsNo ISP-based CALEA surveillance hubs National security threatNational security threat Onus seems to be put on regulated DSL and Cable provider, rather than the ISPOnus seems to be put on regulated DSL and Cable provider, rather than the ISP Confidential & Proprietary

26. Summary of Comparison as ESP and TSP Confidential & Proprietary

27. Conclusion Current regulations are incapable of resolving these issuesCurrent regulations are incapable of resolving these issues –Just in Time regulatory reform opportunity has passed Universal service will remain threatened until sufficient changes have been madeUniversal service will remain threatened until sufficient changes have been made LECs need to be concerned with both the competitive pressures and funding pressures caused by VoIP and especially VoIP combined with wirelessLECs need to be concerned with both the competitive pressures and funding pressures caused by VoIP and especially VoIP combined with wireless LECs also need to look at surviving through a defensive strategy as well as an offensive competitive strategyLECs also need to look at surviving through a defensive strategy as well as an offensive competitive strategy Confidential & Proprietary

28. Questions

29. Thank you Charles Curtis Vice President – Strategic Planning ACRS 2000 ccurtis@acrsokc.com