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Terrence P. McGarty, Lisbon February 13, 2003 Broadband to the User: US Market Development and Options Lisbon February 13, 2003.

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Presentation on theme: "Terrence P. McGarty, Lisbon February 13, 2003 Broadband to the User: US Market Development and Options Lisbon February 13, 2003."— Presentation transcript:

1 Terrence P. McGarty, Lisbon February 13, 2003 Broadband to the User: US Market Development and Options Lisbon February 13, 2003

2 Terrence P. McGarty, Lisbon February 13, 2003 Fiber Network Architecture

3 Terrence P. McGarty, Lisbon February 13, 2003 Fiber to the Home (FTTH) “Home Run” Separate fiber to each home from Head End or Central Office Pros: Ultimate performance Highest flexibility Minimal interoperability and upgradeability issues Cons: Extremely high cost Incremental build-out expensive as well “Active Star” Fiber runs from Head End to remote hubs with switching equipment Pros: High performance Diversity of services Cons: High equipment costs Reliability issues: need for power at every remote Aesthetics, real estate for remotes Passive Optical Network (“PON”) Single fiber runs from Head End to hubs with passive optical splitters Pros: Lowest life-cycle costs Simplest design, minimal need for field electronics Highest reliability Cons: Requires simultaneous upgrade of remotes and Head End Shared resource: bottlenecks upstream, signal compatibility Gigabit Ethernet (“GigE”) Giga Bit Ethernet is a technology which uses “distributed” routers allowing direct 110 Base T or higher connections to the home. Pros: Simple Interface High Data Rate Cons: Shared local connection Increases complexity and management

4 Terrence P. McGarty, Lisbon February 13, 2003 Comparison of Internet Access Residential SOHO SME Large Enterprise Dial-Up DSL Cable Modem LMDS Fixed Wireless Fiber to the Home Data 500 Kbps 1 Mbps 5 Mbps 100 Mbps 56 Kbps High Res. Video, Digital Services Low Res. Video

5 Terrence P. McGarty, Lisbon February 13, 2003 Fiber Backbone Ring 1 Ring 2Ring 3 Ring N Head End Head End Hub SH

6 Terrence P. McGarty, Lisbon February 13, 2003 Technology and Cost Comparisons

7 Terrence P. McGarty, Lisbon February 13, 2003 Broadband Options FTTH – PON FTTH – Gigabit Ethernet HFC Wireless – LMDS, DSL Cable Modems

8 Terrence P. McGarty, Lisbon February 13, 2003 Technical Issues

9 Terrence P. McGarty, Lisbon February 13, 2003 Protocol Layers Application The applications software, it is what the end user sees and uses. Presentation Provides for such things as security and security management. Session Controls communications between applications, flow management, and creates sessions between applications at end user level. Transport Ensures reliable end to end transport and flow control Network Provides point to point and point to end point reliable links Data Link Provides for reliable physical link transport; can be divided into LLC and MAC functions Physical Provides physical connections and electrical connections, including modulation.

10 Terrence P. McGarty, Lisbon February 13, 2003 TCP/IP vs OSI Application Presentation Session Transport Network Data Link Physical Application Transport: TCP (host to host) Internet: IP Network Access Physical

11 Terrence P. McGarty, Lisbon February 13, 2003 Network Convergence ServiceAdaptation L1 L2 F-T1 DS1 DS3 Sonet OC3 - OCn Campus 802.N FrameRelay ATM L3 IP PPP WAN IP

12 Terrence P. McGarty, Lisbon February 13, 2003 IP

13 Terrence P. McGarty, Lisbon February 13, 2003 TCP

14 Terrence P. McGarty, Lisbon February 13, 2003 TCP and IP and ATM Headers Data ATM IP TCP

15 Terrence P. McGarty, Lisbon February 13, 2003 ATM Information Fields 48 Octets Or 384 bits Flow Control VPI VCI Payload Type Header Error Control

16 Terrence P. McGarty, Lisbon February 13, 2003 Ethernet MAC Frame PreambleStart Frame DestinationSource Length DataPad Error Check 56 bits8 bits16 bits

17 Terrence P. McGarty, Lisbon February 13, 2003 Architecture Elements

18 Terrence P. McGarty, Lisbon February 13, 2003 Ethernet Layer 2, 3 and ATM Home Headend Transport ATM TCP/IP Layer 2 Router IP Address Layer 2 SwitchRouter ATM Switch Layer 2 ATM Switch

19 Terrence P. McGarty, Lisbon February 13, 2003 Fiber Rates ATM v GigE ATM Switch Rates of OC 3, OC 48, OC 96, OC 192 Passive Optical Splitter Passive Optical Splitter Passive Optical Splitter 622 Mbps down 155 Mbps Up TDM Down TDMA Up Max 10 Mbps Shared ATM

20 Terrence P. McGarty, Lisbon February 13, 2003 Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE

21 Terrence P. McGarty, Lisbon February 13, 2003 Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE

22 Terrence P. McGarty, Lisbon February 13, 2003 Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE Physical Application Presentation Session TCP IP LLC/MAC Physical IP LLC/MAC Physical IP LLC/MAC Physical Application Presentation Session TCP IP LLC/MAC Telco Network IP Network

23 Terrence P. McGarty, Lisbon February 13, 2003 Physical Application Presentation Session Transport Network Data link Physical Application Presentation Session Transport Network Data link Physical Application Presentation Session Transport Network Data link Physical Application Presentation Session Transport Network Data link

24 Terrence P. McGarty, Lisbon February 13, 2003 Physical Application Presentation Session TCP IP LLC/MAC Physical IP LLC/MAC Physical IP LLC/MAC Physical Application Presentation Session TCP IP LLC/MAC

25 Terrence P. McGarty, Lisbon February 13, 2003 Physical Application Presentation Session TCP IP LLC/MAC Physical IP LLC/MAC Physical IP LLC/MAC Physical Application Presentation Session TCP IP LLC/MAC

26 Terrence P. McGarty, Lisbon February 13, 2003 Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE Physical Application Presentation Session TCP IP LLC/MAC Physical IP LLC/MAC Physical IP LLC/MAC Physical Application Presentation Session TCP IP LLC/MAC Telco NetworkIP Network Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE Physical Application Presentation Session TCP IP LLC/MAC Physical IP LLC/MAC Physical IP LLC/MAC Physical Application Presentation Session TCP IP LLC/MAC Q.931 SS7 SETUP IAM SETUP CALPRO ALERT ACM ALERT CONNECT ANM CONNECT DISC REL DISC REL RLC REL RELC LETE SS7 TRANSIT EXCHANGE LE TE Telco Network

27 Terrence P. McGarty, Lisbon February 13, 2003 PON Passive Optical Networks

28 Terrence P. McGarty, Lisbon February 13, 2003 PON Options APON – ATM based PON EPON – Ethernet based PON

29 Terrence P. McGarty, Lisbon February 13, 2003 Flavors of PON: A / B / E / G / P Multiple ways of implementing PON APON - ATM PON –first commercial product, used primarily for business applications BPON - Broadband PON –expanded version of APON with added functionality to support robust video services EPON - Ethernet PON –PON using Ethernet for packet data - still evolving GPON - GigaPON –evolving PON technology at gigabit rates Proprietary PON –long term viability and support issues Alcatel uses BPON in 7340 FTTU

30 Terrence P. McGarty, Lisbon February 13, H-ONT (Home Optical Network Terminal) - customer interfaces 7340 P-OLT (Packet Optical Line Terminal) - network interface for PONs 7340 V-OLT (Video Optical Line Terminal) - video distribution across PON 7340 AMS (Access Management System) - element management 7340 V-OLT 7340 P-OLT 7340 H-ONT Network Central Office or Fiber NID Home Network Remote Terminal Distribution 7340 AMS Voice Data Video 7340 FTTU System Elements

31 Terrence P. McGarty, Lisbon February 13, BPON Technology Voice, data and video (bidirectonal) for 32 subscribers over a single fiber Coarse WDM supports three wavelengths — 1,490/1,310/1,550 nm 622/155 Mb/s packet rate via two wavelengths Dedicated wavelength for video — very high capacity (4 Gb/s Broadband Entertainment) 20 km (12.4 mi.) span 20 km (12.4 mi.) 1,550 nm 622 Mb/s 1,490 nm 1,310 nm Splitters 7340 V-OLT 7340 P-OLT 7340 AMS Central Office or Remote Terminal Fiber Distribution Passive Outside Plant 155 Mb/s TDMA Up in ATM Frames, TDM down in ATM Frames

32 Terrence P. McGarty, Lisbon February 13, 2003 FTTU System Key Points Optical Network Terminator (ONT) –Optimized for residential service –Environmentally hardened –Locally powered with battery backup Optical Line Terminator (OLT) –Shares common components with the ASAM 7300 –Supports residential and business services –Architected for modularity, scalability and cost –Low initial capital investment Partnering with best-in-class vendors for other elements Element Management FSAN/ITU standards compliant; Alcatel active participant 7340 H-ONT 7340 P-OLT

33 Terrence P. McGarty, Lisbon February 13, 2003 FTTU Service View Supports bundled services — voice, data, video –up to four POTS systems with lifeline support –very high speed data (10/100Base-T or HPNA interfaces) –video (Analog, Standard Definition Digital & High Definition) Flexible bandwidth use –more than 20 Mb/s available per subscriber on average –higher bursting rates possible –supports service level agreements (SLAs) –efficiently carries IP and MPEG payloads Supports service requirements of tomorrow –easily accommodates emerging services –ONT upgradeable via software for new services –ONTs planned for several niche applications — SOHO, MDU, MSE, MTU ONTONT RJ11 Coax RJ45 POTS 10/100baseT CATV HPNA UPS

34 Terrence P. McGarty, Lisbon February 13, 2003 Satellite Cable TV Local TV Broadcast Video Tx 1550nm Central OfficeHome 7340 AMS PSTN Video Optical Transmitter Video RF Mux VoD Server GR-303 /TR-08 Voice Gateway Video Storage 7670 RSP / Omniswitch ATM Switch BAS Class 5 Switch UPS Tx 1490/ Rx 1310 nm Tx 1550nm 7340 V-OLT 7340 P-OLT WDM Alcatel 6620 FTTU Fiber and components in outside plant 7340 H-ONT Intranet/Internet FTTH Network Solution: IP Video Return

35 Terrence P. McGarty, Lisbon February 13, 2003 HPNA 2.0 or Ethernet 10/100 Base-T VoD PUMP Video Application Server Tx 1490 / Rx 1310 nm Satellite Cable TV Local TV Broadcast Video Modulators Tx 1490 nm Rx 1310 nm Tx 1550 nm Video Optical Tx VoD/XCATV/ DBS Tx 1550n m V- OLT WDM IP or ATM network 1:32 CATV Broadcast 75 Ohm Coax IP Return BPON 1550nm CATV Solution

36 Terrence P. McGarty, Lisbon February 13, Homes Passed Primary Flexibility Point 36 fiber Cable ~15 km 1:8 OLT 24 fiber Cable Greenfield 100% Homes passed are Connected Over Build Connect as you add subscribers FP2 24 FP12 24 FP3 FP4 24 FP5 FP6 FP7 24 FP8 FP9 FP10 24 FP Total Homes Passed 24 fiber Cable ~ 1 to 5 km F1 1:4 Final Drop Point FTTU Outside Plant Example Tiered splitting strategy Minimize cost Allow flexibility for future with fiber rich last 1/2 mile

37 Terrence P. McGarty, Lisbon February 13, 2003 APON Costs ElementFixedVariableCapacity Router Cisco $250, ATM Switch 7340 P OLT Optical Switch 317 Remote 7340 H ONT Home Units

38 Terrence P. McGarty, Lisbon February 13, 2003 Gigabit Ethernet

39 Terrence P. McGarty, Lisbon February 13, 2003 System Elements 3700 Headend 160 1,000 BT Carriers 3700 Headend 160 1,000 BT Carriers 410 Hub Concentrator 16 1,000 BT 410 Hub Concentrator 16 1,000 BT 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs Cisco Router Cisco Router 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 410 Hub Concentrator 16 1,000 BT 410 Hub Concentrator 16 1,000 BT 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs

40 Terrence P. McGarty, Lisbon February 13, 2003 GigE Architecture Router TCP/IP From Router Out: Layer 3 TCP/IP From Router Out: Layer 3 Hub Remote Headend Ethernet 100 Gbps Layer 2 Ethernet 100 Gbps Layer 2 Switch Ethernet to Backbone Layer 2 Layer 2 Switch Ethernet to Backbone Layer 2 TCP/IP Layer 3, 4 Contains TCP and IP address TCP/IP Layer 3, 4 Contains TCP and IP address Layer 1, 2 1 Gbps Backbone Layer 1, 2 1 Gbps Backbone

41 Terrence P. McGarty, Lisbon February 13, 2003 Fiber Backbone Ring 1 Ring 2Ring 3 Ring N Head End Head End Hub SH

42 Terrence P. McGarty, Lisbon February 13, 2003 GigE Costs ElementFixedVariableCapacity 3700 Headend$190,000$12, Gbps BT connections 410 Concentrator$6,99516 Gbps BT Connections, 10 km range 317 Remote$7,6954 Gbps, Mbps port pairs, 10 km range 36 Access Portal$1,16510/100 Mbps (8), POTS (2)

43 Terrence P. McGarty, Lisbon February 13, 2003 Design Issues 3700 Headend 160 1,000 BT Carriers 3700 Headend 160 1,000 BT Carriers 410 Hub Concentrator 16 1,000 BT 410 Hub Concentrator 16 1,000 BT 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs Cisco Router Cisco Router 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 410 Hub Concentrator 16 1,000 BT 410 Hub Concentrator 16 1,000 BT 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs 317 Hub Remotes 4 1,000 BT FX Pairs If low load per HH, then can set 15 HH 317 Per 410, and one 1 Gbps from 410 Back to 3700, with 1 Gbps on in and 1 Gbps on out.

44 Terrence P. McGarty, Lisbon February 13, 2003 Capital Plant

45 Terrence P. McGarty, Lisbon February 13, 2003 Per Sub Capital

46 Terrence P. McGarty, Lisbon February 13, 2003 Cap per Sub Large

47 Terrence P. McGarty, Lisbon February 13, 2003 Municipal Broadband

48 Terrence P. McGarty, Lisbon February 13, 2003 What is Municipal Broadband? Optical fiber network owned by municipality (Town / Utility) Fiber connectivity to homes and commercial properties: 100 Mbps service, Fiber to the Home (FTTH) Integration of school, fire, police, public safety, healthcare Open access network allowing any service provider/ISP Municipality provides “bit” backbone only; service provider owns end-users

49 Terrence P. McGarty, Lisbon February 13, 2003 Network and Services ISP Integrator & Carrier Municipal/Town Broadband Value Added Packager Added Services would be Video, VPNs, Voice Over IP and other advanced services. Added Services would be Video, VPNs, Voice Over IP and other advanced services. Basic services would be basic ISP and valued added ISP based services to end user Basic services would be basic ISP and valued added ISP based services to end user Concept of Municipal Broadband

50 Terrence P. McGarty, Lisbon February 13, 2003 Opportunity Size Have budgeted 15 municipalities under definitive contract in 2003; already have 8 with preliminary agreements Anticipated over 300 towns by end of year 6, regional and national Revenue goes to $100 million, NOI peaks at 61% CCF requirements are $5 million, primarily for build out of NOCs and working capital, use of proceeds can be throttled by demand Capital can be throttled on buildout

51 Terrence P. McGarty, Lisbon February 13, 2003 Incumbent network provider “Owns” all of the local customers  High borrowing cost of capital  Unbundling of broadband poses business risk to existing services  Significant cuts in budget  Politically complex Local CATV presence “Owns” the CATV customer  Very bad cash position  Need to upgrade cable plants to support two-way broadband in outlying areas Some broadband in larger cities and towns Some backbone infrastructure  Limited to no financial capability  Serious negative cash flow Municipal Network Capable of raising financing at low cost of capital Capable of local and targeted deployment No local regulatory problems  No network operational skills, but can be easily outsourced  No infrastructure support capabilities, but can be easily outsourced Current Options for Broadband StrengthsWeaknesses

52 Terrence P. McGarty, Lisbon February 13, 2003 Municipal Broadband: “Win Win Win” Scenario Town Consumer ISP Service Provider ISP Service Provider 1.Increased Revenue Source 2.Possible 2:1 or more coverage 3.Improved Town Facilities 4.Integrated Municipal Services 1.Increased Revenue Source 2.Possible 2:1 or more coverage 3.Improved Town Facilities 4.Integrated Municipal Services 1.Lower Cost of Services 2.Improved Gross Margins 3.Added capabilities for advanced services 4.Better competitive positioning 1.Lower Cost of Services 2.Improved Gross Margins 3.Added capabilities for advanced services 4.Better competitive positioning 1.Increased Service Offerings 2.Integrated Town Services 3.Increased Property Values 4.Decreased Town Taxes 1.Increased Service Offerings 2.Integrated Town Services 3.Increased Property Values 4.Decreased Town Taxes

53 Terrence P. McGarty, Lisbon February 13, 2003 Comparison of Internet Access Residential SOHO SME Large Enterprise Dial-Up Cable Modem Fixed Wireless DSL Fiber to the Home Data 500 Kbps 1 Mbps 5 Mbps 100 Mbps 56 Kbps High Res. Video, Digital Services Low Res. Video

54 Terrence P. McGarty, Lisbon February 13, 2003 Fiber-to-the-Home Services Video Services: Standard And enhance video services With HDTV digital TV entertainment Telephone Services: Access To multiple telephone services providers, offering choice And cost savings Broadband Internet Access: 100 Mbps or greater; A secure, ultra high speed network for family, municipal, medical, educational, public safety.

55 Terrence P. McGarty, Lisbon February 13, 2003 “Win Win Win” Scenario Town Consumer ISP Service Provider ISP Service Provider 1.Increased Revenue Source 2.Possible 2:1 or more coverage 3.Improved Town Facilities 4.Integrated Municipal Services 1.Increased Revenue Source 2.Possible 2:1 or more coverage 3.Improved Town Facilities 4.Integrated Municipal Services 1.Lower Cost of Services 2.Improved Gross Margins 3.Added capabilities for advanced services 4.Better competitive positioning 1.Lower Cost of Services 2.Improved Gross Margins 3.Added capabilities for advanced services 4.Better competitive positioning 1.Increased Service Offerings 2.Integrated Town Services 3.Increased Property Values 4.Decreased Town Taxes 1.Increased Service Offerings 2.Integrated Town Services 3.Increased Property Values 4.Decreased Town Taxes

56 Terrence P. McGarty, Lisbon February 13, 2003 Financing “Public Works” Project Treat municipal broadband project as Public Works; like building town roads or sewers Local municipality finances, builds, owns and operates broadband infrastructure Financing: municipal revenue bonds (tax-exempt) Feasibility test: “Revenues sufficient to cover debt service and direct expenses?” Could be partially underwritten by anchor tenants (local businesses and other institutions/coops)

57 Terrence P. McGarty, Lisbon February 13, 2003 Target Markets

58 Terrence P. McGarty, Lisbon February 13, 2003 Target Market Residential: Single cable modem type interconnection, broadband access plus telephony. SOHO/SME: Upscaled cable modem access and multiple telephony connections. LAN support. Commercial: Multi Employee locations with LAN capabilities and server access.

59 Terrence P. McGarty, Lisbon February 13, 2003 Targeted Town Characteristics Not in strict Dillon Rule states (MO, NV, TN, TX, VA) Little or no broadband infrastructure –Old cable / telecom systems –Outside of RBOC/cable immediate interest Proximity to long haul fiber 10,000 or more homes, upper 25% income demographic, 250 ft per front home Existing municipal power/water/sewer systems Wealthy demographics; rich bedroom communities High Internet penetration rate (AOL, AT&T) Town not dependent for goods and services on State (RBOC lobbying factor) Political support

60 Terrence P. McGarty, Lisbon February 13, 2003 Key Demographic Factors High Density per Mile Good Demographics/ High Internet Usage Increased Seasonal Usage Commercial Base Public Services and Public Safety Usage Limited Rural Access

61 Terrence P. McGarty, Lisbon February 13, 2003 New England Target Towns

62 Terrence P. McGarty, Lisbon February 13, 2003 US Target Market

63 Terrence P. McGarty, Lisbon February 13, 2003 US Coverage

64 Terrence P. McGarty, Lisbon February 13, 2003 Broadband Markets Source: FCC Broadband Report, July 2002

65 Terrence P. McGarty, Lisbon February 13, 2003 Case Study: LaGrange, Georgia Basis Statistics Pop. 26,000 11,000 Households Rural Troupe County Avg. Income $26,000 City Budget: $65 mil. Telecom History In early 1990s, established (with ITC Holdings) a 4 mi. fiber network and multi-carrier PoP City provided local bandwidth and route diversity; ITC provided long-haul data carrier services Local fiber network is now 57 mi.; serves commercial customers Local Broadband Project for Homes In 1998, Lagrange Dev. Authority partnered with Charter Communications to build 150 mi. hybrid fiber-coax cable network Financed with $9.2 million revenue bonds City, Authority financed, built and owned network Leased capacity to Charter for video services City currently providing broadband Internet, data, VPN and Voice over IP services; residential broadband + data priced at $40/month Connected all 21 schools and two large colleges in Troupe county for Internet, voice, video; attracted several new businesses to area 100% of households receiving cable TV; 70% signed up for cable Internet access (2001) Revenues grew from $67K in 1997 to $117K in 1998 to $571K in 1999 to over $1,000K in 2000.

66 Terrence P. McGarty, Lisbon February 13, 2003 Local Broadband Networks Alabama: Lincoln, Opp, Foley, Scottsboro Alaska: Angoon, Kake, Kiana, Kotlik Arkansas: Conway, Lockesburg, Paragould California: Anaheim, Alameda, Burbank, Los Angeles, Palo Alto, San Bruno, Santa Rosa Colorado: Center, Copper Mountain, Longmont Florida: Gainesville, Key West, Lakeland, Leesburg, Newberry, Ocala, Valparaiso Georgia: LaGrange, Fairburn, Marietta, Newnan, Thomasville Iowa: Akron, Algona, Alta, Bancroft, Cedar Falls, Coon Rapids, Danbury, Dayton, Denison, Grundy Center, Harlan, Hartley, Hawarden, Hull, Independence, Indianola, Lake View, Laurens, Lenox, Manilla, Manning, Mount Pleasant, Muscatine, New London, Orange City, Primghar, Rock Rapids, Sac City, Sanborn, Sibley, Spencer, Tipton, Wall Lake, Waterloo, Westwood Kansas: Altamont, Baxter, Cawker, Columbus, Courtland Kentucky: Bardstown, Barbourville, Bowling Green, Frankfort, Glasgow, Williamstown Maryland: Easton Massachusetts: Braintree, Chicopee, Holyoke, Shrewsbury, Westfield Michigan: Clearwater, Coldwater, Crystal Falls, Hillsdale, Holland, Lowell, Negaunee, Norway, Wyandotte Minnesota: Bagley, Coleraine, Elbow Lake, Fosston, Jackson, Marble, Westbrook, Windom Missouri: Newburg, Springfield, Unionville Nebraska: Lincoln North Carolina: Morganton New Hampshire: Keane Ohio: Archbold, Butler County, Celina, Cuyahoga Falls, Hamilton, Lebanon, Niles, Wadsworth Oregon: Cascade Locks, Eugene, Lexington, Lincoln County Public Utility District, Springfield Pennsylvania: New Wilmington, Pitcairn South Dakota: Beresford Virginia: Blacksburg, Leesburg, Lynchburg Washington: North Bonneville, Sumas, Tacoma West Virginia: Phillipi Wisconsin: Oconto Falls, Two Creeks Wyoming: Lusk, Bailroil Source: 1998, Muni-Telecom list server, Center for Civic Networking

67 Terrence P. McGarty, Lisbon February 13, 2003 Benefits of Municipal Broadband Ubiquitous Coverage – mission driven Lower buildout costs - Rights of way, RFP process Enhanced Services – digital media, interactive TV Economic Development – attracts new businesses Community Asset – property values and taxes Competition – forces high QoS from private providers Efficiency – leverage existing infrastructure (utilities, etc) Fewer Upgrades –open access, ample bandwidth Improved Government IT – integration, E-government Security – integrated communications infrastructure

68 Terrence P. McGarty, Lisbon February 13, 2003 Risks of Municipal Broadband Financing Risks – experience, credit rating, balance sheet Technology Risks – compatibility and interoperability Revenue Risks –customer demand, private sector interest Operating Risks – experience, regulatory, QoS Political Risks – project approval process, regulatory Regulatory Risk – ILEC, namely Verizon, litigation and delay tactics

69 Terrence P. McGarty, Lisbon February 13, 2003 Target Market – U.S. Initial region of focus is New England: strength of relationships, familiarity, vicinity and demographic factors

70 Terrence P. McGarty, Lisbon February 13, 2003 Not in strict Dillon Rule states (MO, NV, TN, TX, VA) Little or no broadband infrastructure –Old cable / telecom systems –Outside of RBOC/cable immediate interest Medium to high population density Critical size of population and number households Wealthy demographics High Internet penetration rate (AOL, MSN, etc) Political, regulatory support Not in strict Dillon Rule states (MO, NV, TN, TX, VA) Little or no broadband infrastructure –Old cable / telecom systems –Outside of RBOC/cable immediate interest Medium to high population density Critical size of population and number households Wealthy demographics High Internet penetration rate (AOL, MSN, etc) Political, regulatory support Target Coverage

71 Terrence P. McGarty, Lisbon February 13, 2003 Market Penetration

72 Terrence P. McGarty, Lisbon February 13, 2003 Competition Merton is s service integrator: not in highly competitive business of construction, optical technology or consulting Focused on niche market with high demand: public sector Targeted towns below radar of RBOCs and Cable for fiber broadband; private sector weakened financially Only one other known service integrator providing similar functions: DynamicCity out of Provo, UT

73 Terrence P. McGarty, Lisbon February 13, 2003 Competitive Factors Operational, technical and financial experience Operations support capability Credibility in industry and in Washington Regulatory successes Established track record as a team for years Minimal risk strategy to municipal broadband Bankable team

74 Terrence P. McGarty, Lisbon February 13, 2003 Risks RiskExplanationMitigation Market RiskTowns not prepared to take on MBN projects Market is large and there is known demand Timeline / Sales Cycle RiskTime to revenues on any given project is high Diversity of town portfolio; Co-Op approach reduces lead time Regulatory / Political RiskState or Federal regulation, or ILEC supportive laws might prohibit MBN Below radar of ILECs; Merton lobbying both Federal and state legislators Vendor RiskLong-term viability of vendors Careful selection of vendors; due-diligence Town Financing RiskTowns may not be able to raise required capital Track record of infrastructure projects funded by municipal bonds

75 Terrence P. McGarty, Lisbon February 13, 2003 MBN Details

76 Terrence P. McGarty, Lisbon February 13, 2003 Fiber to the Home (FTTH) Head End Switch, and Data Broadband Facility Head End Switch, and Data Broadband Facility Town Local Hub Town Local Hub Town Local Hub Town Local Hub Sub Hub Sub Hub Sub Hub Sub Hub Sub Hub Sub Hub Sub Hub Sub Hub Optical Splitters / Ethernet Switches Optical Splitters / Ethernet Switches Optical Splitters / Ethernet Switches Optical Splitters / Ethernet Switches

77 Terrence P. McGarty, Lisbon February 13, 2003 Capital Costs Estimates Capital CostAssumptionResult Fiber Installation, New Trenching: $50,000 per mile Fiber Installation, Existing Conduits/ Aerial: $20,000 per mile 10%-90% split between new trenching and existing conduits/aerial $23,000 per mile Fiber Cost: $150 per mile per strand48 strands on backbone 2 strands per home drop $7,800 per mile Optical equipment and buried installations: $7,000 per mile Gigabit Ethernet Network architecture $7,000 per mile FTTH drop and home electronics: $900 per home Home has 100 foot frontage, or 60 homes per mile 30% penetration of homes, or 18 homes per mile serviced $16,200 per mile TOTAL$54,000 per mile TOTAL per Home18 homes per mile serviced$3,000 per Home

78 Terrence P. McGarty, Lisbon February 13, 2003 Town Revenue Model Town Owned and Operated Broadband Network Town Owned and Operated Broadband Network ISP Customers (Residential, SOHO/SME, Commercial ) Customers (Residential, SOHO/SME, Commercial ) CATV / LEC Network Access Fees Service Fees Installation / Access Fees

79 Terrence P. McGarty, Lisbon February 13, 2003 Revenue Sources: “Starting Point” Sample Internet Statistics Number Telephone Lines (% of HH with AOL) Number Households (HH)10,000 Number HH with AOL5,000 Number HH with Second Line3,000 Effective Conversion Rate30% Second Line Fee / Month$25 Revenue to Town (Annual)$900,000 Municipal Broadband Network

80 Terrence P. McGarty, Lisbon February 13, 2003 “Back of the Envelope” Head End Head End Hub SH 3,000 HH $25.00 per month 12 months/year =$900,000 Per year 3,000 HH $3,000 per HH =$9,000,000 For plant Payback Ratio = 10 years Bond Interest Coverage = 185% (after Operating Expenses)

81 Terrence P. McGarty, Lisbon February 13, 2003 Beyond Starting Point Starting Point is one “if” scenario: Only homes with second telephone lines moved to Municipal Broadband Network Higher home penetration likely Commercial / public utility provide incremental revenues All other revenues are costless: –Higher fee for 100 Mbps services –Value added services: video, telephone, HD TV

82 Terrence P. McGarty, Lisbon February 13, 2003 Financing “Public Works” Project Treat municipal broadband project as Public Works; mission driven, not profit driven Local municipality finances, builds, owns and operates broadband infrastructure Financing: municipal bonds (tax-exempt/taxable) Feasibility test: “Revenues sufficient to cover debt service and direct expenses?” Could be partially underwritten by anchor tenants (local businesses and other institutions/coops)

83 Terrence P. McGarty, Lisbon February 13, 2003 Bond Coverage Example EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

84 Terrence P. McGarty, Lisbon February 13, 2003 Key Factors

85 Terrence P. McGarty, Lisbon February 13, 2003 User Growth

86 Terrence P. McGarty, Lisbon February 13, 2003 Revenue

87 Terrence P. McGarty, Lisbon February 13, 2003 OPEX

88 Terrence P. McGarty, Lisbon February 13, 2003 CAPEX

89 Terrence P. McGarty, Lisbon February 13, 2003 CAPEX per Sub

90 Terrence P. McGarty, Lisbon February 13, 2003 Financing Options

91 Terrence P. McGarty, Lisbon February 13, 2003 Municipal Project Town invokes State Constitutional Authority to initiate public works project Local municipality finances, builds, owns and operates broadband infrastructure Feasibility test: “Revenues sufficient to cover debt service and direct expenses?” Public works project: mission driven, not profit driven Partially underwritten by anchor tenants (local businesses)

92 Terrence P. McGarty, Lisbon February 13, 2003 Alternative Approach Use optimal combination of alternatives to achieve highest quality, lowest lead-time, most cost-effective establishment of local broadband infrastructure and services Example –Town finances 80% of network installation; sells 20% shares to interested parties (co-ops, businesses) –Town issues municipal bonds to finance project –Town builds, owns and operates network; sells unbundled network access to ISPs and IAPs –ISPs, IAPs provide voice, data and video services

93 Terrence P. McGarty, Lisbon February 13, 2003 Financing Options – Municipal Bonds Revenue Bonds –Tax-exempt municipal debt secured by revenues from projects General Obligation Bonds –Tax-exempt municipal debt secured by tax assessments and project earnings –Voter approval required Assessment Bonds –Municipal debt secured by special tax assessments on property forming collateral on bonds Mello-Roos Bonds –Municipal debt secured by tailored special tax assessments on assets forming collateral on bonds; greater flexibility Certificates of Participation (COPs) –Revenue COPs or Lease COPs (secured by district’s general fund) –No votes, property assessment required; greatest flexibility

94 Terrence P. McGarty, Lisbon February 13, 2003 Financials

95 Terrence P. McGarty, Lisbon February 13, 2003 Market Growth

96 Terrence P. McGarty, Lisbon February 13, 2003 Revenue

97 Terrence P. McGarty, Lisbon February 13, 2003 Cash Flow

98 Terrence P. McGarty, Lisbon February 13, 2003 Head Count

99 Terrence P. McGarty, Lisbon February 13, 2003 Competitive Analysis Some 50 municipal fiber installations in the U.S. and about 200 municipal broadband projects overall –Technology and operations is commodity –Financing, politics and regulatory issues are key barriers Most existing projects financed by internal cash of municipalities, cumbersome bank loans and some bonds Initial financing + full service support (political, legal, finance, technology, operations) is unique concept and key to successful implementation (Merton)

100 Terrence P. McGarty, Lisbon February 13, 2003 Key Business Projections

101 Terrence P. McGarty, Lisbon February 13, 2003 Fund Sources and Uses

102 Terrence P. McGarty, Lisbon February 13, 2003 Pro Forma Income Statement

103 Terrence P. McGarty, Lisbon February 13, 2003 PCNCF Sensitivity


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