1. Telephony: Technology and Business Models in Creative Destruction Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

2. Goodbye to the “Old Regime” of Telecoms in the US... 1.1 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE RBOCs e.g., Bell Atlantic Fringe Players AT&T Carriers Long-Distance MCI Local Carriers Structure Dominated by a Heavily- “Natural Monopoly” Becomes... Telecommunications Industry Regulated, “End-to-End” and

3. Goodbye to the “Old Regime” of Telecoms in the US... 1.2 Telecommunications Industry Segments Separated: By Regulation By Selective Competitive Entry, Which Then Becomes… Broadcasters CBS Fox ABC/ Disney NBC Local Carriers RBOCs e.g.Bell Atlantic RCN Long-Distance Carriers Telco Equipment Suppliers Cable System Operators Time-Warner MediaOne AT&TSprint MCI/WorlCom Cisco Lucent Williams Motorola POST “BREAK-UP” TELECOMMUNICATIONS INDUSTRY SEGMENTS

4. Broadcasters CBS Fox ABC/ Disney NBC Local Carriers Bell Atlantic RCN Long-Distance Carriers Telco Equipment Suppliers Cable System Operators Time-Warner MediaOne AT&TSprint MCI/WorlCom Cisco Lucent Williams...A Single Super-Industry –Call It “Digispace”– With Few Intra- Industry Barriers to Entry, Cable, Wireless and Internet-Based Technologies Enabling Entry by Start-Ups, Industry Incumbents And Firms From Other IndustriesThought Previously to Be “Unrelated.” Excel MediaOne/AT&T MCI Zephyr Cisco Lucent World Com Bell Atlantic/GTE/Verizon RCN Sprint ABC/ Disney Fox CBS Time-Warner Qwest Level3 Motorola Microsoft Williams Enron DIGISPACE Hello to an Emerging “New Regime” for Telecoms in the US... 1.3 Telecommunications Industry Segments Separated: By Regulation By Selective Competitive Entry POST “BREAK-UP” TELECOMMUNICATIONS INDUSTRY SEGMENTS

5. And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.4 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE

6. And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.5 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Corporate Acquisitions Since Break-Up: National Cash Register (Computers, Equipment) McCaw Cellular (Cellular Technology) TCI (Cable Services) Media-One (Cable Services) New York Local Telephone Services (CLEC) Tracking Stock for Wireless Group (Wireless) DIGISPACE AT&T Digi-Platfirm

7. And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.6 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Corporate Acquisitions Since Break-Up: National Cash Register (Computers, Equipment) McCaw Cellular (Cellular Technology) TCI (Cable Services) Media-One (Cable/Internet Services) New York Local Telephone Services (CLEC) Tracking Stock for Wireless Group (Wireless) Spin-Off of Broadband Services to Comcast DIGISPACE AT&T Digi-Platfirm AOL/ Time-Warner Digi-Contentcorp But AT&T is Not Alone..

8. And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.7 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Corporate Acquisitions Since Break-Up: National Cash Register (Computers, Equipment) McCaw Cellular (Cellular Technology) TCI (Cable Services) Media-One (Cable/Internet Services) New York Local Telephone Services (CLEC) Tracking Stock for Wireless Group (Wireless) DIGISPACE AT&T Digi-Platfirm1 AOL/ Time-Warner Digi-Contentcorp But AT&T is Not Alone.. Verizon Digi-Platfirm2

9. And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.8 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers RBOCs Became “Baby Bells” With De Jure and De Facto Protection From Would-Be Rivals What Happened to These Babies? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE

10. And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.9 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers RBOCs Became “Baby Bells” With De Jure and De Facto Protection From Would-Be Rivals What Happened to These Babies? TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE Verizon’s Story Is Illustrative: Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But… DIGISPACE Verizon Digi-Platfirm2

11. And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.10 RBOCs e.g., Bell Atlantic Fringe Players Local Carriers AT&T Long-Distance Carriers MCI Sprint RBOCs e.g., Bell Atlantic Fringe Players Local Carriers RBOCs Became “Baby Bells” With De Jure and De Facto Protection From Would-Be Rivals What Happened to These Babies? COMPETITION: First Small (e.g., Zephyr) Then Large (AT&T, Comcast) TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE Verizon’s Story Is Illustrative: Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But… Still Reliant on “Legacy” Telco Technology Not “Next Generation” Internet, Wireless Firms Forced by 1996 Act to Allow/Encourage Entry Will LDS Market Liberalization Save Verizon? DIGISPACE Verizon Digi-Platfirm2 Zephyr Communications (Niche Internet Telephony For USBusines: 1/9 Verizon’s Unit Operating Costs Smaller, More Efficient Rivals

12. And the “Ancien Regime” of Telecoms in Europe... 1.11 In the 1980’s, Several Telecoms Were Still Organized Like Political Agencies/Ministries; Some Had Become Corporatized SOEs; A Few Had Been Privatized; None Faced Real Competition. 20 Years On… Italy Telecom Italia France France Telecom Spain Britain Germany Deustche Telekom Telefonica British Telecom EVEN MORE STAID, AND STATE-DOMINATED THAN IN THE US Mercury

13. Has Been Replaced by Telecoms Industry Revolutions... 1.12 In the 1980’s, Several Telecoms Were Still Organized Like Political Agencies/Ministries; Some Had Become Corporatized SOEs; A Few Had Been Privatized; None Faced Real Competition. 20 Years On… Meaningful Privatization, Liberalization Profitability Focus Assertive Corporate Governance Corporate Reorganization, Spin-Off Organizational, Technological Experimentation (Alliances, WAP, GSM) Italy Telecom Italia France France Telecom Spain Germany Deustche Telekom Telefonica MORE VARIED EXPERIMENTATION, MORE PROFOUND RATE OF STRUCTURAL CHANGE COMPARED TO US Britain British Telecom Mercury Smaller National Wireless Firms Larger Regional Wireless Firms Attempted Alliances Attempted Mergers

14. And the Retreat from the “Commanding Telecom Heights” in Emerging Markets... 1.13 In the 1990’s, Emerging-Market Telecoms Began a (Sometimes Forced) Transformation from Political Agency (and Often Dominant Political Tool) to: Corporatized State Enterprise (e.g., Turk Telekom) Privatized Company (e.g., South Korea Telecom) Foreign-Owned and Globally- Integrated Telecom (e.g., Telecom Argentina) Turkey Turk Telekom Argentina Telecom Argentina South Korea Singapore Brazil Telebras South Korea Telecom Singtel AND THE RETREAT FROM THE “COMMANDING HEIGHTS” IN EMERGING MARKETS…

15. /AT&T Enron Excel MediaOne MCI-Worldcom Zephyr Cisco Lucent Bell Atlantic/GTE/Verizon RCN Sprint Disney Fox CBS AOL-Time-Warner Qwest Level3 Motorola Microsoft Williams DIGISPACE BOOM AND BUST Creative Destruction or Just Destruction in the US... 1.14 Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: AT&T Enron

16. /AT&T Enron Excel MediaOne MCI-Worldcom Zephyr Cisco Lucent Bell Atlantic/GTE/Verizon RCN Sprint Disney Fox CBS AOL-Time-Warner Qwest Level3 Motorola Microsoft Williams DIGISPACE BOOM AND BUST Creative Destruction or Just Destruction in the US... 1.15 Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: AT&T Enron From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. Former Baby Bell Lost 93.7% in Stock Value SinceMarch 2000

17. /AT&T Enron Excel MediaOne MCI-Worldcom Zephyr Cisco Lucent Bell Atlantic/GTE/Verizon RCN Sprint Disney Fox CBS AOL-Time-Warner Qwest Level3 Motorola Microsoft Williams DIGISPACE BOOM AND BUST Creative Destruction or Just Destruction in the US... 1.16 Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: AT&T Enron From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. Former Baby Bell Lost 93.7% in Stock Value SinceMarch 2000

18. /AT&T Enron Excel MediaOne MCI-Worldcom Zephyr Cisco Lucent Bell Atlantic/GTE/Verizon RCN Sprint Disney Fox CBS AOL-Time-Warner Qwest Level3 Motorola Microsoft Williams DIGISPACE BOOM AND BUST Creative Destruction or Just Destruction in the US... 1.17 Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: Post 1996 Telecom Act Bubble: How Did “Good” Policy Go Bad? Why Did the Bubble Burst? How Long Will the Bust Last? AT&T Enron From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. Former Baby Bell Lost 93.7% in Stock Value SinceMarch 2000

19. /AT&T Enron Excel MediaOne MCI-Worldcom Zephyr Cisco Lucent Bell Atlantic/GTE/Verizon RCN Sprint Disney Fox CBS AOL-Time-Warner Qwest Level3 Motorola Microsoft Williams DIGISPACE BOOM AND BUST Creative Destruction or Just Destruction in the US... 1.18 Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: Post 1996 Telecom Act Bubble: How Did “Good” Policy Go Bad? Why Did the Bubble Burst? How Long Will the Bust Last? Versus Longer-Term Structural Change: Did Telecoms Become More “Dynamically Competitive”? If So, What Drove This Change: Deregulation, Technology, Globalization and or Competition. AT&T Enron From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. Former Baby Bell Lost 93.7% in Stock Value SinceMarch 2000

20. And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.19 Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Italy Telecom Italia France Telecom Spain Britain Germany Deustche Telekom Telefonica British Telecom Mercury Turkey Turk Telekom Argentina Telecom Argentina South Korea Singapore Brazil Telebras South Korea Telecom Singtel EMERGING-MARKET COUNTRIES

21. And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.20 Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Italy Telecom Italia France Telecom Spain Britain Germany Deustche Telekom Telefonica British Telecom Mercury Turkey Turk Telekom Argentina Telecom Argentina South Korea Singapore Brazil Telebras South Korea Telecom Singtel EMERGING-MARKET COUNTRIES Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. Prepared for Privatization Three Times in Last 7Years, Each Time Withdrawn Prior to OfferingDue to Market or Government Instability.

22. And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.21 Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Italy Telecom Italia France Telecom Spain Britain Germany Deustche Telekom Telefonica British Telecom Mercury Turkey Turk Telekom Argentina Telecom Argentina South Korea Singapore Brazil Telebras South Korea Telecom Singtel Telecom Privatization Bubble and Bust: Why Didn’t Self-Interested Shareholders Stop the “Madness” of Technological, Organizational Acqui- sitions? When Will Global Capital Flow Again to Telecoms ? EMERGING-MARKET COUNTRIES Versus: Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. Prepared for Privatization Three Times in Last 7Years, Each Time Withdrawn Prior to OfferingDue to Market or Government Instability.

23. And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.22 Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Italy Telecom Italia France Telecom Spain Britain Germany Deustche Telekom Telefonica British Telecom Mercury Turkey Turk Telekom Argentina Telecom Argentina South Korea Singapore Brazil Telebras South Korea Telecom Singtel Telecom Privatization Bubble and Bust: Why Didn’t Self-Interested Shareholders Stop the “Madness” of Technological, Organizational Acqui- sitions? When Will Global Capital Flow Again to Telecoms ? EMERGING-MARKET COUNTRIES Versus: Longer-Term Institutional Failing: What :Post-Privatization Role Should the State Have Played? What Should Privatizing Telecoms Do If State’s Role Isn’t Played Well? Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. Prepared for Privatization Three Times in Last 7Years, Each Time Withdrawn Prior to OfferingDue to Market or Government Instability.

24. 1.23  Joseph Schumpeter Meets the 21rst Century (or at Least the 1980s and 1990s): “Dynamic Competition” and Innovation in US Telecoms Was It a Bubble or Did Something Fundamental Change in US Telecoms During the 1980s and 1990s?  The Evidence on Long-Term Change in US Telecom Stability  How Bubbles Are Blown Up and Burst by Exuberant First-Movers Creative Destruction in Telecoms Globally: Understanding Basic Concepts, Analyzing Current Debates  Entrepreneurs Meet the 21rst Century (or at Least the 2000s): Defining Basic Telephony Business-Model Drivers: Defining Alternative Telecom-Internet Service Provider (“TISP”) Models:  Developing 3-Dimensional TISP Model Space; Mapping Actual and Potential TISP Players in Portugal  What Are the Public Policy and Business Strategy Implications?

25. 1.24 How This Fits In With Bigger Picture  Organized into Four Sessions Today (Morning, March 14): This Session: Creative Destruction in Global Telecoms, Business Model Responses I (Paul Vaaler) Second Session Later This Morning: Creative Destruction in Global Telecoms, Business Model Responses II (Lee McKnight) Third Session After Lunch: Executive Presentations and Student Project Presentations Fourth Session Later This Afternoon: Creative Destruction in Global Telecoms, Business Model Responses, Introduction to ANT Case Simulation (Lee McKnight, Burkhard Schrage, Paul Vaaler)  And Two Sessions Tomorrow (Morning, Mach 15): Tomorrow’s First Session: Simulated Negotiated Equity Offering to Foreign Investors Interested in Privatizing State-Owned Telecoms: ANT. Post-Simulation Debriefing, Review and Wrap-Up.

26. Telephony: Technology and Business Models in Creative Destruction US Telecoms in the 1990s Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

27. Two Perspectives on the (Creative) Destructive Processes in US Telecoms During the 1980s and 1990s  It Was a Bubble in the Late 1990s…That Burst in 2000s Nothing Really Deep About It: US Telecoms Are Dutch Tulips of the 1990s. Strong Economy, 1996 Telecom Act Mandating Competitive Entry in Long- Distance and Local Exchange Markets, Internet and Cable Telephony, Investor Irrational Exuberance.  No, Something Deeper More Gradual Was/Is Going On At Least Since Deregulation Began in the 1980s (1984), Telecom Performance Instability (Dynamism) Was Increasing.  Dynamic Competition for Markets (Technology-Standards Based) vrs. Static Competition Within Markets (Price-Output Based) Telecoms with Formerly Predictable Strategies and Performance Were Forced to Change Strategies, Exploit Temporary Advantages/Mitigate Temporary Disadvantages More Often. This Implies Greater Performance Instability:  Last Year’s Profitability Decreasingly Predictable of This Year’s Profitability  Rates of Industry Exit (Mortality) Increasing  Likelihood of Losing Position of Market Leadership Increasing 2.1

28. Which of These Two Perspectives Do US Telecoms Researchers and Executives Prefer?  Most Prefer the #2 (Deeper, Gradual Processes) Competition in the American economy has fundamentally changed over the past few decades from static to dynamic (Thomas, 1996) Strategic decision makers in the 1990s have seen both the emergence of a hypercompetitive global marketplace… (Johnson & Greening, 1996)  But a Few Brave Souls Argued for #1 (Bubble) Is it Time to Wake Up and Smell the Tulips –as in the Infamous Dutch Tulip Mania? …Tulips are Pretty, but of Limited Utility as a Store of Wealth. Sort of like Bits on a Network of Networks? Might Many…Business Models be Built from Similarly Misplaced Conceptions of Value? (McKnight, 2001) 2.2  Let’s Consider Each Argument Bubbles First…

29. Creative Destruction in US Telecoms: A Bubble Blown and Then Burst: 1996-2003  Speculative Bubbles Often Form for Rational (Unspeculative) Reasons New Markets Are Emerging Many New Market Players Have Recently Entered Accepted Market Strategy Is to Compete for “The Future” as a “First-Mover,” Taking Advantage of Temporal-Based Factors to Gain and Sustain Superior Profitability Over Time First Movers May Not Have Created the New Market, but They Are the First to Exploit Through Major Investment, Product Commercialization.  Cisco Did Not Invent Router Technology But They Mass Produced It  Voice Stream Did Not Invent GSM-Based Wireless Telephony But Were the First Large- Scale GSM Service Provider 2.3

30. Environmental Opportunity First Mover Resources Capabilities Competitive Strategy Late Entrant Resources Capabilites Competitive Strategy First Mover Positional Advantages CostDifferentiation Learning Curve Behavioral Reputation Switching Cost Scale Economies Pre-emption Legal Non-Legal Late Entrant Advantages imitation costs free-rider effects shifting industrial and techno- logical factors learning from first mover Overall Magnitude of competitive Advantage First Mover Performance -Profits-Market Share -Pricing-Other + +++ - +- Understanding First Mover Advantages A Conceptual Framework 2.4

31. Environmental Opportunity First Mover Resources Capabilities Competitive Strategy Late Entrant Resources Capabilites Competitive Strategy First Mover Positional Advantages CostDifferentiation Learning Curve Behavioral Reputation Switching Cost Scale Economies Pre-emption Legal Non-Legal Late Entrant Advantages imitation costs free-rider effects shifting industrial and techno- logical factors learning from first mover Overall Magnitude of competitive Advantage First Mover Performance -Profits-Market Share -Pricing-Other + +++ - +- Understanding First Mover Advantages A Conceptual Framework 2.5 Post-1996, Many Telecoms Saw First-Mover Opportunities: Mandated More Local, LD Entry, Competition New Internet, Wireless Technologies, “Winner-Take-Most” Rules Cheap Capital Fast-Growing Economy Hubris

32. Environmental Opportunity First Mover Resources Capabilities Competitive Strategy Late Entrant Resources Capabilites Competitive Strategy First Mover Positional Advantages CostDifferentiation Learning Curve Behavioral Reputation Switching Cost Scale Economies Pre-emption Legal Non-Legal Late Entrant Advantages imitation costs free-rider effects shifting industrial and techno- logical factors learning from first mover Overall Magnitude of competitive Advantage First Mover Performance -Profits-Market Share -Pricing-Other + +++ - +- Understanding First Mover Advantages A Conceptual Framework 2.6 Post-1996, Many Telecoms Saw First-Mover Opportunities: Be the First Nat’l Microwave (MCI), Fiber (Sprint), Satellite (Iridium) Network Be the First Global ISP-Media Firm (AOL-Time-Warner)

33. But What If There Are Many First-Movers? The Hold or Fold Game US Long-Distance Companies in the 1990s. US Wireless Companies in the 1990s. US ISPs in the 1990s. - Producing Similar Services -Invested (Heavily) in Networks, Some with Incompatible Standards. Fog of War - Establishing Standards - Guessing Your Rivals Intent - Reputation for Toughness 2.7 Rules of Game: Fight for $100 Billion Market (Wireless) Costs $10 Billion to Stay in Annually Each Year You Hold (Pay $10 Billion) or Fold (Leave). Rules of Game: If You Both Hold, You Both Lose $10 Billion If You Both Fold, You Both Lose $0 Billion If One Holds and the Other Folds, Folder Gets $0, Holder Pays $10 But Gets $100!

34. 2.8 Creative Destruction in US Telecoms: A Bubble Blown and Then Burst: 1996-2003  Speculative Bubbles Often Form for Rational (Unspeculative) Reasons Contractions, Bankruptcies and M&A Are Natural Results of Hold or Fold Game in US Telecoms During 1990s. Managerial Implications: Get In Line But Don’t Go First…  Experimentation with (Rather Than Major Commitment to) New Markets  Wait for the Bubble to Burst and Acquire Firms/Markets At Bargain Prices  “Late-Mover” Advantages (“Last Man Standing” Strategy). Policy Implications: State Has A Role in Encouraging Competition But Not Market Mania.  More Transparent Accounting Practices  Better Corporate Governance  More Deliberate Deregulation

35. But What About Argument #2: Deeper, More Gradual Changes in 1980s and 1990s?  Overall Research Proposition: As Hypercompetitive Forces Developed in the 1980s and 1990s, Market Stability for Telecoms Decreased Hypercompetitive Forces in the 1980s and 1990s: Internationalization of R&D, Technology Cross-Licensing, Industry Deregulation and Liberalization, Trade Liberalization, Professionalization of Technology Management and Policy- Making  Hypotheses for Testing: Indicia of Decreasing Stability in Telecoms Performance During 1980s and 1990s Persistence of Abnormal (Higher-Than-Average) Telecom Returns Should Be Decreasing Persistence of Market (Share) Leadership Should Be Decreasing Rates of Exit (Mortality) from Telecom Industries Should Be Increasing 2.9

36. Evidence Lacking: Nothing Really Changed for Telecoms from 1978-1997 (Pre-Bubble)  Analyzing the Data from Year-to-Year, We Detected No Statistically Significant Trends Either in the Decay Rate of Abnormal Business Returns or in Business Mortality Rate  Hypercompetitive Forces Appear to Be Increasing then Decreasing Over Time: Fluctuation 2.10

37. Evidence Lacking: Nothing Really Changed for Telecoms from 1978-1997 (Pre-Bubble)  Analyzing the Data from Year-to-Year, We Detected No Statistically Significant Trend in the Persistence of Market Share Leadership  Forces of Dynamic Competition Appear to Be Increasing then Decreasing Over Time: Fluctuation 2.11

38. Two Perspectives on the (Creative) Destructive Processes in US Telecoms During the 1980s and 1990s  And the Winner Is…It Probably Was “Just” a Bubble in the Late 1990s…That Burst in 2000s Nothing Really Deep About It: US Telecoms Are Dutch Tulips of the 1990s. Still Hurts Deeply (But Perhaps Not As Durably). Next Economic Cycle Will Light Up Dark Fiber, Restore Venture Capital Markets, But Fewer Telecoms Will Be There (e.g., 6 Wireless Companies Now, But Only 3 Are Likely to Survive).  And the “Deeper, More Gradual” Change in Telecom Dynamic Competition? Largely a Figment of Less Well-Informed, Biased Researchers and Executives Competition in Telephony in Late 1990s Was No More (or No Less) Difficult Than in the Late 1970s. The Late 2000s May Look Much Like the Late 1980s (“That ’80s Show”). 2.12

39. Telephony: Technology and Business Models in Creative Destruction Telecom Business Models for the 2000s Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

40. Introduction  How Do We Describe the Current State and Near-Term Trajectory of Portuguese Internet Service Provider (“ISP”) and Traditional Telecommunications Service Provider (“Telco”) Industries? *From State Agency to Private Monopoly to Monopolistic Competition to Further Liberalization and now to…  A Range of Licensed Businesses. Some Just Telecom, Some Just ISP, Some Both. Dominated by PT. With Several “Upstart” Competitors (e.g., Oni, Bragatel) and Many Other (Very) Small, Often Niche-Playing Carriers, Subscriber TV (“STV”), ISPs. * Industries with Quite Differentiated Segments, Business Models. *Fluid State of Affairs: Several Pending Licensees and “Stealth” Competitors Looking for Capital. *Emerging Technologies, Evolving Regulatory Policies and Customer Preferences, Capital Market “Volatility,” Particularly in Countries “on the Cusp” of Industrialized and Emerging-Market Status Like Portugal.  Better to Describe Current Trends, Key Variables and Likely Near-Term Scenarios and Industry Sector Segments Than Engage in Conclusory Industry Soothsaying. 3.1

41. AT&T 2001 (Cable, ISP, Nat’l/Int’l Telecom Verizon SBC (With Williams, Concentric) AOL, MSN, Net-to-Phone Intel Backbone POP Access Value-Added Services Hosting Applications Services ISP Telephony C&STV Org., Tech., Inst., Drivers Pooling Telecom and ISP Industries Common Value Chain Links Common Production Technology Common Customers Common Regulatory Institutions Illustrations: Voice Over IP (“VoIP”) Telephony AT&T Acquisitions/Diversification Current Trend in US: Merging of ISP Telecom Industries into “TISP” Sector 3.2

42. The Portuguese TISP Sector: Less Complex But Developing Faster? PT ONI, Jaztel, Bragatel, Novis Backbone POP Access Value-Added Services Hosting Applications Services ISP Telephony C&S TV Org., Tech., Inst., Drivers Pooling Telecom and ISP Industries Common Value Chain Links Common Production Technology Common Customers Common Regulatory Institutions Emerging-Market Factors Reinforcing Trends Lower GDP Per Capita Lower Stock Market Capitalization/GDP Developing Institutional Framework Thin External Capital Market, Greater Reliance on FDI/Internal Capital Sources Niche Players 3.3

43. Emerging Customer Preferences TISP Customer Preferences Local ConnectionsEnd-to-End Network Solutions Simple Inter-Complex Connected SolutionsOn-Net Solutions Key Variable Drivers: Customer Buying Behavior Solution Complexity On-Net vs. Off-Net Benefits Key Near-Term Variables: TISP Customer and Supplier Preferences 3.4

44. Emerging Customer Preferences Emerging TISP Provider Preferences TISP Industry Structure TISP Customer Preferences Local ConnectionsEnd-to-End Network Solutions Simple Inter-Complex Connected SolutionsOn-Net Solutions Key Variable Drivers: Customer Buying Behavior Solution Complexity On-Net vs. Off-Net Benefits Key Variable Drivers: Standards Adoption Interconnection of Networks & Systems Basis of Competition (e.g., Scale vs. Customer Control) Vertically Integrated Business Models (Integrated Offerings and Operations) Separate and Distinct Horizontal Businesses (Separate Organizations, Package Offerings) Key Near-Term Variables: TISP Customer and Supplier Preferences 3.5

45. Vertical Market Integration Vertical Market Stratification INTEGRATED SERVICES INTEGRATED SERVICES SEPARATE OPERATIONS SEPARATE BASIC TECHNOLOGY PLATFORMS SOLUTION 1SOLUTION 2 CONNECTED BASIC TECHNOLOGY PLATFORM Integrated Organzation Inter- Organi- zational Fragmentation of Nat’l/Int’l Players on Vertically-Oriented End-to-End Solutions Providers Local Players Continuing to Expand Locally Near-Term Likely Business Models : TISP (Inter-) Organizational Approaches 3.6

46. Vertical Market Integration Vertical Market Stratification Horizontal Market Stratification (Interconnection) Horizontal Market Integration INTEGRATED SERVICES INTEGRATED SERVICES SEPARATE OPERATIONS SEPARATE BASIC TECHNOLOGY PLATFORMS OPERATIONS SOLUTIONS SERVICES & TECHNOLOGY BASIC PLATFORM VERTICALS SOLUTION 1SOLUTION 2 CONNECTED BASIC TECHNOLOGY PLATFORM BASIC TECHNOLOGY PLATFORM CONNECTED SOLUTION CONNECTED SOLUTION Integrated Organzation Integrated Organization Inter- Organi- zational Inter- Organi- zational Fragmentation of Nat’l/Int’l Players on Vertically-Oriented End-to-End Solutions Providers Nat’l/Int’l Players Becoming Vertically-Oriented End-to-End Solutions Providers Providers Focusing on One Step in the TISP Sector Value Chain Local Players Continuing to Expand Locally Near-Term Likely Business Models : TISP (Inter-) Organizational Approaches 3.7

47. HORIZONTAL MARKET SCOPE National/ Int’l Local (Stratified) De-integrated (Stratified) Vertically Integrated VERTICAL MARKET SCOPE 12 34 1. Mass Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Mass End-Users Supplemented by Interconnection to Outside (Locally) Networks and Services. 2. Mass Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Mass End-Users Located Nationally or Internationally. 3. Mass Device-Local User Input Players : Single Technological Device and or Local Mass End-User Suppliers to TISPs. 4. Mass Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Mass End-User Suppliers to TISPs. PT OniBragatel Novis Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs 3.8

48. END-USER MARKET SCOPE Niche-Users Mass-Users HORIZONTAL MARKET SCOPE National/ Int’l Local (Stratified) De-integrated (Stratified) Vertically Integrated VERTICAL MARKET SCOPE 12 34 6 8 5 7 1. Mass Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Mass End-Users Supplemented by Interconnection to Outside (Locally) Networks and Services. 2. Mass Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Mass End-Users Located Nationally or Internationally. 3. Mass Device-Local User Input Players : Single Technological Device and or Local Mass End-User Suppliers to TISPs. 4. Mass Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Mass End-User Suppliers to TISPs. 5. Niche Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Niche End-Users Supplemented by Interconnection to Local and Outside Networks and Services. 6. Niche Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Niche End-Users Located Nationally or Internationally. 7. Niche Device-Local User Input Players: Integrated Technological Platform and or National/Int’l Niche End-User Suppliers to TISPs. 8. Niche Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Niche End-User Suppliers to TISPs. PT Onitelecom Local Internet Subscriber Group Jazztel Oni National Network For Enterprises Only Bragatel Novis Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs Evolution Experimentation Demonstration 3.9

49. END-USER MARKET SCOPE Niche-Users Mass-Users HORIZONTAL MARKET SCOPE National/ Int’l Local (Stratified) De-integrated (Stratified) Vertically Integrated VERTICAL MARKET SCOPE 12 34 6 8 5 7 1. Policy: Near-Term Challenges in TISP Sector: Promoting Experimentation w/ Different TISP Organizational Forms, Technologies, Customer Groupings. Encourage Entry in All Segments (Low Entry/Exit Barriers) Inter-Connection Rates Sustaining Entry in All Segments. For Non-Dominant TISPs Freedom to Price, Package Freely. As Facilities Creation Targets Are Met, Less Restriction of Dom- inant TISP Carriers. Simple, “Rural Reinvestment Licensure Requirement.” “Use It or Lose It” Rule on Licensing and Spectrum Allocation. Light-Handed, Pro-Competitive (Contestable) Reg Guidance. 2. Policy: Medium-Term Challenges in TISP Sector: Continued Regulatory Reform to Match Technological Trends. Collapse Licenses into Two: Mobile and TISP, One TISP License? Mass End-User Regulatory Protection. PT Onitelecom Local Internet Subscriber Group Jazztel Oni National Network For Enterprises Only Bragatel Novis Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs Evolution Experimentation Demonstration 3.10

50. END-USER MARKET SCOPE Niche-Users Mass-Users HORIZONTAL MARKET SCOPE National/ Int’l Local (Stratified) De-integrated (Stratified) Vertically Integrated VERTICAL MARKET SCOPE 12 34 6 8 5 7 1. Policy: Near-Term Challenges in TISP Sector: Promoting Experimentation w/ Different TISP Organizational Forms, Technologies, Customer Groupings. Encourage Entry in All Segments (Low Entry/Exit Barriers) Inter-Connection Rates Sustaining Entry in All Segments. For Non-Dominant TISPs Freedom to Price, Package Freely. As Facilities Creation Targets Are Met, Less Restriction of Dom- inant TISP Carriers. Simple, “Rural Reinvestment Licensure Requirement.” “Use It or Lose It” Rule on Licensing and Spectrum Allocation. Light-Handed, Pro-Competitive (Contestable) Reg Guidance. 2. Policy: Medium-Term Challenges in TISP Sector: Continued Regulatory Reform to Match Technological Trends. Collapse Licenses into Two: Mobile and TISP, One TISP License? Mass End-User Regulatory Protection. 3.Strategy: Near-Term Challenges in TISP Sector: Segment 2 (PT): Tremendous Customer Control-Stakeholder Relationships, TISP Service Bundling for Multiple Niches. Segment 4 (Oni?): TISP Service Bundling, Including VoIP, for Multiple Niches; Increasing Vertical Market Scope Through Proprietary Facilities Build-Out or Merger With Existing Facilities Network Other Segments: Do (Actually Do) What You Do Best! PT Onitelecom Local Internet Subscriber Group Jazztel Oni National Network For Enterprises Only Bragatel Novis Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs Evolution Experimentation Demonstration 3.11 4. Strategy: Near-Term Challenges in TISP Sector: Permitting Easy Movement Among 8 Sectors (Flexibility). Standardized Technology Platforms Complementary Customer Groups (Avoiding the Hold or Fold Game).

51. Conclusion of the Presentation  Reviewing this Session: Point 1: Creative Destruction Means New Telecom Business Models Point 2: What’s Driving the Change in the US Is Less Profound Than We May Think or Argue at First (Technologies, Bubbles). Point 3: Experimentation: Different Types of Telecom (TISP) Business Models Are Potentially Successful, Even in Today’s Climate.  “Application” Session Tomorrow: Saturday: Simulated Negotiated Equity Offering to Foreign Investors Interested in Privatizing State-Owned Telecoms: Anatolia National Telecom. Teaching Aim: Give You the Opportunity to Apply Creative Destruction Ideas to Valuation, Management and Policy Issues Associated with Telecoms Enterprise Privatization in Emerging Economies 3.12