1. 1 “From TV to Telco” Transformation of Cable Industry February 6, 2002 – Miami, FL Ahmet Ozalp VP, Strategic Marketing Narad Networks

2. 2 The Transformation started in Early 90’s Source: Morgan Stanley Total: ~$39 Billion Broadband revolution has been transforming cable industry rapidly since early 90s Cable Industry Revenues For most MSOs 50% of revenue growth is coming from non-video services Cable modem penetration in U.S. is leading DSL 2 to 1 Voice deployments has been lagging high-speed access, BUT momentum is building behind voice as the right technologies emerge

3. 3 U.S. Cable Telephony Deployments - Where are we today? Almost 15% of U.S. homes will have cable telephony available at the end of 2002 More than 2 Million new cable telephony subscribers within the last 4 years Penetration of upgraded homes > 16% Predominantly “Proprietary Circuit Switched” technology Source: Morgan Stanley

4. 4 Cable Headend CMTS Fiber Nodes HFC Access Network Class 5 Switch PSTN IP Backbone data voice HDT Router NIU CM Customer Premise How does it work ? Proprietary Circuit- Switched Telephony Architecture 6 MHz Channel 2 MHz => 24 Voice Circuits (TDM)

5. 5 Circuit Switched vs. VoIP Circuit SwitchedVoIP Benefits Faster time to market Proven technologies Low incremental CAPEX once in place Lower operating costs Lower overall CAPEX Conserves valuable spectrum Drawbacks Higher operating costs Higher CAPEX per customer Low spectrum efficiency Proprietary High upfront costs for new system Newer, less well-proven technology

6. 6 DOCSIS 1.0 DOCSIS 1.1 DOCSIS 2.0 Packet Cable 1.0 Pack et Cable 1.1 Pack et Cable 1.2  Best effort high speed access  Quality of Service (QoS) for voice support  Improved modulation to increase upstream bandwidth Standardization Efforts by CableLabs  Packet voice over DOCSIS in the access network  Support for Pure IP and Hybrid (GR-303) based approach in the Headend  Support for lifeline service  Interconnection of local packet cable zones via SIP protocol

7. 7 Cable Headend CMTS Fiber Nodes DOCSIS 1.1 or 2.0 MTA CM Customer Premise Class 5 Switch PSTN IP Backbone Hybrid Switched/Packet Architecture data voice GR-303 Gateway Router Packet Cable - “Line Control Signalling (LCS)” based on GR-303

8. 8 Cable Headend CMTS Optical MAN Fiber Nodes MTA CM Customer Premise Router CMS MGC Media Servers Media Gateway PSTN Reginal Headend or Data Center IP Backbone VoIP – Pure IP Architecture data voice DOCSIS 1.1 or 2.0 NCS: network based call signalling (MGCP) MTA: Multimedia Terminal Adapter CMS: Call Management Server (softswitch)

9. 9 Cable Telephony Economics  VoIP is expected to provide CAPEX savings of up to 40% for a new entrant  Savings $50 to $ 75 less for service providers with existing Class 5 infrastructure  Primary line monthly revenue per sub ~ $54 (AT&T) Revenue Payback in less than 12 months $600-700 $400-500 $525 - 600 Source: Morgan Stanley

10. 10 Primary or Secondary Line ? Primary LineSecondary Line  High revenue per subcriber  Higher cost and complexity Network or Battery power E911 and other requirements  Revenue per subscriber 1/3 of primary line (What happens then to local voice business?)  25% - 30% less CAPEX per sub  Smaller upfront CAPEX No need for major upgrade of the network powering infrastructure  MSOs with existing voice offerings (AT&T, Cox)  primary line service via hybrid-IP or circuit-switched solutions  New players (AOLTW, Comcast, Cablevision etc)  pure VoIP or Hybrid VoIP solutions and mostly secondary line services only

11. 11 Residential VoIP over Cable Projections (U.S.) Source: Kinetic Strategies 5% penetration 10% penetration

12. 12 What about selling Voice Services to Commercial Customers ? 66% 34% 52% 48% Source: US FCC  Commercial services market is significantly larger than the residential market  voice, VPN, internet access, T1/T3 connectivity and private lines, centrex, frame relay  The Cable plant passes 65% of businesses in U.S.  Specifically small and medium business market provides a major opportunity  underserved by the ILEC  too costly to serve with fiber, but easily reachable by cable

13. SMB Services Revenue Potential Services Revenue per Customer Monthly Revenue Source: IDC, Narad Analysis ~ $925 / month (10 – 20 employees) ~ $8000 / month (100 – 250 employees) $100 - $1000 $200 - $1500 $250 - $1500 $175 - $3500

14. 14  Cable plant historically designed for broadcast...  The upstream spectrum is limited to 5Mhz to 42Mhz, out of which roughly 20Mhz really usable (noise and interference issues)  Only QPSK or QAM 16 possible  Both voice and data services are competing for the same limited upstream bandwidth  As penetration grows, bandwidth per user drops.  DOCSIS 2.0 is expected to provide 3 x the bandwidth – good for residential, but not enough for business customers ! Cable’s Upstream Bandwidth

15. Number of Employees Source: AMI Research – 2001 Small Business Survey Cable Modem Penetration among SMBs Cable modem penetration falls as the company size and needs grow Issues: bandwidth QoS SLAs ability to support voice symmetric bandwidth Cable Modem Take Rates drops with Increasing SMB Size

16. 16 Cost Customer Size New Technologies are enriching the MSO’s Toolbox Very Small Business and SOHO Small and Medium Size Business (10 – 500 empl.) Large Business Fiber to Business Cable Modem (HFC) low Gig-E on HFC low - medium high – very high

17. Gigabit Ethernet on HFC – How does it work?  Extends the usable spectrum well above 2GHz by switching and regenerating the packets within the access network  Adds symmetrical 1Gb on trunks and 100Mb on drops to customers  Coexists with current services (analog and digital TV, cable modem)  ATM-like QoS built into standard Ethernet model  Services: Tiered symmetrical HSA(1Mb – 100Mb), VPN, T- 1/T-3, remote storage, centrex services Current Cable Spectrum in Use 5 42 50 750/860 1GHz 2.5Ghz (MHz) downstream upstream 6 Mhz....... New Spectrum Added 100 Mb Upstream and Downstream 1 Gb Upstream and Downstream

18. W W W W W W W W W W W... Gigabit Ethernet on HFC Deployment Example W Optical Network Distrbution Switch (ONDS) Network Distribution Switch (NDS) Subscriber Access Switch (SAS) Areas without businesses are untouched No headend equipment required beyond a standard GigE port

19. 19 Cable Headend Fiber Nodes Business Premise Optical Switch/ Router Service Examples: TDM over IP and IP PBX HFC with DICSIS and Gig-E Overlay N x T-1 BIU + IP MUX PBX Router 100BT IP T-1/T-3 Class 5 PSTN IP-Mux Service Delivery Platform Router BIU IP PBX CMS MGC Media Servers Media Gateway or IP 100BT

20. High Speed Access – beat the competition by performance and price – 1Mbps to 100Mbps dedicated, flexible bandwidth – Security and performance guarantee (SLA) Telephony – beat the competition by low price and/or quick delivery of services – Voice, Video Telephony, T1 PBX Access, IP PBX, Centrex VPN – site-to-site, telecommuter access Storage Services – remote file systems, data backup, disaster recovery It is all about Bundled Services

21. 21  Cable Industry is transforming...  Data (CM) is leading the way, but voice may be the next killer application  Early adopters (circuit-switched telephony) will continue towards a hybrid-IP telephony at least initially  With VoIP reaching maturity, more MSOs will get into voice business  There will be a mix of primary and secondary line offerings  New technologies such as Gig-E over HFC will open up new opportunities in the business services (VoIP and other IP services)  In the next 5 years we may witness a transformation from “TV service provider” to a “super-carrier” Summary

22. 22 Questions ?

23. P_SMBBusinessCase_v3.3Narad Networks - Proprietary and Confidential