1. - Telecom Services Equity Research Broadband, Economic Growth and the Financial Crisis January 30 th, 2009 Christopher C. King 443-224-1329 ccking@stifel.com

2. Current Broadband Statistics Broadband currently available to 85%-90% of homes nationwide 95% of cable plant has access to broadband According to latest Pew Internet & American Life Survey, only 55% of households subscribe to broadband Thus, approximately 30% of households have access and choose not to pay for broadband According to the survey, 33% of those that do not have broadband access say they are simply not interested Only 12% of those that do not use the Internet at all say it is because they don’t have access

3. Broadband Subscriber Growth Slowing Source: Company data, Stifel Nicolaus estimates

4. Grants in “Unserved Areas” More coordinated stimulus likely required Should include both tax credits and ongoing support mechanisms Why?? Case Studies— CenturyTel October 2007 FCC Ex Parte Filing Rosendale, Missouri Gorin, Missouri

5. Rosendale, Missouri 288 Access Lines (88% residential; 12% small business) 10 miles of fiber will have to be trenched, attached to poles ($330,000); DSLAM ($6,000) and additional electronics ($14,000) purchased Transport costs of $1,200 per month will be incurred for T-1’s to backhaul traffic to Internet node Build will not cover everyone in the exchange because slightly less than half of households live well beyond 18,000 feet from central office Assuming a 40% take rate over 5 years—yields 40 DSL customers at end of year 5 DSL priced at $35 declining to $28 per month over 5 years Retail revenues from DSL would be $48,000 over 5 years while recurring operating expenses would be $93,300 (excluding the $350,000 in capital costs) Broadband rates would have to average $90 per month just for the carrier to break-even on operating expenses—not allowing for any return and ignoring capital commitments

6. Gorin, Missouri 149 access lines (77% residential and 23% small business) A new $6,000 DSLAM would need to be deployed No additional fiber transport required, but 2 T-1’s would need to be purchased from RBOC at a cost of $1,640 per month to backhaul data traffic to Internet node Initial build will cover 76% of the market or 113 access lines Over five years, assume 36 DSL customers and pricing declining from $35 to $28 per month Broadband revenues of $43,400 over five years versus operating expenses of $117,600 Broadband rates would need to be priced at an average of $129 per month over the five-year period for company to break-even on an expense basis—ignoring capital outlays and not allowing for a return on investment

7. More RLEC Economics A quick survey of 6 RLECs suggest an average cost of between $2,000 and $3,000 to provide DSL service to an unserved customer Incremental investment is required to upgrade existing infrastructure by extending fiber into access plant to reduce loop lengths and installing broadband- enabling electronics into the network Increasing downstream speeds to 6 Mbps appears to approximately double the per- home investment costs

8. RLEC Conclusion Current plans unlikely to do much to stimulate private-sector investment in unserved areas Comprehensive support structure needed Capital commitment support Grants Operational Expense support Tax credits to offset middle-mile investment Potential re-regulation of special access

9. Tax Credits ITIF (Information Technology and Innovation Foundation) has suggested tax credits of 60% in unserved areas and at least 35% to promote additional advanced broadband deployment Capital spending for telecom is expected to fall between 10%-15% in 2009 versus 2008 levels The CWA (Communications Workers of America) has recommended that tax credit programs assume that capital spending above 85% of 2008 levels be eligible for tax credits Companies such as Clearwire and Qwest are unlikely to benefit at all from tax credits, given their current financial situations

10. Other Issues Underserved Areas High-speed thresholds in current proposals (45/15 Mbps) will likely only benefit Verizon’s FiOS and possibly cable’s DOCSIS 3.0 platforms today Wireless broadband plans could benefit Clearwire-WiMax Verizon/AT&T LTE

11. Two Significant Potential Issues in Senate Bill Draft language appears to suggest restricting company participation to public- private partnerships Significant complication which will likely disincent investment, in our view Failed Municipal WiFi Model Definition of “underserved area” to include areas with only one broadband provider Would appear to artificially incent competition against incumbent broadband provider Failed UNE-P Model

12. Conclusion Solutions must address both the initial investment costs of the network and the ongoing operating deficits in “unserved” areas Could include substantial tax credits for capital expenditures that would also include “middle mile” investment USF-like Lifeline and Link-Up programs for advanced services that would aid low-income families by relieving them of monthly fees Support mechanisms that not only include grants for broadband deployment in rural areas, but also ongoing support that would help offset material operating expenses

13. Conclusion We believe significant tax credits for broadband deployment is likely the most effective stimulus tool at policymaker’s disposal Tax incentives are available on day one after legislation is signed; easy for companies to implement and normally have a quick impact on investment decisions Tax credits also leverage substantial private investment by companies that have the capability to deploy advanced networks and generally come with very few strings, giving companies ample flexibility—particularly important in a period of economic uncertainty

14. Conclusion We are wary of plans that include artifically incenting competition in the broadband market This includes both a strained definition of “underserved markets” as well as a mandate for public-private partnerships to be eligible to receive grant monies

15. Disclosures Important Disclosures and Certifications I Christopher C. King, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I Christopher C. King, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report.