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BroadbandModernizationImpactonthe
CommunicationIndustryCostQuest AssociatesJanuary, 2013
PanelAgenda• Introduction
• NBP• Developments• Drivers
• Industry Response• Government Response• Replacement Cost impact• Impact on Valuation
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OurPanel• Charles Burkhardt, ASA CAE
• Charles Burkhardt is a Senior Consultant with CostQuest Associates. He is an ASA appraiser with the American Society of Appraisers, and a CAE from the International Association of Assessing Officers. He has 35 years of appraisal experience in valuing utility property and negotiation and litigation of values for property taxation. He previously was a manager in the Verizon Property Tax Group.
• Robert M. Garringer Jr., ASA• Robert Garringer is a property tax manager for Verizon Communications located in Irving,
Texas. His current primary areas of responsibility include completion or supervision of all property tax functions (including compliance, appraisal, negotiation and litigation) in the southeast region and Mid‐Atlantic seaboard of the United States. He began his career with the State of Indiana as a personal property auditor, leaving five years later as the Utilities Director to join GTE Corporation’s tax department. He has continued his career in appraisal and taxation with Verizon Communications. He is a graduate of Ball State University in Muncie, IN with a B.S. degree in accounting. He holds the ASA Senior professional appraisal designation from the American Society of Appraisers in the Machinery & Technical Specialties discipline with a specialty in Public Utilities.
• Mike Wilson • Mike Wilson is Vice President of professional Services with CostQuest Associates. He focuses
his work efforts on Broadband Mapping and Planning initiatives, as well as mobile wireless regulation and economics.
• James Stegeman• James Stegeman is President of CostQuest Associates. He is recognized around the world as
a leading expert on network cost models used for regulatory, management, and tax purposes.
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INTRODUCTION
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NationalBroadbandPlan“ConnectingAmerica”• National Broadband Plan
• Goals• At least 100 million homes having affordable access at 100 megabits per second
download and 50 megabits per second up loads• US should lead world in mobile innovation• Every American should have affordable access to robust broadband service• Every American community should have affordable access to 1 gigabit per second
broadband service to schools, hospitals, and government buildings• To ensure the safety the safety of the American people, every first responder
should have access to a nationwide wireless broadband public safety network• Ensure America leads in in the clean energy economy
• Key Objectives• Move money from the Universal Service Fund to a new Connect American Fund to
help support the National Broadband Plan in unserved areas• Create a Mobility Fund to ensure the wireless network nationwide 3G coverage• Develop plans to give access to broadband for low income Americans• Launch a National Digital Literacy Corps to train youth and adults digital literacy
skills• The impact of the National Broadband Plan is to make the United States a
world leader in providing internet communications nationwide
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CurrentTelcoBroadband
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CurrentCableBroadband
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CurrentFixedWirelessBroadband
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CurrentWirelessBroadband
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BroadbandPenetration
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BroadbandObstacles
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IndustryDevelopments• Wireless
• The U.S. is the first country to deploy 4G wireless at scale and is home to most of the world’s LTE subscribers
• Wireline• ~80% of homes are passed with broadband networks capable of 100Mbs >> nearing the world lead
• Verizon plans • Local exchange
• Increase use of the fiber network• Converting customers• Retiring copper
• Using wireless to augment non‐fiber areas• MCI with higher speed in the network, call server voice architecture• Wireless continues to expand 4G• Purchased cable owned spectrum for $3.6B
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IndustryDevelopments• AT&T
• Project Velocity• Local exchange to expand U‐verse• Non U‐verse areas to be candidate for Fixed Wireless
• Wireless continues to expand 4G• Continued acquisition of spectrum (ATNI purchased within the last week)
• Comcast• Replacing usage cap with data usage management approach • Increasing broadband internet speed tiers
• CenturyLink/Windstream/Frontier• FTTT – Fiber to the tower to support wireless bandwidth demand
• Consolidated/Surewest• Continuing aggressive broadband penetration plans • Deploy capital for backhaul and other wholesale opportunities
• Google• Building it’s own high‐speed broadband network – Google Fiber • Google Fiber plans include TV and Video Services
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EconomicValueAdd
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ROICs
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ROICs
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GovernmentDevelopments• FCC
• Revisions to the universal service• Connect America Fund – Focus is on Broadband deployment in high cost areas via landline and wireless technologies ‐‐ $45B over 10 years
• Broadband Acceleration Initiative• Lowers the cost of stringing new fiber on utility poles and reducing the wait times for cell tower approval
• Spectrum expansion (wireless and wifi)• 35% increase in unlicensed 5 Ghz band for Wifi• Broadcaster incentive auctions for white space (120Mhz in the 600Mhz band, estimate of $22B)
• Allowance of DISH to use S band for terrestrial service• First Responders network
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GovernmentDevelopments• States/Cities
• ID, AL, WY, WI, etc…• States are looking at economic development plans and the cost to deploy
• Cities are encouraging fiber deployment• Chattanooga and Kansas City have built out fiber networks that have gained attention
• Other cities have plans: Cleveland, Lafayette, LA, Chicago, New York, Seattle to name a few
• In all, 42 communities in 14 states have access to “ultra‐high‐speed” fiber providers that reach a gigabit
• Various states are looking at revamping their state specific USF programs
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GovernmentDevelopments• Gig.U
• The University Community Next Generation Innovation Project, or Gig.U, is a broad‐based group of over 30 leading research universities from across the United States
• Drawing on America’s rich history of community‐led innovation in research and entrepreneurship, Gig.U seeks to accelerate the deployment of ultra high‐speed networks to leading U.S. universities and their surrounding communities
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DrivingtheNeed…• Smartphones/Smart Devices/Tablets
• Demand growth• Apps• Internet is ever increasing part of life
• Audio/Video (65% of peak traffic*)• Hulu/Amazon/Netflix/YouTube/SmartTvs
• Netflix accounted for 33% of all downstream peak traffic in the fall of 2012 – up from 20% in 2010• Hulu and Amazon are only at 3.2%
• Increased exclusive content• Increased demand for over the top video
• Peer to peer
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* http://news.cnet.com/8301‐1023_3‐57546405‐93/netflix‐gobbles‐a‐third‐of‐peak‐internet‐traffic‐in‐north‐america/
DrivingtheNeed…• Home Security
• Security/Monitoring cameras• Health Care Expansion and Digitization• Online Education• Machine to Machine
• Monitoring, Information flow, sensors• Cloud Computing/Storage and Big Data
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DrivingtheNeed….
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DrivingtheNeed…
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GlobalDemandGrowth
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WirelessDemandGrowth
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WirelessDemandGrowth
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ShiftofDemand
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INDUSTRYRESPONSE
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Wireline ‐ Telecom & Verizon BusinessWireless
Upgrade electronics to 100 Gigabit per second Project started in 2012 13,000 route miles complete in US
Activate & market health monitoring & fleet management services via LTE
Remove Customers from Copper Move copper trouble pairs to FTTP where overbuilt All “Sandy” repairs will be FTTP
Expand FTTP wire center per plan “Sandy” repairs Will pass approximately 19M homes
In rural non‐FTTP wire centers Move customers to Home Fusion
Move network to all IP Protocol Replace Digital Circuit Switching
Softswitch LAG Equipment – Line Access/ Aggregation Gateways Switch bypass
Move from SONET to ROADM Move video customers from Set top boxes to Home Media Server
Complete 4G LTE build out Enable voice service on LTE network Expand Home Fusion penetration in non‐FTTP wire centers
GOVERNMENTRESPONSE
Mobile Subsidization (CAF)BTOP/ARRA UpdateRUS LoansNTIA’s FirstNet
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MobileBroadbandSubsidization• ConnectAmericaFund(CAF):$6,400,000,000fordeploymentandoperationsofMobileBroadbandoverthenext10years
• Phasedapproach• Phase1:$300milonetimedeploymentfundthroughreverseauction
• Phase2:$500milperyearforongoingsupport• Plus:$100mil‐ Triballandsdeploymentand$100mil/yearongoing
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SubsidySupportModel
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CurrentMobileBroadbandDeployment
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CAF‐Mobility• Phase 1
• $300m for deployment of 3G or 4G in unserved areas• Use of reverse auctions for selection of recipients (Q3 2012)• One time support for deployment• 3G – 200kbps/50kbps• 4G – 768/200• Must serve 75% of road miles/Collocation/Reasonably comparable rates/other
• Also, $100m for Tribal Lands
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CAF‐Mobility• Phase 2
• $500m for ongoing Mobile Broadband support• 5‐year transition from existing CETC support• NPRM for design, most likely reverse auctions• Potential for model‐based system• Timing: Late 2013
• Also, $100m for Tribal Lands
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CAFIMobilityFundResults(ReverseAuctions)
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Sum of Total Bid Amount
Sum of Road Miles
Sum of $ / Road Mile
Sum of Population
Pop per Road Mile
Sum of Total Bid
Amount per Pop
Number of CT's w/
>100 Pops
% of Winning Bids w
>100 PopsAverage for Auction 299,998,632$ 83,494 3,593$ 224,462 2.7 1,337$ 117 15% 795
Census Tracts w/ Multiple Bidders 28
Road Miles Population
Total Winning
Bids
Winning Bids
Percent of Total UnservedRoad Miles served by winning bids 83,494 12.8%Pops served by winning bids 224,462 12.9%
Road Miles for all FCC CAFI Census Tracts 650,393 Pops for all FCC CAFI Census Tracts 1,738,828
Total Awarded
Total Unserved
CAFIMobilityFundResults(ReverseAuctions)
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SupportModel– CAFIMobilityResults
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BroadbandTechnologyOpportunitiesProgram–NTIA• BTOP: NTIA invested approximately $4 billion in 233 BTOP projects benefitting every state. The portfolio of projects initially included: • Infrastructure projects totaling $3.5 billion in Federal grant • Public Computer Center (PCC) projects totaling $201 million• Sustainable Broadband Adoption (SBA) projects totaling nearly $251 million
• State Broadband Initiative (SBI), NTIA granted approximately$293 million to states
• Source: NTIA, January 2012
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RUSLoanProgramUpdateRUS 2012 ‐ $173 million in telecommunications loans and grants
• RUS 2009‐2011 ‐ Broadband Initiatives Program (ARRA) ‐Completed
• 320 awards obligated a total of $3.529 billion • 285 last‐mile projects that totaled over $3 billion, • 12 middle‐mile awards total $172.6 million, • 4 satellite awards for $100 million, and • 19 technical assistance awards for over $3.4 million
Source: RUS, January, 2012
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FirstResponderNetworkAuthority(FirstNet)• A nationwide interoperable broadband network that will help police, firefighters, emergency medical service professionals
• Funded through The Middle Class Tax Relief and Job Creation Act of 2012,
• Single, national network architecture• FirstNet will hold the spectrum license for the network, and is charged with taking “all actions necessary” to build, deploy, and operate the network
• $7 billion in funding towards deployment of this network• $135 million for a new State and Local Implementation Grant Program administered by NTIA to support State, regional, tribal and local jurisdictions’ efforts to plan and work with FirstNet to ensure the network meets their wireless public safety communications needs
Source: NTIA, January, 2012
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REPLACEMENTCOSTIMPACT
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CostQuestRCNDevelopment
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Service area with geocoded customer locations and roads
Geocoding success relies on the quality of the address data and the quality of the geocoding databases. On average we typically achieve 80-95% success rates to the street segment.
For those records that do not geocode, we fall back to an accepted process of surrogation to the roads within a Census Block.
CostQuestRCNDevelopment
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Designed Network
Legend: – DSLAM – AAN – Terminal – Fiber Feeder
– Copper Feeder – Distribution
Wire Center
Management• OSS
“the Cloud”
Access Offices• Gateways
Router
Common Resources
IMS Core Geo Location #1
Applications / Other•Application Servers
Module1
Module…
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IMSSoft‐SwitchingCommon Resources
IMS Core Geo Location #2
Module1
Module…
Matched – Geo Redundancy
Matched – Geo Redundancy
Router
Router
Router
Router
Router
PSTN Network
• Gateways
•Feature Servers
•Session Manager
• Gateways
•Feature Servers
•Session Manager
Router
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CellSite– OwnedorLeased
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ModernizationImpactonReplacementCost• Factors addressed in Replacement Cost Modeling with the push for broadband modernization• Telco Distribution/last mile
• Focus on optics and wireless• Fiber deployment• All‐packet (IP and native ethernet) solutions
• In more rural areas, use of a fixed wireless solution to allow for broadband access • Cable access/last mile
• Push the fiber node farther out• Reduces homes per node• Increases bandwidth• Reduces actives
• Central office, Headend, Hub and circuit equipment• Replacing digital switches with an IMS platform for cVoip offerings• Moving to converged core functionality including content delivery networks• Circuit equipment moving to routers/ethernet switches
• Wireless• LTE networks with VoLTE• MetroNodes• Use of WiFi offloads
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TheLocalTelcoNetwork• Fixed wireless blended with FTTp
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AdditionalFactors
Technology Price Trends Electronic Price Trends
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ConnectAmericaFund• Connect America Fund ‐ Landline
• CAF1 was to distribute $300M in one time support to Price Cap carriers to spur immediate 4/1 buildout
• Disbursement based on CostQuest regression model of cost• Carriers will receive $775 for each unserved location deployed• Only a portion was accepted by carriers• Continued discussion at the FCC to encourage providers to accept funding
• CAF2 will distribute up to 4B annually to landline providers• Up to $1.8b annually to high cost areas served by Price Cap Carriers• Up to $100m for remote very high cost areas• Up to $2b annually to high cost areas served by Rate of Return carriers
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CostQuestandCAF2• CostQuest was retained by USAC to develop and deploy the model to guide disbursement of CAF2’s $1.8B in annual funds for Price Cap Carriers • Model is referred to as CACM >> Connect America Cost Model
• CACM• Based on prior work:
• BAM and CQBAT• Models every wire center in the U.S.
• Includes AK, PR, VI, HI, MP• Over 20,000 service areas
• Current efforts focused on Price Cap areas• Forward looking network deployment (i.e., RCN)
• FTTd12k and FTTp• Funding to high cost census blocks• Excludes areas already served by an unsubsidized competitor (e.g., cable)
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TheChallenge
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Full U.S. FTTp Deployment ‐ RCN
CosttoServe
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Chart is for demonstration purposes only and may not reflect current CACM output
ReviewofPreliminaryResults• CQBAT Support Model Output FTTd – Company Level
FTTd BM 80, Alt 138Solution Set: SS20120201PublicFTTdSum of Support Capped Funding *Company YearlyACS 5,180,753 ATT 569,088,980 CBT 2,111,335 Cent 512,150,019 Cons 6,682,149 Fair 17,923,258 Fron 331,674,907 HTC 2,977,401 PRT 1,611,144 VIT 368,638 VZN 174,338,291 Wind 186,337,754
Grand Total 1,810,444,627
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Chart is for demonstration purposes only and does not reflect current CACM output
ReviewofPreliminaryResults
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Chart is for demonstration purposes only and does not reflect current CACM output
ReviewofPreliminaryResults
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Chart is for demonstration purposes only and does not reflect current CACM output
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IMPACTONVALUATION
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BroadbandModernizationImplicationforValuation• Impact on lives of existing plant
• Competition• Customers demands for additional services and faster speed
• Developing the replacement cost – Options to consider• Fiber to the premise (FTTP)• Internet Protocol (IP)• Fixed Wireless• Wireless
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BroadbandModernizationImplicationforValuation• What RCN address and not from a depreciation standpoint
• Physical depreciation• Functional obsolescence
• Excess capital• Excess operating cost
• Economic/External obsolescence• Inutility or excess capacity (Present/Future)• Inability to make market rate of return on investment
• Replacement cost and addressing software• Developing replacement cost and identifying current and future ownership
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