EQUITY RESEARCH
INDUSTRY UPDATE
Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229
Timothy Horan, [email protected]
Jonathan [email protected]
Oppenheimer & Co. Inc. does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investmentdecision. See "Important Disclosures and Certifications" section at the end ofthis report for important disclosures, including potential conflicts of interest. See"Price Target Calculation" and "Key Risks to Price Target" sections at the end ofthis report, where applicable.
March 17, 2015
COMMUNICATION AND CLOUD
Cloud ConvergenceAnd the Googlization of NetworksSUMMARYWe believe that Internet companies are looking to more vertically integratecommunications and cloud infrastructure and over time offer a fully integratedsuite of applications to control the customer relationship. This is occurring bothin the consumer and enterprise markets. We see Google as wanting to dominateevery aspect of consumers' daily life. Currently the carriers control the customerrelationships and critical last-mile infrastructure. Carriers will need to invest in newvirtualized and a dozen other technologies to retain this leadership. Luckily theseinvestments should leverage existing infrastructure and dramatically lower costs froman automated network and end-user experience. Regardless, companies with uniqueinfrastructure—spectrum, towers, fiber, carrier-neutral datacenters, and managedservice—are well positioned.
KEY POINTS
We believe Google is looking to create a fully integrated, low-cost wireless/cloud service. Google announced two weeks ago that it is entering the wirelessmarket as an MVNO after expanding its fiber rollout. Initially with tablets, but wesee the smartphone as the primary integrator of this converged world, with theability to enable true over-the-top communications and aggregation of the Internet ofThings. This will place pressure on the networks that were not designed to handleupstream traffic, and massive video over-the-top, which we now see as startingto cannibalize paid TV. The cloud is the nexus for this real-time communicationsand computing, something that has never occurred before. There will clearly bestandalone applications like Uber and Netflix, but the ability to integrate theseapplications into an intelligent bundle will be a huge competitive advantage.Internet companies are driving the transformation of communications/cloud ina more vertical way as the suppliers have been lagging, which is usual for anew industry. Google and others are building their own networks (leased fiber/builtdatacenters) with their own virtualized optronic and switching equipment. The largestInternet companies with the most scale have been doing this for some time withinand between datacenters.The incumbent telcos' core competency is control of critical last-mileinfrastructure, but they are using partially outdated technology. We believe to retaintheir dominance they need to deploy the same virtualized open-source equipment,and become more horizontally structured. Positively, we see the telcos' infrastructureas highly undervalued, but this needs to be managed under a better capital structure.We see TMUS, EQIX, CCOI and AKAM as the main beneficiaries of this networktransformation within our coverage universe. We believe that mobility is theprimary driver of this convergence; TMUS has considerable M&A and can leverage itsspectrum, and AKAM/EQIX can efficiently deliver traffic. Last, this is consistent withOpco analyst Jason Helfstein's Perform rating on GOOG, based on a pattern ofcontinued infrastructure investments that will likely weigh on margins.
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Disruptive Technologies Driving the
Googlization of Networks/Services
We believe that networks are now converging with cloud computing and there will be a
battle to control the customer. Currently this relationship is controlled by the carriers with
the combination of network and billing, but this is under threat. We believe that Internet
companies are looking to converge their cloud applications with networks to dominate
every aspect of a consumer’s daily life—social, entertainment, information, commerce,
etc. with a fully integrated platform. They are seeking to use automated customer care
and integrated real-time cloud data to create a unique, new Uber-like cloud service.
Internet companies (Google, Apple, Facebook, Amazon, NFLX) have virtualized
computing to enable the cloud and want to do the same with network technology. The
second half of this report goes through much of the expected changes in network
technology, essentially virtualization (SDN/NFV) enabling on-demand network and
customer functionality, but also fiber closer to customers with small cell sites. The first
half of the report looks at the new services and expected response from the incumbents.
Positively, the incumbent telcos can use these same technologies to greatly improve
network quality/capacity and automate provisioning and care on a much lower cost basis.
Ultimately, everyone’s goal is to create an Uber-like on-demand service for cloud and
communications, and the network to do so will need to emulate GOOG’s (highlighted in
the Appendix section of this report). Regardless of the outcome, companies in our
coverage universe with unique infrastructure should continue to benefit from strong
volume growth and pricing power. These include AMT, EQIX, CCOI, and AKAM, among
others.
Essentially we see Google looking to create a high-quality, low-cost converged
wireless/cloud service that will lock in and expand its customer relationships. Google
announced its intent to enter the wireless market as a service provider two weeks ago in
Barcelona, although this is still in very early stages. We see the smartphone as the
primary integrator of this new converged world, with applications global and primarily
mobile and truly over-the-top communications and video. As the smartphone becomes
an aggregating device of upstream traffic, it also will be the driver of the Internet of things,
which will increase demand for a more intelligent, predictive converged service for
consumers.
The cloud is the nexus for this real-time communications and computing, something that
has never occurred before. There will clearly be standalone applications like Uber and
Netflix, but the ability to integrate these applications into an intelligent bundle will be a
huge competitive advantage. There are a dozen or more technology/services companies
looking to do the same thing. The holy grail of cloud computing will be the ability to be the
dominant operating system that every application and piece of hardware is standardized
around, but the winner of this operating system, if there is just one, is not yet clear.
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Exhibit 1: The Battle for the Consumer
Software(GOOG, MSFT)
Consumer
Hardware(AAPL, Samsung)
Social Media(FB, TWTR)
Commerce(AMZN)
On-Demand Apps(Uber, NFLX)
Wireless(T, VZ, TMUS, S)
Cable(CMCSA, CVC)
Source: Oppenheimer
There have been many examples of Internet companies attacking the consumer from
different angles, attempting to bundle services, and drive consumer-facing applications.
AMZN has released hardware (phone, tablet) to drive its e-commerce platform and on-
demand apps (customer receives one year free of AMZN prime and unlimited cloud
storage for photos with a purchase of the AMZN Fire phone). FB has attempted to release
a phone on HTC hardware that drives its social media platform, and its division Whatsapp
is set to launch an over-the-top voice service. MSFT has introduced hardware (tablets,
Lumia phones with the NOK acquisition) to drive its operating system and attract
application developers, as well as drive its own applications and cloud storage. APPL has
the hardware, software, and is moving toward on-demand apps with its iTunes/TV
offering. However, the most evident of companies attempting to bundle the consumer
experience is GOOG. GOOG’s open operating system (software) approach allowed it to
be placed in hardware devices (driving smartphone pricing down, i.e., Moto for $180
subsidized), alleviating the need for it to build its own. Having the hardware relationships
along with the software, it has created a platform to drive its search engine, on-demand
applications (GOOG Now/Android TV in set-top boxes in France with Iliad), social media
(GOOG +), and is now looking to completely drive its applications through a
wireless/wireline integrated offering.
The Internet companies are moving much faster than the service providers and are
looking to acquire basic fiber/datacenters and possibly even spectrum to be made
compatible with their own equipment. The largest Internet companies with the most scale
have been doing this for computing, datacenters and transport within and between
datacenters using virtualized technologies and are clearly looking to do this on a fully
integrated basis through to the customer connection.
The incumbent telcos’ primary core competency is that they do control the critical last-mile
infrastructure (and customer billing), but they are using outdated technology in some
instances. To retain their dominance in infrastructure, we believe they need to focus on
being the low-cost, high-quality network providers through a more horizontal structure.
We believe that the Internet companies will drive them to this new structure and
technologies faster than most observers believe. Positively, we see the telcos’
infrastructure (specifically their spectrum) as highly undervalued as currently operated and
capitalized, but this still needs to be managed.
COMMUNICATION AND CLOUD
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Internet Companies Driving Convergence
Anyone who has gone from using a traditional taxi or car service for transportation to
Uber, or from linear viewing of television to Netflix, understands the transition that we will
see throughout the economy. This will be a highly organic process, but the broad trends
are in line with our long-held horizontal segmentation thesis. We think we are entering the
sweet spot of this industrywide restructuring, and we expect to see more change in the
communications/cloud industries in the next five years than we have seen in the last 15.
As usual, this is being driven by technology; right now wireless broadband is seeing an
explosion in productivity, but the same is happening in wireline optronics and switching.
We believe that new communications companies (Internet companies) are using the
power of the cloud and wireless broadband to drive their ecosystem of applications to
deliver a superior on-demand end-user experience to take full control of the customer
relationship. The next stage in the evolution will be seamless integration of these assets
bundled with some services at a low price. For example, GOOG’s applications and
products, from YouTube to Google Docs, Google Games and Television, are further
driven to the end user through its (open) Android wireless operating system, whether on
smartphones, Chromebooks, or set-top boxes (i.e., with Iliad in France). Having taken
control of the customer experience through applications, what better way to further
penetration of applications and brand equity than taking direct control of the network by
operating as an MVNO, where the consumer interacts solely with GOOG for
access/application needs?
We think this is a threat to the wireless carriers longer term, and believe other Internet
companies (AMZN, AAPL, FB) with consumer-facing applications will eventually head
down the same path, leveraging their superior capabilities in compute, storage and
networking to drive customer engagement and lock in. This competitive threat, in our
opinion, will force the incumbent carriers to upgrade their networks to offer the most
capacity and best coverage either to compete on the consumer side or act as wholesale
connectivity providers in the long term. Given the threat to their business models, we do
not believe that the wireless carriers would be willing to wholesale their networks in a way
where Google could use software-defined networks to switch between different networks.
We discuss the battle for the consumer in more detail below.
Disruptive Technologies
Ultimately, technology is driving this process, with competition and regulators having
impacts on the trajectory at the margins. We see the combination of very high-speed
wireless and wireline broadband enabling true cannibalization of legacy voice, data, and
video applications for the first time. The communication networks have historically been
built using purpose-manufactured hardware with integrated software. This is set to move
to standardized white boxes with the software layer separate from the hardware. This is
an extremely difficult transition for incumbents, which is why it is being driven by the
Internet companies, which have lower quality/regulatory requirements.
We are in the third major wave of new access technologies, dial-up, wireline broadband
and currently wireless broadband. Each new wave of access technologies has created a
few new dominant content companies and has been more positive for certain segments of
the communications food chain than others. Wireline broadband speeds have doubled
about every three years or so in a fairly consistent manner over the last 20 years.
Similarly, wireless broadband speeds have also been doubling every three years, but
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more recently in a major step-function fashion, with speeds increasing about 10x in the
last two years. This productivity growth is consistent with Moore’s Law, and we believe
this is set to continue with major network improvements driving cloud and communications
convergence:
Major Improvements/Developments Will Drive Communications Convergence
1. Cloud—Shared virtualized computing
2. Internet of Things
3. Integrated Circuits of Optical Components by Infinera (optical multiplexing) OFDM
4. 100 Gig wavelengths to metro upgrades with standardized boxes
5. LTE DAS (small cells are much more efficient than expected), using
unlicensed spectrum with advanced carrier aggregation
6. Shutdown of 2G and 3G spectrum to migrate to LTE (only 30% of spectrum has been built out for LTE)
7. Broadcast spectrum auctions (game changer for Sprint/TMUS or Dish)
8. Voice over LTE enabling lower cost handsets and higher quality
9. Remove cloud-based LTE radio access devices (RADs) 10. OTT Unified Communications and integration of wireless and wireline 11. DOCSIS 3.1
12. VDSL using vectoring
13. Video OTT and multicast video on wireless networks
14. Virtualization of networking
15. Open compute of network hardware
With continuous improvements on the wireless side, we believe wireless broadband,
leveraging the capabilities of the cloud, is driving new applications and content focused on
the real-time flow of information among people and devices. The access to real-time data
flowing in both directions is an economy-wide game changer, allowing for the Internet of
Things and affecting every vertical of the economy from health care to financial services.
Exhibit 2: Three Major Waves of Access Technologies
Access Technology Dial-up Wireline Broadband Wireless Broadband
Network Providers: Incumbent Telcos Telcos and Cable companies Telcos, Cable, and possibly
Internet Cos
Dominate Internet Companies: AOL, YHOO GOOG, FB AAPL, GOOG, NLFX, Uber
New Applications:Second Lines, E-mail, Web
Browsing, Instant Messaging Social Media, Search, Streaming On-demand apps, OTT Video
Disrupted: Traditional mail services Dial up internet service providersTraditional Linear Content
Providers
Source: Oppenheimer
The legacy telecom operators benefited from the addition of second phone lines, and the
Internet was born with new companies such as AOL and Yahoo benefiting. When wireline
broadband arrived, new Internet companies such as GOOG and FB were able to leverage
faster speeds and more ubiquitous connectivity. In the current wave, wireless broadband,
we see the on-demand, over-the-top applications as well as the basic infrastructure
COMMUNICATION AND CLOUD
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providers benefiting the most, such as AAPL, AMZN (AWS for infrastructure), Uber, etc.
For the wireless carriers there is strong demand for their services with limited supply.
Pricing has been aggressive by Sprint and TMUS in the last year, but we do not believe
that they can reduce prices further.
These new applications are stressing the legacy wireline networks, and they need to be
able to deliver on-demand broadband virtually anywhere in a similar way that AWS has
delivered on-demand computing and Netflix on-demand video. Given recent advances in
network access technology over the past couple of years (wireless broadband/LTE, dual
SSID wireless routers/WiFi hotspots, and SDN/NFV), we believe the communications
industry is poised for a tectonic shift in terms of both broadband deployment and video
consumption.
In this report we go over these overarching impacts and also discuss how the incumbent
broadband providers (AT&T, Verizon, Comcast, etc.) can partially offset rising competition
by leveraging wireless technology and software-defined networking (SDN). It also touches
upon the viability of OTT video and how the rising costs of linear TV (outpacing inflation by
~4x) are creating pent-up demand for lower cost Internet video. The success of OTT video
is more of a wild card given that the content providers hold all of the cards and have
incentives to keep the status quo (specifically $3B in annual re-trans fee; expected to grow
to $6B by 2018). That being said, if the FCC forces the content providers to sell
programming to the OTT video providers without discrimination, it could open the
floodgates for the entire OTT video industry. We discuss this possibility further below.
Incumbent Response
Over the next year we will be examining the reaction of each incumbent and each
segment of the market in more detail. There are almost too many variables to give an
accurate prediction to this organic process, but here are a few thoughts:
The structure of the wireless market could largely be determined by outsiders—Dish and
Google and possibly cable. Cable companies will need some mobile capabilities, and
they will need to offset declines in video revenue with business and broadband, which will
be a challenge. We have written about Dish’s options with its spectrum, and where this
ends up will largely dictate future industry profitability. However, Google’s entry into
wireless is equally important. Google, as discussed, is creating essentially a smartphone
than can elect to roam on the best wireless network (in this case, Sprint, TMUS, or WiFi),
and could be highly deflationary to the wireless industry.
The response of T and VZ to this trend will be interesting. T is trying to create a
converged product on its own with the digital home/car/video over-the-top, but as
mentioned, we believe an Internet company with a global reach will be able to implement
this better. At some point the incumbent telcos will come to this realization, and we
believe they will look to break themselves up into several companies; as we have written
previously, their spectrum alone could represent the value of the entire company. In the
meantime, we look for them to aggressively deploy new virtualized technologies to enable
more seamless consumer interactions and dramatically lower operating/capex costs.
Ultimately, we see these advances having major impacts to the industry, including:
1. The demand for truly converged/integrated services, not just applications
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2. The fight between seven sub-segments of the market to create this converged
service
3. The encroachment of cable/Internet companies into the wireless space
4. Some consumers replacing wireline broadband with wireless broadband
5. The proliferation of over-the-top services/the Internet of Things with
cannibalization of the paid video market
6. Transformation of legacy networks using more fiber and LTE combined with
SDN/NFV to better leverage compute and storage capabilities, effectively driving
convergence between cloud and the network
7. Continued telco spin-out of assets but also further consolidation. The most
important consolidation for the industry is Sprint/TMUS, but we expect more
datacenter and fiber consolidation also.
Wild Cards for the Industry
1. Does Dish build a wholesale wireless network, or does it lease spectrum to the
telcos, cable or Internet companies to build?
2. Are Sprint and TMUS willing to separately wholesale their networks to GOOG?
3. If GOOG enters the wireless space as an MVNO, do other Internet companies
need to follow suit?
4. Does Google or Apple look to use smart SIMs to have instant roaming between
different cellular networks and WiFi?
5. Can the telcos update their networks to enable the “Uberization” of the customer
experience before Internet companies take control of the network to drive a
superior end-user experience?
6. Does AWS get spun out and/or acquire AKAM as cloud computing begins to
mature and content delivery, acceleration and security become even more
crucial?
These trends will have an outsized impact on the P&L statements of the communications
industry, with scale being the dominant factor. On the revenue side, we expect to see
pricing pressure in voice and video applications driven primarily by over-the-top providers
(RingCentral in business voice, Netflix, etc.), helped by the FCC’s net neutrality order,
which will in turn drive growth from innovation/new applications. On the cost side, we see
SDN, virtualization, cheaper optronics and LTE technologies (which are seeing massive
productivity improvements) driving lower procurement and operating costs.
We expect to see increasing competition in video similar to what we’ve seen with
voice over the past ten years. Initially, we saw the wireless cellphone gradually
substitute and then altogether replace home phone lines as we moved from regional 1 and
2G networks, to nationwide coverage on 3G and LTE networks. More recently, we have
seen the impact of cloud computing on the voice industry, where Skype, RingCentral, and
other VoIP providers have entered the market with lower price points, but like Uber,
dramatically improved automated/integrated services and a simplified business
proposition. These business models were able to rely heavily on cloud computing and
improved last-mile wired and wireless broadband, enabling them to provide services
running over the public Internet, instead of having to spend heavily on upfront CAPX
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related to on-premise PBX or spending on a home phone line for consumers. In this
regard, legacy voice revenue of the carriers has continuously been declining in the 7-9%
range in the last decade.
The virtualization of applications and networks and seamless integration with cloud
computing needs to happen, which will be the most dramatic change since the Internet
started to become adopted by consumers 20 years ago. Positively, we estimate that the
industry could save 20% or more off its CAPX spending and 40% off its OPEX if it
automates network and customer care. The question is whether the incumbents can do
this themselves or will start up Internet companies do it.
At this point it is too early to say whether the carriers can offset cost savings from network
productivity enough to outweigh the effects of OTT competition, but this will largely be
determined by the number of players in the industry. However, the last-mile assets are
unique infrastructure, and if the telcos/cable companies remain price disciplined will see
very strong volume growth from this convergence and good returns on invested capital for
scarce infrastructure. The highest returns for infrastructure are generally recognized
through scale from horizontal structure in a more consolidated environment. We believe
players at the wholesale layer are in a very strong position (EQIX, AMT, AKAM), but in the
enterprise and consumer layer, the industry is more fragmented, with a battle for the end
user being waged. The wireline carriers are likely in a strong position in the enterprise
market, but we believe they need to figure out a way to integrate networks with cloud more
efficiently.
Exhibit 3: Horizontal Segmentation
Wholesale(I.E. AMT, CCOI, EQIX,
Dish?)
Enterprise(I.E. T, VZ, CRM, MSFT,
RAX)
Consumer(I.E. GOOG, AAPL, FB,
AMZN)
Source: Oppenheimer
Wireless Technology Driving Technological
Convergence
LTE is driving massive improvements in mobile broadband speeds, coverage and
capacity, and this will be improved with small cells (in many forms) and unlicensed
spectrum. Consumers will get used to and demand mobility for all their applications. As
we’re beginning to see across the industry, Comcast and Cablevision are gradually taking
steps to enter the wireless industry, as is GOOG, while the wireless carriers are
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increasingly looking to LTE-U and small cells to densify their networks and increase
spectrum capacity.
We’ve seen these developments accelerate over the past several months with Comcast
turning in-home routers into public WiFi hotspots, Cablevision introducing its WiFi-only
service Freewheel, and GOOG expected to enter the market as an MVNO. On the
wireless side we’ve seen AT&T and VZ make a strategic shift from copper-based DSL
toward fiber and fixed wireless LTE. Broadly speaking, we see the convergence of
communications technologies into a single last-mile access industry that is primarily
horizontally segmented, but with the network providers looking to source OTT revenue
from the content providers. We believe this trend will lead to additional consolidation as
broadband access becomes the truly meaningful differentiator, and greater scale becomes
needed to compete.
Exhibit 4: NC Computing Drives Convergence Among Devices, Media,
Communications and Computing
Source: Oppenheimer & Co.
We believe that this will be the next major driver of consolidation in the US. We expect to
see three to four players ultimately competing on a national level with a quadruaple-play
service for both the enterprise and consumer markets. As a result, we would expect to
see competition between the cable companies, satellite and telcos heating up, helped by
technological innovation and convergence.
The technologies driving this competition include:
1. LTE Advanced with up to 50 Mbps speeds
2. WiFi hotspots leverage the consumers’ broadband connection
3. Cloud, leveraging compute/storage capabilities inside virtualized networks
4. More fiber pushed direct to consumer premises in 50% of the most dense homes
and the rest split between LTE and DSL/Vectoring
Overall, we believe that given the increased importance of mobility, the cable industry will
enter the wireless space more aggressively, and new entrants in the enterprise market will
emerge due to improvements in their own technology, the cost of upgrading their plant as
well as distprutive technologies. The above trends will be positive for content
providers, and we believe companies with unique infrastructure or applications are
well positioned. In infrastructure─spectrum, towers, fiber, datacenters and
managed services─have strong competitive advantages and barriers to entry due to
huge economies of scale. This infrastructure is currently dominated by VZ/T, AMT,
CCOI, EQIX, and AKAM, respectively. The telcos have spun out towers and
outsourced some fiber, datacenters and CDNs, but this is a trend that needs to
accelerate to lower costs.
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The Battle for the Consumer
Exhibit 5: Current communications ecosystem dominated by ISPs
AT&TVerizon CenturylinkComcast
Consumer Consumer Consumer
Enterprise
Telcos/MSOs leverage last-mile broadband connection and spectrum to maintain control over the end users.
Web applications & Content (Google, Facebook, Amazon)
Web Companies , telcos and enterprises utilize proprietary datacenters, wholesale datacenters and carrier-neutral facilities to store and process data.
Public Cloud (AMZN, GOOG)
Carrier Neutral Facilities (EQIX, INXN)
Towers (AMT, CCI)
CDNs (AKAM)
Fiber (LVLT, CCOI)
Enterprise
Wholesale Datacenters(DLR, DFT)
Towers & CDNs offer uniquely positioned infrastructure to facilitate deployment of communications services.
Enterprise
CLECs, Long-haul Operators offer low-cost data transit services and compete against ILECs to provision voice and broadband for enterprise customers.ILECs in SMB &
Enterprise
Enterprise
Internet companies , have control of the customer on the application side, but not on the network access side. Business model is advertising based.
Source: Oppenheimer
The current communications ecosystem is dominated by the last-mile wireless and
wireline broadband providers, with the cable companies and VZ having the best
infrastructure. This enables them to control the consumer relationship. Google and Apple
and others are challenging this by focusing on the entire consumer experience. Initially
this was driven by separate and distinct apps which are now converging. For example,
GOOG Now provides users updates on weather when they wake up, suggestions for
groceries they may need to re-order (and provides a link to do so at the click of a button,
or press of a screen), the traffic conditions and the time it will take to travel to work, etc.
GOOG is essentially a full personal assistant, providing real-time, instantaneous
information and services at the click of a button (not to mention social networking with
GOOG+).
Through Android, GOOG’s open operating system, it is essentially driving its search and
consumer-facing apps (YouTube, Docs, Games, etc.). Other Internet companies are
attempting to do the same thing. AMZN released its Fire phone to drive use of its e-
commerce platform as well as its instant video service (the phone came with a one-year
free subscription to Prime and free unlimited cloud storage for photos). FB in conjunction
with HTC attempted to release a phone that utilized GOOG’s Android OS, but drove FB
applications. To state the obvious, APPL has been very successful in driving its full
ecosystem of hardware and content. The list goes on, with the success of some initiatives
questionable. These companies are aiming to become the communications companies of
the future, with several initiatives and acquisitions in recent years highlighting their efforts
including:
MSFT buying Skype
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FB buying WhatsApp
GOOG Talk/Hangouts
GOOG buying YouTube
GOOG becoming an MVNO/laying fiber
GOOG deployed in Iliad’s set-top boxes
AMZN introducing Instant Video
AMZN introducing Fire TV
AAPL TV
APPL buying Beats Audio/Electronics
Given the compute, storage and networking capabilities Internet companies have built out,
they are eager to deliver an over-the-top, automated, on-demand end-user experience,
but traditional networks are not built to handle the growth in bandwidth demand and
volatility of usage and latency requirements to do so. We believe that in response, these
companies will look to further their direct control of the consumer experience by offering
not only the applications, but the network. The most visible of these plans is from GOOG,
which is building out fiber on the wireline side to entice carriers to upgrade their networks,
but is also planning on becoming an MVNO, to take control of the wireless network and
the consumer relationship.
GOOG is looking to become a wireless provider in a unique way, with an MVNO
agreement with S and TMUS for cellular service migrating between both networks for
better coverage and capacity. This can be accomplished with software-defined sim cards,
making the GOOG service better than S or TMUS can provide on a standalone basis. We
also believe it will look to partner with a cable company to offer WiFi offloading, leveraging
hotspots so that it has the ability and technology to offer seamless transition of
connectivity to whatever network is the strongest and most appriopriate for the application
being run (whether it’s over-the-top voice, video or data). The cable companies may also
look to build out more LTE hotspots using consumers' broadband as backhaul to increase
their coverage. We believe this is a potential threat over the long term to wireless carriers,
so we would be surprised if they enabled this in a very large way, but this said, Sprint is
fairly desperate. Also, markets outside the US have much larger wholsale components
and are oftentimes more fragmented, so it may be easier for GOOG to deploy its “smart”
wireless MVNO outside the US initially. If GOOG can integrate cheap wireless serivce
with its over-the-top applications, its offering could be extremely attractive. Like most
disruptive technologies, it would likely start on one device and penetrate the rest of the
market over time.
We think if GOOG partners with both S and TMUS, this will lead to the commoditization of
wireless carriers, where the only way they can compete is on network quailty and
coverage. To combat this, we think S and TMUS should form a partnership before
entering into an agreement with GOOG, to drive pricing power and maintain control and
leverage over their last-mile advantage.
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Exhibit 6: Possible Communication Ecosystem Transition
Consumer ConsumerConsumer
Enterprise
Telcos/MSOs compelled to sell last-mile access to the internet companies, who in turn sell a complete cloud/communications offering direct to the consumer.
Web applications & Content (Google, Facebook, Amazon)
Internet Companies , leverage proprietary datacenters and 3rd party facilities to seamless store, process, and provision, web applications.
Carrier Neutral Facilities (EQIX, INXN)
Towers (AMT, CCI)
CDNs (AKAM)
Fiber (LVLT, CCOI)
Enterprise
Wholesale Datacenters (DLR, DFT)
Towers & CDNs offer uniquely positioned infrastructure to facilitate deployment of communications services.
Enterprise
CLECs, Long-haul Operators offer low-cost data transit services and compete against ILECs to provision voice and broadband for enterprise customers.ILECs in SMB &
Enterprise
Enterprise
Internet companies have control of the customer on the application side, and now purchase access capability to reach the customer directly on the communications side.
Last Mile Access (T, VZ, CMCSA)
Public Cloud (AMZN, GOOG)
Google Facebook Amazon
Source: Oppenheimer
Shifting Competitive Landscape
The communications competitive landscape is undergoing a dramatic shift driven by
technological advancements and the demand for high-speed/reliable connectivity. Trends
in end-user behavior including moving from fixed connections to mobile and from owning
computing resources to sharing those resources are shaping the landscape. Those trends
are driving network changes and the necessity for incumbent carriers to upgrade
infrastructure and utilize new technology to meet demands.
Exhibit 7: Shifting Trends in End-User Behavior and Networks
Aspect From To
Connectivity: Fixed Mobile
Provisioning: Call Centers Click and Install
Computing: Owned Sharing Resources
Aspect From To
Wireline: Copper Fiber
Voice: TDM IP
Wireless: 3G LTE
Architecture Focus: Hardware SoftwareSource: Oppenheimer
End User Behavior
Networks
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On the wireless side LTE is a truly revolutionary product, enabling fast-speed mobile
broadband, and we believe, over time, it will lead to some cannibalization of wireline
broadband. It is a largely open standards-based technology that has been wildly
successful for the telcos (something that is needed in SDN). To solidify their positions, the
incumbent wireless carriers are increasingly looking to small cells and LTE-U to increase
speeds/capacity. By using QCOM chips on small cell base stations, incumbents can
greatly increase wireless speeds and reduce congestion on networks. By doing so,
wireless broadband could progress to the point where it becomes a suitable replacement
for wireline broadband. To this point, data capacity constraints have limited the
effectiveness of fixed wireless LTE as a suitable replacement for wireline access, but we
believe that as wireless networks continue to densify, this will all change.
Exhibit 8: Internet Access Price Points for Standalone Broadband
Offering Speeds Monthly Cost Start-up cost Data Cap
Verizon Fixed Wireless LTE 5-12Mbps $60 $0 10GB
Verizon Fixed Wireless LTE 5-12Mbps $90 $0 20GB
Verizon Fixed Wireless LTE 5-12Mbps $120 $0 30GB
Centurylink DSL (Phoenix) 7 Mbps $49 $160 250GB
Centurylink DSL (Phoenix) 12Mbps $54 $160 250GB
Centurylink DSL (Phoenix) 20Mbps $64 $160 250GB
Centurylink DSL (Phoenix) 40Mbps $75 $160 250GB
Windstream DSL (Lincoln) 6Mbps $57 $60 Unlimited
Windstream DSL (Lincoln) 24Mbps $67 $60 Unlimited
Comcast Coaxial Cable (Brooklyn) 3Mbps $50 $40 Unlimited
Comcast Coaxial Cable (Brooklyn) 6Mbps $59 $40 Unlimited
Comcast Coaxial Cable (Brooklyn) 25Mbps $77 $40 Unlimited
Comcast Coaxial Cable (Brooklyn) 105Mbps $89 $40 Unlimited
Source: Verizon, Centurylink, Windstream, Comcast
Note: Start-up cost assumes purchase of modem plus installation
Note: Start-up cost waived with 2 year contract for fixed wireless LTE
Note: Monthly cost ignores promotional pricing
Note: Activation fees not included
Note: Comcast Windstream pricing includes a $10/month and $7/month modem rental fee respectively
While cable has dominated last-mile high-speed broadband in the last ten years, the cable
companies are not sitting idle; they are looking to enter the wireless business leveraging
WiFi hotspots. While we believe WiFi-only services’ impact, such as CVC’s Freewheel, is
currently minimal, given no backup cellular service without a cellular network, it highlights
the threat dense hotspot networks could be, especially if cable companies turn home
routers into dual-access points for personal/public use.
On the wireline side, if the incumbent telcos want to compete, they must realize that
there is enormous demand for fiber connections in a distributed environment. However, it
is difficult to deploy infrastructure for their own usage, when it is much better to share the
infrastructure. This is one of the primary reasons the tower and datacenter companies are
in existence. It is also one of the reasons CCOI and Level 3 are doing so well, but they
are also benefiting from increased enterprise outsourcing of datacenters/computing.
Regardless, at the last-mile level we do believe that this is more of a duopoly environment
and that the incumbent wireline carriers should aggressively deploy fiber. It has proven
time and again that there is relatively strong demand for high-quality communications
infrastructure. Previously, upgrading wireline infrastructure may not have been cost
effective, but now the technology is cheap enough to do.
The incumbent telcos in particular have historically underappreciated the competitive
advantage of having premium speeds. In effect, they have been slow to upgrade their
plant and to share infrastructure. Speeds have been slower than those of cable
companies, and more investment is needed to close the gap. Several major forces will
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(should) drive the incumbent telcos to upgrade their plant more aggressively, mostly due
to strong demand, lower costs, improved capabilities and most importantly competitive
necessity:
Demand remains very strong. We estimate that global IP traffic will continue to
grow at a 30% CAGR through 2018.
Cost to provision fiber closer to the home has plummeted. We believe that
fiber can be strung on aerial lines for $20,000 per mile. With the average suburb
in the US at more than 20 households per mile, the home passed cost is only
$1,000, and the connection cost another $1,000; at 50% penetration the total
cost is $3,000 per home. The $2,000 in total costs compares to Comcast’s
current firm value of $5,000 per home passed. We believe that even with 50%
penetration of homes passed, the cost per home is still in the $3,000 area.
Double-play bundled services can support $1,500 per year in revenue and
$1,000 in EBITDA, for a payback period in the three-year range. The added
benefit is that homes and businesses not connected directly with fiber should
also have much shorter loop lengths with the ability to upgrade to 100 Mbps
easily. At this point labor costs remain the most expensive aspect of a fiber
deployment.
DSL technologies (vectoring in particular) have improved, which is helping
AT&T upgrade Uverse from 25 Mbps speeds to 45 (and eventually 100). VDSL
speeds can be close to 100Mbps within 2,000 feet and 200-400Mbps if bonded
with a few pairs of copper. There are vDSL2 products that use 8 copper pairs to
achieve 400Mbps speeds at 1,000 feet or 200Mbps at 2,000 feet. If fiber is
extended to 50% of homes passed, we believe vDSL would need to be extended
to 30/40% of subscribers, with improvements in wireless technologies being
suitable for the 10/20% of remaining households.
We estimate optical terminating units at the home have declined from $500 a
decade ago to $50 today. The optical industry is on the verge of a mass
migration from 10 gig wavelengths to 100 gig coherent (Finisar, Infinera, etc. are
driving this process). The components will be standardized on CSP2+, and this
is what has enabled a step-function decrease in prices. This has been occurring
in long haul, but has now become cheap enough to deploy in metro areas and
even datacenters. This is a once in 15-year migration enabling a 10x increase in
capacity. This capacity increase will make it much easier to deploy small cells
and fiber either to the home (we expect half the country) or closer to the home
(within 2,000 feet, VDSL can handle 100 Mb speeds).
For building out fiber, the regulatory environment has also greatly
improved (thanks to GOOG). Google has done the industry a large favor by
convincing the regulators to allow selective build-outs of plant with minimum
requirements.
GOOG is building out fiber to the home. Google is building out fiber in ~50
cities with a Gbps symmetrical broadband service at $70 a month (voice and
video are extra). In the cities it is in, it also provides free 5Mbps services with a
onetime install fee of $300.
Demand trends are not lost on cable companies. Cable companies have had an
advantage in wireline connections based on the COAX connections to each home, which
can handle about 1,000 Mhz of spectrum. Allocating 20% of this to broadband can enable
1Gpbs of capacity or ~6Mbps for each Mhz of capacity (using the standard 256-QAM).
DOCSIS 3.1 uses new modulation technologies that can increase speed per Mhz to
9Mbps and can also increase the number of channels used. CableLabs is coordinating the
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new technologies defined in the converged cable access platform (CCAP), which
combines edge QAM and cable modem termination systems to drive video broadband and
IP convergence.
DOCSIS 3.1 is the fourth generation of DOCSIS standards developed by CableLabs, and
we believe this technology will enable cable networks to get to substantially higher
speeds, beginning by year-end. This technology enables broadband data transport over
the cable plant and has allowed cable companies to dominate broadband delivery where
deployed, usually gaining ~60% of household market share and ~85% of the bit share.
The 3.1 specifications were released on October 2013, with plans to support capacities of
at least 10Gbps downstream and 1Gbps upstream using 4096 QAM.
DOCSIS 3.1 is part of the entire upgrade to a Cable Converged Access Platform (CCAP),
and there are dozens of other technologies also needed to be deployed, both at the
physical layer and software layer (software-defined networking, SDN). However, the
advantage of DOCSIS 3.1 is that it is backward compatible and fits into existing operating
systems relatively easily. We expect 3.1 to have double the existing broadband speed
packages, but at premium prices with the ability to move to 1Gbps download speeds over
the very long term. We believe the rollout will take half a decade or longer as the cable
companies are not under competitive threat to act any faster to defend their wireline
advantage. In addition, much of the basic infrastructure will need to be upgraded to
support 3.1, the fiber POPs will need to be extended deeper into the network and/or have
more capacity added. More of the spectrum capacity on the COAX will have to migrate
from video usage to broadband usage. Practically speaking, getting 100Mbps speeds will
not be that difficult to achieve in two to three years.
Fixed wireless LTE could be the carriers’ answer to upgrading a lot of the last-mile
connectivity, particularly in rural areas or poor neighborhoods without having to extend
fiber all the way to the home to be competitive. However, in most areas at this point, fixed
wireless services do not reach over 25Mpbs and are relatively expensive with low data
caps compared to wireline offerings. However, as LTE progresses and technological
advances allow for more efficient use of spectrum, fixed wireless could become a viable
alternative to wireline services. We see fixed wireless LTE first penetrating rural markets
where connectivity is limited and capacity unused.
Overall, last-mile connectivity is the competitive differentiator. Fiber is the ultimate
last-mile connection, and we always believe the closer to the consumer, the better.
However, LTE is a truly revolutionary product enabling fast-speed mobile broadband, and
we believe will lead to some cannibalization of wireline broadband.
The bottom line is the incumbent network providers need to be focused on
defending their last-mile barrier. We believe Investing in wireless connectivity is the
right strategic move, and having fiber closer to the end user will help greatly with
speeds/capacity. The incumbents will need to be vigilant about how these technological
advances impact their revenue on the applications side and how quickly the competitive
landscape is moving. We also believe they will need to be players in the enterprise market
for cloud services and will need to transform their networks, utilizing SDN/NFV protocols
to offer a network that can appropriately leverage the capabilities of computing and
storage, something legacy networks cannot do efficiently.
OTT Video Is Finally a Substitute for Linear TV
We believe Internet video or OTT video will continue to evolve from a secondary, niche
service into a mainstream commercial offering capable of becoming a legitimate substitute
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to linear television. Going forward, we expect 1-2% of households per year to drop or
reduce their paid video service. This compares to wireless cannibalization of wireline of
~3% per year. We see five key reasons this is happening.
Higher broadband speeds and penetration
Increased Internet content availability
Proliferation of smart mobile devices and applications
Stagnant disposable income among consumers
Video ARPU continues to rise above the rate of inflation. In this regard, paid TV
is close to $100 per month with a triple-play bundle at $160, with content costs of
just $40 of this amount.
We have seen several recent studies that support this hypothesis. To illustrate, a
recent study published by Nielsen indicated that the average time spent watching linear
TV in 4Q14 declined 13 minutes from last year to a total of 4 hours and 51 minutes per
day. While linear TV viewing remains substantial, the report goes on to note that 40% of
US homes now subscribe to streaming services (Netflix, Amazon Instant Video, Hulu, etc.)
vs. 36% in 4Q13. Another recent study by DigitalSmiths suggests that roughly 1.5M video
subs plan to cancel their cable subscription sometime in the near future and another 2.4M
subscribers plan to downgrade their service.
Cable TV pricing is likely to peak: Using Comcast as an example, video ARPU has
risen to $78/month from $49/month in 2004, for a CAGR of 4.6% vs. inflation of about
1.5%. When bundled with broadband, a typical cable bill approaches $160. Approximately
half the cost of television goes toward content versus a third back in 2004. Given that
consumer income and spending are relatively flat, we believe there is going to be pent-up
consumer demand to cut the video cord once OTT video has better content. We think we
are close to that point and that the next economic downturn will drive the cord cutting.
With companies like Google, Intel, Sony and even Apple all reportedly working on over-
the-top (OTT) services that deliver live TV broadcasts via an Internet connection, it’s clear
that the pay TV market is ripe for lower priced new entrants. The telcos will also be rolling
out 15-channel lineups using multicast over the wireless networks. The main challenge
historically is getting access to the content, but there are now enough independent
producers and middlemen such as Netflix that the legal and economic barriers to getting
content are declining.
We believe that part of the hold-up has been that the broadcast TV stations are now being
paid by the cable providers for retransmission fees. We guesstimate that these fees
totaled $3B in 2014 and will double in the next five years. We believe this has dis-
incentivized the content providers from offering their product to OTT players, as it would
dilute their video product, thereby making it less valuable to their current customers (the
MSOs and telcos).
Regulation may open the floodgates: We believe that FCC Chairman Wheeler wants
his legacy to be tied to the growth of OTT video, and may consider ways to force the
content providers to sell content to OTT video providers at more competitive rates and on
an a la carte basis. This would open the floodgates to potentially dozens of OTT providers,
although we would expect consolidation to leave us with two to four additional Internet
video players.
We believe this would have two major effects. The first would be a sharp decline in video
revenue and video subs, which would be partially offset by cable trying to increase the
price of standalone broadband, or potentially putting into place a broadband cap, which
would limit video consumption outside the linear TV model. We are skeptical, though, that
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17
the cable providers will be able to retain the $120 per month they are currently receiving
net of video fees for a broadband customer.
Sony TV a harbinger of what’s to come? According to the WSJ, Sony will start
commercial operation of its PlayStation Vue service within two weeks in New York,
Chicago and Philadelphia. Sources indicate it will be tested by customers in those cities
on an invitation-only basis and go nationwide by year-end. Sony noted that it aims to offer
roughly 75 channels per market, and most importantly, it will include the major broadcast
networks, which will enable users to watch live sports programming. While pricing has yet
to be revealed, we believe the service would be competitive in the $50 area. We think
pricing will be critical, since if the bill exceeds $50, the cost will defeat the entire purpose
of the service. However, we believe a decent triple-play service could be priced around
$100 per month versus the $150 cable is receiving.
Cable stocks have priced in some of this expected impact. However, if revenue
growth slows to the 2% area from the 4% expected, it will be difficult to see further
margin expansion. For now we believe the cable companies can continue to grow
revenue around 4%, but this is likely peak growth. Luckily for Comcast, its NBC business
should do better in this transition, offsetting some of this slowdown in growth.
Network Transformation
As mentioned, we believe the demand for bandwidth is being driven by video, cloud
and mobility. Wireless broadband in turn is driving cloud computing adoption, and
adoption of cloud by enterprises and many legacy consumer applications (video, etc.) is
set to drive extremely strong network volume growth. This in turn is creating a revolution in
provisioning of services to more nimble, lower cost, general-purpose white-box servers.
The lower cost broadband and computing is propelling strong enterprise and consumer
volume growth driven by new applications. Most of the new applications and network
virtualization are being driven by Internet companies, which will force legacy telcos to
more aggressively upgrade their networks. The lower costs should drive more enterprise
adoption of cloud, video OTT and the Internet of Things. We believe the legacy telcos will
continue to rationalize assets, and this and the new technologies should enable much
lower cost of service.
Cloud architectures were born out of virtualization of computer servers which allowed for
low-cost sharing of resources. Internet companies such as GOOG and FB have already
virtualized much of their datacenters and networks, and we believe carriers will be forced
to adopt similar technologies to drive efficiencies, innovation, and to be able to compete
effectively. Business models of traditional communications companies will be transformed
over the next five years as we expect to see an increase in competition from both wireless
startups and large Internet companies, which will force a major restructuring of legacy
networks.
The incentive for the telcos/cable companies to aggressively upgrade their plant and
capabilities will be driven by Internet companies. The largest ones have been building
their own switch and optical technologies. Google is probably the most visible, and it has
been a clear innovator of cloud and datacenter interconnectivity. It has helped drive the
industry forward on virtualized computing and is looking to do the same with networking.
While we see GOOG (or other Internet companies) looking to move down market to
promote inexpensive mobile connectivity and clearly more video over-the-top to
consumers, we believe in the enterprise market, it (and other Internet companies) could
move to offer connectivity solutions to drive increased penetration of enterprise
applications. While we do not see this as an immediate risk, we do note that there is a
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possibility companies with disruptive technologies move up market to offer connectivity to
drive further penetration of enterprise applications.
On the enterprise side, we believe carriers need to invest in converting legacy
networks to all-IP networks and use SDN/NFV protocols to drive down costs,
allowing for agile, flexible, and scalable networks, which we believe are imperative
to defend against new entrants and start-ups. We also believe that the incumbents will
look to greatly reduce operating expenses through this migration, essentially using cloud
computing themselves, which could save tens of billions in operating expenses.
Below, we go through some of the disruptive technologies (SDN/NFV) that can be used to
drive/defend enterprise market share. Along with competitive shifts highlighted above, we
believe this is set to be the most dramatic change to the communications industry since
the Internet started to become adopted by consumers 20 years ago.
Why Now?
IP traffic continues to grow at astounding rates, and mobile traffic is growing even
faster with the emergence of social media and streaming videos. The Internet of
Things only points to continued growth in IP traffic with a huge amount of data coming
from multiple devices per user. Cisco estimates by 2018 the average number of
connected devices in North America per user will be over eight.
Traditional networks were not built to handle the sheer volume of Internet traffic we are
witnessing today due to the demand for cloud services and mobility. Additionally,
traditional telecom networks were not built to handle the amount of traffic on both fixed
and wireless networks. We estimate that global IP traffic will grow ~30% annually through
2018, and growth will be led by mobile data traffic, which we estimate will grow over 65%
annually through 2018.
Exhibit 9: Global IP Traffic Growth Estimates
27%
28%
29%
30%
31%
32%
0
50,000
100,000
150,000
200,000
2013 2014 2015 2016 2017 2018
Pe
tab
yte
s p
er
mo
nth
Global IP Traffic Growth
Fixed Internet Managed IP Mobile Data YoY Growth
Source: Cisco VNI, Oppenheimer & Co. Inc.
Continued demand for bandwidth as well as competitive pressures to lower prices has led
to increased operating/CAPX expenses and diminishing returns for the incumbents.
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Hardware requirements within networks require new services to be provisioned to specific
protocols and often require specific ancillary hardware purchases to ensure
interoperability with new services and applications. There are additional
maintenance/repair costs that go into legacy hardware throughout each central office a
telecom operator owns.
To bring networks up to speed with traffic growth and ensure scalable, agile, flexible
networks to compete in the current environment and meet demand, software-defined
networking and network function virtualization protocols must be used. Utilizing these
technologies will allow for significant cost savings and enable innovation leading to new
services, such as on-demand bandwidth provisioning. There are several operational shifts
that will take place as traditional physical networks shift to virtualized networks.
Exhibit 10: Expected Operational Shifts
From To
Hardware Centric Software Centric
Separate IT/data center & Network/Central Offices Common Technology & plant
Quarterly software releases Continuous software process
Geographically fixed, single purpose equipment Highly dynamic & configurable topology/roles
Tight coupling of Network Elements Separation of physical/logical components
Separation of service elements/support systems Integrated orchestration/automation/virtualization
Hardware monitoring appliances Software based monitoring
Special design and provisioning Configurable catalog/rule-driven delivery frameworks
Optimized provider network/ops process Optimized customer experience
Highly constrained, independent control planes Highly integrated/automated control planes
Limited service dimensions Multifaceted service dimensioning
Highly constrained data translation/synchronization Shared management technology between network/systems
Slow tooling changes requiring coding Rapid tooling changes using policies/rules
Network management Customer experience management
Long lead provisioning times Real-time provisioning
Static billing and charging Granular and dynamic usage-based charging/billing
Source: AT&T, Oppenheimer & Co. Inc.
While we acknowledge that software-defined networking is nothing new, we believe
the incumbent carriers have been slow to adopt new technologies used by Internet
companies and used in cloud datacenters. New computing/networking architectures
forced datacenters to become more of a virtualized resource. To take advantage of
compute and storage virtualization, it became evident that even further efficiencies could
be gained through the movement of a software-defined datacenter. The software-defined
datacenter builds on server and storage virtualization and utilizes SDN protocols to further
automate the flow of data and the movement of workloads and is the foundation for hybrid
cloud architectures.
The primary chip vendor for the white-box hardware is Broadcom which enables the
Internet companies to write the software code that essentially controls the hardware from
a remote datacenter. We believe that by doing so, the hardware/operating costs at these
companies are one-fifth that of a telecom operator’s.
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We believe that by embracing open standards and developing/utilizing SDN/NFV
protocols, Internet-facing companies, especially GOOG, could move up market to begin
offering wireless and wireline solutions to consumers and enterprises; given GOOG’s cost
and technological advantage, this is a major threat to incumbent carriers.
Disruptive technologies are usually adopted and developed by new market entrants and
often resisted by incumbents because they usually predicate a move down to a lower
value network (cost structure). As SDN/NFV climbs up the S-curve of adoption,
companies that are deploying this technology often find new use cases, which we believe
in this case will be the ability to offer high-speed on-demand/flexible services and
connectivity demanded by customers and enterprises. In “The Innovator’s Dilemma” by
Clayton M. Christensen, he explains how disruptive technology usually gets its start in
emerging value networks (in this case, cloud computing) before invading established
networks. He further explains that after the technology progresses in its first use, it can
progress to the point where it can satisfy the level and nature of performance demanded
in another value network. The disruptive technology can then invade, knocking out the
established technology and its established practitioners. The exhibit below depicts a
disruptive technology S-Curve where SDN/NFV (technology 2) has been developed and
used inside datacenters and inside networks of Internet companies (mainly between their
datacenters). We believe these disruptive technologies have progressed enough to
become applicable to carrier networks (Application A below).
Exhibit 11: Disruptive Technology S-Curve
Source: Clayton Christensen, The Innovator’s Dilemma
We note that given the complexity in building networks as well as the massive scale of the
incumbents’ networks, it would take a herculean effort from GOOG or another Internet
company to rapidly take market share.
There is a natural marriage between Internet-facing applications, mobile
connectivity and cloud computing, and the carriers can take advantage of it to
reshape the industry for their benefit if they are successful in upgrading their
networks. The carriers can positively adjust their cost structure and have more flexibility
and resources to deploy in the face of increased competition from Internet and cable
companies if a shift to a multipurpose all-IP network occurs, which will be facilitated by
SDN/NFV. Among the major implications of this will be an explosion in innovation and
usage, helped by lower cost end-user devices and computing (in the datacenter). In
essence, to be competitive in the enterprise market, carriers will need to offer a network
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that appropriately leverages the flexibility, agility and scalability of compute and storage
resources (cloud computing) to facilitate the utilization of innovative applications that drive
new products and services, and SDN/NFV provides the framework to do so.
Exhibit 12: Reasons for Change
Reason Description
Optimizes OPEX Move from telco OPEX model, to lower cost IT model
Lowers CAPX Move from dedicated appliances to virtualization
Accelerates time to market
Deploy new software/services quickly from months to minutes
Open platforms accelerates innovation
Broadens access to partners who can innovate
Rapidly scale up/down apps
Modify QoS
Deliver New Services Faster
Speed
Innovation
Agility
Source: Lightreading, HP, Oppenheimer & Co.
By utilizing SDN and NFV protocols the carriers can redefine their networks to be more
flexible, agile, and cost-effective, allowing them to innovate and offer new
products/services as well as reinvest cost savings to bring faster speeds closer to the
premise. By utilizing new technology and bringing connectivity closer to the premise not
only to increase speeds and reliability but to optimize networks, carriers will benefit from a
more optimal cost structure, lower capital requirements, speed of deployment, innovation,
and agility.
Industry Implications
Exhibit 13: High-Level Cloud Networking Architecture
Source: Cyan
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By utilizing SDN/NFV. Service providers are being forced to move to an all-IP network to
leverage the benefits of SDN which effectively allows previously specialized hardware to
be replaced by unintelligent, white-box hardware. This will allow the carriers not only to
buy hardware for less, but leverage open standards to design protocols that will be
compatible with multiple vendors and suppliers. It will also allow the hardware to be used
for multiple tasks and applications. Combining network function virtualization on top of
software-defined networking will enable industry participants to leverage commodity
hardware to quickly develop, test and launch new services and utilize resource and
applications only when needed.
Specific cost savings are difficult to estimate given the transformational process. As
organizations compete to hire top IT talent well versed in relatively new technological
advances, some operating expense cost savings from being able to centrally manage a
network and not having to maintain hardware at each central location may be offset by
increased hiring and R&D costs in the near term. AT&T estimates that it will be able to
save ~$3B by transitioning its network to all-IP (and utilizing SDN/NFV) by 2020. In the
near term, we believe savings on CAPX is more likely, given the pure cost of white-box
hardware compared to legacy hardware.
Further, we believe that SDN and NFV will also allow carriers to reduce the number of
central offices they own by moving switching away from local networking into the cloud in
tandem with a move to all-IP networks. Outsourcing these functions to an external cloud
datacenter makes sense, with most of the functions residing in software, rather than
hardware, and allowing the management of those functions to be centrally located, rather
than in each of the central offices.
We believe that the most successful organizations are the most focused ones, and
outsourcing and/or selling off datacenters and legacy wireline assets will allow the
incumbent carriers to focus on defending their main competitive advantage, which is last-
mile connectivity. Becoming more horizontally integrated would benefit the organizations
to drive innovation and allow them to compete effectively in each area of focus. We
believe the most successful organization in the race for enterprise dollars will be the one
that decides to utilize disruptive technology to its advantage, redefining its networks and
leveraging cloud computing to offer enterprises the connectivity, flexibility, agility, and
scalability they need to bring a superior experience to their end users.
Positively, the need to utilize SDN and NFV is not lost on carriers, and many have begun
testing, including:
CTL (utilizing Cyan’s platform)
T (Domain 2.0)
VZ
Deutsche Telkom AG
Orange
KDDI Corp.
NTT Group
Telefonica
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APPENDIX
What Is Software-Defined Networking?
Software-defined networking separates the control plane (which deals with the overall
network map of how to deal with different types of data packets/how they should be
routed) from the data plane (which deals with how data and the overall network topology
are managed), allowing for a centralization of network intelligence/state and separating
the underlying infrastructure from network applications and features. This is a shift from
traditional network devices (switches, routers, etc.) that have built-in control, data,
management and service planes that rely on conventional protocols to route traffic and
manage the network.
At the heart of software-defined networking is an SDN controller, which abstracts network
elements and allows for end-to-end control of a network, replacing element-based
configuration. This abstraction allows for applications, through APIs, to be programmed to
manipulate the abstracted network elements. Essentially, SDN moves a large portion of
what a physical switch had done, and virtualizes the capabilities to allow the data to be
dealt with on an abstracted level. This allows physical ports to be virtualized and allows
data flows to be more controlled, which allows for fewer hops and less latency.
Exhibit 14: Software-Defined Networking Architecture
Source: Gartner
What Happened To Enable SDN?
Traditional networking approaches have been based on closed, proprietary technology
that has become exceedingly complex to handle various applications. Networks have
been built using switches, routers, and other devices that implement distributed protocols
to support various functionality and applications. However, it has becoming increasingly
difficult for Internet companies to manage their traffic growth and has limited some of the
features and functionality they had wanted to deploy. Traditional networks are difficult to
optimize and costs continue to grow, making it difficult to introduce new revenue-
generating services. Also, networks continue to have problems with security, robustness,
manageability, and mobility.
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As traffic continued to grow, it became expensive to continue to add hardware that went
underutilized into datacenters that were inefficient. That is when computer servers
became virtualized, and shortly after storage followed.
With virtualization, compute and storage became pools of resources that were provisioned
on an as-needed basis, which became the basis of the private cloud for on-premise
workloads. AWS took this one step further, introducing a business model that provided
shared infrastructure off-site, in a pay-as-you-go model, which is the essence of the public
cloud. These new architectures forced datacenters to become more of a virtualized
resource. To take advantage of compute and storage virtualization it became evident that
even further efficiencies could be gained through the movement of a software-defined
datacenter. The software-defined datacenter builds on server and storage virtualization
and utilizes SDN protocols to further automate the flow of data and the movement of
workloads and is the foundation for hybrid cloud architectures.
Using virtualization and SDN protocols, enterprises can now shift workloads between
private clouds and public clouds and can utilize the features and resources of both the
private and public clouds, or traditional on premise client-server architectures in a hybrid
environment.
We believe the next logical step in the virtualization chain is the network. We believe that
in the next five years we will have progressed from compute/storage virtualization to
complete network virtualization.
Inside Google’s Network To support all of the product and services GOOG offers (web search, GOOG+, Gmail,
YouTube, Maps, etc.), it needed a network that could appropriate/leverage the scale that
advancements in compute and storage brought to the table. To support its mission “to
organize the world’s information and make it universally accessible and useful,” it required
a global wide area network (WAN) with economies of scale that could deliver cost
efficiency, higher performance, better fault tolerance and manageability, operating the
WAN as a fabric, not just boxes. The vendors could not support Google’s ambition.
GOOG’s network is organized as two backbones, an Internet-facing network and an
internal network that carriers traffic between datacenters. Within the latter, GOOG has
deployed an OpenFlow-powered SDN solution. With Google’s scale it had to build its own
network switch utilizing outsourced chips and open-source routing stacks. The company
also built a centralized traffic engineering service, allowing it to collect real-time utilization
metrics/topology data from the underlying network as well as bandwidth demand from
apps/services. The data then allowed for the computation of the path assignments for
traffic flows, which then programmed the paths to the switches using OpenFlow. The
service can recompute the path assignments and reprogram switches on a real-time
basis. Traditional (telecom) networks do not have this ability given the intelligence is inside
the hardware, not the software, and hardware applications cannot be re-used for different
applications and services.
GOOG’s datacenter-to-datacenter WAN successfully runs on an SDN/OpenFlow-enabled
network and has greatly improved the manageability, performance, utilization and cost-
efficiency of the WAN. Network utilization, according to GOOG, is up to 95%, which is
unheard of in the industry. GOOG began deploying this network in 2010, and it has been
fully functioning since 2012. We believe telecom operators are five to ten years behind
Google’s network capabilities. Interestingly, as of 2013, more than 60% of all web-
enabled devices exchange traffic with GOOG’s servers.
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Exhibit 15: GOOG WAN Network Timeline
Source: Google
We believe that Google has had the scale to leverage advancements in compute and
storage driving SDN that enables a network that is flexible, agile, and can handle
enormous volume growth. We believe that the incumbent carriers need to emulate
GOOG’s network to drive an end-user experience that GOOG and other Internet
companies are attempting to provide; if not, they face serious threats from Internet
companies being forced to move down market to drive customer lock-in and a superior
experience.
A Look at Facebook’s Open Compute Project
Large-scale Internet companies have been using virtualization and software-defined
technologies, developing open-source technologies to support their core business. Instead
of relying on technologies that are proprietary to suppliers, these companies avoid vendor
lock-in and inflexible hardware protocols by developing open-source software to be used
with generic white-box hardware.
As an example, over the last four years Facebook has contributed to the Open Compute
Project (OCP) to disaggregate core components of the traditional datacenters to build new
systems that are more flexible, scalable and efficient. In 2013 the Open Compute Project
began focusing on networking, which according to opencompute.org, is a project to build
“a disaggregated switch to enable a faster pace of innovation in the development of
networking hardware; help software defined networking continue to evolve and flourish;
and ultimately provide consumers of these technologies with the freedom they need to
build infrastructures that are flexible, scalable and efficient across the entire stack.”
Since 2014 Facebook has introduced a number of advancements in achieving OCP’s
goals including “Wedge,” “FBOSS,” and a few weeks ago “6-pack,” a scalable switch.
Facebook’s goal in developing and introducing these products was to make its network
look, feel and operate like the OCP computer servers it has already deployed in its
datacenters. While we recognize these technologies are largely deployed within and
between datacenters, we believe they can be applied to carrier networks as well.
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Exhibit 16: Facebook OCP Progression
Source: Facebook
Wedge – A top-of-the-rack switch that utilizes an open-source server module to allow for
provisioning with Facebook’s Linux-based operating environment. By doing so, it allows
for the deployment, monitoring and controlling of the systems alongside servers and
storage resources, allowing engineers to focus more on innovation than management of
existing systems.
FBOSS – A Linux-based operating system that is designed to leverage software
libraries/systems Facebook currently uses to manage its server fleet. By controlling the
programming of the (wedge) switch hardware, FB can implement forwarding software
much faster. The service layer allows both distributed/centralized control and allows
flexibility for where the control logic resides. By using a central control, it allows the
company to find the optimal network path for data at the edges of the network, and by
doing so, Facebook claims it has managed to boost utilization of edge network resources
to more than 90%. FBOSS also allows the company to leverage existing tools for
environmental monitoring.
6-Pack – Uses wedge as the basis and includes 12 independent switching elements.
Each element runs its own operating system and is completely independent. This allows
for modification of any part of the system, with no system-level impact on either the
software or the hardware. All of Facebook switch designs use off-the-shelf, white-box
hardware. The open, module, technology-agnostic design of the 6-Pack allows for
customized solutions and centralized control of switches using an open-source operating
system such as FBOSS.
If carrier networks can make the transition to all-IP, utilizing open-sourced technology like
those highlighted above would be transformative.
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What Is Network Function Virtualization?
Network function virtualization (NFV) is the concept of traditional network functions,
previously implemented in specialized hardware, being run in software on industry
standard, or white-box hardware. For example, traditional proprietary hardware-based
network applications or functions, such as routing, packet inspection, firewalls, load
balances and mobile packet gateways are removed from the proprietary hardware and
embedded in software. Each of these virtual network functions (VNFs) allows network
operators to spend less on hardware on centrally controlling their networks. This can be
deployed for individual network elements. SDN looks to tie all of the elements together.
Exhibit 17: Network Function Virtualization
Source: ETSI
Vendors
Large companies from CSCO to IBM are involved with the SDN/NFV supply chain. Below
we highlight some interesting companies that are involved in the supply chain.
Cyan – Cyan provides the SDN platform, packet-optical transport platform, as well as a
hyper-scale platform. Cyan’s Blue Planet is a carrier-grade SDN platform built for network
operators. It integrates the capabilities of a multi-domain service orchestrator, multi-layer
SDN controller, and multi-vendor management system. Applications include:
- Planet Orchestrate - A multi-domain service orchestration app. for
allocating/automating virtual and physical resources across carrier cloud and
software-defined WANs.
- Planet Operate – A multi-layer SDN controller/management app. for WANs
- Planet View – A multi-vendor performance monitoring SLA assurance app.
- Planet Inventory – An inventory reporting app.
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- Planet Design – A multi-layer network planning app.
The platform centralizes control and management of physical network elements and
virtual SDN/NFV resources to simplify service orchestration across carrier data centers
and the WAN. It supports open northbound and southbound APIs to enable integration
with existing systems/accelerate service and app. development. Its open architecture
design enables a fully software-defined, open, and virtualized network that gives network
operators the flexibility to select multi-vendor solutions.
Its Z-Series Packet Optical Platform is a foundation for transformation to more
manageable/scalable multi-layer networks. Metro/regional networks consist of multiple
layers─WDM, OTN, and Ethernet─and what the Z-series has done is introduce a scalable,
COTS-based platform that leverages the latest advances in commercial off-the-shelf
(COTS) technology, including merchant silicon and photonic components, to combine
carrier-grade Carrier Ethernet, DWDM, OTN and ROADM functionality within a single,
open platform. It supports a broad array of module options that provide native switching
aggregation, and transport functions for a mix of Ethernet, wavelength, OTN, and
SONET/SDH services.
The N-Series Hyper scale provides a fundamentally new model for scaling datacenter
interconnect (DCI) networks that leverage best-in-breed COTS silicon and photonic
components, combined with a disaggregated Linux operating system. This has the effect
of eliminating vendor lock-in associated with proprietary, vertically integrated solutions,
and significantly reduces the cost of high-capacity optical transport. It also allows
datacenter operators to enable, control and program the DCI network using the
management and automation systems already in place for the compute/switching
infrastructure.
Orion VM – Orion VM has built a proprietary wholesale low-cost cloud service, which uses
white-box hardware combined with its own software. The company will only wholesale it
primarily through systems integrators and telco service providers. It primarily uses
Cumulus networks (highlighted below) and Linux networking stack. It also takes
advantage of modular switching Facebook has provided (highlighted above). The
company uses a chipset from Broadcom called Trident II, and the switches themselves
are manufactured by ODMs out of Taiwan (Quanta, Acton). Utilizing open/industry
standard hardware designs and writing its own software, Orion VM is able to provide cost-
effective white-label cloud services to system integrators and telco operators.
Cumulus Networks – Cumulus positions its Cumulus Linux product as the first, true Linux
OS for hardware networking. The product boasts a broad application ecosystem working
with existing open source and commercial Linux apps that run natively on industry standard
switches. New applications can be developed and integrated rapidly, and customers can
write applications to run directly on switches and implement any software agent they would
like. The company develops agents for network orchestration tools such as OpenStack and
VMware NSX. Cumulus OS works with a number of open networking switches and utilizes
Broadcom chipsets.
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Exhibit 18: Cumulus Linux Hardware Compatibility List
Manufacturer Switch Silicon
DELL Broadcom Trident II
Edge Core Broadcom Trident II
Penguin Computing Broadcom Trident II
Quanta Broadcom Trident II
Agema Broadcom Trident
DELL Broadcom Trident
Edge Core Broadcom Trident +
Penguin Computing Broadcom Trident +/II
Quanta Broadcom Trident +
Agema Broadcom Triumph2
Edge Core Broadcom Apollo2
Penguin Computing Broadcom Triumph2
Quanta Broadcom Firebolt3
40 GB Portfolio
10 GB Portfolio
1 GB Portfolio
Source: Cumulus Networks, Oppenheimer & Co. Inc.
Big Switch Networks – According to the company’s website, Big Switch was founded
with roots in the original Stanford research team that invented SDN. Beginning in 2013,
the company began packaging technology components into Bare Metal SDN Fabric
Solutions. The company combines commodity Ethernet switches with sophisticate SDN
control software, developing modern networking fabrics. The company is currently focused
on datacenter networks and monitoring networks, with switching and routing being a core
area of focus.
Broadcom – Broadcom, in compliance with the Open Compute Project’s Networking
Project, has developed an open switch specification, delivering the foundation for efficient,
high-performance, flexible network architectures. The switching specification is based on
the Trident Switch architecture, which sports a large ecosystem of networking operating
systems and apps. According to the company, its Trident II brings the most advanced and
comprehensive feature set into the open-switch ecosystem. In conjunction with open
standards and what the SDN/NFV solutions promise, the adoption of the open-switch
specification will help enable faster innovation in the market, while providing more choice
to datacenter operators and telecom service providers. The Trident II is a single-chip
solution for common fixed top-of-the-rack aggregation and line card switching applications
and can be found in many of the commodity hardware devices that run SDN/NFV
protocols. Customers can use both the hardware and software functions offered by
Broadcom, or choose to write their own software given the open source characteristics of
Broadcom’s portfolio. In essence, Broadcom’s product portfolio provides reference
designs and hardware/software building blocks that enable advanced SDN
implementations, targeting datacenter and carrier/service provider applications.
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Exhibit 19: SDN/NFV Vendors by Network Layer
Source: Gartner.
Stock prices of other companies mentioned in this report (as of 03/12/15):
Dish Network Corp. (DISH – NASDAQ, $73.82, Not Covered)
Deutsche Telecom (DTEGY:US-OTC, $18.14, Not Covered)
Cablevision Systems Corp. (CVC – NYSE, $17.86, Not Covered)
Sony Corp. (SNE – NYSE, $26.56, Not Covered)
Cyan , Inc. (CYNI – NYSE, $3.99, Not Covered)
Orange (ORAN - NYSE, $16.19, Not Covered)
KDDI Corp. (KDDIF - OTC, $65.75, Not Covered)
NTT DOCOMO, Inc. (DCM - NYSE, $18.17, Not Covered)
Telefonica, S.A. (TEF - NYSE, $13.97, Not Covered)
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Exhibit 20: Annual Communications Industry Cash Flow Model Last Updated: 3/13/2015
2009 2010 2011 2012 2013 2014 2015E 2016E
Revenues*:
AT&T (T) 117,018 119,702 122,980 126,329 128,713 132,417 134,180 136,541
Verizon (VZ) ** 108,211 107,106 110,836 115,648 120,246 126,075 130,119 133,623
Sprint Nextel (S) 33,415 33,637 34,627 36,215 36,304 35,725 34,797 34,855
T-Mobile (TMUS) 21,531 21,347 20,618 19,719 26,130 29,564 32,354 33,727
Comcast (CMCSA) 33,742 35,363 37,226 39,604 41,836 44,140 46,047 48,151
Time Warner Cable (TWC) 17,868 18,868 19,675 21,386 22,120 22,812 23,681 24,970
Charter Communications (CHTR) 8,017 8,419 9,108 9,608 10,108
CenturyLink (CTL) 20,841 19,431 18,692 18,376 18,095 18,031 18,058 18,289
Windstream (WIN) 6,259 6,239 6,140 5,988 5,851 5,838 5,887
Level 3 (LVLT) 6,231 6,140 6,318 6,376 7,850 8,168 8,349 8,763
LEAP (LEAP) 2,481 2,697 3,071 3,142 2,898
MetroPCS (Acquired by TMUS) 3,481 4,071 4,846 5,101
Clearwire (CLWR) *** 274 558 1,259 1,265
Total 365,093 375,179 386,387 407,317 418,599 431,890 443,031 454,914
Growth YoY % 1.2% 2.8% 3.0% 5.4% 2.8% 3.2% 2.6% 2.7%
Capital Expenditures:
AT&T (T) 17,335 20,302 20,277 19,728 21,228 21,433 18,207 18,536
Verizon (VZ) ** 16,044 15,707 15,372 15,199 15,654 16,265 16,852 17,131
Sprint Nextel (S) 1,419 1,675 2,574 5,126 7,153 5,458 6,270 6,298
T-Mobile (TMUS) 3,692 2,819 2,729 2,901 4,241 4,317 4,702 4,781
Comcast (CMCSA) 5,037 4,853 4,806 4,921 5,403 6,154 6,711 7,077
Time Warner Cable (TWC) 3,231 2,930 2,937 3,095 3,198 4,097 4,197 4,297
Charter Communications (CHTR) 1,816 1,854 2,221 2,321 2,421
CenturyLink (CTL) 2,450 2,555 3,151 2,858 3,001 3,026 3,034 3,073
Windstream (WIN) 647 892 1,049 812 764 817 883
Level 3 (LVLT) 487 603 628 743 1,262 1,256 1,269 1,315
LEAP (LEAP) 700 399 441 434 133
MetroPCS (Acquired by TMUS) 831 790 890 889
Clearwire (CLWR) *** 1,540 2,644 246 183
Total 52,766 55,924 54,943 58,942 63,938 64,990 64,381 65,811
Growth YoY % (7.7%) 6.0% (1.8%) 7.3% 8.5% 1.6% (0.9%) 2.2%
Cap-ex as % of Revenues 14.5% 14.9% 14.2% 14.5% 15.3% 15.0% 14.5% 14.5%
2009 2010 2011 2012 2013 2014 2015E 2016E
EBITDA
AT&T (T) 41,035 41,948 40,713 42,002 42,567 41,582 42,500 43,368
Verizon (VZ) 35,638 36,167 35,906 38,531 42,899 44,136 46,091 47,896
Sprint Nextel (S) 6,419 5,621 5,067 4,796 5,442 6,119 6,621 6,963
T-Mobile (TMUS) 5,919 5,478 5,310 4,886 5,317 5,636 7,137 8,234
Comcast (CMCSA) 13,767 14,561 15,288 16,255 17,205 18,112 18,854 19,806
Time Warner Cable (TWC) 6,492 6,875 7,226 7,824 7,980 8,228 8,626 9,311
Charter Communications (CHTR) 2,864 2,948 3,190 3,290 3,390
CenturyLink (CTL) 8,378 8,303 7,799 7,656 7,361 7,043 6,919 6,976
Windstream (WIN) 2,406 2,430 2,384 2,318 2,144 2,137 2,151
Level 3 (LVLT) 1,258 1,239 1,297 1,432 2,218 2,443 2,630 2,936
LEAP (LEAP) 485 525 562 597 408
MetroPCS (Acquired by TMUS) 956 1,176 1,331 1,512
Clearwire (CLWR) *** (871) (1,364) (381) (157)
Total 119,478 122,936 122,548 130,582 136,662 138,633 144,805 151,032
EBITDA as % of Revenues 32.7% 32.8% 31.7% 32.1% 32.6% 32.1% 32.7% 33.2%
2.9% (0.3%) 6.6% 4.7% 1.4% 4.5% 4.3%
Unlevered FCF
AT&T (T) 23,700 21,646 20,436 22,274 21,339 20,149 24,292 24,831
Verizon (VZ) 19,594 20,460 20,534 23,332 27,245 27,871 29,239 30,766
Sprint Nextel (S) 5,000 3,946 2,493 (330) (1,711) 661 351 666
T-Mobile (TMUS) 2,227 2,659 2,581 1,985 1,076 1,319 2,435 3,454
Comcast (CMCSA) 8,730 9,708 10,482 11,334 11,802 11,958 12,143 12,728
Time Warner Cable (TWC) 3,261 3,945 4,289 4,729 4,782 4,131 4,429 5,014
Charter Communications (CHTR) 1,048 1,094 969 969 969
CenturyLink (CTL) 5,928 5,749 4,648 4,798 4,360 4,017 3,885 3,904
Windstream (WIN) 1,759 1,538 1,335 1,506 1,381 1,320 1,268
Level 3 (LVLT) 771 636 669 689 956 1,187 1,361 1,621
LEAP (LEAP) (214) 126 121 162 275
MetroPCS (Acquired by TMUS) 125 386 441 623
Clearwire (CLWR) *** (2,411) (4,007) (626) (340)
Total 66,712 67,012 67,606 71,640 72,724 73,643 80,424 85,221
UFCF as % of Revenues 18.3% 17.9% 17.5% 17.6% 17.4% 17.1% 18.2% 18.7%
Source: Company Reports & OPCO Research Estimates.
Notes:
* Includes wireless equipment sales.
** Proforma for wireless/wireline acquisitions/dispositions
*** Part of Sprint as of 3Q13
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Exhibit 21: Annual Wireline Industry Cash Flow Model
Last Updated: 3/13/2015
2009 2010 2011 2012 2013 2014 2015E 2016E
Revenues*:
AT&T (T) 63,514 61,202 59,765 59,566 58,814 58,425 58,117 58,210
Verizon (VZ) 46,080 42,919 40,682 39,780 39,223 38,429 38,232 38,401
Sprint (S) 5,629 5,040 4,326 3,881 3,537 2,916 2,627 2,499
CenturyLink (CTL) 20,841 19,431 18,692 18,376 18,095 18,031 18,058 18,289
Windstream (WIN) 6,259 6,239 6,140 5,988 5,851 5,838 5,887
Level 3 (LVLT-TWTC) 6,231 6,140 6,318 6,376 7,850 8,168 8,349 8,763
Comcast (CMCSA) 33,742 35,363 37,226 39,604 41,836 44,140 46,047 48,151
Time Warner Cable (TWC) 17,868 18,868 19,675 21,386 22,120 22,812 23,681 24,970
Charter Communications (CHTR) 7,032 7,208 8,017 8,419 9,108 9,608 10,108
Total 206,216 202,254 200,131 203,126 205,882 207,879 210,557 215,278
Growth YoY % (2.3%) (1.9%) (1.0%) 1.5% 1.4% 1.0% 1.3% 2.2%
Capital Expenditures:
AT&T (T) 11,407 11,166 10,513 8,932 10,037 10,050 7,558 7,570
Verizon (VZ) 8,892 7,473 6,399 6,342 6,229 5,750 5,664 5,607
Sprint (S) 258 231 158 242 320 282 158 150
CenturyLink (CTL) 2,450 2,555 3,151 2,858 3,001 3,026 3,034 3,073
Windstream (WIN) 386 647 892 1,049 812 764 817 883
Level 3 487 603 628 743 1,262 1,256 1,269 1,315
Comcast (CMCSA) 5,037 4,853 4,806 4,921 5,403 6,154 6,711 7,077
Time Warner Cable (TWC) 3,231 2,930 2,937 3,095 3,198 4,097 4,197 4,297
Charter Communications (CHTR) 1,209 1,311 1,816 1,854 2,221 2,321 2,421
Total 32,148 31,667 30,795 29,998 32,116 33,599 31,729 32,393
Growth YoY % (13.5%) (1.5%) (2.8%) (2.6%) 7.1% 4.6% (5.6%) 2.1%
Cap-ex as % of Revenues 15.6% 15.7% 15.4% 14.8% 15.6% 16.2% 15.1% 15.0%
2009 2010 2011 2012 2013 2014 2015E 2016E
EBITDA
AT&T (T) 21,162 20,194 18,780 18,407 17,176 15,954 15,692 15,717
Verizon (VZ) 11,103 9,707 9,417 8,803 8,700 8,917 9,137 9,332
Sprint (S) 1,221 1,090 800 649 494 85 79 75
CenturyLink (CTL) 8,378 8,303 7,799 7,656 7,361 7,043 6,919 6,976
Windstream (WIN) 2,406 2,430 2,384 2,318 2,144 2,137 2,151
Level 3 1,258 1,239 1,297 1,432 2,218 2,443 2,630 2,936
Comcast (CMCSA) 13,767 14,561 15,288 16,255 17,205 18,112 18,854 19,806
Time Warner Cable (TWC) 6,492 6,875 7,226 7,824 7,980 8,228 8,626 9,311
Charter Communications (CHTR) 2,593 2,676 2,864 2,948 3,190 3,290 3,390
Total 67,796 66,968 65,713 66,274 66,399 66,116 67,364 69,693
EBITDA as % of Revenues 32.9% 33.1% 32.8% 32.6% 32.3% 31.8% 32.0% 32.4%
Unlevered FCF
AT&T (T) 9,755 9,028 8,267 9,475 7,139 5,904 8,133 8,147
Verizon (VZ) 2,211 2,234 3,018 2,461 2,471 3,167 3,474 3,724
Sprint (S) 963 859 642 407 174 (197) (79) (75)
CenturyLink (CTL) 5,928 5,749 4,648 4,798 4,360 4,017 3,885 3,904
Windstream (WIN) 1,759 1,538 1,335 1,506 1,381 1,320 1,268
Level 3 771 636 669 689 894 1,187 1,361 1,621
Comcast (CMCSA) 8,730 9,708 10,482 11,334 11,802 11,958 12,143 12,728
Time Warner Cable (TWC) 3,261 3,945 4,289 4,729 4,782 4,131 4,429 5,014
Charter Communications (CHTR) 1,384 3,701 1,048 1,094 969 969 969
Total 34,625 35,301 37,254 36,276 34,222 32,517 35,635 37,300
UFCF as % of Revenues 16.8% 17.5% 18.6% 17.9% 16.6% 15.6% 16.9% 17.3%
Source: Company Reports & OPCO Research Estimates.
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Exhibit 22: Annual Wireless Industry Cash Flow Model
Last Updated: 3/13/2015
2009 2010 2011 2012 2013 2014 2015E 2016E
Revenues*:
AT&T Mobility (T) 53,504 58,500 63,215 66,763 69,899 73,992 76,063 78,332
Verizon Wireless (VZ) 62,131 64,187 70,154 75,868 81,023 87,646 91,887 95,222
Sprint Nextel (S) 27,786 28,597 30,301 32,334 32,767 32,809 32,171 32,356
T-Mobile (TMUS) 21,531 21,347 20,618 19,719 26,130 29,564 32,354 33,727
LEAP (LEAP) 2,481 2,697 3,071 3,142 2,898
MetroPCS (Acquired by TMUS) 3,481 4,071 4,846 5,101
Clearwire (CLWR) ** 274 558 1,259 1,265
Total 171,188 179,957 193,464 204,192 212,717 224,011 232,475 239,636
Growth YoY % 4.9% 5.1% 7.5% 5.5% 4.2% 5.3% 3.8% 3.1%
Wireless Revenue as % of Total 47% 48% 50% 50% 51% 52% 52% 53%
Capital Expenditures:
AT&T Mobility (T) 5,928 9,136 9,764 10,796 11,191 11,383 10,649 10,966
Verizon Wireless (VZ) 7,152 8,234 8,973 8,857 9,425 10,515 11,188 11,524
Sprint Nextel (S) 1,161 1,444 2,416 4,884 6,833 5,176 6,112 6,148
T-Mobile (TMUS) 3,692 2,819 2,729 2,901 4,241 4,317 4,702 4,781
LEAP (LEAP) 700 399 441 434 133
MetroPCS (Acquired by TMUS) 831 790 890 889
Clearwire (CLWR) ** 1,540 2,644 246 183
Total 21,004 25,466 25,459 28,944 31,823 31,391 32,652 33,418
Growth YoY % 2.9% 21.2% (0.0%) 13.7% 9.9% (1.4%) 4.0% 2.3%
Wireless Cap-ex as % of Total 39.8% 45.5% 46.3% 49.1% 49.8% 48.3% 50.7% 50.8%
Cap-ex as % of wireless Revenues 12.3% 14.2% 13.2% 14.2% 15.0% 14.0% 14.0% 13.9%
2009 2010 2011 2012 2013 2014 2015E 2016E
EBITDA
AT&T Mobility (T) 19,873 21,754 21,933 23,595 25,391 25,628 26,808 27,651
Verizon Wireless (VZ) 24,535 26,460 26,489 29,728 34,199 35,219 36,953 38,565
Sprint Nextel (S) 5,198 4,531 4,267 4,147 4,948 6,034 6,542 6,888
T-Mobile (TMUS) 5,919 5,478 5,310 4,886 5,317 5,636 7,137 8,234
LEAP (LEAP) 485 525 562 597 408
MetroPCS (Acquired by TMUS) 956 1,176 1,331 1,512
Clearwire (CLWR) ** (871) (1,364) (381) (157)
Total 56,096 58,560 59,512 64,308 70,263 72,517 77,440 81,339
EBITDA as % of Revenues 32.8% 32.5% 30.8% 31.5% 33.0% 32.4% 33.3% 33.9%
Unlevered FCF
AT&T Mobility (T) 13,945 12,618 12,169 12,799 14,200 14,245 16,159 16,685
Verizon Wireless (VZ) 17,383 18,226 17,516 20,871 24,774 24,704 25,765 27,041
Sprint Nextel (S) 4,037 3,087 1,851 (737) (1,885) 858 430 741
T-Mobile (TMUS) 2,227 2,659 2,581 1,985 1,076 1,319 2,435 3,454
LEAP (LEAP) (214) 126 121 162 275
MetroPCS (Acquired by TMUS) 125 386 441 623
Clearwire (CLWR) ** (2,411) (4,007) (626) (340)
Total 35,093 33,095 34,053 35,364 38,440 41,126 44,789 47,920
UFCF as % of Revenues 20.5% 18.4% 17.6% 17.3% 18.1% 18.4% 19.3% 20.0%
Source: Company Reports & OPCO Research Estimates.
Notes:
* Includes equipment sales.
** Part of Sprint as of 3Q13
COMMUNICATION AND CLOUD
34
Exhibit 23: Annual Wireless Statistics Model
Last Updated: 2/20/2015 Year Over Year % Change CAGR
Subscribers (000s): 2009 2010 2011 2012 2013 2014 2015E 2016E 2009 2010 2011 2012 2013 2014 2015E 2016E '11-16
Net-Adds
Verizon Wireless 5,552 3,673 6,421 7,663 4,908 5,783 5,200 4,600 (2.6%) (33.8%) 74.8% 19.3% (36.0%) 17.8% (10.1%) (11.5%) (6.5%)
AT&T 7,278 8,853 7,699 3,764 2,721 5,608 5,100 4,500 8.6% 21.6% (13.0%) (51.1%) (27.7%) 106.1% (9.1%) (11.8%) (10.2%)
Sprint Nextel* (1,132) 1,777 5,111 605 (2,221) 575 2,372 2,722 NM NM NM NM NM NM NM NM (12%)
T-Mobile USA 1,033 (55) (549) 203 4,408 8,334 5,000 3,800 (64.9%) NM NM NM NM NM NM NM NM
MetroPCS 1,273 1,516 1,191 (459) (9.4%) 19.1% (21.4%) NM
Leap Wireless 1,110 241 417 (637) (745) 17.8% (78.3%) 73.0% (252.8%) 17.0%
Others (1,760) (239) (339) (1,356) (309) (1,291) (1,395) (1,395)
Total U.S. - Net-Adds 13,353 15,766 19,951 9,783 8,762 19,009 16,277 14,227 (5.2%) 18.1% 26.5% (51.0%) (10.4%) 116.9% (14.4%) (12.6%) (6.5%)
Incremental Market Share
Verizon Wireless 41.6% 23.3% 32.2% 78.3% 56.0% 30.4% 31.9% 32.3%
AT&T 54.5% 56.2% 38.6% 38.5% 31.1% 29.5% 31.3% 31.6%
Sprint Nextel (8.5%) 11.3% 25.6% 6.2% (25.3%) 3.0% 14.6% 19.1%
T-Mobile USA 7.7% (0.3%) (2.8%) 2.1% 50.3% 43.8% 30.7% 26.7%
MetroPCS 9.5% 9.6% 6.0% (4.7%) 0.0%
Leap Wireless 8.3% 1.5% 2.1% (6.5%) (8.5%)
Others (13.2%) (1.5%) (1.7%) (13.9%) (3.5%) (6.8%) (8.6%) (9.8%)
Ending Subs
Verizon Wireless 98,573 102,246 108,667 116,330 121,238 127,021 132,221 136,821 36.8% 3.7% 6.3% 7.1% 4.2% 4.8% 4.1% 3.5% 4.7%
AT&T 85,120 95,536 103,247 106,957 110,376 120,554 125,654 130,154 10.5% 12.2% 8.1% 3.6% 3.2% 9.2% 4.2% 3.6% 4.7%
Sprint Nextel 48,133 49,910 55,021 55,626 53,405 53,980 56,352 59,074 19.5% 3.7% 10.2% 1.1% (4.0%) 1.1% 4.4% 4.8% 1.4%
T-Mobile USA 33,791 33,734 33,185 33,389 46,684 55,018 60,018 63,818 3.2% (0.2%) (1.6%) 0.6% 39.8% 17.9% 9.1% 6.3% 14.0%
MetroPCS 6,640 8,155 9,347 8,888 23.7% 22.8% 14.6% (4.9%)
Leap Wireless 4,954 5,518 5,934 5,297 4,552 28.8% 11.4% 7.5% (10.7%) (14.1%)
Others 17,636 17,971 17,633 16,277 15,968 14,677 13,282 11,887 (54.7%) 1.9% (1.9%) (7.7%) (1.9%) (8.1%) (9.5%) (10.5%) (7.6%)
Total U.S. - Ending Subs 294,846 313,070 333,034 342,764 352,223 371,250 387,527 401,754 9.1% 6.2% 6.4% 2.9% 2.8% 5.4% 4.4% 3.7% 3.8%
Penetration 95.6% 100.7% 106.3% 108.4% 110.3% 115.2% 119.2% 122.4%
Market Share
Verizon Wireless 33.4% 32.7% 32.6% 33.9% 34.4% 34.2% 34.1% 34.1%
AT&T 28.9% 30.5% 31.0% 31.2% 31.3% 32.5% 32.4% 32.4%
Sprint Nextel 16.3% 15.9% 16.5% 16.2% 15.2% 14.5% 14.5% 14.7%
T-Mobile USA 11.5% 10.8% 10.0% 9.7% 13.3% 14.8% 15.5% 15.9%
MetroPCS 2.3% 2.6% 2.8% 2.6% 0.0% 0.0% 0.0% 0.0%
Leap Wireless 1.7% 1.8% 1.8% 1.5% 1.3% 0.0% 0.0% 0.0%
Others 6.0% 5.7% 5.3% 4.7% 4.5% 4.0% 3.4% 3.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Churn
Verizon Wireless 1.5% 1.6% 1.4% 1.3% 1.4% 1.4% 1.4% 1.4%
AT&T 1.5% 1.3% 1.4% 1.4% 1.4% 1.5% 1.4% 1.3%
Sprint Nextel 2.7% 2.8% 2.5% 2.5% 2.8% 2.8% 2.7% 2.4%
T-Mobile USA 3.2% 3.4% 3.5% 3.2% 3.3% 3.1% 3.2% 3.2%
MetroPCS 5.5% 3.6% 3.8% 3.5%
Leap Wireless 4.5% 4.8% 3.8% 4.3% 3.9%
Total ARPU
Verizon Wireless $46.65 $46.72 $46.56 $47.42 $48.56 $49.01 $47.91 $46.90 (9.5%) 0.2% (0.3%) 1.8% 2.4% 0.9% (2.3%) (2.1%) 0.1%
AT&T $50.68 $49.68 $47.77 $46.99 $47.41 $43.79 $40.54 $40.09 0.2% (2.0%) (3.8%) (1.6%) 0.9% (7.6%) (7.4%) (1.1%) (3.4%)
Sprint Nextel $44.18 $44.48 $43.69 $43.33 $44.55 $42.35 $38.15 $36.35 (3.6%) 0.7% (1.8%) (0.8%) 2.8% (4.9%) (9.9%) (4.7%) (3.6%)
T-Mobile USA $47.31 $46.31 $45.84 $43.09 $38.81 $36.69 $35.86 $35.75 (7.7%) (2.1%) (1.0%) (6.0%) (9.9%) (5.5%) (2.3%) (0.3%) (4.9%)
MetroPCS* $42.45 $40.79 $41.32 $41.14 (3.3%) (3.9%) 1.3% (0.4%)
Leap Wireless $42.14 $39.65 $41.19 $42.36 $44.88 (3.3%) (5.9%) 3.9% 2.8% 6.0%
Data ARPU
Verizon Wireless $15.66 $18.74 $21.69 $24.74 $27.21 $29.10 $31.44 $31.44 21.8% 19.6% 15.8% 14.1% 10.0% 7.0% 8.0% 0.0% 7.7%
% of Total ARPU 33.6% 40.1% 46.6% 52.2% 56.0% 59.4% 65.6% 67.0%
AT&T $14.71 $16.86 $18.52 $20.59 $22.44 $24.18 $25.69 $25.69 22.1% 14.7% 9.8% 11.2% 9.0% 7.7% 6.3% 0.0% 6.8%
% of Total ARPU 29.0% 33.9% 38.8% 43.8% 47.3% 55.2% 63.4% 64.1%
Sprint Nextel $15.89 $18.28 $20.11 $21.92 $23.89 $25.70 $26.33 $26.33 23.4% 15.0% 10.0% 9.0% 9.0% 7.6% 2.5% 0.0% 5.5%
% of Total ARPU 36.0% 41.1% 46.0% 50.6% 53.6% 60.7% 69.0% 72.4%
T-Mobile USA $9.81 $11.93 $15.56 $17.35 $19.08 $20.75 $22.67 $22.67 11.2% 21.6% 30.4% 11.5% 10.0% 8.8% 9.3% 0.0% 7.8%
% of Total ARPU 20.7% 25.8% 33.9% 40.3% 49.2% 56.6% 63.2% 63.4%
Source: Company reports, Oppenheimer & Co. Inc. estimates.
COMMUNICATION AND CLOUD
35
Exhibit 24: Annual Wireless Statistics Granular Model Last Updated: 2/20/2015 Year Over Year % Change CAGR
Subscribers (000s): 2009 2010 2011 2012 2013 2014 2015E 2016E 2009 2010 2011 2012 2013 2014 2015E 2016E '11-16
Ending Postpaid Subs
Verizon 82,194 83,125 87,382 92,530 96,771 102,079 106,779 110,779 22.7% 1.1% 5.1% 5.9% 4.6% 5.5% 4.6% 3.7% 4.9%
AT&T 64,627 68,041 69,309 70,497 72,638 75,931 78,131 80,131 8.3% 5.3% 1.9% 1.7% 3.0% 4.5% 2.9% 2.6% 2.9%
Sprint Postpaid 33,967 33,112 33,014 31,877 30,837 29,904 30,554 31,554 (7.4%) (2.5%) (0.3%) (3.4%) (3.3%) (3.0%) 2.2% 3.3% (0.9%)
Sprint Affiliates 276 296 316 336 376 498 620 742 (70.2%) 7.2% 6.8% 6.3% 11.9% 32.4% 24.5% 19.7% 18.6%
T-Mobile 26,765 24,574 22,367 20,293 22,299 27,185 29,885 31,885 (0.2%) (8.2%) (9.0%) (9.3%) 9.9% 21.9% 9.9% 6.7% 7.3%
US Cellular 5,482 5,416 5,299 5,134 4,267 4,175 4,075 3,975 6.8% (1.2%) (2.2%) (3.1%) (16.9%) (2.2%) (2.4%) (2.5%) (5.6%)
Alltel 0 0 0
Clearwire 642 1,529 2,563 2,500 2,958 2,958 2,958 2,958 35.4% 138.1% 67.7% (2.5%) 18.3%
Others 2,115 2,623 2,223 1,823 1,423 1,023 623 223 (38.4%) 24.0% (15.2%) (18.0%) (21.9%) (28.1%) (39.1%) (64.2%) (36.8%)
Total 216,068 218,716 222,474 224,990 231,569 243,753 253,625 262,247 1.8% 1.2% 1.7% 1.1% 2.9% 5.3% 4.1% 3.4% 3.3%
% total 73% 70% 67% 66% 66% 66% 65% 65%
Ending Prepaid/Wholesale Subs
Verizon 16,379 19,121 21,285 23,800 24,467 24,942 25,442 26,042 NM 16.7% 11.3% 11.8% 2.8% 1.9% 2.0% 2.4% 4.1%
AT&T 20,493 27,495 33,938 36,460 37,738 44,623 47,523 50,023 18.1% 34.2% 23.4% 7.4% 3.5% 18.2% 6.5% 5.3% 8.1%
Sprint 13,890 16,502 21,691 23,413 24,141 25,527 27,127 28,727 19.1% 18.8% 31.4% 7.9% 3.1% 5.7% 6.3% 5.9% 5.8%
T-Mobile 7,026 7,287 8,389 13,096 24,385 27,833 30,133 31,933 18.0% 3.7% 15.1% 56.1% 86.2% 14.1% 8.3% 6.0% 30.6%
Leap Wireless 4,954 5,518 5,934 5,297 4,552 0 0 0 28.8% 11.4% 7.5% (10.7%) (14.1%)
MetroPCS 6,640 8,155 9,347 8,888 23.7% 22.8% 14.6% (4.9%)
US Cellular 945 656 592 664 1,185 1,186 1,091 996 (11.0%) (30.6%) (9.8%) 12.2% 78.5% 0.1% (8.0%) (8.7%) 11.0%
Alltel 0 0 0
Others 8,737 9,620 9,384 6,155 4,186 3,386 2,586 1,786
Total 79,064 94,354 110,560 117,773 120,654 127,497 133,902 139,507 41.2% 19.3% 17.2% 6.5% 2.4% 5.7% 5.0% 4.2% 4.8%
% total 27% 30% 33% 34% 34% 34% 35% 35%
Total Gross Additions
Verizon Wireless 22,357 23,291 23,691 25,035 24,380 26,905 27,410 27,028 38.5% 4.2% 1.7% 5.7% (2.6%) 10.4% 1.9% (1.4%) 2.7%
AT&T 21,540 22,986 23,925 20,810 20,628 25,963 25,781 24,453 1.7% 6.7% 4.1% (13.0%) (0.9%) 25.9% (0.7%) (5.2%) 0.4%
Sprint Nextel 14,085 18,206 20,817 17,230 15,998 18,647 20,070 19,678 51.3% 29.3% 14.3% (17.2%) (7.1%) 16.6% 7.6% (2.0%) (1.1%)
T-Mobile USA 13,939 13,599 13,660 13,087 21,333 27,579 27,119 27,370 0.6% (2.4%) 0.5% (4.2%) 63.0% 29.3% (1.7%) 0.9% 14.9%
MetroPCS 5,324 4,756 5,291 3,353 33.9% (10.7%) 11.3% (36.6%)
Leap 3,523 3,234 3,016 2,347 1,521 42.6% (8.2%) (6.8%) (22.2%) (35.2%)
Other 7,591 6,065 5,493 4,112 4,569 2,779 2,256 1,742
Total 79,512 84,147 87,586 80,274 86,908 101,873 102,637 100,271 6.1% 5.8% 4.1% (8.3%) 8.3% 17.2% 0.8% (2.3%) 2.7%
Total Postpaid Gross Additions
Verizon Wireless 14,363 12,645 13,910 14,829 15,068 17,796 17,858 17,053 12.7% (12.0%) 10.0% 6.6% 1.6% 18.1% 0.3% (4.5%) 4.2%
AT&T 12,565 10,880 11,057 10,512 10,861 12,520 12,830 12,445 (0.0%) (13.4%) 1.6% (4.9%) 3.3% 15.3% 2.5% (3.0%) 2.4%
Sprint Nextel 5,391 6,927 7,267 6,725 6,124 6,973 8,086 8,080 (11.7%) 28.5% 4.9% (7.5%) (8.9%) 13.9% 16.0% (0.1%) 2.1%
T-Mobile USA 7,548 6,211 5,400 3,938 6,317 9,607 8,257 7,930 (10.0%) (17.7%) (13.1%) (27.1%) 60.4% 52.1% (14.1%) (4.0%) 8.0%
Other 1,571 991 850 642 (221) 587 471 376
Total 41,438 37,655 38,484 36,645 38,149 47,483 47,503 45,885 (6.1%) (9.1%) 2.2% (4.8%) 4.1% 24.5% 0.0% (3.4%) 3.6%
% of Total 52% 45% 44% 46% 44% 47% 46% 46%
Total Prepaid/Wholesale Gross Additions
Verizon Wireless 7,994 10,646 9,782 10,206 9,312 9,109 9,552 9,974 135.0% 33.2% (8.1%) 4.3% (8.8%) (2.2%) 4.9% 4.4% 0.4%
AT&T 8,975 12,106 12,868 10,298 9,767 13,443 12,951 12,008 4.2% 34.9% 6.3% (20.0%) (5.2%) 37.6% (3.7%) (7.3%) (1.4%)
Sprint Nextel 8,694 11,279 13,550 10,505 9,874 11,673 11,984 11,597 171.4% 29.7% 20.1% (22.5%) (6.0%) 18.2% 2.7% (3.2%) (3.1%)
T-Mobile USA 6,391 7,387 8,260 9,149 15,016 17,972 18,863 19,440 16.9% 15.6% 11.8% 10.8% 64.1% 19.7% 5.0% 3.1% 18.7%
MetroPCS 5,324 4,756 5,291 3,353 33.9% (10.7%) 11.3% (36.6%)
Leap 3,523 3,234 3,016 2,347 1,521 42.6% (8.2%) (6.8%) (22.2%) (35.2%) (100.0%)
Other 6,020 5,074 4,643 3,470 4,790 2,192 1,785 1,366
Total 46,921 54,481 57,409 49,328 50,280 54,390 55,135 54,385 25.9% 16.1% 5.4% (14.1%) 1.9% 8.2% 1.4% (1.4%) (1.1%)
% of Total Wireless Industry Subscribers59% 65% 66% 61% 58% 53% 54% 54%
Postpaid Net Additions
Verizon Wireless 4,135 2,550 4,252 5,024 4,118 5,482 4,700 4,000 (22.8%) (38.3%) 66.7% 18.2% (18.0%) 33.1% (14.3%) (14.9%) (1.2%)
AT&T 4,199 2,153 1,429 1,438 1,776 3,290 2,200 2,000 (7.2%) (48.7%) (33.6%) 0.6% 23.5% 85.2% (33.1%) (9.1%) 7.0%
Sprint Nextel (Direct Postpaid) (3,546) (855) (98) (1,137) (2,209) (933) 650 1,000 (12.9%) (75.9%) NM NM NM (57.8%) NM NM NM
T-Mobile USA (41) (1,068) (2,205) (2,074) 2,006 4,886 2,700 2,000 NM NM NM NM (196.7%) 143.6% (44.7%) (25.9%) NM
Other (352) (433) (497) (545) (1,227) (302) (378) (378)
Total 4,395 2,347 2,881 2,706 4,464 12,423 9,872 8,622 (45.0%) (46.6%) 22.8% (6.1%) 65.0% 178.3% (20.5%) (12.7%) 24.5%
% of Total Wireless Additions 32.9% 14.9% 14.4% 27.7% 50.9% 65.4% 60.6% 60.6%
Wholesale/Prepaid Net Additions
Verizon Wireless 1,417 1,123 2,169 2,639 790 301 500 600 NM (20.7%) 93.1% 21.7% (70.1%) (61.9%) 66.1% 20.0% (22.7%)
AT&T 3,079 6,700 6,270 2,326 945 2,318 2,900 2,500 41.5% 117.6% (6.4%) (62.9%) (59.4%) 145.3% 25.1% (13.8%) (16.8%)
Sprint Nextel (Direct Prepaid) 2,552 1,638 2,512 798 (145) (683) 400 500 NM (35.8%) 53.4% (68.2%) (118.2%) NM (158.6%) 25.0% (27.6%)
T-Mobile USA 1,074 1,013 1,656 2,277 2,402 3,448 2,300 1,800 (4.1%) NM 63.5% 37.5% 5.5% 43.5% (33.3%) (21.7%) 1.7%
MetroPCS 1,273 1,516 1,191 (459) (9.4%) 19.1% (21.4%) NM
Leap 1,110 241 417 (637) (745) 17.8% (78.3%) 73.0% (252.8%) 17.0% (100.0%)
Other (1,408) 1,188 2,855 133 1,052 1,202 305 205
Total 9,096 13,419 17,070 7,077 4,298 6,586 6,405 5,605 49.3% 47.5% 27.2% (58.5%) (39.3%) 53.2% (2.7%) (12.5%) (20.0%)
% of Total 68.1% 85.1% 85.6% 72.3% 49.1% 34.6% 39.4% 39.4%
Source: Company reports, Oppenheimer & Co. Inc. estimates.
COMMUNICATION AND CLOUD
36
Exhibit 25: Annual Video Subscriber Model
Last Updated: 03/13/2015 CAGR
($ in millions, except subscribers) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 10-15
U.S. Households 113.9 115.3 116.7 117.3 117.9 117.9 117.9 117.9 119.0 120.2 121.4
MSO Video Subscribers 65.6 64.9 63.5 62.2 60.4 59.1 57.8 56.0 55.9 54.9 54.0 (1.9%)
YOY Growth 0.31% -1.07% -2.09% -2.08% -2.94% -2.11% -2.20% -3.16% -0.11% -1.83% -1.59%
Satellite Video Subs 29.1 30.6 31.3 32.7 33.4 33.9 34.1 34.3 34.3 34.4 34.5 0.6%
YOY Growth 6.94% 5.34% 2.25% 4.35% 2.13% 1.49% 0.85% 0.50% 0.06% 0.23% 0.23%
Telco Video Subs 0.2 1.2 3.0 4.9 6.5 8.0 9.3 10.7 11.6 12.6 13.7 14.3%
YOY Growth 459.0% 152.4% 66.3% 31.1% 23.3% 16.3% 15.8% 8.1% 8.8% 8.7%
MSO Market Share 69.3% 68.0% 65.0% 62.3% 60.3% 58.6% 57.1% 55.4% 54.9% 53.9% 52.8%
Total U.S. Video Subs 94.9 96.7 97.8 99.8 100.2 100.9 101.2 101.0 101.8 101.9 102.2 0.3%
YOY Growth 2.5% 1.9% 1.2% 2.0% 0.4% 0.7% 0.3% (0.2%) 0.8% 0.1% 0.3%
Penetration 83% 84% 84% 85% 85% 86% 86% 86% 86% 85% 84%
Cable Video Revenue
Video ARPU $57.00 $61.00 $64.00 $67.20 $69.89 $72.68 $74.86 $76.36 $77.89 $79.45 $81.04 2.6%
Total Video Revenue $44,870 $47,507 $48,800 $50,173 $50,646 $51,559 $51,940 $51,303 $52,271 $52,339 $52,537 0.7%
EBITDA Margin 37.5% 38.3% 38.5% 38.3% 38.0% 37.5% 36.0% 35.0% 34.0% 33.0% 32.0% (2.8%)
EBITDA $16,826 $18,195 $18,788 $19,216 $19,245 $19,335 $18,698 $17,956 $17,772 $17,272 $16,812 (2.1%)
Broadband Revenue
Broadband Subs 30.1 34.0 37.1 39.4 41.9 44.2 46.5 47.9 48.8 48.8 48.8 3.1%
ARPU $42.96 $43.10 $42.24 $41.82 $42.86 $44.15 $45.69 $47.29 $48.95 $50.66 $52.43 3.4%
Total Broadband Revenue $15,501 $17,579 $18,807 $19,752 $21,546 $23,401 $25,501 $27,172 $28,677 $29,680 $30,719 6.6%
EBITDA Margin 50.0% 55.0% 55.0% 55.0% 55.0% 56.0% 57.0% 58.0% 59.0% 60.0% 61.0%
EBITDA $7,751 $9,668 $10,344 $10,864 $11,850 $13,105 $14,535 $15,760 $16,919 $17,808 $18,739 8.5%
Telephony Revenue
Telephony Subs 6.6 12.9 18.0 20.7 21.9 23.2 24.5 25.4 26.1 26.3 26.6 3.7%
ARPU $43.00 $42.14 $41.30 $40.47 $39.26 $38.47 $38.47 $38.47 $38.47 $38.47 $38.47 (0.4%)
Total Telephony Revenue $3,404 $6,539 $8,929 $10,060 $10,326 $10,722 $11,294 $11,709 $12,039 $12,142 $12,280 3.3%
EBITDA Margin 8.0% 12.0% 18.0% 25.0% 30.0% 33.0% 33.0% 34.0% 35.0% 35.0% 35.0% 3.1%
EBITDA $272 $785 $1,607 $2,515 $3,098 $3,538 $3,727 $3,981 $4,214 $4,250 $4,298 6.5%
Other Revenue(1)$2,244 $2,375 $2,440 $3,010 $3,545 $4,254 $5,105 $6,126 $7,351 $8,822 $10,586 20.0%
EBITDA Margin 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%
EBITDA $897 $950 $976 $1,204 $1,418 $1,702 $2,042 $2,450 $2,941 $3,529 $4,234 20.0%
Total MSO Revenue $66,019 $74,000 $78,976 $82,996 $86,063 $89,936 $93,839 $96,309 $100,338 $102,983 $106,122 3.7%
YOY Growth 13.8% 12.1% 6.7% 5.1% 3.7% 4.5% 4.3% 2.6% 4.2% 2.6% 3.0%
Total ARPU $83.87 $95.02 $103.57 $111.16 $118.76 $126.79 $135.26 $143.35 $149.51 $156.32 $163.69 5.6%
YOY Growth 13.5% 13.3% 9.0% 7.3% 6.8% 6.8% 6.7% 6.0% 4.3% 4.6% 4.7%
(1) Includes Advertising, Installation, Content, Wireless etc.
Cash Flow Analysis
EBITDA $25,747 $29,598 $31,715 $33,799 $35,612 $37,679 $39,003 $40,147 $41,846 $42,858 $44,083 3.8%
EBITDA Margin 39.0% 40.0% 40.2% 40.7% 41.4% 41.9% 41.6% 41.7% 41.7% 41.6% 41.5%
EBITDA Growth 16.6% 15.0% 7.2% 6.6% 5.4% 5.8% 3.5% 2.9% 4.2% 2.4% 2.9%
CAPEX $11,700 $15,000 $13,426 $13,694 $13,770 $13,490 $13,137 $12,520 $13,044 $13,388 $13,796 (0.6%)
As % of revenue 17.7% 20.3% 17.0% 16.5% 16.0% 15.0% 14.0% 13.0% 13.0% 13.0% 13.0%
Cash Flow (Unlevered, Pre Tax) $14,047 $14,598 $18,289 $20,105 $21,841 $24,189 $25,865 $27,627 $28,802 $29,471 $30,287 6.2%
YOY Growth 26.8% 3.9% 25.3% 9.9% 8.6% 10.7% 6.9% 6.8% 4.3% 2.3% 2.8%
Total Debt $77,191 $74,271 $70,613 $66,603 $62,235 $57,397 $52,224 $46,699 $40,938 $35,044 $28,987 (10.9%)
Debt to EBITDA 3.0X 2.5X 2.2X 2.0X 1.7X 1.5X 1.3X 1.2X 1.0X 0.8X 0.7X
Source: Company Reports & Opco Research Estimates.
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Exhibit 26: Annual Video Subscriber Model Bottom-Up Last Updated: 03/13/2015 YoY Percentage Change (%) CAGR
2009 2010 2011 2012 2013 2014 2015E 2016E 2009 2010 2011 2012 2013 2014 2015E 2016E '10-'15
Total Pay-TV Subscribers (mil)
Cable 62.218 60.389 59.113 57.816 55.987 55.925 54.900 54.027 -2.1% -2.9% -2.1% -2.2% -3.2% -0.1% -1.8% -1.6% -1.9%
DBS 32.660 33.356 33.852 34.140 34.310 34.330 34.410 34.490 4.3% 2.1% 1.5% 0.9% 0.5% 0.1% 0.2% 0.2% 0.6%
Telco Facilities-Based 4.926 6.990 8.522 9.715 11.282 12.512 13.392 14.552 66.3% 41.9% 21.9% 14.0% 16.1% 10.9% 7.0% 8.7% 13.9%
Total 99.804 100.736 101.487 101.670 101.579 102.767 102.702 103.069 2.0% 0.9% 0.7% 0.2% -0.1% 1.2% -0.1% 0.4% 0.4%
Total Pay-TV Subscribers (market share %)
Cable 62.3% 59.9% 58.2% 56.9% 55.1% 54.4% 53.5% 52.4%
DBS 32.7% 33.1% 33.4% 33.6% 33.8% 33.4% 33.5% 33.5%
Telco Facilities-Based 4.9% 6.9% 8.4% 9.6% 11.1% 12.2% 13.0% 14.1%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total Pay-TV Subscriber Additions (mil)
Cable (1.324) (1.829) (1.357) (1.298) (1.829) (0.062) (1.025) (0.873) -2.5% 38.2% -25.8% -4.4% 41.0% -96.6% nm -14.9%
DBS 1.361 0.696 0.496 0.288 0.170 0.020 0.080 0.080 97.8% -48.9% -28.7% -41.9% -41.0% -88.2% nm 0.0%
Telco Facilities-Based 1.963 2.064 1.531 1.193 1.568 1.230 0.880 1.160 9.7% 5.2% -25.8% -22.1% 31.4% -21.6% -28.4% 31.8%
Total 2.000 0.931 0.670 0.183 (0.091) 1.188 (0.065) 0.367 78.7% -53.4% -28.0% -72.6% nm nm nm nm
Total Pay-TV Subscriber Additions (market share %)
Cable -66.2% -196.4% -202.4% -707.2% 1999.5% -5.2% 1573.8% -237.5%
DBS 68.0% 74.7% 74.0% 157.0% -185.8% 1.7% -122.8% 21.8%
Telco Facilities-Based 98.1% 221.7% 228.4% 650.3% -1713.7% 103.5% -1351.0% 315.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Telco Facilities-based Video Subscribers (mil)
AT&T 2.065 2.987 3.791 4.536 5.460 5.943 6.593 7.343 97.6% 44.6% 26.9% 19.7% 20.4% 8.8% 10.9% 11.4% 17.2%
Verizon 2.861 3.472 4.173 4.726 5.262 5.649 6.019 6.369 49.2% 21.4% 20.2% 13.3% 11.3% 7.4% 6.5% 5.8% 11.6%
CenturyLink 0.000 0.000 0.000 0.106 0.175 0.242 0.270 0.300 na na na na 65.1% 38.3% 11.6% 11.1%
Cincinatti Bell (Fioptic Video) 0.040 0.055 0.074 0.091 0.100 0.120 23.2% 9.4% 20.0%
Frontier Comm. 0.000 0.531 0.558 0.347 0.385 0.587 0.410 0.420 na na 4.9% -37.8% 11.2% 52.2% -30.1% 2.4%
Total 4.926 6.990 8.561 9.770 11.357 12.512 13.392 14.552 66.3% 41.9% 22.5% 14.1% 16.2% 10.2% 7.0% 8.7% 13.9%
Telco Facilities-based Video Subscriber Additions (mil)
AT&T 1.020 0.922 0.804 0.745 0.924 0.483 0.650 0.750 25.3% -9.6% -12.8% -7.3% 24.0% -47.7% 34.6% 15.4%
Verizon 0.943 0.611 0.701 0.553 0.536 0.387 0.370 0.350 -3.3% -35.2% 14.7% -21.1% -3.1% -27.8% -4.4% -5.4%
CenturyLink 0.000 0.000 0.000 0.000 0.069 0.067 0.028 0.030 na na na na na -2.9% -58.2% 7.1%
Cincinatti Bell (Fioptic Video) 0.016 0.019 0.017 0.009 0.020 -9.9% -50.0% 132.6%
Frontier Comm. 0.000 0.538 0.026 (0.211) 0.039 0.201 (0.177) 0.010 na na -95.1% nm nm nm nm nm
Total 1.963 2.071 1.531 1.103 1.587 1.155 0.880 1.160 9.7% 5.5% -26.1% -28.0% 43.9% -27.2% -23.8% 31.8%
Cable Basic Subscribers (mil)
Comcast 23.559 22.790 22.331 21.994 21.689 22.382 22.247 22.197 -2.6% -3.3% -2.0% -1.5% -1.4% 3.2% -0.6% -0.2% -0.5%
Time Warner 12.859 12.422 12.061 12.218 11.393 10.992 10.473 10.013 -1.6% -3.4% -2.9% 1.3% -6.8% -3.5% -4.7% -4.4% -3.4%
Cox 5.282 5.176 5.099 5.048 4.997 4.947 4.898 4.849 -1.5% -2.0% -1.5% -1.0% -1.0% -1.0% -1.0% -1.0% -1.1%
Charter 4.824 4.520 4.440 4.286 4.177 4.160 4.035 3.914 -4.4% -6.3% -1.8% -3.5% -2.5% -0.4% -3.0% -3.0% -2.2%
Cablevision 3.063 3.314 3.250 3.197 2.813 2.681 2.627 2.575 -1.4% 8.2% -1.9% -1.6% -12.0% -4.7% -2.0% -2.0% -4.5%
Mediacom 1.238 1.193 1.069 1.000 0.945 0.890 0.846 0.803 -4.3% -3.6% -10.4% -6.5% -5.5% -5.8% -5.0% -5.0% -6.7%
Other 11.393 10.973 10.864 10.073 9.972 9.873 9.774 9.676 -0.8% -3.7% -1.0% -7.3% -1.0% -1.0% -1.0% -1.0% -2.3%
Total 62.218 60.389 59.113 57.816 55.987 55.925 54.900 54.027 -2.1% -2.9% -2.1% -2.2% -3.2% -0.1% -1.8% -1.6% -1.9%
Cable Basic Subscriber Additions (mil)
Comcast (0.623) (0.769) (0.459) (0.337) (0.305) 0.693 (0.135) (0.050) nm 23.4% -40.3% -26.6% -9.5% nm nm -63.0%
Time Warner (0.210) (0.437) (0.442) 0.157 (0.825) (0.401) (0.519) (0.460) 15.4% 108.1% 1.1% nm nm -51.4% 29.4% -11.4%
Cox (0.080) (0.106) (0.078) (0.051) (0.050) (0.050) (0.049) (0.049) 95.7% 32.1% -26.5% -34.3% -1.0% -1.0% -1.0% -1.0%
Charter (0.222) (0.304) (0.080) (0.154) (0.109) (0.017) (0.125) (0.121) 28.2% 36.9% -73.5% 91.5% -29.2% -84.4% nm -3.0%
Cablevision (0.045) 0.251 (0.064) (0.053) (0.384) (0.132) (0.054) (0.053) 200.0% nm nm -17.2% nm -65.6% -59.4% -2.0%
Mediacom (0.055) (0.045) (0.124) (0.069) (0.055) (0.055) (0.045) (0.042) 77.4% -18.2% 175.6% -44.4% -20.3% 0.0% -19.1% -5.0%
Other (0.089) (0.420) (0.110) (0.791) (0.101) (0.100) (0.099) (0.098) -91.4% nm -73.9% nm -87.3% -1.0% -1.0% -1.0%
Total (1.324) (1.829) (1.357) (1.298) (1.829) (0.062) (1.025) (0.873) -2.5% 38.2% -25.8% -4.4% 41.0% -96.6% nm -14.9%
DBS Video Subscribers (mil)
DirecTV 18.560 19.223 19.885 20.084 20.253 20.352 20.392 20.422 5.3% 3.6% 3.4% 1.0% 0.8% 0.5% 0.2% 0.1% 1.2%
DISH 14.100 14.133 13.967 14.056 14.057 13.978 14.018 14.068 3.1% 0.2% -1.2% 0.6% 0.0% -0.6% 0.3% 0.4% -0.2%
Total 32.660 33.356 33.852 34.140 34.310 34.330 34.410 34.490 4.3% 2.1% 1.5% 0.9% 0.5% 0.1% 0.2% 0.2% 0.6%
DBS Video Subscriber Additions (mil)
DirecTV 0.939 0.663 0.662 0.199 0.169 0.099 0.040 0.030 18.9% -29.4% -0.2% -69.9% -15.1% -41.4% -59.6% -25.0%
DISH 0.422 0.033 (0.166) 0.089 0.001 (0.079) 0.040 0.050 nm -92.2% nm nm -98.9% nm nm 25.0%
Total 1.361 0.696 0.496 0.288 0.170 0.020 0.080 0.080 97.8% -48.9% -28.7% -41.9% -41.0% -88.2% nm 0.0%
Source: Company Reports; Oppenheimer & Co, Inc. estimates
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Exhibit 27: Annual Broadband Subscriber Model Last Updated: 03/13/2015 CAGR
Subscribers (000s): 2009 2010 2011 2012 2013 2014 2015E 2016E 2009 2010 2011 2012 2013 2014 2015E 2016E '11-'16
Cumulative Subscribers
RBOCs 27,821 30,010 30,651 31,033 31,431 31,315 31,780 32,580 5.4% 7.9% 2.1% 1.2% 1.3% (0.4%) 1.5% 2.5% 1.2%
Others 6,143 5,000 4,849 4,901 5,012 5,477 5,525 5,580 7.2% (18.6%) (3.0%) 1.1% 2.3% 9.3% 0.9% 1.0% 2.9%
Total Telco (DSL/Fiber) 33,964 35,010 35,500 35,934 36,443 36,791 37,305 38,160 5.7% 3.1% 1.4% 1.2% 1.4% 1.0% 1.4% 2.3% 1.5%
Total Cable 39,364 41,891 44,431 46,800 48,290 50,772 52,178 53,509 6.1% 6.4% 6.1% 5.3% 3.2% 5.1% 2.8% 2.6% 3.8%
Total Broadband Subscribers 73,328 76,901 79,930 82,734 84,734 87,563 89,483 91,669 5.9% 4.9% 3.9% 3.5% 2.4% 3.3% 2.2% 2.4% 2.8%
Incremental Additions
RBOCs 1,419 3,248 641 382 398 (116) 465 800 1.4% 128.9% (80.3%) (40.4%) 4.2% (129.2%) (499.5%) 72.0% 4.5%
Others 411 (2,202) (151) 52 111 464 49 55 (35.5%) (635.5%) (93.1%) NM NM NM NM NM #NUM!
Total Telco 1,830 1,046 490 434 509 348 514 855 (10.2%) (42.9%) (53.2%) (11.3%) 17.3% (31.7%) 47.6% 66.5% 11.8%
Market Share - Incremental Additions 44.8% 29.3% 16.2% 15.5% 25.5% 12.3% 26.7% 39.1%
Total Cable 2,259 2,527 2,540 2,369 1,490 2,482 1,407 1,331 (27.5%) 11.8% 0.5% (6.7%) (37.1%) 66.5% (43.3%) (5.4%) (12.1%)
Market Share - Incremental Additions 55.2% 70.7% 83.8% 84.5% 74.5% 87.7% 73.3% 60.9%
Total Broadband Net Adds 4,090 3,573 3,030 2,803 2,000 2,830 1,920 2,186 (20.7%) (12.6%) (15.2%) (7.5%) (28.7%) 41.5% (32.1%) 13.8% (6.3%)
Broadband Market Share
RBOCs 37.9% 39.0% 38.3% 37.5% 37.1% 35.8% 35.5% 35.5%
Others 8.4% 6.5% 6.1% 5.9% 5.9% 6.3% 6.2% 6.1%
Total Telco 46.3% 45.5% 44.4% 43.4% 43.0% 42.0% 41.7% 41.6%
Total Cable 53.7% 54.5% 55.6% 56.6% 57.0% 58.0% 58.3% 58.4%
Broadband Penetration - HHs 62.5% 65.2% 67.3% 69.2% 70.4% 72.2% 73.4% 74.9%
YOY Change 3.2% 2.7% 2.1% 1.9% 1.2% 1.8% 1.2% 1.4%
Broadband Penetration - Online HHs 81.5% 83.0% 84.1% 85.4% 86.8% 89.2% 90.6% 92.3%
YOY Change 1.9% 1.5% 1.2% 1.2% 1.4% 2.5% 1.4% 1.7%
Total Narrowband 16,651 15,778 15,065 14,162 12,937 10,596 9,265 7,672 (5.9%) (5.2%) (4.5%) (6.0%) (8.6%) (18.1%) (12.6%) (17.2%) (12.6%)
Narrowband Penetration - HHs 14.2% 13.4% 12.7% 11.8% 10.7% 8.7% 7.6% 6.3%
Narrowband Penetration - Online HHs 18.5% 17.0% 15.9% 14.6% 13.2% 10.8% 9.4% 7.7%
Narrowband Subs Migrating To Broadband 26% 24% 24% 32% 61% 83% 69% 73%
Total U.S. Households (mil.) 117.3 117.9 118.7 119.6 120.4 121.2 121.8 122.5 0.5% 0.5% 0.7% 0.7% 0.7% 1.0% 0.5% 0.5% 0.6%
Total U.S. Computer Households (mil.) 90.0 92.7 95.0 96.9 97.7 98.2 98.7 99.3 3.5% 3.0% 2.5% 2.0% 0.8% 0.5% 0.6% 0.6% 0.9%
As % of HHs 76.7% 78.6% 80.0% 81.0% 81.1% 81.0% 81.0% 81.1%
Source: Company reports, Oppenheimer & Co. Inc. estimates.
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Exhibit 28: Acess Line Analysis Model Last Updated: 03/13/2015 CAGR
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 11-16E
Total U. S. Access Lines4 162.8 152.9 149.7 143.3 138.1 133.2 130.6 128.6 126.7 (2.4%)
YOY Growth 2.7% (6.0%) (2.2%) (4.2%) (3.7%) (3.5%) (2.0%) (1.5%) (1.5%)
Primary Access Lines 152.3 142.8 139.7 133.5 128.4 123.7 121.1 119.2 117.4 (2.5%)
YOY Growth 3.3% (6.2%) (2.2%) (4.4%) (3.8%) (3.7%) (2.1%) (1.5%) (1.5%)
Secondary Access Lines 10.5 10.1 9.9 9.8 9.7 9.6 9.5 9.4 9.3 (1.0%)
YOY Growth (5.0%) (3.0%) (2.0%) (1.5%) (1.3%) (1.0%) (0.9%) (0.9%) (0.9%)
By End Market
Total Residential 97.8 91.4 87.0 82.8 78.9 75.3 74.5 74.6 75.4
YOY Growth 4.2% (6.6%) (4.8%) (4.9%) (4.7%) (4.6%) (1.0%) 0.1% 1.1%
Switched Access Line 78.2 68.6 60.0 51.9 44.6 37.6 33.1 29.4 26.2
ILEC 72.5 63.6 55.7 48.4 41.5 35.0 30.8 27.4 24.4
Competitor 5.6 5.0 4.3 3.7 3.1 2.6 2.3 2.0 1.8
Interconnected VoIP 19.7 22.8 27.0 30.9 34.3 37.7 41.5 45.2 49.2
ILEC 0.3 1.0 2.5 4.2 6.1 8.0 10.0 12.0 14.4
Competitor 19.0 21.4 24.6 26.7 28.2 29.7 31.4 33.2 34.8
Total Business 65.0 61.5 62.6 60.5 59.2 58.0 59.2 61.4 65.1
YOY Growth 0.6% (5.3%) 1.7% (3.4%) (2.2%) (2.0%) 2.1% 3.7% 6.0%
Switched Access Line 62.9 58.3 57.9 54.7 51.5 47.7 45.3 43.1 40.9
ILEC 45.4 42.2 39.0 36.4 33.7 31.0 29.2 27.4 25.8
Competitor 17.4 16.3 17.9 18.4 17.8 16.7 16.1 15.6 15.1
Interconnected VoIP Business 2.1 3.2 4.7 5.8 7.6 10.3 13.9 18.3 24.2
ILEC 0.3 0.6 0.4 0.5 0.7 1.0 1.6 2.3 3.5
Competitor 1.7 3.0 4.3 5.2 6.9 9.2 12.3 16.0 20.7
VOIP Market Share 5.2% 7.6% 9.5% 12.9% 17.7% 23.4% 29.8% 37.1%
VOIP
Total ILEC VoIP 0.5 1.6 2.9 4.7 6.9 9.0 11.6 14.3 17.9
201.7% 79.3% 64.5% 46.0% 31.8% 27.9% 24.0% 24.9%
Total Competitive VoIP 20.7 24.4 28.8 32.0 35.1 38.9 43.7 49.1 55.5
17.7% 18.2% 10.9% 9.8% 10.9% 12.4% 12.3% 12.9%
Total VOIP 21.3 26.0 31.7 36.7 41.9 48.0 55.3 63.5 73.4
22.2% 21.9% 15.7% 14.4% 14.3% 15.4% 14.8% 15.6%
Coax Cable 20.1 23.2 25.9 27.8 29.3 30.9 32.4 34.0 35.7
139.8% 15.2% 11.7% 7.3% 5.6% 5.3% 5.0% 5.0% 5.0%
SaaS VoIP (Residential + Business) 0.6 1.2 2.9 4.2 5.8 8.0 11.3 15.1 19.7
96.9% 141.6% 42.4% 37.6% 39.3% 41.1% 33.3% 30.8%
Market Share
ILEC Residential Market Share 74.4% 70.7% 66.9% 63.3% 60.4% 57.1% 54.8% 52.8% 51.4%
ILEC Business Market Share 70.4% 68.9% 62.8% 61.0% 58.3% 55.3% 51.9% 48.5% 45.0%
Incumbent Access Lines 118.5 107.0 97.5 89.4 81.6 75.1 70.3 66.8 63.5 (6.6%)
YOY Growth (8.6%) (9.7%) (8.9%) (8.3%) (8.8%) (8.0%) (6.3%) (5.0%) (5.0%)
Absolute Declines (11.20) (11.48) (9.52) (8.07) (7.84) (6.51) (4.75) (3.55) (3.33)
Competitive Line Analysis
Total Lines 44.3 45.9 52.2 53.9 56.5 58.2 60.2 61.8 63.2 3.2%
YOY Growth 54.1% 3.7% 13.6% 3.3% 4.8% 3.0% 3.6% 2.6% 2.3%
Cable (mostly VoIP1) 19.1 21.3 23.1 24.3 25.3 26.0 27.1 27.7 28.1 2.9%
YOY Growth 31.8% 11.5% 8.2% 5.4% 4.2% 2.7% 4.3% 2.2% 1.4%
Consumer VoIP1 5.3 5.3 5.7 5.9 6.0 6.2 6.2 6.2 6.2 1.2%
YOY Growth 36.8% 0.5% 6.9% 3.0% 1.4% 4.8% (0.4%) 0.1% 0.1%
CLEC and Other2 19.8 19.3 23.4 23.7 25.2 25.9 26.9 27.9 28.9 4.0%
YOY Growth 92.0% (2.8%) 21.3% 1.3% 6.3% 2.8% 3.9% 3.7% 3.6%
Estimated Substitute Lines
Total Lines 58.9 67.2 75.5 83.6 90.7 95.7 98.5 101.3 104.1 6.1%
YOY Growth 13.1% 14.1% 12.4% 10.7% 8.5% 5.5% 2.9% 2.8% 2.8%
Wireless 40.0 48.0 56.0 64.0 71.0 76.0 79.0 82.0 85.0 5.8%
YOY Growth 17.6% 20.0% 16.7% 14.3% 10.9% 7.0% 3.9% 3.8% 3.7%
Broadband (2nd line substitution) 18.9 19.2 19.5 19.6 19.7 19.7 19.5 19.3 19.1 (0.5%)
YOY Growth 4.4% 1.6% 1.6% 0.5% 0.5% 0.0% (1.0%) (1.0%) (1.0%)
Normalized U.S. Access Lines3 221.7 220.1 225.2 226.9 228.8 228.9 229.1 229.9 230.8 0.3%
YOY Growth 5.3% (0.7%) 2.3% 0.8% 0.8% 0.1% 0.1% 0.4% 0.4%
Source: Company reports and Oppenheimer & Co. Inc. estimates.
Notes:
1. VoIP includes both consumer and business lines.
2. Other represents primarily facilities based CLEC mostly provided by the integrated long distance carriers.
3. Normalized lines represent actual lines plus estimated substitute lines.
4. U.S. reported lines peaked at 192 million in 2000.
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Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about thesubject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no partof his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views containedin this research report.Potential Conflicts of Interest:Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firmincluding the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensationbased upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any researchanalyst and any member of his or her household from executing trades in the securities of a company that such researchanalyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer,director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in coveredcompanies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long positionof less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options,futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoingarrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered byOppenheimer & Co. Inc:Stock Prices as of March 17, 2015Apple Inc. (AAPL - NASDAQ, $124.95, OUTPERFORM)Akamai Technologies (AKAM - NASDAQ, $72.08, OUTPERFORM)American Tower Corp. (AMT - NYSE, $94.61, OUTPERFORM)Amazon.Com, Inc. (AMZN - NASDAQ, $373.35, OUTPERFORM)Broadcom Corporation (BRCM - NASDAQ, $44.94, OUTPERFORM)Crown Castle International (CCI - NYSE, $85.80, PERFORM)Cogent Communications (CCOI - NASDAQ, $35.24, OUTPERFORM)Comcast (CMCSA - NASDAQ, $59.75, OUTPERFORM)Salesforce.com (CRM - NYSE, $66.43, OUTPERFORM)Cisco Systems (CSCO - NASDAQ, $28.30, OUTPERFORM)CenturyLink (CTL - NYSE, $34.50, PERFORM)Equinix Inc. (EQIX - NASDAQ, $236.14, OUTPERFORM)Facebook, Inc. (FB - NASDAQ, $78.07, OUTPERFORM)Google, Inc. (GOOG - NASDAQ, $554.51, PERFORM)Intel Corp. (INTC - NASDAQ, $30.83, PERFORM)InterXion Holding N.V. (INXN - NYSE, $30.05, NOT RATED)Level 3 Communications, Inc. (LVLT - NASDAQ, $54.55, PERFORM)Microsoft Corporation (MSFT - NASDAQ, $41.56, OUTPERFORM)Netflix, Inc. (NFLX - NASDAQ, $421.97, OUTPERFORM)Nokia Corporation (NOK - NYSE, $7.78, OUTPERFORM)QUALCOMM Incorporated (QCOM - NASDAQ, $70.00, OUTPERFORM)Rackspace Hosting, Inc. (RAX - NYSE, $53.06, OUTPERFORM)Sprint Nextel (S - NYSE, $5.15, UNDERPERFORM)AT&T, Inc. (T - NYSE, $33.06, OUTPERFORM)T-Mobile (TMUS - NYSE, $32.47, OUTPERFORM)Twitter, Inc. (TWTR - NYSE, $46.43, PERFORM)Verizon (VZ - NYSE, $49.27, OUTPERFORM)
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Windstream Corporation (WIN - NYSE, $7.59, PERFORM)Yahoo! Inc. (YHOO - NASDAQ, $43.51, OUTPERFORM)
All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co.Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department,Business Manager.
Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:
Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.
Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.
Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.
Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflictof interest.
Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:
Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/orthe ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.
Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to aperceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higherrated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressivetrading accounts might decide to liquidate their positions to employ the funds elsewhere.
Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceivedin the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.
Distribution of Ratings/IB Services Firmwide
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
OUTPERFORM [O] 320 55.08 144 45.00
PERFORM [P] 251 43.20 93 37.05
UNDERPERFORM [U] 10 1.72 2 20.00
Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do notcorrelate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assignedbuy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.
Company Specific Disclosures
Oppenheimer & Co. Inc. makes a market in the securities of AAPL, AKAM, AMZN, BRCM, CCOI, CMCSA, CSCO, DCM,DISH, EQIX, FB, GOOG, INTC, MSFT, NFLX, QCOM, SLA, T, TMUS and YHOO.
Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3months from CMCSA, FB, INXN, LVLT and WIN.
Additional Information Available
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Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: EquityResearch Department, Business Manager.
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