Dennis WellerChief EconomistVerizon

Mobile EconomicsARCEP26 March 2007

Mobile Markets:The US Experience

2

Verizon: Profile

Verizon Wireless59 million subscribers

Verizon Telecom45 million lines7 million broadband customers:

700,000 FiOS Internet 189,000 FiOS TV

Verizon BusinessOperations in 150 countriesServes 97% of Fortune 500World’s most connected IP network

3

Verizon Wireline Footprint in US

4

$12.8

$12.5

$12.2

$12.1

$6.4

$7.6

$6.1

$6.9

$6.0

$6.8

$4.2

$3.5

$4.2

$3.5

$3.8

$2.7

$3.3

$1.9

$2.1

$2.0

$2.1

$1.8

$13.5

$14.0

$13.3

$13.4

$7.4

$8.0

$8.3

$7.3

$5.4

$5.5

$4.6

$4.0

$3.5

$2.7

$2.5

$2.2

$2.4

$2.0

$2.2

$16.3

$15.8

$15.6

$15.2

$14.6

$8.5

$7.3

$8.0

$6.0

$4.2

$3.7

$2.2

$2.7

$2.8

$2.4

$2.5

$2.2

$2.8

$3.5

$15.5

$8.1 $10.5

$7.6

$1.8

$3.5

$12.9

$4.4

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45

VerizonWal-Mart

GEExxon Mobil

ConocoPhillipsAvg. of Fortune 10 Companies

Chevron

GMAIG

FordAT&T

IntelIBM

Avg. of 28 Dow Companies*Home Depot

CitigroupPfizer

Johnson & Johnson

Procter & GambleCaterpillar

Hewlett-PackardAltria

AlcoaWalt Disney

McDonald'sMerck

BoeingDuPont

Microsoft

3MCoca-Cola

GoogleUnited Technologies

HoneywellAmerican Express

Capital Expenditures (in billions)

2004 2005 2006

*Excludes Verizon. Data for JPMorgan & Chase are not

*Excludes Verizon. Data for JPMorgan & Chase are not available.

Companies in the Dow Jones Industrial Average: 3M, AIG, Alcoa, Altria, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, DuPont, Exxon Mobil, GE, GM, Hewlett-Packard, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JPMorgan & Chase, McDonald's, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon, Wal-Mart, and Walt Disney.

Companies in the Fortune 10: Exxon Mobil, Wal-Mart, GM, Chevron, Ford, ConocoPhillips, GE, Citigroup, AIG, and IBM.

Sources: Reuters data; company reports.

Year Ending Sept./Oct.

Capital Expenditures of US Companies

Sources: Reuters data; company reports.

*Excludes Verizon. Data for JPMorgan & Chase are not available.

Companies in the Dow Jones Industrial Average: 3M, AIG, Alcoa, Altria, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, DuPont, Exxon Mobil, GE, GM, Hewlett-Packard, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JPMorgan & Chase, McDonald's, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon, Wal-Mart, and Walt Disney.

Companies in the Fortune 10: Exxon Mobil, Wal-Mart, GM, Chevron, Ford, ConocoPhillips, GE, Citigroup, AIG, and IBM.

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45

VerizonWal-Mart

GEExxon Mobil

ConocoPhillipsAvg. of Fortune 10 Companies*

Chevron

GMAIG

FordAT&T

IntelIBM

Avg. of 28 Dow Companies*Home Depot

CitigroupPfizer

Johnson & Johnson

Procter & GambleCaterpillar

Hewlett-PackardAltria

AlcoaWalt Disney

McDonald'sMerck

BoeingDuPont

Microsoft

3MCoca-Cola

GoogleUnited Technologies

HoneywellAmerican Express

2004 2005 2006

*Excludes Verizon. Data for JPMorgan & Chase are not

*Excludes Verizon. Data for JPMorgan & Chase are not available.

Companies in the Dow Jones Industrial Average: 3M, AIG, Alcoa, Altria, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, DuPont, Exxon Mobil, GE, GM, Hewlett-Packard, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JPMorgan & Chase, McDonald's, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon, Wal-Mart, and Walt Disney.

Companies in the Fortune 10: Exxon Mobil, Wal-Mart, GM, Chevron, Ford, ConocoPhillips, GE, Citigroup, AIG, and IBM.

Sources: Reuters data; company reports.

Year Ending Sept./Oct.

5

Market Structure of US Wireless

Verizon

AT&T

Sprint/Nextel

T-Mobile

Alltel

Other players Cable consortium Regional carriers

6

1990s Reform of US Wireless Policies

Increased spectrum, capacity, competition

“Light touch” regulation Preemption of states

Flexibility in technology Verizon, Sprint, Alltel are CDMA AT&T, T-Mobile are GSM

Flexibility in use of spectrum Development of secondary market 3G service without 3G license

7

Compensation for Wireless Termination in the US Market

A “calling party pays” system

Local traffic from a wireline carrier pays $0.0007 per minute for wireless termination.

Wireless carriers have commercial agreements to exchange traffic on a “bill and keep” basis

Long distance carriers do not pay to terminate traffic on wireless carriers

8

Wireless Termination in Europe and the US

13.3

9.29

0.07

17.09

0 5 10 15 20

Luxembourg

EU average

Sweden

US

Termination rate in US cents per minute

9

Performance of US Wireless Market

Rapid growth in subscription 19% annual growth over last decade 233 million subscribers More wireless than wireline

Lower prices Flat-rated packages include nationwide calling

Increased usage Average usage per wireless handset:

832 minutes/month in US 149 minutes/month in Europe

More total wireless minutes in US than wireline

10

US Retail Market for Wireless

Most offers count minutes in and out But some offers count only minutes out

Flat rate offers for “buckets” of minutes Unlimited off-peak minutes Unlimited on-net minutes Nationwide coverage Most roaming is free “Family share” plans

Handsets are subsidized

Numbers are portable Geographic numbers from same pool as wireline

MVNOs are common

11

Future Development and New Services

Broadband

Video

Shopping

Gaming

Payment

Integration between wireline and wireless New solutions for business

IP

12

Growth of Wireless Broadband

In 1H06, total high-speed lines grew 26%, from 51.2 million to 64.6 million lines

59% of all adds were mobile wireless subscriptions.

From June 2005 to June 2006: Mobile wireless’ share

of total broadband lines rose from 1% to 17% of total broadband lines.

3.1

2.0

0.5

7.9

0

1

2

3

4

5

6

7

8

Mill

ion

s

ADSL CableModem

OtherBroadband

Wireless

High Speed Net Adds by Type, Dec. 2005 – June 2006

13

14

Pricing of VCAST Service

V CAST VPak $15 per Month

Mobile Web 2.0

VZW TodayUnlimited Browsing

Unlimited Data TransportGet It Now services

Get Games**Get Tones**

Get Wallpaper**Get Going**

Unlimited Basic Video ClipsNews

Sports Entertainment

Weather

Access to Premium Content

• Partners include Comedy Central, MTV, News Corp, 20th Century Fox• NBC News tailored for mobile• Exclusive mini-episodes of popular TV shows• More than 300 clips updated daily

15

Verizon iobi HomeIP Enabled Telephone Service

16

VerizonOne Concept2-way Multimedia Communication

17

Access Point - Client

CALL LOGS

CONTACTS

SEND MESSGAGES

CALLFORWARDINGVOICE MAIL

• iobi desktop client allows

users to manage their

communications from their

PC

• Most convenient access

point from your office or

home PC

• Send SMS or e-mails with a

mouse click

• View your weather

information

18

Service Control

ISCP™ISCP™

VMVM

Outlook

PSTN/VoIPCall Control

iobiEnd UserPortal

Addr bookCalendarContent

Directories

ConferencingAnd

CollaborationWeb Sharing

IMSMS

MessagingVM Alert

VM Retrieval

BroadsoftApplication

Server

MGC SIP Proxy

TGMSCMSC

MSCMSC

SSPSSP

SSPSSP

Internet

L1 GatewayEPG

19

Traffic Flows Among 20,000 Autonomous Networks on the Internet

20

Lost?

21

STM-1 IP Transit Prices in London

22

VOIP Peering

VOIP traffic exchange: Some services (e.g. SKYPE) don’t use telephone numbers –

route IP to IP Today, services that use phone numbers (e.g. Vonage)

usually route through PSTN, even if both customers are VOIP

“VOIP peering” will allow VOIP to be exchanged on an IP basis, even if phone number is used Data base lookup provides concordance between telephone

number and IP address of recipient Several systems now under development Depends on what service customer buys, or on agreements

among providers

23

Challenges for Future of IP Market

Threat of regulation As next-generation platforms converge with Internet,

collision between Internet traffic model and traditional regulation of voice traffic exchange

Adding new dimensions to Internet market model Quality SMS VOIP Content Security and privacy