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1© 2005 Cisco Systems, Inc. All rights reserved.
PLAY TO WIN: The UK Opportunity
Next Generation ISPOctober 4th, 2005
Fernando Gil de BernabeManaging Director, Europe and EmergingCisco Internet Business Solutions Group
222© 2005 Cisco Systems, Inc. All rights reserved.
Revenue Scenarios
That twisting feeling in the SP business
2000 2005 2010 2015
UpliftsUplifts
•Cash in the bank •IP services provide new potential growth areas
•Vertical integration in the value chain to provide value added services in the SMB and Enterprise market
•Broadband access provides new revenue in consumer and a new platform to grow new services
•NGSP transformation offers room for ROIC and OPEX improvement
DepressantsDepressants•Regulation is heating up the market particularly through ULL, potentially driving ARPUs down.
•IP services so far are not providing the revenue and profits expected
•Enterprise market is going DIY and outsourcing to SIs
•Consumers are increasingly on iTunes, iVideos, Skype, and others, which destroy the current SP business model
Source: Cisco IBSG, 2005
333© 2005 Cisco Systems, Inc. All rights reserved.
Consumers EnterprisesSmall Business
• Real-time operations• Lower costs• Broader reach
• Access to customers• Scaleable growth• Lower costs• Learning and knowledge
• Entertainment• Convenience
The “interactions” economy provides tremendous opportunities for SPs
Service ProviderInfrastructureand Services
$1.2T Industry WW
$600B $400B$200B
Source: Cisco IBSG analysis, 2005
444© 2005 Cisco Systems, Inc. All rights reserved.
The challenge is profitable growth
PSTN
Voice
ROIC
RevenueGrowth
CAGR % per yr
MobileVoice
-5% +5% +10% +15%
IP,BBSvcs
VoIPMobile
LLU SaturationCompetitionNew technology (4G)
$200B2004
Revenue
Business modelScale
OECD Market Composite
=
LegacyData
IPSubstitution
Source: OECD, Cisco IBSG analysis
555© 2005 Cisco Systems, Inc. All rights reserved.
Consumer Broadband Is Strong Growth Opportunity
Consumer broadband is still in its infancy in most markets
Worldwide 21% CAGR (2003-2008)• 97 million subscribers in 2003
Source: Cisco IBSG, January 2005
2003
* Estimated
2010
• 251 million expected by 2008
U.S. and Europe expected to reach 60% penetration
by 2010
15%
75%60% 60%
90%*
20%
South Korea U.S. Europe
666© 2005 Cisco Systems, Inc. All rights reserved.
In the UK growth accelerated substantially in Q1 05.
Source: Company data, NRA, Asociacion de internautas, JP Morgan July 2005
Broadband penetration (by percentage of households)
777© 2005 Cisco Systems, Inc. All rights reserved.
Unbundled lines have been traditionally very low in the UK
Source: Company data, CSFB June 2005
888© 2005 Cisco Systems, Inc. All rights reserved.
Openreach may change the competitive scene
Source: Om Malik’s Broadband Blog
999© 2005 Cisco Systems, Inc. All rights reserved.
Broadband access is a platform for new services
Security and Data Services
• VoIP• Video Telephony• Mobility
Advanced Communications Services
Entertainment Services
• Video on Demand• Music on Demand• Internet Radio
• VPN• Firewalls• Parental Controls
$1.5bn to $12bn2004 2008
2004 2008
$2.2bn to $28bn2004 2008
BroadbandAccess
$1.5bn to $5.5bn2004 2008
• Security• Monitoring• Utility
Management
Home Management Services
$41bn to $110bn2004 2008
$1bn to $20bn2004 2008
Source: Cisco IBSG, January 2005
101010© 2005 Cisco Systems, Inc. All rights reserved.
Broadband Drives Home Networking Market
Broadband Owners More Likely to Network HomesLikely Adoption
26%
42%
49%
29%
41%
38%
29%
13%
11%
11%
3%
2%
5%
1%
0% 20% 40% 60% 80% 100%
Broadband
Dial Up
Mass Market
Definitely NOT Set Up Probably NOT Set Up
Might/Might Not Set Up Probably Set Up
Definitely Set Up
(Total n=450; Primary Market n=243; Mass Market n=208; Broadband n=220; Dial Up n=221 ; Q47)
16% Adopt Home Network
4% Adopt Home Network
2% Adopt Home Network Use
r Typ
e
Source: Internet Home Alliance, State of the Connected Home Market Study, Trends & Forecast, October 2003
111111© 2005 Cisco Systems, Inc. All rights reserved.
Churn Reduction Impacts Overall Profitability…
. . . and Bundling Reduces Churn and Increases ARPU
Source: Bear, Stearns & Co. Inc estimatesChurn Rate
Ave
rage
Cus
tom
er L
ife
40403636333331312929272725252424222221212020
$1,036$1,036$910$910
$815$815$720$720
$657$657$594$594
$531$531$499$499
$468$468$436$436
$404$404
2.50% 2.75% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00%3.00%
Source: UBS, September 2003
Products in Products in BundleBundle
ChurnChurn Life of SubLife of Sub(in months)(in months)
Life of SubLife of Sub(in years)(in years)
ChurnChurn Life of SubLife of Sub(in months)(in months)
Life of SubLife of Sub(in years)(in years)
11
22
33
3.10%3.10%
2.46%2.46%
1.55%1.55%
32.2632.26
40.6540.65
64.5264.52
2.692.69
3.393.39
5.385.38
3.20%3.20%
2.80%2.80%
1.20%1.20%
31.2531.25
35.7135.71
83.3383.33
2.602.60
2.982.98
6.946.94
CoxCox InsightInsight
Mon
ths
Ret
aine
d
121212© 2005 Cisco Systems, Inc. All rights reserved.
Take-up of Subscriber Lines Is the Key Factor Impacting Profitability of DSL
Source: Lehman Brothers, Oftel Data, Company Data
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%Incr
emen
tal %
Impa
ct o
n To
tal F
ixed
Rev
enue
s
% of Lines Taking DSL and/or VoIP
5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Revenue Impact of VoIPExcluding DSL Uplift
Revenue Impact of DSLIncluding Cannibalizationat EUR 35
Revenue Impact of DSLIncluding Cannibalizationand VoIP at EUR 35
The positive impact should be larger if savings from network convergence are attained.
131313© 2005 Cisco Systems, Inc. All rights reserved.
The Skype threat
Source: Evalueserve 2005
141414© 2005 Cisco Systems, Inc. All rights reserved.
Strategies for Success in Broadband: Content and Communications
Making Money in CommunicationsMaking Money in Communications
Mak
ing
Mon
ey in
Con
tent
Mak
ing
Mon
ey in
Con
tent
Level 1:Basic Broadband Connectivity
Level 2:Improved Operations and Services
Level 3:Value-Added Communications Services
Source: Cisco IBSG, November 2004
Level 3:Light Vertical Integration
Level 2:Value Added Distribution
Level 1:Hands-Off Distribution
151515© 2005 Cisco Systems, Inc. All rights reserved.
Strategic Gameboard
MakingMoney in
“Communications”
Mak
ing
Mon
ey in
“C
onte
nt”
Hands Off Distribution
Value Add Distribution
Light Vertical Integration
Basic BB Connectivity
Improve The Obvious
Value Added Comms Services
• DRM, billing, storage, CDN, CS, VoD, PVR, PPV, HDTV
• Price per service• Customer: content
owners, consumers• Content class of
service
• DRM, billing, storage, CDN, CS, VoD, PVR, PPV, HDTV
• Price per service• Customer: content
owners, consumers• Content class of
service
• Portal business content aggr
• Subscription, Ads, per service
• Sophisticated marketing/branding
• Advanced billing, provisioning
• Portal business content aggr
• Subscription, Ads, per service
• Sophisticated marketing/branding
• Advanced billing, provisioning
• BB access only, no content revenue. Wholesale BB
• Flat rate pricing• One size fits all mktg• Inconsistent, long
provisioning• Direct sales
• BB access only, no content revenue. Wholesale BB
• Flat rate pricing• One size fits all mktg• Inconsistent, long
provisioning• Direct sales
• +P2P (bill or kill), storage, security, home networks.
• Bundling• Tiered pricing• Sophisticated
segmentation. • zero touch prvsing• Home Network
• +P2P (bill or kill), storage, security, home networks.
• Bundling• Tiered pricing• Sophisticated
segmentation. • zero touch prvsing• Home Network
• + IP Telephony, Mobility, Video Telephony, Service and support, HA, etc.
• Per service pricing• Service-based QoS• Service enabling CPE
• + IP Telephony, Mobility, Video Telephony, Service and support, HA, etc.
• Per service pricing• Service-based QoS• Service enabling CPE
Source: Cisco IBSG
161616© 2005 Cisco Systems, Inc. All rights reserved.
In the SMB: Security, IP telephony and wireless present the best opportunities
95%
78%
61%
59%
47%
25%
15%
12%
4%
14%
12%
14%
10%
28%
37%
39%
63%
71%
3%
11%
2%Anti-Virus
Firewall
Remote access via dialup
PBX
VPN
Wireless LAN
IP telephony
Currently have Plan in next 12 months Do not have/no plans to buy
Note: Figures relate to those 72% of all SMBs that qualified for the study i.e. those that either use or plan to buy all of the various network technologies at QS6B.
Q: Do you currently have, or plan to buy in the next 12 months, any of the following?
Source: Cisco SMB Research, May 2004
171717© 2005 Cisco Systems, Inc. All rights reserved.
SMBs also express increasing interest in managed services
7.6
5.7
5.3
Mean score out of 10 where 10 means very appealing and 1 means not appealing at all
(Scheme 1) (Scheme 2) (Scheme 3)
Note: Figures relate to those 72% of all SMBs that qualified for the study i.e. those that either use or plan to buy all of the various network technologies at QS6B (see section 3).
Source: Cisco SMB Research, May 2004
35%27% 21%
40%
17%14%
Broadband with secureInternet access
. . . Plus option forwireless LAN
. . . Plus IP Telephony
Rating of9&10 outof 10
Rating of7&8 out of10
181818© 2005 Cisco Systems, Inc. All rights reserved.
SPs must develop IP service evolution paths that leverage the IP platform
Broadband
IP PBX
Managed LAN
Wireless LAN
Managed Desktop
IP VPNHome
gateway
IP Key system
WirelessNetwork
Managed LAN
Wireless LAN
IP telephony
Consumer
SME
Enterprise
IP Network
Managed Desktop
IP VPNSecurity/Control Security
VideoMobility ServiceMobility bundle |Mobility Service
Security
Managed StorageNetwork Backup
Photo Storage
Internet Access Internet
AccessInternet Access
191919© 2005 Cisco Systems, Inc. All rights reserved.
The goal is to expand the share of wallet with a low marginal cost per service
Source: Cisco IBSG analysis
IP VPN
LAN
IP Tel
W-LAN
Security
Multicast
Internet
100%
19%19%
48%
141%
15%
30%
100%
270%
202020© 2005 Cisco Systems, Inc. All rights reserved.
SMB business attitudesQ: Using a scale of 1 to 10, where 10 means you agree very strongly and 1 means you do not agree at all, please tell me how much you agree with each one.
Source: Cisco SMB Research, May 2004
8.5
7.9
7.8
6.9
6.5
6.3
5.9
4.7
It is important that we are able to separatebusiness from our private life
I am very comfortable using new technologies
Without our IT network, our business couldnot be successful
Our business is very risk averse
If our network went down, we would not beable to conduct any business
It would help us if we could access thecompany network from home
We have to deal with more challenges thanopportunities in our daily business
It would help us if we could access thecompany network from airports or hotels
212121© 2005 Cisco Systems, Inc. All rights reserved.
36%
35%
29%
26%
25%
22%
0% 5% 10% 15% 20% 25% 30% 35% 40%
IPVPN
Intrusion Detection
Apps Perfm Mgt
Apps Hosting
Disaster Recovery
Desktop mgt
SMBs are prepared to outsource
Source: Yankee Mid Market Survey 2004 Europe 100-499 employees
Types of Solutions Handled by an External Supplier
222222© 2005 Cisco Systems, Inc. All rights reserved.
Fundamental drivers for outsourcing/out-tasking: cost and skills
Cost• Cost reduction (via scale and expertise)• Financial re-engineering
Cost• Cost reduction (via scale and expertise)• Financial re-engineering
People• Limits need to attract and retain IT staff• Access to emerging technology skills
People• Limits need to attract and retain IT staff• Access to emerging technology skills
Complexity• Integration / consolidation of disparate
systems, networks
Complexity• Integration / consolidation of disparate
systems, networks
232323© 2005 Cisco Systems, Inc. All rights reserved.
However, mixed customer experience
The Good• Cost savings: 2/3rds receive 5–10%• Consolidation• Faster decision makingThe Bad• Innovation—80% dissatisfied• Service levels—30% with
significant issues• Contract inflexibility• 70% prematurely ended contractThe Ugly• Skills depleted, hard to rebuild
23© 2003 Cisco Systems, Inc. All rights reserved.8712_09_2003
242424© 2005 Cisco Systems, Inc. All rights reserved.
Perception of firms that can best provide outsourcing/out-tasking services
Global Enterprise Post Installation Management Preferences
Telecommunications Networks or Services
Enterprise Networks
Applications
Telecom Service Providers
IT Out-Taskers (i.e., IBM Global Services and EDS)
VARs (Including Systems Integrators and Big 5 Accounting/ Consulting Firms)
IT Consultants (i.e., Accenture)
Base: All Respondents, n=1489
Others2 3 38
13 178
1210
25
4748
57
25 22
0%
20%
40%
60%
80%
100%
Source: Cisco IBSG Enterprise-Service Provider Connect Study 2004
252525© 2005 Cisco Systems, Inc. All rights reserved.
Key success factors in selecting a provider
Source: Cisco SMB Research, May 2004
25.2
12.6
12.3
12.2
10.7
8.7
6.3
4.1
3.5
2.2
2.2
Reliability
Providing information so that you can clearlyunderstand what the product does
Network products are suitable for my type of business
The post-sales support
Security inbuilt into the product
A company you know well
Reseller’s advice
Network manufacturer offers a full range of ITproducts, eg. PCs, printers, servers
Comprehensive network product portfolio
Offer good financial options
Among the cheapest price
262626© 2005 Cisco Systems, Inc. All rights reserved.
SMB key business needs point out potential marketing strategies
Base: all qualified respondents (1024) – QA2
Source: Cisco SMB Research, May 2004
20.1
17.3
16.0
15.3
12.7
11.6
7.0
Increasing our profitability
The security of your data
Productivity
Growing your company’s revenues
The security of your network
Maintaining cashflow
Expanding into new geographical markets
272727© 2005 Cisco Systems, Inc. All rights reserved.
Example: FastWeb Business Model
Source: FastWeb
282828© 2005 Cisco Systems, Inc. All rights reserved.
Customers Payback Time
Source: FastWeb
292929© 2005 Cisco Systems, Inc. All rights reserved.
Example: FastWeb, the NGSP Advantage, now
Source: FastWeb Estimates
303030© 2005 Cisco Systems, Inc. All rights reserved.
Taking Advantage of Consumer Broadband and SMB Opportunities
Source: Cisco IBSG
1. Ramp-up quickly and protect Access Fees as they will still be critical in the next 3-4 years
2. Enter home networking market to ensure service control, and intelligent management of customer
3. Build a service portfolio with SLAs and develop sophisticated marketing strategies
IBSG - 30
1. Partner with Cisco, VARs, and specialty integrators to improve competitive position
2. Strengthen brand, segment the SMB market, educate the market; create lower cost, reliable, scaleable solutions, and improve customer service
3. Aim for simplicity
Consumer SMB
313131© 2005 Cisco Systems, Inc. All rights reserved. 313131© 2005 Cisco Systems, Inc. All rights reserved.Presentation_ID CISCO CONFIDENTIAL