1

Wireless Telephone Data Networks - Yesterday, Today and Tomorrow

and How to Value It

Kevin SnowAT&T

December 4, 2012

History• Wireless Networks were voice centric,

extremely limited data• 1G – Analog - voice• 2G – Digital – voice

• CDPD for data, “1 Adam 12” – police running license plate #’s

– CDMA, GSM, TDMA

• 2.5G –Digital – circuit switch voice + data (3x dial up)– 1XRTT-CDMA; GSM-GPRS/EDGE; TDMA – DEAD*

• 3G – Broadband Data (DSL speed but voice via circuit switch)– CDMA-EVDO & RevA, UMTS-HSPA

• * Acronym for DEAD – none – literally means dead

2

Current• Data centric but still with circuit switched voice• 3.5G – Broadband Data (cable modem speed, voice via circuit;

– UMTS-HSPA+, CDMA EVDO-Rev B, not deployed )AT&T is double trouble, has 2 circuit switch networks –GSM & UMTS

– That will both transition to LTE VOLTe– And now three data networks – EDGE/HSPA+ transitioning to LTE

• 4G – Broadband Data (cable modem+ speed, voice as packet -VOLTe LTE (some carriers have not yet deployed VOLTe)

– GSM-UMTS path To LTE– CDMA path to EVDO Rev C – DBA* so LTE

• * DBA Acronym (Dead Before Arrival) – never will be deployed

3

Characteristics of the Wireless Industry

Highly competitive Not regulated as to prices or rates of return Rapidly changing technology due to competition

& customer demand for more service capability Declining voice demand Messaging at risk from various data apps Exploding demand for high volume data due to

smart phones and computer applications

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Where We Are • Voice Network

– A circuit switched TDM network – based on a mature technology

– A reliable infrastructure optimized to support circuit voice

– Difficult to support non circuit voice applications

– Circuit switch/TSI based infrastructure is harder to scale

• Data Network– A packet switched network – based on

emerging technology

– Optimized for non-delay sensitive (best effort) applications

– Support data/audio/video as data application

– Packet based infrastructure offers greater scalability

• Two separate networks, each designed/optimized to support different applications (AT&T actually 5 different networks including LTE)

• Even without “4G”, technology has advanced where the “circuit switch Voice

Network” is being replaced

• TRFO (transcoder free operation)

• MPLS (multi-protocol layered system)

• We are already packetizing all switches and any new switch builds are 100% packet

• DACS are sunsetted and “5E” class switches are planned for removal

Network Overview The current AT&T network is comprised of different generations of equipment

installed over more than a decade. A high level view of the current AT&T Mobility network is represented below:

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State of the Industry• Approaching Maturity, Growth is Slowing Except for Data

– Over-penetration • Mid Year 2012 321,716,905 Total Connections (CTIA Estimate)

– Customers with two or more mobile devices• M2M

– Increased usage• Data Usage Up Double Digits During last 12 month period

• Innovation– Robust data networks– New product

• Streaming Video• Wireless house/security/more wireless car apps coming

• Industry Convergence• Highly Competitive

– Consolidation

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Mobile Wireless Internet Access Subscribers and Devices in Use [1]

86

115.7

26.5

55.8

3

22

51

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009

Millio

ns

Mobile Wireless Devices in UseCapable of +200 kbps

Mobile Wireless Internet AccessSubscribers

Mobile Wireless Connections

AT&T 3rd Q 2012 –18.3 percent growth in wireless data revenues, up more than $1 billion versus the year-earlier

quarter Strong smartphone sales of 6.1 million postpaid Smartphones represented 81 percent of postpaid device sales.63.8 percent of AT&T’s postpaid subscribers had smartphones, up from 52.6 percent, a

year earlier and up 1.4 million from the second quarter.AT&T’s ARPU for smartphones is twice that of non-smartphone subscribers

[1] Commission estimates based on Form 477 data. Mobile wireless Internet access subscribers include subscribers whose device and subscription plan allow them to access to the lawful Internet content of their choice at over 200 kbps in at least one direction.

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261.3

26.5

228.4

227.2

202.7

86

7.2

274.3

55.8

257

238.4

238.4

115.7

49.8

11.9

0 50 100 150 200 250 300

Mobile Telephone Subscribers (Form 477)

Mobile Internet Access Subscribers (Form 477)

Data-Capable Handsets/Devices (CTIA)

SMS-Capable Devices (CTIA)

Web-Capable Handsets (CTIA)

Mobile Devices Capable of +200 kbps (Form 477)

Smartphones (CTIA)

Wireless Laptops, Aircards, Modems (CTIA)

Millions

2008

2009

Mobile Data Service Adoption Rates Among Cell Phone Users[1]

58%

19%

19%

17%

65%

25%

25%

20%

72%

34%

38%

30%

0% 20% 40% 60% 80% 100%

Texting

E-mail

Internet (Web)Access

Instant Messaging

May-10

April-09

December-07

[1] Mobile Access 2010, at 7; Wireless Internet Use, at 16.

Total Wireless Data Traffic (CTIA)

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Data Evolution• 2G systems, some limited circuit switch data was possible• Cell sites had CDPD cabinets, maximum speed 19.6 kb/s, ran in reality no

more than 14.4 kb/s, very little revenue with it• Depending on the chosen technology-

– 2002/2003/2004 – CDMA carriers 1X RTT(2.5G) – GPRS them EDGE – GSM carriers

• that incorporated packet data at a maximum speed of 144 kb/s, ran at approximately 90kb/s

• Use of 2.5G packet data grew significantly into 4th Q 2006 and has declined since to almost zero

• Broadband data (3G-EVDO) is currently experiencing tremendous growth but has started its rapid decline

• 2010 – 4G LTE launched Verizon• Late 2011 launched AT&T

DEPRECIATION & TRENDING TABLES THAT ARE APPLIED TO WIRELESS EQUIPMENT DO NOT TAKE INTO ACCOUNT TECHNOLOGY DIFFERENCES OR PRICING DECLINES OF ELECTRONICS. APPLICATION OF TYPICAL DEPRECIATION & TRENDING TABLES TO THE HISTORICAL ACQUISITION COSTS WOULD RESULT IN THE ABOVE 2G EQUIPMENT HAVING A HIGHER VALUE PER UNIT OF CAPACITY THAN 3G EQUIPMENT THAT WOULD OPERATE FAR MORE EFFICIENTLY AND HAVE GREATER FUNCTIONALITY.

Switching Equipment (Note rows of equipment replaced by 1 cabinet)

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NOT ONLY GENERATION TO GENERATION, BUT WITHEN A GENERATIONGSM BASE STATIONUMTS BASE STATION UMTS NODE BLTE - ENODE B

Base Station/Cell Site RF Changing Technology/Smaller, less expensive/more

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GSM BASE STATION

• 6 foot “refrigerator” size cabinet

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UMTS BASE STATION

• First Type of UMTS deployed – also a 6 foot sized “refrigerator” cabinet– Had more than double the capacity of the GSM

and also did broadband data

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New UMTS – NODE B

• A one-one ½ foot plug in that takes the place of an entire 6 foot cabinet

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LTE E-NODE B

• LTE – a two foot cabinet (outside cabinet) that is 50% vacant

• (the equipment only is 1 foot high)

• Has more than double the capacity of even the UMTS Node B and is capable of doing voice as a data packet

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LTE and New UMTS (inside configuration)

• LTE and UMTS mounted together in a “rack”– UMTS about 1.5feet high– LTE about 1 foot high

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New UMTS

• Close up of the 1.5 foot high equipment

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LTE

• Close up of the 1 foot high LTE

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Current – Future 4G LTE Buildouts

•LTE – Long Term Evolution–4G radio technology of choice for ALL

–Standardized under 3GPP–All-IP IMS core network supports LTE

•What is 4G:–Fourth Generation System

–Comprehensive IP Solution – Voice, Data, Streamed Multimedia can be given to users “Anytime & Anywhere”, ALL IP SYSTEM

–Based on OFDMA

•Capabilities–Minimum 100 Mbits/sec indoors & outdoors, premium quality & high security

•Technologies–WiMax (IEEE 802.16e) “going, going ………….gone”

–LTE (Long Term Evolution (3GPP)–UMB (Ultra Mobile Broadband, formerly EV-DO Rev C, 3GPP2 )

•Officially DOA (“dead on arrival” – actually DBA – “dead before arrival”

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Verizon's 4G LTE Rollout Will Be Complete By Mid-2013 -On an investor call earlier this morning, Verizon Wireless CFO Fran Shammo said that the carrier's buildout of its 4G LTE network will be completed by mid-2013. This is after an earlier estimate of the end of 2013, putting the company a full six months ahead of schedule.Right now, Verizon's LTE network already covers 250 million people; And as we know, Verizon will also begin its VoLTE (voice over LTE) rollout some time before the end of 2013, which will almost certainly make it America's first VoLTE network of any substantial size. This puts Verizon on the fast track to begin phasing out its CDMA equipment

Verizon Wireless CTO Nicola Palmer announced that 35 percent of the carrier's overall data traffic traveled over its LTE network at the end of September 2012. She said that in "a few months" a majority of the carrier's traffic would be transmitted over its LTE network. Palmer said it took Verizon eight years to reach this milestone with its 3G CDMA network, but it only took the carrier two years to reach the goal with its LTE network

SPRINT: Customers in Atlanta, Baltimore, Dallas/Fort Worth, Houston, Kansas City, San Antonio and Waco are already experiencing 4G LTE service. Stay tuned -

over 100 new markets are expected to launch in the coming months.

T-Mobile, MetroPCS Deal Is About LTE The merger of T-Mobile and MetroPCS is foremost about an LTE network and all it enables,

Deutsche Telekom (DT) and MetroPCS, in the opening paragraph of an Oct. 3 statement announcing a "definitive agreement" to merge the small but notable carrier with DT's American brand, T-Mobile, First, they said, the transaction will create a "clear-cut technology path to one

common LTE network."Long Term Evolution technology is critical to T-Mobile's ability to compete against the nation's

top three carriers; is necessary for it to offer an Apple iPhone; and is the only network technology that it has in common with MetroPCS, as the latter's legacy network is based on

Code Division Multiple Access (CDMA) technology.While T-Mobile has said it will begin offering LTE in early 2013, MetroPCS, which in Sept. 2010

jumped ahead of Verizon to offer the first commercial LTE deployment, completed its LTE rollout in March 2011. In August 2012, MetroPCS was the world's first carrier to offer voice-

over LTE.

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NOT ONLY THE BIG BOYS (and GIRLS) US Cellular announced on Wednesday that it will increase its LTE network coverage by 30 new markets on November 5th.Tier 2 carrier U.S. Cellular is accelerating its plans to deploy LTE. The company, which had originally planned to deploy the next-generation technology in 2012, announced it will deploy LTE in 24 markets by November, covering approximately 25 percent to 30 percent of its total subscriber base. The company will outfit around 1,250 cell sites with LTE using its 700 MHz spectrum. Leap's LTE rollout to start next weekOctober 10, 2012 SAN DIEGO--Cricket provider Leap Wireless (NASDAQ:LEAP) plans to begin turning on its LTE network starting next week. The carrier said it will flip the switch on one LTE market next week and will then announce additional markets in November.Leap spokesman Greg Lund said the carrier plans to have 21 million POPs covered by year-end and two-thirds of its current network footprint covered with LTE by 2015. Cellular South details network enhancements ahead of LTE launch August 19, 2011 | Cellular South said its plan to deploy an LTE network late this year is on schedule..

Cellular South plans to launch an LTE network in 700 MHz spectrum in the fourth quarter of 2011. Cellular South intends to use Voice over LTE technology and will continue its LTE deployment into 2012.

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Radio Interface Progression2005 2006 2007 2008 2009 2010

LTE 1.25-20 MHz 100/50 Mbps

HSPA+ 2x 5 MHz FDD 40/10 Mbps 850/1900 MHz

HSUPA 2x 5 MHz FDD 14.4/5.8 Mbps 850/1900 MHz

WiM

AX

HSDPA 2x 5 MHz FDD 14.4/2.0 Mbps 850/1900 MHz

WCDMA 2x 5 MHz FDD 0.384/0.384 Mbps 850/1900 MHz

EV-DO Rev 0 2x 1.25 MHz FDD 2.4/0.15 Mbps (DL/UL) 850/1900 MHz

EV-DO Rev A 2x 1.25 MHz FDD 3.1/1.8 Mbps 850/1900 MHz

EV-DO Rev B 1.25-20 MHz FDD 4.9/1.8 Mbps 850/1900 MHz

EV-DO Rev C(UMB) (“DBA”) 1.25-20 MHz FDD 70+/30+ Mbps 850/1900 MHz

Fixed WiMAX 1x 10 MHz TDD 15/5.3 Mbps 2.5/5.8 GHz

Mobile WiMAX 1x 10 MHz TDD 14/5.3 Mbps 2.5 GHz

Mobile WiMAX 1x 10 MHz TDD 32/7 Mbps 2.5 GHz

Cel

lula

r

Radio Interface

Note: All speeds are theoretical maximums. Device and deployment configurations will constrain attainable throughput capabilities.

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LTE Transforms Wireless Access and Core Networks

to All-IP

e

26 |

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• For a 3G to 4G OFDMA migration, a ~2-3 year “phased transition” period can be planned, where both technologies are deployed (to ease subscriber migration).

– This requires separate spectrum to be assigned to 3G and 4G technologies

– 3G traffic will initially grow, peak, and ultimately decline as 4G traffic grows

– 4G traffic will then take off and continue after migration

– Efficient spectrum utilization is very important during this migration period

3G to 4G Migration: Efficient Spectrum Migration

Time

Tota

l Tr

affi

c

3G traffic

4G traffic

10

MH

z spectru

mutiliza

tion

3G spectrum(carriers)

4G spectrum (carriers)

-

+4G

+1 4G 1.4MHz Re-scale to

3MHz4G

5MHz 4G

Re-scale to10MHz

4G

5MHz

3G provides a smooth, efficient spectrum migration to 4G

To leverage OFDM benefits, a minimum

starting bandwidth of 5 MHz is recommended. Smaller allocations are

possible.

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What Does LTE Mean to End Users & Service Providers?

Technology innovation significantly improves performance, which translates to better quality of experience for the end user

Performance Improvement Impact to End User Impact to Service Provider

INCREASED SPECTRAL EFFICIENCY

Uplink: 2.00-2.25x vs. 3GDownlink: 1.25x vs. 3G

Lower costs – flat fee pricing

Can buy the same amount of spectrum and pump more data to users, or less spectrum to maintain the same level of data usage

Reduced cost per bit

FASTER SPEEDSUplink: 2.00-2.25x vs. 3G

Downlink: 3x vs. 3GPeak rate = 100 Mbps

Faster downloads of multi-media

Better experience with blended services

More ways to splice bandwidth: Same # of users with more bandwidth/user or more users with same bandwidth per user

INCREASED VOICE CAPACITY

10 MHz: 2x vs. 3GBetter voice quality Support more voice users

REDUCED LATENCY< 50 ms

Faster reactions when gaming

Better voice, video telephony

Can reuse applications across wireless and wireline

More capacity for VoIP and TCP-based applications

Comparisons based on average aggregate performance

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Spectral Efficiencies

Signalling Data Rate (Mbps), R Channel Width (MHz), B Link Efficiency (bit/s/Hz), R/B Reuse factor, K System Efficiency (bit/s/Hz/sector), R/B/K

AMPS 0.0096 – 0.03 0.32 7 x 3 0.015

GSM 0.013 x 8 = 0.104 Pk 0.2 0.52 4 x 3 0.043

EDGE 0.384† Pk 0.2 1.92 4 x 3 0.16

cdmaOne 0.0096 Av 1.2288* 0.0078 1 0.0078 x 13 = 0.1

1xRTT 0.0096 Av 1.2288* 0.0078 1 0.0078 x 26 = 0.2

1xEV-DO 1.100 Av 1.2288 0.9 1 0.9

1xEV-DO 2.457 Pk 1.2288 2.0 1 2.0

W-CDMA (UMTS) 0.384 Pk 5* 0.0768 1 0.0768 x 33 = 2.53

LTE 16.2 Av 10 1.62 1 1.62

LTE 172.8 Pk 20 8.6 1 8.6

IEEE 802.16e 75 Pk 20 3.75 1 3.75

The promise of 4G isn’t average spectral LINK efficiency…it’s in frequency-domain aggregation and scheduling (and therefore total throughput), and to a lesser extent, peak spectral link efficiency.

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LTE-SpeedDependent on how much spectrum

Average Throughput

0

1

2

3

4

5

6

7

8

5 x 5 10 x 10

Mbps

FUTURE• Actually, right down the road*• LTE Advanced

– 100% Data Centric with voice as just a data packet• Technical Specifications:

• In LTE-Advanced focus is on higher capacity:• Increased peak data rate, DL 3 Gbps, UL 1.5 Gbps (“actual” goal 1Gps Down, 500m up)• Higher spectral efficiency, from a maximum of 16bps/Hz in R8 to 30 bps/Hz in R10 • Increased number of simultaneously active subscribers • Improved performance at cell edges, e.g. for DL 2x2 MIMO at least 2.40 bps/Hz/cell.• The main new functionalities introduced in LTE-Advanced are Carrier Aggregation (CA),

enhanced use of multi-antenna techniques and support for Relay Nodes (RN).• *The technology received its first commercial implementation in October 2012 by Russian network Yota• Yota Networks launched the technology LTE Advanced, which will provide data rates up to 300 Mbit / s on the user's

device. LTE Advanced technology currently implemented by 11 base stations. LTE Advanced, п. The first consumer devices that support LTE Advanced, will have virtual network operator Yota Networks in the first half of 2013.

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Growth Drives Changes in Network CapacitiesLatency/Year of Rollout

WCDMA = 150 ms (2003/4) HSPA = 100 ms (2005/6 HSDPA, 2007/8 HSUPA)

HSPA+ = 50 ms (2008/9)LTE = ~10 ms (2009/10

LTE Advanced = less than 5msAccording to Cisco, Mobile video will grow at a CAGR of 90 percent between 2011 and 2016

Mobile video traffic exceeded 50 percent for the first time in 2011Last year’s mobile data traffic was eight times the size of the entire global Internet in 2000

In 2011, a fourth-generation (4G) connection generated 28 times more traffic on average than a non-4GGlobal mobile data traffic will increase 18-fold between 2011 and 2016

Two-thirds of the world’s mobile data traffic will be video by 2016Cisco estimates that traffic in 2012 will grow 2.1-fold

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2012 2013 2014 2015 2016

Mobile Data Volumes Estimated to Grow 10X Over Five Year Period

AT&T Mobile Data Volumes Estimated to Grow 10X Over Five Year PeriodPetrabytes/Month

2012 2013 2014 2015 2016

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Total Florida*

AT&T Total Traffic By Technology

Total FL Jan-07 Jan-08 Jan-10 Jan-12

TDMA MB's Equiv 0.59% 0.03% 0.00% 0.00%

GSM MB's Equiv 96.83% 79.87% 26.03% 3.65%

UMTS MB'sEquiv 2.58% 20.09% 73.97% 96.18%

LTE MB's Equiv 0.00% 0.00% 0.00% 0.17%

Total 100.00% 100.00% 100.00% 100.00%

Industry Data Jan-07 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Dec-17

Traffic Voice vs Data

Voice % 97.53% 91.16% 61.98% 29.31% 16.26% 13.45% 12.87%

Data % 2.47% 8.84% 38.02% 70.69% 83.74% 86.55% 87.13%

Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

*Voice also includes non circuit switched voice starting in 2013 - the LTE voice is a data packet - Voice Over Long Term evolution

the data shown does not include VOLTe as data so actually the true data % from 2014 forward is even greater

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© 2012 SNL Kagan, a division of SNL Financial LC, estimates. All rights reserved.

Network Coverage & Subscriber Unit Projections For 3G, 4G And Smartphone Proliferations, 2011-2021

2013 2015 2017 2019 2021

2G Subs % Total Subscriptions (%) 20% 7% 2% 0% 0%

3G Subs % Total Subs (%) 66% 60% 44% 25% 15%

4G Primary Subs % Total Subscriptions (%) 14% 33% 54% 75% 85%

Smartphone Owners (mil.) 190.9 231.6 259.2 280.0 294.9

Smartphone Owners % Total Retail Subs (%) 66% 77% 85% 90% 94%

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AT&T Recent Announcement

4G LTE Extending Our BuildoutExpand build plan to 300M POPs U.S. coverage by Year‐End 2014

Densification of wireless gridEnhances AT&T’s ability to offer voice and data servicesSupports launching Voice over LTEMultiple technology deployments*: 10,000+ new macro sites1,000+ distributed antenna systems40,000+ small cells

*Over plan period

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PARADIGM CHANGING TECHNOLOGY:THE ELIMINIATION OF THE CELL TOWER

The “lightRadio Cube” … A small antenna and radio that has

shrunk the regular workings of a conventional cell phone base station and antenna and could, as soon as mid-2012, replace those unsightly cell phone towers.

Photo courtesy of Bell Labs / Alcatel-Lucent

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PARADIGM CHANGING TECHNOLOGY:THE ELIMINIATION OF THE CELL TOWER

The “lightRadio Cube” o Three 2-inch, stacked circuit boards for the antenna, radio, and network

connection, replacing the conventional antenna system that connects every cell phone call.

o Could radically transform the model for wireless networks and could actually change the way the wireless industry operates," per Dan Hays, Telecommunications Consultant with PRTM of Washington, D.C.

o Developed by Bell Labs.o Could replace wireless towers blanketing urban areas and the countryside.o Can be positioned nearly anywhere:

• Sides of buildings.• Light poles.• Arranged in grids for more strength.

Implication: Lowers the barriers for competitors to inexpensively gain entry into markets by [1] eliminating the need to obtain permission to place towers or [2] placing additional antennas on existing towers. These scenarios could be exploited as competitive threats which, in turn, translates into greater risk.

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WIRELESS SUBSCRIBERS BY TECHNOLOGYSource: Technology Futures, Inc.

40

0

50

100

150

200

250

300

350

400

1990 1995 2000 2005 2010 2015 2020Year

Mill

ion

s o

f Su

bsc

rib

ers

Source: Technology Futures, Inc.

Wireless F

orecast

Historical Data Source:CTIA & ITU

Total

Analog

Digital

2.5G

3G4G

2011

Summary Wireless Changing Technology Analog – No longer in Service TDMA – No longer in Service GSM – In service but going, going…. Not capable of high volume data UMTS – Now widely used for data and voice

o HSPA – Software upgrades to improve datao HSPA+ - Additional software upgrades to further increase speedo It too is starting to be phased out

LTE (Long Term Evolution)4-G – Currently being deployed to enhance and replace 3G because of data demand. Based on IP technology. Relies on typical servers and routers for much of its infrastructure.

LTE Advanced – coming right on down the road

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Analog

TDMA

GSM/CDMA

UMTS

HSPA/EVDO

HSPA+

LTE

LTE Advanced

VALUATION

VALUATION

VALUATION

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Valuation / Depreciation Issues1. The introduction of a next generation of technology / equipment does not

mean that the old equipment or technology is immediately removed from service.

2. Generations of equipment and technology are “layered,” meaning that customers are “migrated” from older generations and technologies to newer ones over a period or time.

3. During that process of migration, layers of overlapping equipment and old technologies are captured in the historical costs that are carried on the General Ledger and in the Fixed Asset Register.

4. The historical costs do not reflect the cost efficiencies and capacity improvements of newer technologies (i.e., functional obsolescence).

5. Wireless equipment depreciation factors that are applied to historical costs need to take into account the embedded inefficiencies and the layers of overlapping equipment / older technologies in order to derive an appropriate value.

6. Wireless equipment depreciation factors should also take into account: Price declines of wireless electronics impacted by technology Cost efficiencies and capacity improvements of newer technologies

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Principle of Substitution

• States that a buyer will not pay more for aparticular property if it costs less to buy asimilar property of equal utility anddesirability. People prefer the less expensiveprice if all other things are considered equal.

• The maximum value of a property tends to beset by the cost of acquiring an equallydesirable substitute property.

• A prudent investor would pay no more for aproperty than the cost of acquiring an equallyacceptable alternative property on a timely basis

REPLACEMENT COST– ASA “is the current cost of asimilar new item having the nearest equivalentutility as the item being appraised” – constructinga property with the same function/utility as thesubject using current prices for labor and materials

Replacement Cost

• Principle of Substitution

• Even if Replacement Cost used – it only eliminates excess capital costs – Subject property still has obsolescence

• Excess operating costs (reduces margins)• Lacks ability to do streaming video (reduces potential

revenue/income)

45

46

Next Generation Technologies Result in Improved Network Performance & Lower Unit Costs

47

48

RCN Impacts: Pricing Decline

49

Technology Price Trends Electronic Price Trends

50

Summary of Replacement Cost Translators

as of December 31, 2011 by Asset Group

and Vintage in Service Year

Translators 1998=100

Description 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(b) (m) (n) (o) (p)

(q) (r)(s) (t) (u) (v) (v) (v) (v) (z) (aa) (ab) (ac)

Depreciable Plant

Switching Equipment 0.149 0.150 0.152 0.182 0.184 0.238 0.345 0.346 0.359 0.396 0.479 0.504 0.562 0.634 0.695 0.752 0.774

Radio Frequency & Control Equip 0.075 0.087 0.089 0.145 0.148 0.237 0.336 0.360 0.363 0.377 0.404 0.469 0.589 0.636 0.704 0.755 0.759

Used with permission of AUS/VZW

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REPLACEMENT COST ONLY ELIMINATES THE EXCESS CAPITAL COSTS 

THE SUBJECT PROPERTY 2.5G/3G/3.5 G LACKS THE UTILITY OF NEW PLANT

CUSTOMERS ARE DEMANDING MORE AND MORE DATA APPLICATIONS, ESPECIALLY VIDEO

Current technologies lack the ability to give customers what they want

Loss of potential revenue/incomeCurrent technologies, have significant additional costs to operate

Operating expenses to operate dual networks (voice & data)

Spectral inefficiencies of current technology require more plant/carriers (spectrum) to be deployed than LTE

Lower margins/income

Transport Costs (Backhaul – significantly less expensive for fiber/ethernet connection than multiple T1 (copper) connection

Need To Quantify for Proper Valuation

Depreciation

The American Society of Appraisers states, in part, that:“The most economical new substitute property may have many advantages over an old property, such as longer life expectancy, lower annual disbursements for operation and maintenance, increased receipts from sale of product or service. The depreciation deduction of the hypothetical new substitute property should be a measure in money terms of all of these disadvantages of the existing old property.” [The American Society of Appraisers, Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets, 2005, pg. 66]

52

53

TechnologyThroughput

012345678

Today LTE

MbpsLatency

01020304050607080

Today LTE

msec

Cost Efficiency

0

Cost per MB

Today LTE

54

LTE Economics EV-DO

Network Cost

1 GB = 100%

1.25 Mhz

15 Mbps

Network Cost

1 GB ~ 10 –16%

10 Mhz

1.1 Mbps

Packet CoreBase Station• Common platforms

used for GSM and WCDMA

• Common elements across product lines (amplifiers, filters)

• Mobility Manager evolved from existing GSM Nodes

• Gateways use widely deployed router platforms

UMTS 5 Mhz

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ASA • Functional Obsolescence is the loss in valuewithin the property as a result of thedevelopment of new technology – thisincludes such things as changes in design,materials, or process resulting inovercapacity, inadequacy, excessconstruction, lack of utility, or excessvariable operating costs.

Starting Point For Value• IF YOU ARE STARTING FROM ORIGINALCOST OR REPRODUCTION COST,ACCORDING TO THE ASA, “the differencebetween reproduction and replacement costrepresents the amount of excess capital costwhich is a form of FUNCTIONALOBSOLESCENCE”

Not Only Speed• Spectral Efficiencies

– Can have more users in the same amount of spectrum

• Data/Voice on same session – Big plus for carriers especially if spectrum constrained

• Real-time delivery– Super low latency, 30-millisecond latency is better than the

50-millisecond “real time” threshold, new revenue streams/real time applications

• Cost– Both infrastructure costs, transport costs and other variable

costs are significantly lower (increased margins)

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Quantification of Obsolescence

• Identification of excess operating costs in subject property• Subject property, lacks potential revenues

• In my opinion, what works best is an economic approach

• Companies are is business to make money – in a highly competitive industry such as wireless, projections of revenue/income of different technologies over a period of time works best

Remember, lack of utilityAnalog – no dataDigital – limited data2.5G – data but only 3X dial up3G/3.5G – BB data but not real time, voice still circuit switched4G – ability for new revenue streams/real time apps/VOLTe

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HYPOTHETICAL REVENUE OPPORTUNITY

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

VOICE 23.77 21.47 19.22 17.07 14.97 12.97 11.07 9.32 7.72 6.22

FEATURES 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

DATA 22.56 24.37 26.37 28.52 30.82 33.27 35.87 38.37 40.62 42.62

TOTAL 49.33 48.84 48.59 48.59 48.79 49.24 49.94 50.69 51.34 51.84

USING 10 YR PERIOD 2013-22

POTENTIAL REVENUE

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10

VOICE 23.77 21.47 19.22 17.07 14.97 12.97 11.07 9.32 7.72 6.22

FEATURES 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Non BB Data 4.35 3.70 3.14 2.67 2.27 1.93 1.64 1.39 1.19 1.01

3G BB Data 13.15 11.83 10.65 9.59 8.63 7.76 6.99 6.29 5.66 5.09

4G BB Data 1.25 5.46 9.29 12.66 15.49 17.95 20.01 21.89 23.59 25.15

Total 45.52 45.46 45.30 44.99 44.36 43.61 42.71 41.89 41.16 40.47

Revenue Opportunity 1G 1G 1G 1G 1G 1G 1G 1G 1G 1G Totals

23.77 21.47 19.22 17.07 14.97 12.97 11.07 9.32 7.72 6.22 143.80 33.02%

2G 2G 2G 2G 2G 2G 2G 2G 2G 2G

26.77 24.47 22.22 20.07 17.97 15.97 14.07 12.32 10.72 9.22 173.80 39.91%

2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G

31.12 28.17 25.36 22.74 20.24 17.90 15.71 13.71 11.91 10.23 197.09 45.26%

3G 3G 3G 3G 3G 3G 3G 3G 3G 3G

44.27 40.00 36.01 32.33 28.87 25.66 22.70 20.00 17.57 15.32 282.73 64.93%

4G 4G 4G 4G 4G 4G 4G 4G 4G 4G

45.52 45.46 45.30 44.99 44.36 43.61 42.71 41.89 41.16 40.47 435.47 100.00%

DCF using 10% discount rate 0.9091 0.8264 0.7513 0.683 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855

Present Value 1G 21.61 17.74 14.44 11.66 9.29 7.32 5.68 4.35 3.27 2.40 97.77 36.16%

Present Value 2G 24.34 20.22 16.69 13.71 11.16 9.02 7.22 5.75 4.55 3.55 116.20 42.98%

Present Value 2.5G 28.29 23.28 19.05 15.53 12.57 10.10 8.06 6.40 5.05 3.94 132.28 48.92%

Present Value 3G 40.25 33.06 27.05 22.08 17.93 14.49 11.65 9.33 7.45 5.91 189.18 69.97%

Present Value 4G 41.38 37.57 34.03 30.73 27.54 24.62 21.92 19.54 17.46 15.60 270.39 100.00%

59

INCOME OPPORTUNITY

KNOWLEDGEABLE

WILLING BUYER/WILLING SELLER

REVENUE IS NOT EVERYTHING - REMEMBER OPERATING COSTS

IT IS NOT ONLY REVENUE - IT IS INCOME, MARGINS

EACH GENERATION OF EQUIPMENT IS MUCH MORE SPECTRAL EFFICIENT

EACH GENERATION OF EQUIPMENT COSTS LESS BUT DOES MORE

ERACH GENERATION OF EQUIPMENT COSTS LESS TO OPERATE

SO:

MARGINS

1G 5% = voice only

2G 10% = voice + features

2.5G 15% = voice+features+data @ 3x dial up

3G 20% = voice+features+brodbad data (dsl speed)

4G 40% = voice*+features+super fast broadband data (cable modem speed)

coming down the road Advanced LTE = 4.5G voice*+features+super fast broadband data (fiber optic speed)

*Voice in 4G and 4G Advanced = VOLTe (Voice Over Long Term Evolution) - voice is just another data packet, no dedicated equipment such as circuit switches

60

HYPOTHETICAL INCOME OPPORTUNITY

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

VOICE 23.77 21.47 19.22 17.07 14.97 12.97 11.07 9.32 7.72 6.22

FEATURES 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

DATA 22.56 24.37 26.37 28.52 30.82 33.27 35.87 38.37 40.62 42.62

TOTAL 49.33 48.84 48.59 48.59 48.79 49.24 49.94 50.69 51.34 51.84

USING 10 YR PERIOD 2013-22

Revenue Per User

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10

VOICE 23.77 21.47 19.22 17.07 14.97 12.97 11.07 9.32 7.72 6.22

FEATURES 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Non BB Data 4.35 3.70 3.14 2.67 2.27 1.93 1.64 1.39 1.19 1.01

3G BB Data 13.15 11.83 10.65 9.59 8.63 7.76 6.99 6.29 5.66 5.09

4G BB Data 1.25 5.46 9.29 12.66 15.49 17.95 20.01 21.89 23.59 25.15

Total 45.52 45.46 45.30 44.99 44.36 43.61 42.71 41.89 41.16 40.47

NOI PER USER 1G 1G 1G 1G 1G 1G 1G 1G 1G 1G Totals

1.19 1.07 0.96 0.85 0.75 0.65 0.55 0.47 0.39 0.31 7.19 4.13%

2G 2G 2G 2G 2G 2G 2G 2G 2G 2G

2.68 2.45 2.22 2.01 1.80 1.60 1.41 1.23 1.07 0.92 17.38 9.98%

2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G 2.5G

4.67 4.23 3.80 3.41 3.04 2.69 2.36 2.06 1.79 1.53 29.56 16.97%

3G 3G 3G 3G 3G 3G 3G 3G 3G 3G

8.85 8.00 7.20 6.47 5.77 5.13 4.54 4.00 3.51 3.06 56.55 32.46%

4G 4G 4G 4G 4G 4G 4G 4G 4G 4G

18.21 18.18 18.12 18.00 17.74 17.44 17.08 16.76 16.46 16.19 174.19 100.00%

DCF using 10% discount rate 0.9091 0.8264 0.7513 0.683 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855

Present Value 1G 1.08 0.89 0.72 0.58 0.46 0.37 0.28 0.22 0.16 0.12 4.89 4.52%

Present Value 2G 2.43 2.02 1.67 1.37 1.12 0.90 0.72 0.57 0.45 0.36 11.62 10.74%

Present Value 2.5G 4.24 3.49 2.86 2.33 1.89 1.52 1.21 0.96 0.76 0.59 19.84 18.35%

Present Value 3G 8.05 6.61 5.41 4.42 3.59 2.90 2.33 1.87 1.49 1.18 37.84 34.98%

Present Value 4G 16.55 15.03 13.61 12.29 11.02 9.85 8.77 7.82 6.98 6.24 108.16 100.00%

VALUATION

• Start with RCN– Fee simple, actual costs new for same capacity/function– Mass Appraisal – trend original cost (will be higher than

“fee simple” if sight added to over time)

Depreciation- Physical- Obsolescence

- Functional- External (test for)

61

Summary• LTE is not only a complete replacement for 2.5G/3G/3.5G,

it is also a growth technology; can handle all traffic today and new services that can’t be run on even 3G– EnodeB (base station) launched actually has almost DOUBLE the

capacity of our average deployed cell sites – Core network has significantly less cabinets and in fact are not

tied to just the cell sites “homed” to them. They have significantly more capacity and are now in a “community of interest” where other sites can also be run thru them

• All at a fraction of the cost of today’s 2.5G and 3G/3.5G networks

• As history shows, technology keeps moving along, plans/standards are being drawn up for the next iteration:

• LTE ADVANCED

63

KEY TAKEAWAY “Remember”

State of the Art TodayObsolete Tomorrow

• As evidenced by Moore's law, technology is continually changing at a rapid pace– Thus, today’s innovation although “state of the art,” will become functionally obsolete property in the near future

• The good news is that in a highly competitive marketplace such as wireless, companies will try to differentiate themselves and will continually reinvest and bring the latest & greatest to the marketplace