SHIBA SANKAR BEHERA

RAVENSHAW MANAGEMENT CENTRE, CUTTACK

Telecom Metamorphosis
William Quigley
Managing Director
Clearstone Venture Partners

Emerging Telephony Conference

January 24-26, 2006
 Clearstone Venture Partners
Founded in 1997 Early investors in:
Great success in Internet, – Overture
Software, Services – Paypal
Investing out of 3rd Fund. First – NetZero
and second funds among top – Good Technology
industry performers
– PeopleSupport
Investment Focus: Wireless, VoIP, – MP3
Security, Consumer, Biometrics,
Service Providers – Citysearch
Excellent limited partners (MIT,
– CarsDirect
CalTech, Univ of California, – Meru Networks
CALPERS, Goldman Sachs, JP – Idealab
Morgan, Dell, others)
A Time of Transition
Telecom service companies are going
through a metamorphosis
A whole new set of players are
emerging as competitors
After long hiatus, attractive investment
opportunities returning to telecom
sector
 Top 5 Global Internet
Market Cap Leaders
Google + Yahoo + eBay + Yahoo!Japan + Amazon

$ 2B = market value – pre 2000 IPO

$178B = market value – Nasdaq peak
$ 32B = market value – Nasdaq trough
$280B = market value – 2006

Source: Morgan Stanley

 Why are VCs still
Interested in Telecom?
Volatility/uncertainty is a good
thing for investors
10’s of $ billions riding on the
right answer
So many divergent opinions
today….
 Only One Quadrant Makes
Serious Money

Non
Consensus
View

Consensus
View

Incorrect Correct
Prediction Prediction
 Possible Headlines in 2010?
RBOCs dissolve. Cable MSOs run
America’s communication
networks…
RBOCs and MSOs unite….
Ebay/Skype et.al. control phone
network. End of era for toll calls…
The Contrarian Case
Incumbents are not going away
Consumer wireline represents just 20% of
EBITDA (and 10% of FCF)
Wireless EBITDA margin stabilizing at 36%
to 38%
Wireless substitution will eventually stabilize at
20% of US homes
Incumbents investing $60B over next 5
years…
Incumbents Choosing to Fight
FTTX Homes Passed

2005 = 7M
2006 = 18M
2010 = 54M
 We Value Companies On Cash
Generating Ability
Telecom service sector not overvalued
– 15 EPS
– 14.7 FCF
– 6.5 EBITDA
Yet enormous data, entertainment and
mobile services business up for grabs
Cable Threat Manageable

MSOs Behaving Rationally

Comcast, TWC raising rates
by 3% to 6%
Cable telephony totaled 5
million subs end of 2005…
using non predatory pricing
Cap Ex spending flat
 What Piqued Our
Interest in VoWLAN?
Over half of businesses using VOIP by 2006
100M + dual mode phones by 2009 at <$300
price points
Development of affordable SIP WiFi
handsets: precursor to dual mode
400 VoIP service providers in North America
in 2005
Spectralink financials compelling…
 Economics of An Early
VoWLAN Player
We were motivated by the financial
metrics of Spectralink:
– VoWLAN pure play
– 70% gross margins
– Trading at 5X revenues
– 10 year old technology
requiring $1,000
 Wireless Minutes Are
Surging

• 800
850
$0.11 $0.11

750 $0.10
Average MOU

700

Average Price Per

$0.09
650

600 $0.08

Minute
550
Average MOU $0.07
500 Average Price Per
Minute
450 $0.06

2003 2004 2005

 Drivers For VoWLAN
Deployments
Most enterprises running converged
networks in 2 to 5 years
2/3 of all network connections will be
mobile by 2009
Fixed mobile convergence underway in
Asia
Asia Adopting VoWLAN
First
Japan and Korea most aggressive in
VoIP mobility deployment
– Yahoo BB was the catalyst
Asian enterprise customers willing to
accept first generation product
Osaka Gas was first big deployment:
– 50 Offices: 10,000+ DoCoMo
3G/WLAN phones
Drivers For FMC +VoWLAN
Deployments
86% of employees spend at least one day per
week outside of office
– Yet enterprise IP systems do not serve
mobile employees
35% of mobile calls are inter-office
– Yet mobile telecom spending not part of
enterprise communication platform
Enterprises ready for PBX features on mobile
phones
 Learnings From Our FMC
Investments
Enterprise rollouts not like initial RIM
deployments
ROI is impressive but not driving the
buying decision
If enterprise committed to VoIP, then
VoWLAN and FMC next logical step
Underestimated need for diagnostics and
RF environment visualization tools
Clearstone’s VoIP/WiFi
Investment Interests
VoIP security – RF security, not just
packet based
Next generation access points
all software based?
part of WiFi client?
Monitoring and management
platforms
Applications Drive Value in
The VoIP Network
Software becomes the dominating
factor for adding value
fertile ground for start-ups
Voice just another app…but QoS
sensitive
Emerging new opportunities like
Hosted IP and Managed Services
 A Non Consensus Bet
CBeyond Communications
Performance Highlights
Valued at Started in 2001!
2X All IP based carrier

Market Delivering voice & mng svs

Multiple $160M run rate

70% gross margins