BUSINESS CONTRASTS BETWEEN HFC AND xDSL Naval Ravikant Manager, Strategic Planning @Home Network

1. BUSINESS CONTRASTS BETWEEN HFC AND xDSL Naval Ravikant Manager, Strategic Planning @Home Network June, 1998

2. BROADBAND ACCESS LINES RACE TO THE FUTUREMajority of Deployments will be Hybrid-Fiber Coax and Digital Subscriber Lines • Cable deployments are leading the way • 15,000-20,000 ADSL lines are installed in North America, whereas over 200,000 cable modem lines are installed Source: America’s Network Magazine, IDC, Merrill Lynch

3. TECHNOLOGY REVIEW: xDSLDSL Bypasses LEC Switch and Uses Full 1MHz of Bandwidth • Physical layer protocol for data-over copper • Extends from subscriber premises to DSL Access Multiplexer (DSLAM) located in Central Office. Bypasses LEC Switch, unlike ISDN • Filters in switch allow only 3-4kHz for voice, limiting analog modems • DSLAMs needed in every CO, whereas one analog modem bank can serve entire LATA • Uses full 1MHz of bandwidth • Unlike T1, doesn’t need repeaters every 3-6000 feet and causes less bundle interference • Discrete Multi-Tone line code breaks signal into 256 adaptive 4k chunks, trading complexity and expense for reliability and rate-adaptivity vs. Carrier-less Amplitude Modulation’s single 1MHz signal • Asymmetric solutions send more aggregate data, taking advantage of lower loop clustering and crosstalk at edge of network Type Range Up Down Pairs Application HDSL 12,000 1.5Mb 1.5Mb 2 T-1 replacement SDSL 12,000 768kbps 768kbps 1 SOHO T-1 A / RADSL 18,000 16-640kbps 1.5-6Mbps 1 Residential, passband VDSL 1-4000 1-2Mbps 13-52Mbps 1 FTTC Source: @Home study, America’s Network Magazine

4. TECHNOLOGY REVIEW: DATA-OVER-HFCModems Leverage “Fat” Coax Pipe to Set-Up Always-On Ethernet LAN • Downstream programming begins at 50MHz, with 5MHz-42MHz reserved for upstream communication. Each channel occupies 6MHz • For data-over-cable, one channel in 50-750MHz range carries signals downstream, and one in 5-42MHz carries signals upstream • Downstream capacity is 36Mbps using 256 QAM and upstream is 10Mbps using 16QAM or QPSK (more robust scheme is needed since signals combine higher in the network, increasing vulnerability to interference) • Bandwidth is shared, but since it does not need to be reserved (a la dialup modems), overbooking ratios are very good - from 10-20:1 • Bursty nature of data traffic means that high-speed shared connections are often preferable to mid-speed dedicated ones • CableLabs tests show that performance degradation does not begin until 200-400 users per node are simultaneously accessing the network Source: @Home study, America’s Network Magazine

5. BOTH TECHNOLOGIES ARE READY FOR PRIME TIMECarrier Willingness to Invest in Deployment is the Real Constraint • All major Cable MSOs have begun deployment of cable modem services, most as part of @Home or Roadrunner, at prices ranging from $35/month to $60/month • 5 RBOCs and 19 CLECs have plans to begin deployment of xDSL this year, at prices ranging from $60-$150 for residences and $100-1000 for businesses • Cable modem technology, provisioning, deployment and scaling work! • Over 200,000 full service paying customers • Security is a non-issue for residential subs. Encryption at layer 2-7 plus insecurity of Internet limit issue • Shared bandwidth is not a problem with 1000 homes / node. (1000 homes x 10% penetration x 30% simultaneous online x 15% transferring data - tests indicated 200-400 supported users / node) • Can add more channels or split node further as needed • DSL technology has been tested in labs, trials, and HDSL deployments • HDSL already composes 60% of T-1 deployments • G.lite and UAWG addressing standards issues - DMT wins over CAP • Modems offered by ~30 vendors • Provisioning, loop testing and scaling issues still need to be addressed

6. BROADBAND TECHNOLOGIES FAVOR DIFFERENT MARKETSDSL Naturally Favors Business Whereas HFC Naturally Favors Residential • DSL Attributes Favors • Secure Loop Business • Dedicated loop bandwidth Business • Symmetric service (H, S) Business • Uses existing ISDN equipment (I) Business • Baseband (H, S, V) Business • Asymmetric Service (A, V) Residential • Passband (A) Residential • HFC Attributes Favors • Can integrate video / data signals Residential • Costs decline with high penetration Residential • Asymmetric Service (Telco return) Residential • Symmetric Service (2-way) Business • Close to 60% of current T-1 lines are HDSL based • Only 17% of carriers will deploy ADSL to residential users soon, and only 4% will deploy HDSL to residences • Fear of T-1 cannibalization and high frequency crosstalk will lead RBOCs to choose a high price, low penetration service model Source: IDC

7. COSTS: BROADBAND MODEMSSilicon Follows Moore’s Law and Will be a Small Factor Over Time • Cable MCNS standards initiative will keep modems cheap and interoperable • Similar efforts underway on xDSL side (MSDSL) • DMT v. CAP debate settled - DMT will lead deployments • Fast DSPs means DSL and 56k modem can be implemented in software on the same box • Cable modems have 1-2 year head start on price / performance curve • Some DSL deployments (~20-30% HDSL, 10% ADSL) will require midspan units to bridge distance limitations Source: @Home Estimates

8. COSTS: xDSL LOOP TESTING AND PROVISIONINGReaching the Last 40% of Households Becomes Very Expensive • About 40% of Homes are further than 18k feet, run through bridge taps or loading coils, are served by DLCs, or are served out of a bundle carrying a T1 signal • Installs are expensive - provisioning one circuit doesn’t tell you much about adjacent circuits • Crosstalk between adjacent T-1 lines or other DSL lines causes interference • Line splices and loading coils that trap the signal above 4khz prevent DSL • Range limits of 12-18 kilofeet from Central Office. 25% of homes are outside of this range in urban / suburban areas, up to 50% in rural areas • Current loop testing and provisioning systems only test the voice frequency spectrum • 25% of homes are served by DLCs, which have less space and power to hold DSL equipment • $100-$150 per average install, $500+ for difficult installs • Example - US West charges $395 for average loop install

9. COSTS: DATA-OVER-CABLE PLANT UPGRADESRebuild Costs Vary by Market and Application • Cable MSOs must upgrade plant to 2-way, with small node sizes • Entire neighborhood must be upgraded simultaneously • Opportunity cost of invested capital • Rural System upgrades are more expensive • Upgrade needed for digital TV & telephony • Marginal cost of adding a subscriber is low Rebuild costs / home passed (avg. suburban system) Homes passed / optical node 300 600 1200 2000 Fiber overlay on coax trunk $150 $80 $40 $22 Optical / return-path amplifiers $5 $4 $3 $2 • Assumes no coax plant rebuild required to overcome channel lock Source: @Home Estimates

10. BARRIERS TO MASS DATA-OVER-HFC DEPLOYMENTS • Significant plant upgrades required • Short-term amplifier-only strategy can only support low take rates • Older systems need the most work • Telco-return implementations do not have a quick enough payback • Debt-load can make it difficult to raise cash - ROI expectations high • Plant is also being upgraded for other services • Interactive TV revisited • Video channel capacity • Conventional, lifeline telephony • Selling applications vs. pipes • Long term, people want IP dial-tone, but carriers are used to selling applications and services, not connections • Provisioning / Install needs to be easier • MCNS compatible, USB plug’n’play • Lack of ubiquity • Constrains retail modem sales • Prevents mass deployment of packet telephony, tele-commuting, etc. • Security and shared bandwidth “problems” are red herrings • Security available at higher layers • All bandwidth is shared at some point • More channels can be added (up to 4.5 Gbps capacity) and nodes split

11. BARRIERS TO MASS xDSL DEPLOYMENTS • Complex provisioning and line certification issues • Bridge taps, loading coils, DLCs, range limitations, etc... • No testing systems in place • Dinosaur distractions • Long distance telephony • Video aspirations • T-1, leased-line business • Unrealistic expectations • Serving all customers • End-to-end ATM • End result: Quarter speed ahead! • ISPs and CLECs will drive xDSL deployment (Covad, Northpoint, AIX, UUNET, etc.) • Subloop must be unbundled - RBOCs will drag their heels

12. RBOCs WILL PREVENT MASS DSL DEPLOYMENT BY CLECs & ISPs • RBOCs need to keep prices high to protect leased line and T-1 revenues • Bury exorbitant markups in ATM circuit from CO to ISP facility • Force distance insensitive pricing even for short circuits • Forces cache to be in ISP facility rather than next to DSLAM • ISP has to pass cost through to customer • CLECs and ISPs are relying on dry copper loops (used for alarm circuits, etc.) • RBOCs are making these loops harder to obtain - raising prices, adding loading coils, etc. • Dry loop now costs $30 per month instead of the $9-15 it would cost for an alarm circuit. C.O.s to put the equipment in are strapped for space. • 1996 Telecom Act lays foundation for unbundling, but is insufficient • Requires incumbent LECs to provide interconnection and mutually compensatory rates for “exchange service.” • Unclear whether it is required for data services • Arbitration has focused on unbundling of entire loops, when it should focus on subloop elements • Network Interface Device • Distribution plant (2-4 wire copper loops running from customer to concentration equipment) • Concentration equipment (Aggregates dist plant circuits) • Feeder plant (Fiber / high capacity copper running from conc. Equipment to CO) Source: IDC

13. BASIC ECONOMIC COMPARISONDSL’s Subscriber-Based Economics Win at Low Penetration Rates, but HFC Triumphs When Plant Upgrade Cost is Spread over Large User Base • DSL modems @ $740, declining 30% annually; cable @ $250, decl. 20% • Cable upgrade is $55/HHP with $5 maintenance; 1/2 charged to data • DSL carriers don’t fix unreachable loops - 30% cost $400 to provision • Cost of capital = 15%; No differences in backhaul, CS, mkting costs

14. THE FUTURE OF CABLE AND DSL COMPETITION • In areas where cable has already been rolled out: • Cable wins in residences (low marginal cost of adding subscribers) • In areas where both services are deployed • Battle of marketing, services, and performance. The consumer wins • Cable has long term economic advantage for residences • Areas where neither service will be rolled out or win: • Rural areas (wireless, satellite), FTTC (unlimited bandwidth) • DSL’s chances improve if: • RBOCs do not try and serve all customers, and are willing to say “no” to those served by poor loops • Subloop elements are un-bundled for ISPs and CLECs • Unrealistic requirements about network uptime and ATM are dropped • Long term, the race will actually be for access capacity • Cable has 4.5 Gbps pipe, whereas xDSL is pushing limits of copper at 6Mbps • MSOs will push fiber out gradually as customers need capacity • RBOCs will replace aging copper with fiber wholesale, oversupplying some areas and undersupplying others • RBOCs have more fiber in the ground, but MSOs are laying new fiber faster