MORGAN STANLEY DEAN WITTER Equity Research June 1999 Global Telecommunications Global Telecommunications Primer A Guide to the Information Superhighway The Global Telecommunications Team MORGAN STANLEY DEAN WITTER Global Telecommunications Team North America Wireline U.K/Europe Cellular Simon Flannery [email protected] (212) 761-6432 Fanos Hira [email protected] (44171) 425-6675 Margaret Berghausen [email protected] (212) 761-6392 Jerry Dellis [email protected] (44171) 425-5371 April Henry [email protected] (212) 761-4669 U.K./Europe Alternative Carriers Peter Kennedy [email protected] (212) 761-8033 Edings Thibault [email protected] (212) 761-8553 Saeed Baradar [email protected] (44171) 425-6594 Myles Davis [email protected] (212) 761-6916 Vathana Ly Vath [email protected] (44171) 425-6014 Richard Lee [email protected] (212) 761-3685 Europe Emerging Markets North America Data & Internet Services Damon Guirdham [email protected] (44171) 425-6665 Jeffrey Camp [email protected] (212) 761-3112 Anton Inshutin [email protected] (7 503) 785-2232 Stephen Flynn [email protected] (212) 761-8294 Latin America North America Wireless Luiz Carvalho [email protected] (212) 761-4876 Colette Fleming [email protected] (212) 761-8223 Vera R. Rossi [email protected] (212) 761-4484 Mark Kinarney [email protected] (212) 761-6342 Steve Amaro [email protected] (212) 761-3403 North America Independents and Rural Telephony Asia/Pacific Steven Franck [email protected] (212) 761-7124 Mark Shuper [email protected] (65) 439-8954 Bhaskar Dole [email protected] (9122) 209-6600 Canada David Langford [email protected] (612) 9770-1583 Greg MacDonald [email protected] (212) 761-7413 Scott Brixen [email protected] (8522) 848-5422 Erik Zamkoff [email protected] (212) 761-7323 Lina Choi [email protected] (8522) 848-6782 U.K./Europe Fixed Line Incumbents Japan Michael Armitage [email protected] (44171) 425-6615 Paul Saferstein [email protected] (813) 5424-5340 Paul Marsch [email protected] (44171) 425-6611 Hironori Tanaka [email protected] (813) 5424-5336 Damon Guirdham [email protected] (44171) 425-6665 Yukari Kitamura [email protected] (813) 5424-5308 Beth Sargeant [email protected] (44171) 425-5452 Angus Lund [email protected] (44171) 425-8238 Upin Dattani [email protected] (44171) 425-3537 —————————————————————————— Research assistance for this report was provided by Robert Keith. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report. MORGAN STANLEY DEAN WITTER June 11, 1999 Introduction Welcome to the Information Superhighway! It sounds a wireless company. As for technology, it could be alphabet great, but what does it really mean? To help you navigate soup all over again for those who haven’t been following the complicated terrain of global telecommunications, we the technological changes minute-by-minute. We go from offer the first edition of our Global Telecom Primer. Our the basics of how a telephone call is executed to an expla- aim is to provide a road map to telecom markets and com- nation of new technologies that deliver high-speed Internet munications technology that has some shelf life, while access over traditional copper telephone wires. We also highlighting our global telecom team’s best investment provide a glossary of industry terms. ideas for the longer term. Some key themes cut across global regions: Our Primer has two sections: a region-by-region analysis of • wireline and wireless telecom markets, and a review of key Wireless growth is outpacing wireline, although the nuts-and-bolts issues in the sector. After highlighting in- seemingly insatiable demand for data continues to drive vestment themes and top picks, the regional sections focus wireline growth rates higher. on market size and growth, describe the competitive envi- • The infrastructure for data services is requiring major ronment, discuss key industry trends, and highlight the pace capital investment. and impact of regulatory changes. The discussions cover virtually the entire telecom world, from the Americas and • While it’s no secret that deregulation is laying waste to Greater Europe to Japan, Asia, and the rest of the Pacific existing business models, countries that think they are doing Rim. For those looking to skim the report quickly, each their incumbents a favor by deregulating slowly may well be region has an overview summarizing key points and top creating an opening for aggressive global operators. Asia, picks. in particular, may suffer from its relatively slow deregula- tion efforts. The nuts and bolts section offers an in-depth look at three topics we view as critical to understanding the sector: the Competition is accelerating in every market, making it criti- history of telecom deregulation in the U.S., techniques for cal to know what to look for in telecom winners. We boil analyzing and valuing wireless companies, and changes in these ingredients down to excellent management, organiza- telecommunications technology. The deregulation of the tional flexibility, ownership of the customer or of superior U.S. telecom market, and the intense competition we are proprietary technology that can build customers quickly, witnessing there today, offer an excellent case study for and a strong capital structure (in the emerging markets) or other telecom markets as they, too, accelerate the pace of access to capital (in developed markets). These, we believe, deregulation. Analyzing wireless companies can often are the criteria that investors should use in picking long- make you feel as if you’re drowning in alphabet soup. Our term winners in global telecom markets. Our top picks, discussion walks you through the do’s and don’ts of valuing listed in the table below, are companies that we believe have This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report. 2 MORGAN STANLEY DEAN WITTER the right mix of these key ingredients to create a competitive update our work next year and look forward to incorporating advantage and become long-term winners in their space. your feedback. Please let us know what was particularly helpful and what else you would like us to provide. We hope that you find this Global Telecom Primer useful in assessing which telecom stocks to invest in. We expect to Table 1 Morgan Stanley’s Top Global Telecom Picks Asia/Pacific Japan U.K/Europe United States Wireline Wireline Wireline Wireline Telstra NTT British Telecom AllTel TCNZ Japan Telecom Equant Bell Atlantic Hongkong Telecom Wireless KPN CenturyTel SingTel NTT DoCoMo NTL GTE Wireless Sonera ITC^DeltaCom SmarTone Latin America Telewest MCI WorldCom SK Telecom Wireline Wireless McLeodUSA China Telecom Telesp Par Mannesmann RSL Communications Advanced Info Service Telmex Securicor Time Warner Telecom Embratel Wireless Canada Eastern Europe Wireless Nextel Wireline Telesp Celular Wireline Powertel Bell Canada Iusacell MATAV AT&T/MetroNet Tele Sudeste Celular Sprint Canada Wireless Clearnet Rogers Cantel This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report. MORGAN STANLEY DEAN WITTER 3 U.S. Wireline: Beginning of a Golden Age? Overview the local business market has been steadily increasing over The wireline telecom sector is enjoying a golden age that the last two years, as the competitive local-access carriers may only be just beginning. Over the last several years, (CLECs) continue to make inroads in the market. industry growth has significantly accelerated with the Competition may finally come to the residential market growth of data and, in particular, the Internet. Local and over the next couple of years with AT&T’s purchase of long distance operators are being inundated with demand for TCI and planned purchase of MediaOne. We expect high-capacity circuits. We expect data and Internet-related AT&T to offer consumers local and long distance phone revenues to grow at close to 30% annually over the next service, multiple voice lines, cable TV, and Internet services several years. Additional demand for high-margin value- all over one high-bandwidth cable pipe, starting in ten test added services such as caller ID and call waiting is another markets in 1999. AT&T will use innovative pricing plans, key value driver. and also intends to partner with other cable companies to We firmly believe that the communications sector is deliver AT&T branded telephony services to residential taking a larger and larger share of economic activity. consumers. In response, the local telcos have announced Doomsday predictions of vicious competition following the aggressive digital subscriber line (DSL) deployment plans Telecom Act of 1996 have failed to materialize, although to offer residential users high-speed Internet access over a there are certainly going to be periods of strong competition. copper loop. We expect some 600,000-plus DSL subscrib- The key takeaway is that this is not a zero sum game. New ers by the end of the year, with America Online acting as a entrants are enjoying rapid growth and taking market share, key distributor. The Bells are also looking at VDSL and but growth remains robust for the incumbents who are see- satellite TV to allow them to offer a video product as part of a competitive bundle.