The broadband potential in Eastern Europe Michael Philpott [email_address] 4 th December 2008

Agenda General market demographics Country by country overview Hungary Poland Romania The potential for IPTV The potential for broadband

General market demographics

Country by country overview

Hungary

Poland

Romania

The potential for IPTV

The potential for broadband

Level 3 General market demographics © Copyright Ovum 2007 www.ovum.com

Financial In general the spread of wealth is relatively even. However, average salary is low compared to Western European countries

ICT General ICT levels are good. Fixed broadband is in danger of early saturation though.

Level 3 The Hungarian market © Copyright Ovum 2007 www.ovum.com

The Hungarian broadband market Hungary still has old incumbent boundaries. Magyar is the dominant incumbent, and has DSL and cable interests

Magyar Magyar’s fixed broadband is already starting to plateaux

Magyar’s strategy may be misplaced Investing in FTTX, 100Mbps to 30% of homes by 2013 Upgrade cable to Docsis3.0, ~ 400k homes by end of 2009 Current broadband offerings have stalled 4000 (3000 on cable) Ft for 2Mbps DSL, 11,400 Ft for up to 25Mbps 4000 Ft is ~$20 per month = roughly 4 times more than UK and France compared to GNI per capita TV service via Satellite, cable and IPTV Triple play starts at 6,480 Ft (~$31)

Investing in FTTX, 100Mbps to 30% of homes by 2013

Upgrade cable to Docsis3.0, ~ 400k homes by end of 2009

Current broadband offerings have stalled

4000 (3000 on cable) Ft for 2Mbps DSL, 11,400 Ft for up to 25Mbps

4000 Ft is ~$20 per month = roughly 4 times more than UK and France compared to GNI per capita

TV service via Satellite, cable and IPTV

Triple play starts at 6,480 Ft (~$31)

Main competition: UPC is Magyar’s biggest broadband competitor It has gained 15% household penetration in its footprint, but its footprint is limited to 2 million homes (56% of households) 4000 Ft (~$20) for a 2Mbps service, equivalent to Magyar, and offers 20Mbps for 9000 Ft ($45) Triple play starts at 6,480 Ft (~$31) RGU = 1.4

UPC is Magyar’s biggest broadband competitor

It has gained 15% household penetration in its footprint, but its footprint is limited to 2 million homes (56% of households)

4000 Ft (~$20) for a 2Mbps service, equivalent to Magyar, and offers 20Mbps for 9000 Ft ($45)

Triple play starts at 6,480 Ft (~$31)

RGU = 1.4

The Hungarian TV market Pay TV is popular in Hungary, but analogue TV still dominates the Hungarian TV market. DTH is the biggest digital TV platform, with big satellite players such as DigiTV (~500k subscribers) and cable TV operators also offering services such as UPC. UPC has 173K DTH subscribers versus, 48k digital cable, and 640 analogue cable. DTT service is scheduled to launch December 2008 & will initially be available to around 60% of the population (6 million viewers) and will eventually reach 96%. Analogue switch off planned for 2011 Magyar offers IPTV, cable TV and DTH

Pay TV is popular in Hungary, but analogue TV still dominates the Hungarian TV market.

DTH is the biggest digital TV platform, with big satellite players such as DigiTV (~500k subscribers) and cable TV operators also offering services such as UPC.

UPC has 173K DTH subscribers versus, 48k digital cable, and 640 analogue cable.

DTT service is scheduled to launch December 2008 & will initially be available to around 60% of the population (6 million viewers) and will eventually reach 96%.

Analogue switch off planned for 2011

Magyar offers IPTV, cable TV and DTH

Level 3 The Polish market © Copyright Ovum 2007 www.ovum.com

The Polish broadband market Cable Cable TPSA is the incumbent operator and dominates the Polish broadband market The cable market provides reasonable competition, but is fragmented. Netia is the only large ISP to be really growing market share

Overall market conditions Fixed market in sharp decline PLN (million) Source: UKE Source: TPSA financial reports TPSA’s fixed line revenues Change in fixed line revenues

The competition: TPSA’s biggest telco competitor Largest competitor in fixed voice with ~10% (Q4 2007) of fixed voice market after the Tele2 acquisition Only 8% broadband market share, but the only player in the top 8 to be actually growing – 4 percentage points in 12 months Pilot of IPTV with telewizja n for the joint development of 3play (TV + Internet + phone) and 2play (TV + Internet) Pilot Q4 2008 in the cities of Warsaw and Wrocław Commercial launch is to include the full package of telewizja n’s programs, including HD channels, as well as new services and functionalities offered by IPTV. Netia and telewizja n started their cooperation in May 2008, offering joint 3play service packages through selected sales channels with TV service based on satellite technology.

TPSA’s biggest telco competitor

Largest competitor in fixed voice with ~10% (Q4 2007) of fixed voice market after the Tele2 acquisition

Only 8% broadband market share, but the only player in the top 8 to be actually growing – 4 percentage points in 12 months

Pilot of IPTV with telewizja n for the joint development of 3play (TV + Internet + phone) and 2play (TV + Internet)

Pilot Q4 2008 in the cities of Warsaw and Wrocław

Commercial launch is to include the full package of telewizja n’s programs, including HD channels, as well as new services and functionalities offered by IPTV.

Netia and telewizja n started their cooperation in May 2008, offering joint 3play service packages through selected sales channels with TV service based on satellite technology.

The competition: Good range of services HD TV & content from major studios UPC offers up to 20Mbps broadband VoIP and PSTN, but relatively slow growth (~130k customer each) Heading towards 2 RGUs per customer (UPC 1.4, MM 1.6) Footprints limited: 2M and 1M respectively But slowly increasing via acquisition and some new build. Multimedia also branching out into DSL and IPTV

Good range of services

HD TV & content from major studios

UPC offers up to 20Mbps broadband

VoIP and PSTN, but relatively slow growth (~130k customer each)

Heading towards 2 RGUs per customer (UPC 1.4, MM 1.6)

Footprints limited: 2M and 1M respectively

But slowly increasing via acquisition and some new build. Multimedia also branching out into DSL and IPTV

Competitive offerings TP is highly focused on the provision of content But is being attacked on broadband access 70 zl ($21) (30 zl ($9) for the first 2 months) 135 zl ($41) 150 zl ($45) 30 zl ($9) 48 zl ($14) 80 zl ($24) 79 zl ($24) (54 zl ($16) under current promotion) 512k to 6M 59 zl ($18) 1M to 16M 69 zl ($20) 2M to 20M

The Polish TV market Analogue terrestrial TV still dominates. Cable TV has approximately 40% market share, but much of that is still analogue. Satellite is smaller than cable TV, with approximately 3.5 million subscriber, but is growing quite quickly TPSA and Netia are taking advantage of Satellite’s growth and country coverage, as well as moving into IPTV services. TPSA has formed agreements with Canal+ Cyrowy to offer DTH services where IPTV is not available Netia is partnering with ‘n’.

Analogue terrestrial TV still dominates.

Cable TV has approximately 40% market share, but much of that is still analogue.

Satellite is smaller than cable TV, with approximately 3.5 million subscriber, but is growing quite quickly

TPSA and Netia are taking advantage of Satellite’s growth and country coverage, as well as moving into IPTV services.

TPSA has formed agreements with Canal+ Cyrowy to offer DTH services where IPTV is not available

Netia is partnering with ‘n’.

Level 3 The Romanian market © Copyright Ovum 2007 www.ovum.com

Overview Fixed line penetration is low – 4.26 million lines, ~50% of households Fixed broadband household penetration is therefore ~25%, but 50% of homes with a fixed line According to the regulator, 3.45 million people have Internet access via mobile technology (16% of the population), only 11% via fixed Internet at home. “ Neighbourhood networks”

Fixed line penetration is low – 4.26 million lines, ~50% of households

Fixed broadband household penetration is therefore ~25%, but 50% of homes with a fixed line

According to the regulator, 3.45 million people have Internet access via mobile technology (16% of the population), only 11% via fixed Internet at home.

Romtelecom 50% reduction in monthly subscription fees Increase lowest speed to 1M Introduces 20M More aggressive pricing is starting to pay off 78 ($100) 20 Mbps 49 ($63) 8 Mbps 25 ($32) 6 Mbps 15 ($19) 2 Mbps Tariff (EURO) Speed

The cable competition 2 million homes passed (22%), growing slowly – 8300 homes over the past 12 months Loosing customers as they switch to digital New focus around triple play Broadband being hit by RomTel’s aggressive pricing Cheapest broadband now 25 lei ($7.5) Cheapest Triple play (Digital) now = 60 lei ($18)

2 million homes passed (22%), growing slowly – 8300 homes over the past 12 months

Loosing customers as they switch to digital

New focus around triple play

Broadband being hit by RomTel’s aggressive pricing

Cheapest broadband now 25 lei ($7.5)

Cheapest Triple play (Digital) now = 60 lei ($18)

Neighbourhood example: Neighbouhood networks have taken advantage of the incumbent’s traditionally high broadband charges Local metropolitan networks offer cheap triple play service with up to 100Mbps Example: Airbite’s network covers a number of main cities such as Bucharest. Triple play service currently being offered at 19.50 RON ($6) with a 1Mbps service. For every extra 1Mbps, pay just 10 RON ($3) Get basic TV package for free if taking a broadband service of 3Mbps or more

Neighbouhood networks have taken advantage of the incumbent’s traditionally high broadband charges

Local metropolitan networks offer cheap triple play service with up to 100Mbps

Example: Airbite’s network covers a number of main cities such as Bucharest.

Triple play service currently being offered at 19.50 RON ($6) with a 1Mbps service. For every extra 1Mbps, pay just 10 RON ($3)

Get basic TV package for free if taking a broadband service of 3Mbps or more

The Romanian TV market Pay-TV services are very popular in Romania, with ~ 70% household penetration. Cable TV is the most popular platform, but is in decline. As customers switch over to digital TV they are often switching to Satellite TV, which is rapidly growing. Romtelecom launched in November 2006 its own DTH service as Dolce Romtelecom is currently the 2 nd largest satellite operator in the country.

Pay-TV services are very popular in Romania, with ~ 70% household penetration.

Cable TV is the most popular platform, but is in decline. As customers switch over to digital TV they are often switching to Satellite TV, which is rapidly growing.

Romtelecom launched in November 2006 its own DTH service as Dolce

Romtelecom is currently the 2 nd largest satellite operator in the country.

Level 3 The potential for IPTV © Copyright Ovum 2007 www.ovum.com

Pay-TV is gaining strength Need to attack, not defend Difficult to find niche Good market for IPTV Must provide value Lack of good free TV Good free TV Weak pay-TV Competition Strong pay-TV Competition

There is an opportunity, but Broadcast TV VoD HDTV Multi screen Int. Apps UGC UGC sharing Int. Long tail Target Ads Int. home The beginning Differentiation Building value PVR / Catch -up But can it do it at the right price point? IPTV will really have to differentiate

There is a fibre push Hulu Apple TV But at what cost? Verizon Fios BT Vision

Given price points, utilising other platforms should be a good strategy Broad-band Broad-band Broad-band Simple service bundling to create value Add interactivity to provide new features Add DTT option to reduce costs further

Two issues with this strategy Broad-band Broad-band Partnerships can break down A VoD only service can come under new competition

Is there a need for IPTV? Fixed line business is coming under increasing pressure Fixed telephony is in steep decline – but mainly due to FMS Broadband growth is slowing prematurely Service providers need to stimulate the broadband market, which will stabilise the fixed market Triple play could help – if it is cheap! Triple play is unlikely to be a big revenue earner in the short term

Fixed line business is coming under increasing pressure

Fixed telephony is in steep decline – but mainly due to FMS

Broadband growth is slowing prematurely

Service providers need to stimulate the broadband market, which will stabilise the fixed market

Triple play could help – if it is cheap!

Triple play is unlikely to be a big revenue earner in the short term

Level 3 The potential for broadband © Copyright Ovum 2007 www.ovum.com

Broadband access is a sticky service Source Ovum sample size 8,000 consumers

Broadband is in danger of stalling Prices are just too high to appeal to lower segments of the population By the end of 2010 Easter European countries should be in the early 20% penetration range If the current trend was to continue, Poland will struggle to get much over 12% However, broadband needs to continue to grow to: Slow down fixed line decline Counteract a declining fixed voice revenue Triple play will appeal to some segments, but basic, good value, broadband access deals are still important and stimulate the market more Consumers don’t seem to mind 2 or even 3 years contracts if the deal is good enough Includes TV

Prices are just too high to appeal to lower segments of the population

By the end of 2010 Easter European countries should be in the early 20% penetration range

If the current trend was to continue, Poland will struggle to get much over 12%

However, broadband needs to continue to grow to:

Slow down fixed line decline

Counteract a declining fixed voice revenue

Triple play will appeal to some segments, but basic, good value, broadband access deals are still important and stimulate the market more

Consumers don’t seem to mind 2 or even 3 years contracts if the deal is good enough

A tough pill to swallow Reducing pricing will impact significantly on broadband profit Average price for broadband in Western Europe is $25. On this typical margins are between 40% and 60%. Hungary and Romania are already offering prices of less than $20 At $10, margins will be very thin But where will growth come from without such action?

Reducing pricing will impact significantly on broadband profit

Average price for broadband in Western Europe is $25. On this typical margins are between 40% and 60%.

Hungary and Romania are already offering prices of less than $20

At $10, margins will be very thin

But where will growth come from without such action?

“The challenge is to keep the customer” Big focus on entertainment due to the ARPU opportunity If it is about ‘stickiness’, there are other alternatives Search for applications that gain stickiness and value Who do you see as a reliable source of technical support? Would you value technical support? 25.73% 25.42% 24.93% 11.24% 7.09% 5.59% High-street retailer Network telco provider Independent specialist Multimedia services (e.g. pay-TV operators) Third-party telco provider None of these Don't know 17.6% No 20.2% Yes 62.3%

Big focus on entertainment due to the ARPU opportunity

If it is about ‘stickiness’, there are other alternatives

Search for applications that gain stickiness and value

Using OTT to your advantage Consumer Home One bill QoS Guaranteed Customer service Maintenance & support ISP acquired content Sport content Film content Music content Gaming Gambling • • • • • • • • • •

Level 3 Concluding thoughts © Copyright Ovum 2007 www.ovum.com

Concluding thoughts Operators must risk profits in order to stimulate greater broadband demand Fixed-mobile substitution will have a bigger impact than it does in the west, but broadband can be used to dampen the effect Broadband is a sticky service, so consumers will not mind signing long term contracts for a good deal on their broadband Pay-TV is popular in many Eastern European countries. It will be hard for IPTV to directly compete without significant investment Bundling with satellite or in the future DTT, is a good way to bring additional value and new revenue streams in the future

Operators must risk profits in order to stimulate greater broadband demand

Fixed-mobile substitution will have a bigger impact than it does in the west, but broadband can be used to dampen the effect

Broadband is a sticky service, so consumers will not mind signing long term contracts for a good deal on their broadband

Pay-TV is popular in many Eastern European countries.

It will be hard for IPTV to directly compete without significant investment

Bundling with satellite or in the future DTT, is a good way to bring additional value and new revenue streams in the future

Level 3 Thank you © Copyright Ovum 2007 www.ovum.com