1. Finance and Tech:
Not a Pretty Picture
Richard Kramer, Managing Partner
richard.kramer@arete.net
Richard Kramer November 2011 - 1

2. About Arete
Left in disgust at ethics of investment bank world after four yrs.
as #1 ranked Tech analyst,
Founded Arete in early 2000 on three principles:
No conflicts of interest
Integrity No money from
companies
Exclusivity
Excellence
Select list of investors
trust us to help them All analysts w/ tech industry +
und. investment ideas financial market experience
No First Call, quotes, etc. 200+ company visits/month
Frequent presentations to companies’ strategy teams…
Since inception: profitable, low staff turnover;
Looking at global trends with total freedom to tell the truth.
Unlike banks/industry analysts, we are entrepreneurs.
Richard Kramer November 2011 - 2

3. Tech vs. Rationality
Huge disparities in regional Tech’s premium is not rational:
importance, valuations of TMT ROIC not above other sectors,
Investors dangerously susceptible to more often prone to large losses
hype in tech, far less so in telco There is little Net Cash
GOOG $192bn 16x AAPL $372bn 12x logic to tech
SSUNG $118bn 12x hardware vs. AAPL $82bn
YHOO $19bn 19x
RIM $10bn 4x software
EBAY $42bn 16x HTC $18bn 8x MSFT $45bn
AMZN $98bn 173x NOK $25bn 18x valuations,
IBM $220bn 14x most large CSCO $28bn
WALM $198bn 13x
BAIDU $39bn 48x HPQ $54bn 6x cos. are QCOM $17bn
TCNT $43bn 26x TSMCINTC
$64bn 14x already
$125bn 10x INTC $8bn
ORCL $164bn 14x QCOM $95bn 16x hybrids
MSFT $221bn 10x CSCO $97bn 11x GOOG $38bn
VMW $42bn 47x JNPR $13bn 19x
NLFX $5bn 21x ERIC $35bn 12x AMZN $6bn
TWC $20bn 14x Current M&A spree will aim to create illusion
CCST $62bn 15x of growth, paper over failing strategies
Key lessons of past 15+ yrs.: Tech companies cannot grow while restructuring
Richard Kramer November 2011 - 3

4. IPO’s: Crop Failure
Overall, $2.5bn raised from Mar.-Aug. ‘10
F l oa t.
D at e
D ea l S i ze
(m)
Is s ue
Pr i c e
F r e e F l oat O p e n i ng
P ric e
P e r f. To
1 /9 /1 0
C u r r en t
P r i ce
Pe r f.
Si n ce I P O
P TH- G B P r om e t he an Ma r.’ 1 0 £18 6 200p 93% 2 10 - 38% 32 .75 -84% -251
C AL X- U S C al ix M ar . 1 0 83 $13 18% 18 - 27% 6 .82 -62% -52
M ER U -U S
M XL -U S Within <6mos., this was -$750m, i.e. 30% loss
Me ru
M a xL i n e ar
A l ph a & O m e ga
Ma r.’ 1 0
Ma r . ’ 1 0
Ap r . 1 0
66
90
91
$15
$14
$14
30%
20%
23%
20
18
18
- 32%
- 36%
- 36%
6.3
5 .35
-69%
-70%
-58%
-45
-63
-52
A O SL -U S S em i. 7 .64
M IT L-U S
M OT R -U S You’d have lost OVER HALF OF YOUR MONEY!
Mit el
M o t ri c i ty
Ap r . 1 0
June ‘ 10
14 7
50
$14
$10
20%
13%
1 2 .7 5
10
- 53%
- 25%
2.4
1 .73
-81%
-83%
-119
-41
O C D O- GB O ca do J u ly ‘ 1 0 £36 9 180p 41% 1 80 - 13% 8 8.8 -51% -299
S MT- US S m ar t Te ch . J u ly . ‘ 1 0 66 0 $17 88% 1 7 .5 - 33% 3 .57 -80% -525
N XP I-U S N XP A ug. ‘ 10 47 6 $14 14% 14 - 15% 15 .98 14% 67
$2, 551 - $75 0 P& L -$ 1 ,3 8 1
e x cl N X P -$ 1 ,4 4 9
Raised $2.8bn, but in <6mos.,
a 43% combined loss.
Valuations anyways inflated by
tiny free floats (c.f. Groupon)
Richard Kramer November 2011 - 4

5. Devices: Demolition Derby,
Fight Club…Now Purgatory?
9M11 Sales/profits for vendors Largest end market in CE:
9M11 Sales Profit $230bn+ in mobile devices
APPL $36.6bn $14.2bn $150bn+ in smartphones
SSUNG $33.7bn $5.2bn HTC sold 35m smartphone in 9M11 =
NOK $22.9bn $0.8bn LGE (14m), Motorola (13m), and
SonyEricsson (9m);
HTC $12.5bn $1.9bn
HTC = 15% margins vs. losses at all the
RIM $11.3bn $800m Android vendors (ex Samsung)
LGE $8.2bn Clear message from Android to
Loss
MOT $7.0bn Loss OEMs: Profit is your problem!
Huge differentiation New entrants PC model of std. HW
SEMC $5.2bn
problem for Mobile B/E
have 15% gross + platform SW
Device vendors margin template coming to handsets:
Samsung 4Q11 Android volumes (~25m+) more than
Nokia (<2M WP7), LG (<5m), SonyEric. (<5m) and Motorola (<6m).
Richard Kramer November 2011 - 5

6. Standing On Its Head
Getting to 1bn Smartphones
“Segmentation” High-end far larger
Consumers see higher than once imagined
Forget it! marginal utility in device
High-end is >50% of total smartphone market
– Apple iPhone $55bn, Samsung/HTC $20bn+
Smartphones Sustaining
Industry ASPs vs. Mix Squeezing mid-range featurephones
350 15% Getting to an $80 BoM
300 10%
250
5% Smartphone? Value Value Value
Emerging
(US$) Specifications Details '10 '11 '12
0% Commodity Tech
Touchscreen Display Size [inch] 2.8
200 Resolution [pixels] 240x320 15.7 9.1 7.3
-5% Price per inch squared [$] 2
Markets
Touch Module Price per inch squared [$] 1 7.8 5.9 4.4
150 NAND Amount [GB]
Price per GB [$]
1
1.5
1.5 1.2 1.0
-10% DRAM Amount [GB] 0.25
3.8 3.0 2.4
Price per GB [$] 15
100 -15%
Other
Total
Chassis, etc. 3.0
31.8
2.7
21.9
2.4
17.5
Semiconductors
Connectivity Bluetooth, GPS, WiFi 3.5 2.8 2.2
50 -20%
ASPs actually rising
Baseband Quad Band, HSPA
17.0 14.0 11.0
Application Processor Integrated ARM11 AP/Baseband
MEMs Compass, Mic, etc. 4.3 3.6 3.1
0 -25% RF/PA e.g. IFX, ST, SWKS, RFMD, etc. 2.6 2.3 2.0
Other
~58% of 4.0 3.6 3.2
'11E
'12E
'13E
'14E
'15E
Total 31.4 26.3 21.5
'96
'97
'98
'99
'01
'04
'07
'10
'00
'02
'03
'05
'06
'08
'09
'95
Hardware
Board Number of PCB Layers 4 3.5 3.0 2.5
smartphone
Components Other Components (Filters, Bus, Conn.) 10.0 8.5 7.2
Camera module Resolution [MP] 3.2
3.5 2.8 2.3
Low-end will embrace smartphones as
YoY ASP Variation (RHS) ASP in US$ (LHS) Li-Ion Battery
Front facing Camera
Capacity [mAh]
No
1100 3.0 2.6 2.3
units in ‘13
Charger, box, literature Price [$] 4.0 3.4 2.9
Total 24.0 20.3 17.2
Total component cost 87.1 68.4 56.3
they reach $100 and lower BoM cost
Assembly cost Cost [$] 5.0 4.3 3.6
Total construction cost 92.1 72.7 59.9
Royalties (% of ASP) Qualcomm, Nokia, Dolby 7% 9.1 7.2 6.0
Total Direct Cost 101.2 79.9 65.9
Shipping/distribution Cost [$] 10.0 9.5 9.0
Provision Warranty [% of ASP] 2% 2.6 2.1 1.7
Total gross costs (ex D&A) per phone 113.8 91.4 76.6
Gross margin Implied (%) 12% 11% 10%
Too much focus on US/EU today; growth BoM cost <$100,
ASP [$] 130.0 103.0 85.0
opportunities are in EM in 2011-2015 going to $80, $60
Richard Kramer November 2011 - 6

7. Example from Tele2 Sweden
Where is WP7 in this world? Tango not
cheap enough, OS not familiar enough
Mobile devices
Smartphone now half are NOT
of market, and rising… commodities!
Low-end creeping Would also be bad
into the mix for operators!
Key questions we put to low-end smartphone vendors:
How to make money? We don’t think ZTE/HW do!
How to differentiate longer-term for any premium?
Consumer
end-markets
will demand
local brands
Richard Kramer November 2011 - 7

8. Software Ecosystem:
New Control Point 50-100 most popular apps
avail. on all platforms.
Shift in innovation, R&D AppStore = Content
Packaging content
spend, profits from OEMs Store Consistent UX
to software platforms. Consumers pick “their”
favourite channels Stability and quality
Nokia-WP7. Industry wants competition. Not mobile-only
Concerns w/ Android governance, security By the time “third platform” hits
Operators want to contain Apple “scale,” no one will care about OS
anymore…can have mobile
Major Facebook push into OS/comms virtualisation
Android, MeeGo, QNX/BBOS7, WP7, Bada, WebOS,
Symbian, iOS: consumers don’t care about any of this!
Cross product compute platforms: same OS on TV, Tab, Mobile
Smartphone Shipments by OS ‘13E
RIM, 13%
Android, 57%
WinMo, 8%
Others, 2%
Symbian, 2%
Android MeeGo, 3%
Dominating
iOS, 15%
Richard Kramer November 2011 - 8

9. Hooked on Tablets
Tablet Forecast
Table 2: Tablet Forecast '10-'14, and Its Impact on Netbook Demand
Apple’s low iPad gross margins are
2010E 2011E 2012E 2013E 2014E
July ’10 = ~53m in 2011…
Mobile PC Units (m)
Notebooks
#1 issue for Android OEMs.
181 230 280 317 358
Jan. ’11 = ~55m, more iPad
Netbooks
Total Mobile PCs Who can match Apple’s tech specs
40
221
33
263
31
311
30
347
28
386
Unit Growth (%)
AND ecosystem AND retail channel?
19% 18% 12% 11%
UX not from PCs, but smartphones: SSD,
Tablets Units (m)
touch, 3G, all-day battery, cloud storage
Apple Tablets (m)
40% of BoM = display and touch,
16 26 35 43 53
Market Share (%)
Other Tablets (m)
94%not AP or modem! $200 by mid-’12
1
49%
27
45%
43
43%
57
42%
74
Media consumption device, like TV
Market Share (%)
Total Tablets (m)
6% 51% 55% 57%
India = 54 languages, 8 major ones
17 53 77 100
58%
127
or game consoles; further pressures
Unit Growth (%)
o/w 3G Enabled Tablets (m) 6
200m+ tablets in next 5 yrs.
212%
24
45%
42
30%
55
27%
76
PCs until Win8 comes
Penetration (%) 35% 45% 55% 55% 60%
Source: Arete Research estimates.
Puts virtual shop
window in
consumer’s
= hands 24/7.
OS = means to an end, Tablets will be the low
Apps a.k.a. Content cost computing platform
Kindle Fire: $180 BoM cost? No 3G.
in emerging markets.
Subsidy to Prime users ($80/yr.) No need to subsidise (netbooks failed)
Richard Kramer November 2011 - 9

10. Apple: Secrets of the Temple
Vulnerabilities?
$81bn cash
Rivals narrowing gaps
+80% growth
iOS notebooks TVs, next…. Vs.
iTunes’ 220m+ billing accounts
makes Apple a Top 15 telco w/
wealthier customers
A4/A5 processor = superior Now Lagging on displays
cost structure recognising Relies on operator SAC
Scale = could be 400m risks on
APs sold in 2015 IPR… Less suited for EMs
T a b le 2 : A p p le ' s G r o s s P r o f i t B o o s t F ro m N A N D F la s h
Apple avoids Apple makes up to a third
P r ic e C os t /G B E xtra M em o ry A d d ' l M a r g in M arg in o n A s s um e d / G ros s
paying of its operating profit by
C o st p e r U n it E x tr a M e m o r y In c rem . G P P r o fi t / U n i t
chipmaker i P o d T o u ch 8 G B
i P o d T o u ch 3 2 G B
$199
marking up NAND flash -
$249
$ 1 .0
$ 1 .0 $24 $26 $30 profit x
52 %
2 0%
2 6%
$40
$66
gross margin, i P o d T o u ch 6 4 G B $349 $ 1 .0 $32 $68
11m units =
68 % 3 8% $134
and higher $100 for 16GB
i P h on e 3 G S 8G B $499 $ 1 .0 3 8% $190
$300m!
i P h on e 4 16 G B $599 $ 1 .0 $8 $92 92 % 4 3% $257
foundry GMs i P h on e 4 32 G B $699 $ 1 .0 $16
S o u r c e : A re t e R e s e a r c h e s t i m a t e s , C o m p a n y a c c o u n t s .
$84 84 % 4 9% $341
Richard Kramer November 2011 - 10

11. Samsung: Brute Force
40.0 18%
Samsung sold c. 29m smartphones in 35.0
30.0
Smartphone
Margins
16%
14%
3Q11, up 40% seq., now #1 by volume 25.0
12%
10%
20.0
Koreans obsessed with league tables, 15.0
8%
6%
share ; 2012 aim to surpass Nokia as #1 10.0
5.0
4%
2%
overall volume share player 0.0
1Q11 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
0%
Tablets lack content/cloud services
Recycling Galaxy S II profits into low-
Table 2: SG&A by Vendor, '09-'11E ($bn) end to build scale
'09 '10 '11E
Industry’s biggest marketing budget
Apple $1.4bn $1.7bn $3.5bn
Samsung $4.1bn $5.0bn $6.4bn Fight Apple
Nokia $3.9bn $3.6bn $3.5bn on its own
LGE $2.1bn
Samsung Telecom division is a
$2.4bn $2.3bn
terrain….
RIM $1.2bn $1.4bn $1.8bn
distribution channel for memory,
HTC $0.4bn $0.9bn $1.7bn
display, and in future, logic/AP,
Sony Ericsson $1.5bn $1.2bn $1.2bn
modem, etc. - Far greater returns in
Motorola $1.1bn
Source: Arete Research estimates.
$1.3bn $1.5bn
leverage of commodity dominance
Richard Kramer November 2011 - 11

12. HTC: The Old College Try
Taiwanese co.
(former ODM) Losing
Desire Sensation XL? momentum?
making $500m XE?
of Acquisitions Best example of innovation in
in US/EU both hardware and software
from Asian vendor, ex-ODM
Investment in software skills/UI
35m units YTD, 15% margins,
$2.8bn of profit/$3.5bn of cash
Hitting a wall in 4Q based on US market share
gains by Apple at Sprint, and pressure from
Samsung … BUT, execution matters hugely here
Needs portfolio refresh in 1Q12 to keep up competitiveness
Richard Kramer November 2011 - 12

13. Nokia and RIM: Troubled Twins
Key Issue: execution Blind Man’s Bluff, Feb. ‘11
RIM: Doors of
Perception, Sharp Turn for
June ‘11 the Titanic,
May ‘10
RIM: Lost in Hold Your Horses, Nov. ‘11
Transition,
Sept. ‘11 Nokia and RIM both still profitable, w/ resources, and
desperate … but v. hard to reverse market perception
and make up for lack of Internet innovation.
Leap Leap Leap
#1 #2 #3
(YE’11) (1H12) (YE12)
Make current Address lower- Aim for parity, or
portfolio & initial tier WP7 leapfrog next iterations
WP7 competitive; segment w/ of Android, iPhone5;
parity unrealistic Apollo release; “ nique experience?
u ”
Richard Kramer November 2011 - 13

14. Vampire Squids?
Quasi-monopoly market share in
search, brings with it FTC
regulatory risk (AdMob)
Challenge in how to monetise
Android, not to mention countless
other acquisitions…
45 cos. since ’10, 18 already in ’11
Mult. failures: Gears, Wave, Chrome, GoogleTV
Internal conflicts (e.g. Chrome vs Android)
Needs systematic cross-platform “Google” UX
Effort to “save” Devices was failure
It looks inevitable that
Beyond IPR, is this just “boys with toys?” FB will expand into more
Schmidt “just don’t let it lose money” ads, connectivity, own
Home to forge a path for GoogleTV “brand” applications
Richard Kramer November 2011 - 14

15. Building Global Brains…
Vertical model?
= Or external reach
of search?
Expect more
= devices – FB’s #1
priority is mobile
Does any of this link
= up or resonate with
consumers?
Internet brands will create significant
niche device categories; Kindle Fire just
the start, very culture-specific…
You can see four clear product + services ecosystems forming up
Each one trying to absorb data on connected consumer behaviour
Richard Kramer November 2011 - 15

16. Telcos in 2011:
Stop Bullying the Fat Kid
Weighted Average European
Nasty data/ APRU Uplift from S’phone
Mobile Revenue Growth
14 %
SMS shift 12 %
10 %
KPN’s profit warning - 8%
Re-Price
6%
cannibalisation of high 4%
margin SMS by IP mess. 2%
0%
on free data plans -2 %
Gone from 0% to
-4 %
-6 %
VODA now 40% declining voice revenues,
60% growing data and emerging markets
4Q09
1Q10
2Q10
2Q09
3Q09
3Q10
4Q10
1Q11
88% in 8mos Se rvi ce R e v en u e D a ta ( In c. M e ssa g in g ) R ev en u e
Mobile data is 90% of network traffic/cost but only 10% of revenue. All
Source: Arete Research.
operators headed to more data usage, until voice becomes an app
Customer innovation
Re-Org (Again!) has to mean letting
Unintentional slip?
customers innovate!
Digital divisions aside, NOT specialised
we still see 2-sided customer care…
business models as
mostly fantasy
Google 31K staffn(!) FB 2,000…
Re-Duce Costs
FT = 100,000!
Richard Kramer November 2011 - 16

17. Mobile Ads, Mobile Money
Who makes money? PoS? Use
case?
Issuer Visa, MC Acquirer Merchant
Bank InterLink Bank Has to Pay
<2% <1% <1% Some…
Operators want NFC to be SIM based to manage authentication, security
Credit card companies do not want SIM and say telcos can’t manage risk.
Then mobile advertising Behaviour Regulatory
change? issues
Not yet clear who monetises mobile
advertising, under which model:
‘06
‘12
‘08
‘10 ‘07
‘13
‘09
‘11 ‘08
‘14
‘10
‘12 ‘09
‘15
‘11
‘13 ‘10
‘16
‘12
‘14 Telcos? ISPs? Web Brands?
Mobile Ad Forecasts Trad. agencies going digital?
Richard Kramer November 2011 - 17

18. Please, Get Me Excited!
Price!
Device!
Are T-Mobile or Verizon doing something really different? Still the same
old confusing tariff packages, offering same devices as competition
Richard Kramer November 2011 - 18

19. Get Me Excited, Part II!
Price! Device!
Can Vodafone or Tele2 be like Apple – premium brand, connect consumers
to platform, content, retail, billing? Then show me what I can do!
Richard Kramer November 2011 - 19

20. Maybe T-Mobile Slovakia is on
to Something Here?
At least I know T-Mobile is about chicks (and guys) at the beach, pool,
Still no “use case” “demos” or “new services”!
Richard Kramer November 2011 - 20

21. Weiβer Spargel or
Surstromming?
So, what’s with What’s unique
weiβer Spargel? customer experience
on Vodafone? Tele2?
Any operator?
Segment
“leading- Loads of scope for
Develop X-platform Apps edge” multi-SIM offers;
customer Get consistent UX
A few hit apps branded by operator base on all devices!
that work on any platform: based on
customer insight - location, Create “radical chic” buzz in high-end:
contacts, usage, etc. VodafoneVanguard? O2 Too?
Can apps help telcos offer
tings that competitors won’t or
can’t? Co-opt internet brands,
Build communities! rather than counter them…
Richard Kramer November 2011 - 21

22. OK, How’s ‘Bout Some Forecasts?
A Billion Smartphone in 2013, By 2013, every smartphone
dominated by emerging markets co-branded with Internet
brand based on likely usage…
“Best for…” Twitter, Facebook,
WeiBo, Yandex, LinkedIn, ESPN, etc.
By the time industry gets
“third platform” scaling up,
Tablets to follow… native apps will be in decline
Device OS means zero w/o content ecosystem behind it;
it’s a means to an end…the end is content consumption/creation/communities
Tech’s future in emerging markets, for innovation and consumer demand.
Tech hardware in period Google, Apple, Facebook, Amazon
of “scorched earth” are tech’s Hydras; as they get cut off or
competition; but risk of fail at things, they grow back in two
perception like PC. segments; next as services providers….
Richard Kramer November 2011 - 22

23. Q&A
Richard Kramer, Managing Partner
richard.kramer@arete.net
Richard Kramer November 2011 - 23